-----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, JmmvMawHoipsyF9cm1Wscqhe7Z3JJO9/tc0XzK+W81IWYQtl6CKbbjDYfereegTd xFBcsqOR/C7rDaV4YSoxhg== 0000912057-97-014441.txt : 19970430 0000912057-97-014441.hdr.sgml : 19970430 ACCESSION NUMBER: 0000912057-97-014441 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970429 SROS: NASD 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: ND FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12641 FILM NUMBER: 97589409 BUSINESS ADDRESS: STREET 1: 2829 SOUTH UNIVERSITY DR CITY: FARGO STATE: ND ZIP: 58109-7160 BUSINESS PHONE: 7012398730 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1997 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) 237-7363 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. YES X 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]. As of April 25, 1997, 5,721,508 shares of Class A Common Stock of the Registrant were outstanding, and the aggregate market value of the Class A Common Stock of the Registrant as of that date (based upon the last reported sale price of the Class A Common Stock on that date as reported by the New York Stock Exchange), excluding outstanding shares beneficially owned by directors and executive officers, was approximately $86 million. DOCUMENTS INCORPORATED BY REFERENCE Part II of this Annual Report on Form 10-K incorporates by reference information (to the extent specific pages are referred to herein) from the registrant's Annual Report to Shareholders for the year ended January 31, 1997 (the "1997 Annual Report"). Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the registrant's Proxy Statement for its 1997 Annual Meeting to be held May 29, 1997 (the "1997 Proxy Statement"). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. 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 operates 38 retail stores in seven states, specializing in the distribution, sales, service and rental of equipment, primarily supplied by Deere & Company and its subsidiaries ("Deere"), to the agricultural, construction, materials handling and transportation industries, as well as to public service entities, government agencies and utilities. The Company's stores are located in Arizona, California, Minnesota, North Dakota, South Dakota, Texas and Washington. These stores include the largest network of Deere construction equipment dealerships and agricultural equipment dealerships in the United States. The Company believes that its network of stores enables it to achieve benefits from increasing operational synergies. The Company expects to continue to expand its network through future acquisitions. The equipment and parts sold by the Company primarily are supplied by Deere, which is a leading manufacturer and supplier of construction and agricultural equipment in the United States. Sales of new Deere equipment by the Company accounted for approximately 71% of the Company's new equipment sales in fiscal 1997. No other supplier accounted for more than 10% of the Company's new equipment sales in fiscal 1997. The Company expects that Deere products will continue to account for the majority of its construction and agricultural new equipment sales. The Company's stores also offer complementary equipment from other suppliers, used equipment, new and used parts, equipment servicing, equipment rental, and other related products and services. For the fiscal year ended January 31, 1997, the Company's revenues were generated from the following areas of business: New equipment sales . . . . . . . . . . . . . . 52% Used equipment sales. . . . . . . . . . . . . . 22% Product support, parts, service . . . . . . . . 25% Equipment rental income . . . . . . . . . . . . 1% The Company is the surviving entity resulting from a merger between the Company and RDO Equipment Co., a North Dakota corporation ("RDO-North Dakota") which was effective January 22, 1997 (the "Merger"). RDO-North Dakota was originally incorporated in North Dakota on March 13, 1968. The Company's executive offices are located at 2829 South University Drive, Fargo, North Dakota 58103. The Company's phone number is (701) 237-7363. References to the Company include its subsidiaries and RDO-North Dakota. INDUSTRY OVERVIEW CONSTRUCTION RETAIL EQUIPMENT. Management estimates that United States retail sales of new construction equipment in its target product market (light to medium applications) in calendar 1995 totaled approximately $5.7 billion. Deere is one of the leading suppliers of construction equipment in the United States for light to medium applications and offers a broad array of products. Currently, Deere has approximately 110 construction dealers which operate approximately 355 stores in the United States. 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. Over the last five years, while the number of Deere construction stores has remained constant, the number of Deere construction dealers has declined by more than 30%. This dealer consolidation is being driven, in part, by an increasing need for capital, owners' concerns about succession, and Deere's support for consolidation of its dealers. The Company expects to benefit from this consolidation trend by continuing its strategic acquisition of Deere construction dealerships. AGRICULTURAL RETAIL EQUIPMENT. Management estimates that United States retail sales of new agricultural equipment in its target product market in calendar 1995 totaled approximately $10.1 billion. Deere is the leading supplier of agricultural equipment in the United States. Within the Deere agricultural dealer system, dealers are not assigned exclusive territories, but are authorized to operate at specific store locations. Currently, Deere has approximately 1,275 agricultural dealers which operate approximately 1,545 stores in the United States. The Company believes that Deere agricultural dealers also face an increasing need for capital, owners' concerns about succession, and Deere's support for consolidation and, as a result, that a consolidation of Deere agricultural dealers will occur. The Company expects that it will have increasing opportunities to complete strategic acquisitions of Deere agricultural dealerships as this consolidation trend develops. 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, 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 construction and agricultural retail equipment store offers a broad array of its respective Deere equipment lines, and also sells complementary products from other suppliers, based on the nature of each store's customer base. As the installed base of equipment expands with the Company's increasing market share, the Company has the opportunity to generate additional parts and service business. 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 currently have higher profit margins than wholegoods sales. The Company also has diversified its business into complementary fields to serve its customers' needs, expand its customer base, and enhance its revenues by developing and expanding its construction equipment rental fleet, offering undercarriage service at strategic locations, selling irrigation equipment at one store, and expanding the geographic scope of its construction equipment rental operations, and in the first quarter of fiscal 1998 acquiring a Mack Truck dealership in Fargo. 3 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 construction and agricultural retail equipment dealers. Due to the Company's leadership position in the retail equipment industry and its 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 dealership 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 dealership into its construction or agricultural retail equipment operations by implementing the Company's operating model and seeks to enhance the acquired dealership'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. The consent of Deere is required for the acquisition of any Deere dealership. IMPLEMENTING THE RDO OPERATING MODEL. The Company has developed a proven operating model designed to improve the performance and profitability of each of its retail equipment 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 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, 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 network of construction and agricultural retail equipment stores into geographic areas that have a large base of construction or agricultural activity and that provide the Company with opportunities to continue to develop its store network. The Company believes that its business diversification into both construction and agricultural retail equipment operations 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, as well as local and regional economic fluctuations. Typically, other retail equipment dealers operate only construction or agricultural dealerships, with a limited number of stores concentrated in a specific geographic region. For example, based on information published by Deere, the Company believes the average United States Deere construction dealer has less than four stores, as compared to the Company's 21 Deere construction stores, and the average United States Deere agricultural dealer operates a single store as compared to the Company's 10 Deere agricultural stores. In addition, the Company has five other stores focused on construction equipment rental (as of the first quarter of fiscal 1998), a Mack Truck dealership (as of the first quarter of fiscal 1998), and one store focused on irrigation equipment, all of which complement and supplement the Deere stores. 4 RECENT ACQUISITIONS The Company acquired three construction equipment stores and two agricultural equipment stores in fiscal 1997. These acquisitions extended the Company's equipment retail store network into Texas and Washington, which the Company believes will provide platforms for future growth. In early fiscal 1998, the Company acquired certain assets of a construction equipment rental company with five locations in Arizona, which had unaudited total revenues of approximately $8.2 million in calendar year 1996. The transaction was structured such that this rental operation is owned 80% by the Company and 20% by the previous owner, with the Company having a right to purchase the minority interest. Also in early fiscal 1998, the Company acquired a Mack Truck dealership in Fargo, North Dakota, with unaudited total revenues of approximately $5.9 million in calendar year 1996. CONSTRUCTION DIVISION The Company is the largest Deere construction retail equipment dealer in the United States both in number of stores and total revenues and accounted for approximately six percent of Deere's United States construction equipment sales in calendar 1996. As of the end of fiscal 1997, the Company owned and operated 21 Deere construction equipment stores located in metropolitan areas in Arizona, Southern California, Minnesota, North Dakota, South Dakota, and North Central Texas. Customers of the Company's Construction Division include contractors, for both residential and commercial construction, utility companies, and federal, state and local government agencies. The Construction Division has a diverse customer base. The Construction Division provides a full line of equipment for light to medium size applications and related product support to its customers. Its primary products include John Deere backhoe loaders, hydraulic excavators, crawler dozers, and four-wheel drive loaders. While the sale of new Deere construction equipment is the main focus, the Company's construction equipment stores also offer complementary equipment from other suppliers, as well as used equipment taken as trade-ins. The Company's construction equipment stores are located in areas with significant construction activity, including Dallas-Fort Worth, southern Los Angeles, Minneapolis-St. Paul, Phoenix, and San Diego. Each construction 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 and the economies of scale inherent in its centralized administrative, purchasing, and inventory management functions. The Company attributes the success of its Construction Division to its continuing implementation of its operating model. AGRICULTURAL DIVISION The Company is the largest Deere agricultural retail equipment dealer in the United States both in number of stores and total revenues and accounted for approximately one percent of Deere's United States agricultural equipment sales in calendar 1996. As of the end of fiscal 1997, the Company owned and operated 10 Deere agricultural equipment stores located in Minnesota, North Dakota, South Dakota, and Washington, and one agricultural store focused on irrigation equipment. 5 The Company's Agricultural Division is a full-service supplier to farmers, offering a broad range of farm equipment and related products. The Company's customers primarily farm corn, soybeans, wheat, sugar beets, and potatoes. As a result of the customer mix and Deere's product offering, the core products of the Agricultural Division 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 the Division's new equipment sales. A wide variety of additional agricultural equipment lines, which complement the Deere products, is also offered according to local market demand. The agricultural stores also sell used equipment, generally acquired as trade-ins. The Company's store in Wadena, Minnesota sells irrigation equipment supplied by Valmont Industries, Inc. and vegetable storage ventilation equipment. 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 and the economies of scale inherent in its centralized administrative, purchasing, and inventory management functions. PARTS AND SERVICE The Company's construction and agricultural retail equipment 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 both its construction and agricultural equipment operations. Each construction and agricultural equipment 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 Minneapolis, Minnesota and Riverside, California, and at one of the Dallas-Fort Worth, Texas sites also operate undercarriage shops for all makes and sizes of crawler equipment. RENTAL FLEET OPERATIONS The Company maintains a rental fleet of construction equipment, primarily in its Arizona and Southern California operations. The Company rents the construction equipment to customers on a short-term basis, generally for a specified number of days or weeks, at competitive rates. The Company believes that its rental operations will continue to benefit from the trend among businesses to outsource operations, including equipment ownership, in order to minimize their capital investment in equipment as well as reducing or eliminating the down-time, maintenance, repair, and storage costs associated with equipment ownership. Used rental equipment is then sold by the Company, generally after 18 to 24 months of service. The Company believes that the rental business will be an area of growth for it as the Company expands its operations in Arizona and California, as well as in its Texas operations. In early fiscal 1998, the Company acquired an 80% equity interest in a five store construction equipment rental business in Arizona. The Company believes that its network of construction equipment stores support the sale of the used equipment retired from the rental fleet through the ability to relocate used equipment to various geographic regions based on market demand, the access to an expanded customer base, and the availability of trained personnel to service the used equipment to enhance its resale value. 6 INVENTORY AND ASSET MANAGEMENT The Company maintains substantial inventories of equipment and parts in order to facilitate sales to customers on a timely basis. The Company also is required to build its inventory 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 its customer needs and to avoid shortages or delays. Deere has an inventory warehouse that its dealers may access to obtain equipment to facilitate inventory management. In addition, to maximize asset productivity, the Company maintains a complete database on sales and inventory of parts and equipment, and has a sophisticated, 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 parts or equipment from the supplier. As a result, the Company minimizes its investment in inventory while still effectively and promptly satisfying its customers' parts 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. DEALERSHIP AGREEMENTS 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, 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: North Central Texas, including the Dallas-Fort Worth and Waco 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 7 selection of Company's management personnel, including Deere store managers, 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 store within the Company's designated areas of responsibility and for the acquisition of any other Deere dealership. In addition, 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 Company's equity to assets ratio 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 1997, the Company's equity-to-assets ratio was 48.3%. 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." The Company's Deere dealer appointments are not exclusive. Deere could appoint other dealers in close proximity to the Company's existing stores. The areas of responsibility assigned to the Company's construction equipment dealerships can be reduced by Deere 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. OTHER SUPPLIERS. In addition to Deere, the Company is an authorized dealer at various stores for suppliers of other equipment. 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. FLOOR PLAN FINANCING Having adequate wholegoods and parts inventories at each of the Company's construction and agricultural equipment 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. DEERE. Deere and Deere Credit offer floor plan financing to Deere dealers for extended periods, to enable dealers to carry representative inventories of equipment and to encourage the purchase of goods by dealers in advance of seasonal retail demand. Deere charges variable market rates of interest at or over the prime rate on balances outstanding after any interest-free periods and retains a security interest in the inventories, which it inspects periodically. The interest-free periods, which Deere changes periodically, are currently six to twelve months for agricultural equipment and one to five months for construction equipment. Deere also provides financing for used equipment accepted in trade, repossessed equipment, and approved equipment from other suppliers, and receives a security interest in such equipment. The Company has a line of credit for $50.0 million with Deere Credit. After the interest-free period, the Company generally shifts its financing to Deere Credit to obtain a lower interest rate. The rate charged by Deere Credit is at the prime rate, which as of January 31,1997, was 8.25%. 8 OTHER SUPPLIERS. For equipment from suppliers other than Deere, the Company primarily finances its inventory through its line of credit at Ag Capital Company ("Ag Capital"). Financing also may be available through floor plan financing programs provided by the suppliers, which may be financed by such suppliers themselves or through third party lenders, depending on which option provides the Company with the most favorable terms. The interest rate on the Ag Capital line of credit is the prime rate, which as of January 31, 1997 was 8.25%. CUSTOMER FINANCING OPTIONS Financing options for customer purchases support the sales activities of the Company. Significant financing sources for purchases by the Company's customers are through programs offered by Deere and Ag Capital. The Company does not grant extended payment terms to its customers. DEERE. Deere's credit subsidiaries provide and administer financing for retail purchases and leases of new and used equipment, primarily through Deere Credit. Deere Credit retains a security interest in the equipment financed. A portion of the customer financing provided by Deere is recourse to the Company. Deere retains a reserve for amounts that the Company may be obligated to pay Deere, by retaining 1% of the face amount of each contract financed until the reserve reaches 3% of the total dollar amount of contracts outstanding. In the event a customer defaults in paying Deere and there is a deficiency in the amount owed to Deere, the Company has the option of paying the amount due under its recourse obligations or using a portion of its reserve. The Company's liability is capped at the amount of the reserve, which, as of January 31, 1997, was $778,000. AG CAPITAL AND OTHERS. Ag Capital, a cooperative lending institution, also provides financing to the Company's customers. Some of the financing provided by Ag Capital to its customers also is recourse to the Company. This contingent liability is capped at an amount equal to 10% of the amount of the aggregate outstanding contracts, which contingent liability was approximately $2.1 million as of January 31, 1997. ACL Company, LLC and Farmers Equipment Rental, Inc. also provided financing to customers for which the Company has some contingent recourse liability, which contingent liability was approximately $1.9 million as of January 31, 1997. These contingent liabilities are also capped at an amount equal to 10% of the amount of the aggregate outstanding contracts. REPURCHASE CONTRACTS. The Company enters into repurchase contracts with certain of its customers, primarily its governmental customers, pursuant to which the Company, at the request of the customer, may be required to repurchase the equipment at a price fixed in the contract after a specified period of time, typically five years, subject to certain conditions. The repurchased equipment is then sold by the Company as used equipment. PRODUCT WARRANTIES Product warranties for new equipment and parts are generally provided by the supplier. The term and scope of these warranties vary greatly by supplier and by product. The Company does not provide additional warranties to retail purchasers of new equipment. The supplier (such as Deere) pays the Company for repairs to equipment under warranty. The Company generally sells used equipment "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. Typically, the Company does not provide additional warranties on used equipment. 9 COMPETITION The Company's construction equipment retail stores compete with distributors of equipment produced by manufacturers other than Deere, including Case Corporation ("Case"), Caterpillar Inc. ("Caterpillar"), and Komatsu Corporation. 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 retail equipment stores compete with distributors of equipment from suppliers other than Deere, including Agco Corporation, Case, Caterpillar, and New Holland N.V., a subsidiary of Fiat. 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. Competition among retail equipment dealers is primarily based on price, value, reputation, quality, and design of the products offered by the dealer, the customer service and equipment servicing provided by the dealer, and the accessibility of the stores. The Company believes that its broad product line, product support, and superior quality products will enable it to compete effectively. 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 obtained from suppliers other than Deere are licensed from their respective owners. The Company historically has operated each of its construction and agricultural retail equipment stores 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 Deere dealership in that location. Each Deere store also is identified as either an authorized John Deere construction or agricultural equipment retail store and may 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 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. EMPLOYEES As of January 31, 1997 the Company employed 800 full-time employees. Of this number, 13 employees were located at the Company's corporate offices and employed in corporate administration. The balance of the employees were located at the various stores: 97 were employed in administration, 160 in 10 equipment sales and rental operations, 134 in parts sales, and 396 in servicing equipment. None of the Company's employees is covered by a collective bargaining agreement. CERTAIN IMPORTANT FACTORS In addition to the matters discussed above, there are several 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 28, 1997, as it may be supplemented or amended from time to time in subsequent Form 8-K or other filings with the Securities and Exchange Commission. Some of these important factors (but not necessarily all important factors) include the following: (i) The overall success of Deere and the Company's other suppliers; (ii) The availability and terms of floor plan financing and customer financing; (iii) The incentive and discount programs provided by Deere and the Company's other suppliers, and their promotional and marketing efforts for the Company's construction and agricultural products; (iv) The introduction of new and innovative products by the Company's suppliers; (v) The manufacture and delivery of competitively-priced, high quality equipment and parts by the Company's suppliers in quantities sufficient to meet the requirements of the Company's customers on a timely basis; (vi) General economic conditions, including agricultural industry cycles, construction spending, federal, state and local government spending on highways and other construction projects, new housing starts, interest rate fluctuations, economic recessions, customer business cycles, and customer confidence in the economy; (vii) The length of the crop growing season and winter and spring weather conditions in the Midwest, and the confidence of the Company's agricultural customers in the farm economy; (viii) Risks associated with expansion, including the management of growth; and (ix) Continued availability of key personnel. ITEM 2. PROPERTIES. As of the end of fiscal 1997, the Company owned the real estate for eight of its stores, leased its executive offices and eight stores from an Offutt Entity (as defined in Item 4A below), and leased 16 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. 11 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. Prior to the completion of the Company's initial public offering and the merger to reincorporate in Delaware (the "Merger"), in the fourth quarter of fiscal 1997 the Merger was approved by the sole shareholder of the Company by written consent and all the shareholders of RDO-North Dakota approved, by written action, the Merger, the 1996 Stock Incentive Plan and the Share Exchange Agreement, between the Company and Ronald D. Offutt, pursuant to which Mr. Offutt exchanged his shares of Class A Common Stock for shares of Class B Common Stock. No other matter was submitted to a vote of security holders during the fourth quarter of fiscal 1997. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers of the Company, their ages and the offices held, as of April 25, 1997 are as follows: NAME AGE OFFICE - ---- --- ------ Ronald D. Offutt 54 Chairman of the Board and Chief Executive Officer Paul T. Horn 54 President and Chief Operating Officer Allan F. Knoll 53 Chief Financial Officer and Secretary Richard J. Moen 49 Chief Administrative Officer and Treasurer Gary R. Allan 48 Senior Vice President - Northwest Agricultural Division Charles Calhoun 44 Senior Vice President - Used Equipment Division H. David Frambers 53 Senior Vice President - Midwest Construction Division Randolph F. Goss 44 Senior Vice President - South Central Construction Division William R. Hutton 49 President - RDO Rental Co. (d/b/a Sun Valley Equipment) Larry B. Kerkhoff 43 Senior Vice President - Midwest Agricultural Division Larry E. Scott 54 Senior Vice President - Southwest Construction Division Mark A. Doda 34 Controller - ----------------- 12 RONALD D. OFFUTT is the Company's founder, Chairman, Chief Executive Officer, and principal stockholder. Mr. Offutt was first elected President of the Company in 1968 upon formation of the Company. Mr. Offutt also serves as Chief Executive Officer and Chairman of the Board of R.D. Offutt Company ("Offutt Co."), and he owns, controls, and/or manages other entities (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 spends approximately 25% of his time on the Company's business. Mr. Offutt is 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. PAUL T. HORN has served as President of the Company since August 1996 and as Chief Operating Officer and a Director of the Company since 1986. Prior to October 1, 1996, he was an employee of Offutt Co. and spent approximately 25% of his time on the business of the Company. Since such date, he has been a full- time employee of the Company. Mr. Horn serves as a director and officer and is a beneficial stockholder of many Offutt Entities. Mr. Horn currently serves as Chairman of the Board of Crop Growers Insurance Corp., a crop insurance company, and 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 Chief Financial Officer, Secretary, and a Director of the Company since 1974. 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 spends approximately 25% of his time on the business of the Company. Mr. Knoll is a graduate of Moorhead State University with degrees in Business Administration and Accounting. RICHARD J. MOEN has served as the Chief Administrative Officer and Treasurer of the Company since October 1996. Prior to joining the Company, from August 1993 until September 1996, Mr. Moen served as Vice President--Legal Services of ConAgra Diversified Products Companies, a division of ConAgra, Inc. ("ConAgra"), a diversified international food company. From March 1988 until August 1993, Mr. Moen served as Executive Vice President--Administration, General Counsel, Secretary, and a director of Golden Valley Microwave Foods, Inc., a company specializing in food products designed for use in microwave ovens. Mr. Moen is a graduate of Massachusetts Institute of Technology, with a degree in Economics, and Harvard Law School. GARY R. ALLAN has served as Senior Vice President -Northwest Agricultural Division since the Company's acquisition in October 1996 of two agricultural stores located in the State of Washington. Previously, Mr. Allan was the President of the acquired Washington agricultural stores and had held such position since 1986. He is also a partner in Coho L.T.D., a diversified farming company located in Pasco, Washington, and currently serves on the Board of Directors of Yakima Federal Savings and Loan in Yakima, Washington. Mr. Allan attended Columbia Basin College and Eastern Washington University. CHARLES CALHOUN has served as Senior Vice President - Used Equipment Division since March 1997. Previously, he was Vice President and an owner of the construction dealership in Texas which 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 Texas construction dealership and started the Used Equipment Division. He is a graduate of Texas Tech University with a degree in Marketing. H. DAVID FRAMBERS has served as Senior Vice President - Midwest Construction Division since July 1996 and from July 1996 until March 1997 also served as Senior Vice President - South Central 13 Construction Division. With the expansion of the Construction Division, he became Vice President and General Manager of the Construction Division for the Midwest and Southwest regions and held such position from 1991 to July 1996. Mr. Frambers served as Vice President and General Manager of the Agricultural and Construction Divisions from 1986 to 1991. Prior to joining the Company, he was the manager of a Deere agricultural dealership in Grand Forks, North Dakota from 1979 to 1986. From 1968 to 1979 he was employed by Deere in sales and marketing and held positions as the territory manager based in Denver, Colorado, the store manager at Fargo Implement, Fargo, North Dakota, and a division sales manager for Deere in Minneapolis, Minnesota. He is a graduate of Kansas State College with a degree in Industrial Technology. RANDOLPH F. GOSS has served as Senior Vice President - South Central Construction Division since March 1997. He joined the Company in January 1997 and managed the Company's Texas construction dealership until his appointment as Senior Vice President. Prior to joining the Company, Mr. Goss was Vice President - Sales and Marketing of Source, Inc., a telecommunications company, from March 1996 until January 1997. From March 1995 until March 1996, he served as Vice President - National Accounts of American Hi-Lift Corporation, a division of Vibroplant USA, Inc. engaged in the rental and sale of equipment. Prior thereto, Mr. Goss was employed by Hertz Equipment Rental Corporation as Director of National Accounts (1992 until March 1995) and as Director of Sales, Southwest Region (1987 until 1992). Mr. Goss attended the University of Miami (Florida). WILLIAM R. HUTTON has served as President of RDO Rental Co. (d/b/a Sun Valley Equipment), an 80% owned subsidiary of the Company, since March 1997. He is also the President of W.R. Hutton & Associates, Inc., a private investment firm with offices in Arizona, which owns the remaining 20% of Sun Valley Equipment. From 1984 until February 1997, he was President and owner of the Arizona construction equipment rental business acquired by Sun Valley Equipment in February 1997. From 1977 to 1980, Mr. Hutton was Vice President and one of the founders of Sunstate Equipment Corp. From 1971 to 1977, Mr. Hutton was a regional manager for U.S. Rentals, Inc. He attended Glendale Community College. LARRY B. KERKHOFF has served as Senior Vice President - Midwest Agricultural Division since July 1996. Prior to that time, he was the manager of the Company's agricultural equipment store in Breckenridge, Minnesota, since 1990. He has been in agri-business for over 20 years. Prior to joining the Company, he was with Kibble Equipment, a Deere agricultural dealership, in Montevideo, Minnesota. He is a graduate of Mankato Area Vocational Institute-- Diesel Mechanics Program and Mankato State University with a degree in Business Administration. LARRY E. SCOTT has served as Senior Vice President - Southwest Construction Division since July 1996. Prior to that time, he served as a Vice President and General Manager of the Agricultural Division since 1991. Mr. Scott has been involved in management in the agricultural business for 24 years. He managed the Company's agricultural stores in Casselton, North Dakota, Breckenridge, Minnesota, and Fargo, North Dakota prior to becoming Vice President of the Agricultural Division. He is a graduate of North Dakota State University with a degree in Mathematics and a minor in Business Administration. MARK A. DODA has served as Controller of the Company 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 January 1985 to December 1991, Mr. Doda worked for Deloitte & Touche LLP. Mr. Doda is a graduate of the University of North Dakota with a degree in Accounting. 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information under the captions "Common Stock Information" and "Dividend Policy" on page 37 of the Company's 1997 Annual Report to Shareholders is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The information under the caption "Selected Financial Data" on page 13 of the 1997 Annual Report to Shareholders 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 14 through 21 of the Company's 1997 Annual Report to Shareholders is incorporated herein by reference. 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 22 through 35 of the Company's 1997 Annual Report to Shareholders are incorporated herein by reference and are listed in Item 14(a)(1)(A) on pages 16 and 17 of this Report. The report of the Company's former independent public accountants, Eide Helmeke PLLP, is included at page 18 of this Report. The supplementary data required by this Item 8 appears as Note 14 entitled "Unaudited Quarterly Financial Data" on page 34 of the 1997 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Effective as of April 17, 1995, the Company's Board of Directors dismissed Eide Helmeke PLLP and appointed Arthur Andersen LLP as the Company's independent public accountants. The report of Eide Helmeke PLLP on the Company's financial statements as of January 31, 1995 and for each of the two years ended January 31, 1995, did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits for the fiscal years ended January 31, 1994 and 1995, and through April 17, 1995, there were no disagreements with Eide Helmeke PLLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure at the time of the change of independent public accountants or with respect to the Company's financial statements. Prior to retaining Arthur Andersen LLP, the Company had not consulted with Arthur Andersen LLP regarding the application of accounting principles or the type of audit opinion that might be rendered on the Company's financial statements. 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information under the captions "Election of Directors--Information About Nominees" and "Election of Directors--Other Information About Nominees" in the Company's 1997 Proxy Statement is incorporated herein by reference. The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1997 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 Company's 1997 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the caption "Principal Shareholders and Beneficial Ownership of Management" in the Company's 1997 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 Company's 1997 Proxy Statement in incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS OF REGISTRANT. (A) The following are incorporated herein by reference from the pages indicated in the Company's 1997 Annual Report to Shareholders, copies of which are included as Exhibit 13.1 to this Report: Report of Independent Public Accountants--Arthur Andersen LLP--page 35. Consolidated Statements of Operations for the Years Ended January 31, 1997, 1996 and 1995--page 22. Consolidated Balance Sheets as of January 31, 1997 and 1996--page 23. 16 Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 1997, 1996 and 1995--page 24. Consolidated Statements of Cash Flow for the Years Ended January 31, 1997, 1996 and 1995--page 25. Notes to Consolidated Financial Statements--pages 26 to 34. (B) Report of Independent Public Accountants--Eide Helmeke PLLP- -is included at page 18 of this Report. (a)(2) FINANCIAL STATEMENT SCHEDULES OF REGISTRANT. 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 Report are listed in the Exhibit Index on pages 20 to 22 below. A copy of any of the exhibits listed or referred to above will be furnished at a reasonable cost to any person who was a shareholder of the Company as of April 25, 1997, upon receipt from any such person of a written request for any such exhibit. Such request should be sent to RDO Equipment Co., Stockholder Relations, 6866 Washington Avenue South, Eden Prairie, Minnesota 55344. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(a)(3): 1. RDO Equipment Co. 1996 Stock Incentive Plan, including forms of option agreements. 2. Form of Agreement Re: Confidentiality, Assignment of Inventions and Non-Competition. 3. Form of Indemnification Agreement between the Company and each of its executive officers and directors. (b) REPORTS ON FORM 8-K. The Company did not file any Current Reports on Form 8-K during the fourth fiscal quarter of the year. 17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To RDO Equipment Co. We have audited the consolidated balance sheet [not presented herein] of RDO Equipment Co. (a Delaware corporation, formerly a North Dakota corporation) and Subsidiary as of January 31, 1995 and the accompanying related consolidated statements of operations, stockholders' equity and cash flows for the year ended January 31, 1995. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position [not presented herein] of RDO Equipment Co. and Subsidiary as of January 31, 1995, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. EIDE HELMEKE PLLP Fargo, North Dakota, December 15, 1995 18 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 28, 1997 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 28, 1997 by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title - --------- ----- /s/ Ronald D. Offutt - ------------------------------------- Chairman of the Board, Chief Executive Ronald D. Offutt Officer and Director (principal executive officer) /s/ Paul T. Horn - ------------------------------------- President, Chief Operating Officer and Paul T. Horn Director /s/ Allan F. Knoll - ------------------------------------- Chief Financial Officer, Secretary and Allan F. Knoll Director (principal financial officer) /s/ Mark A. Doda - ------------------------------------- Controller Mark A. Doda (principal accounting officer) /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 19 RDO EQUIPMENT CO. EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 1997
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 Stock Certificate...................... Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 4.2 Specimen Form of the Company's Class B Common Stock Certificate...................... Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 (File No. 333-13267) 10.1 Agreement between Ronald D. Offutt, RDO Equipment Co., John Deere Company and John Deere Construction Equipment Incorporated by reference to Exhibit 10.1 to the Company....................................... Company's Registration Statement on Form S-1 (File No. 333-13267). 10.2 Form of Deere Agricultural Dealer Agreement Package............................. Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 333-13267) 10.3 Form of Deere Construction Dealer Agreement Package............................. Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 10.4 Loan Agreement, Seasonal Note and Security Agreement between Ag Capital and the Company, dated July 25, 1996.................. Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 20 10.5 Loan Agreement and Seasonal Note between Ag Capital Company and Minnesota Valley Irrigation, Inc., dated August 26, 1996....... Incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 10.6 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). 10.7 Deere Construction Dealer Finance Incorporated by reference to Exhibit 10.7 to the Agreement..................................... Company's Registration Statement on Form S-1 (File No. 333-13267). 10.8 RDO Equipment Co. 1996 Stock Incentive Plan, including forms of option agreements.... Filed herewith. 10.9 Form of Indemnification Agreement entered into by the Company with each of its executive officers and directors.............. Incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 10.10 Corporate Service Agreement between RDO Equipment Co. and R.D. Offutt Company, dated as of November 1, 1996.................. Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 10.12 Agreement and Plan of Merger by and between RDO Equipment Co. (North Dakota) and RDO Equipment Co. (Delaware).............. Incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 10.13 Tax Agreement Relating to S Corporation Distribution, with Supplement................. Incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 10.14 Agreement between RDO Equipment Co., John Deere Company and John Deere Construction Equipment Company................ Incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 21 10.15 Form of Agreement re: Confidentiality, Assignment of Inventions and Non- Competition entered into by the Company with each of its executive officers and directors.. Filed herewith. 11.1 Statement re: Computation of Per Share Earnings...................................... Filed herewith. 13.1 1997 Annual Report to Shareholders (pages 13 through 35 and selected portions of page 37)...................................... Filed herewith. 16.1 Letter re Change in Certifying Accountant..... Incorporated by reference to Exhibit 16.1 to the Company's Registration Statement on Form S-1 (File No. 333-13267) 21.1 Subsidiaries of the Registrant................ Filed herewith. 27.1 Financial Data Schedule....................... Filed herewith.
22 EX-10.8 2 EXHIBIT 10.8 Exhibit 10.8 RDO EQUIPMENT CO. 1996 STOCK INCENTIVE PLAN AND FORMS OF OPTION AGREEMENTS 1. PURPOSE OF PLAN. The purpose of the RDO Equipment Co. 1996 Stock Incentive Plan (the "Plan") is to advance the interests of RDO Equipment Co. (the "Company") and its stockholders by enabling the Company and its Subsidiaries to attract and retain persons of ability to perform services for the Company and its Subsidiaries by providing an incentive to such individuals through equity participation in the Company and by rewarding such individuals who contribute to the achievement by the Company of its economic objectives. 2. DEFINITIONS. The following terms will have the meanings set forth below, unless the context clearly otherwise requires: 2.1 "BOARD" means the Board of Directors of the Company. 2.2 "BROKER EXERCISE NOTICE" means a written notice pursuant to which a Participant, upon exercise of an Option, irrevocably instructs a broker or dealer to sell a sufficient number of shares or loan a sufficient amount of money to pay all or a portion of the exercise price of the Option and/or any related withholding tax obligations and remit such sums to the Company and directs the Company to deliver stock certificates to be issued upon such exercise directly to such broker or dealer. 2.3 "CHANGE IN CONTROL" means an event described in Section 13.1 of the Plan. 2.4 "CODE" means the Internal Revenue Code of 1986, as amended. 2.5 "COMMITTEE" means the group of individuals administering the Plan, as provided in Section 3 of the Plan. 2.6 "COMMON STOCK" means the Class A Common Stock of the Company, par value $.01 per share, or the number and kind of shares of stock or other securities into which such Common Stock may be changed in accordance with Section 4.3 of the Plan. 2.7 "DISABILITY" means the disability of the Participant such as would entitle the Participant to receive disability income benefits pursuant to the long-term disability plan of the Company or Subsidiary then covering the Participant or, if no such plan exists or is applicable to the Participant, the permanent and total disability of the Participant within the meaning of Section 22(e)(3) of the Code. 2.8 "ELIGIBLE RECIPIENTS" means all employees of the Company or any Subsidiary and any non-employee directors, consultants and independent contractors of the Company or any Subsidiary. 2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 2.10 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of any date (or, if no shares were traded or quoted on such date, as of the next preceding date on which there was such a trade or quote) (a) the mean between the reported high and low sale prices of the Common Stock if the Common Stock is listed, admitted to unlisted trading privileges or reported on any national securities exchange or on the Nasdaq National Market; (b) if the Common Stock is not so listed, admitted to unlisted trading privileges or reported on any national securities exchange or on the Nasdaq National Market, the closing bid price as reported by the Nasdaq SmallCap Market, OTC Bulletin Board or the National Quotation Bureau, Inc. or other comparable service; or (c) if the Common Stock is not so listed or reported, such price as the Committee determines in good faith in the exercise of its reasonable discretion. If determined by the Committee, such determination will be final, conclusive and binding for all purposes and on all persons, including, without limitation, the Company, the stockholders of the Company, the Participants and their respective successors-in-interest. No member of the Committee will be liable for any determination regarding the fair market value of the Common Stock that is made in good faith. 2.11 "INCENTIVE AWARD" means an Option, Stock Appreciation Right, Restricted Stock Award, Performance Unit or Stock Bonus granted to an Eligible Recipient pursuant to the Plan. 2.12 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that qualifies as an "incentive stock option" within the meaning of Section 422 of the Code. 2.13 "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that does not qualify as an Incentive Stock Option. 2.14 "OPTION" means an Incentive Stock Option or a Non-Statutory Stock Option. 2.15 "PARTICIPANT" means an Eligible Recipient who receives one or more Incentive Awards under the Plan. 2.16 "PERFORMANCE UNIT" means a right granted to an Eligible Recipient pursuant to Section 9 of the Plan to receive a payment from the Company, in the form of stock, cash or a combination of both, upon the achievement of established employment, service, performance or other goals. 2.17 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock that are already owned by the Participant or, with respect to any Incentive Award, that are to be issued upon the grant, exercise or vesting of such Incentive Award. 2.18 "RESTRICTED STOCK AWARD" means an award of Common Stock granted to an Eligible Recipient pursuant to Section 8 of the Plan that is subject to the restrictions on transferability and the risk of forfeiture imposed by the provisions of such Section 8. 2.19 "RETIREMENT" means termination of employment or service pursuant to and in accordance with the regular (or, if approved by the Board for purposes of the Plan, early) retirement/pension plan or practice of the Company or Subsidiary then covering the Participant, provided that if the Participant is not covered by any such plan or practice, the Participant will be deemed to be covered by the Company's plan or practice for purposes of this determination. 2.20 "SECURITIES ACT" means the Securities Act of 1933, as amended. 2.21 "STOCK APPRECIATION RIGHT" means a right granted to an Eligible Recipient pursuant to Section 7 of the Plan to receive a payment from the Company, in the form of stock, cash or a 2 combination of both, equal to the difference between the Fair Market Value of one or more shares of Common Stock and the exercise price of such shares under the terms of such Stock Appreciation Right. 2.22 "STOCK BONUS" means an award of Common Stock granted to an Eligible Recipient pursuant to Section 10 of the Plan. 2.23 "SUBSIDIARY" means any entity that is directly or indirectly controlled by the Company or any entity in which the Company has a significant equity interest, as determined by the Committee. 2.24 "TAX DATE" means the date any withholding tax obligation arises under the Code for a Participant with respect to an Incentive Award. 3. PLAN ADMINISTRATION. 3.1 THE COMMITTEE. The Plan will be administered by the Board or by a committee of the Board. So long as the Company has a class of its equity securities registered under Section 12 of the Exchange Act, any committee administering the Plan will consist solely of two or more members of the Board who are "non-employee directors" within the meaning of Rule 16b-3 under the Exchange Act and, if the Board so determines in its sole discretion, who are "outside directors" within the meaning of Section 162(m) of the Code. Such a committee, if established, will act by majority approval of the members (but may also take action with the written consent of all members of such committee), and a majority of the members of such a committee will constitute a quorum. As used in the Plan, "Committee" will refer to the Board or to such a committee, if established. To the extent consistent with corporate law, the Committee may delegate to any officers of the Company the duties, power and authority of the Committee under the Plan pursuant to such conditions or limitations as the Committee may establish; provided, however, that only the Committee may exercise such duties, power and authority with respect to Eligible Recipients who are subject to Section 16 of the Exchange Act. The Committee may exercise its duties, power and authority under the Plan in its sole and absolute discretion without the consent of any Participant or other party, unless the Plan specifically provides otherwise. Each determination, interpretation or other action made or taken by the Committee pursuant to the provisions of the Plan will be conclusive and binding for all purposes and on all persons, and no member of the Committee will be liable for any action or determination made in good faith with respect to the Plan or any Incentive Award granted under the Plan. 3.2 AUTHORITY OF THE COMMITTEE. (a) In accordance with and subject to the provisions of the Plan, the Committee will have the authority to determine all provisions of Incentive Awards as the Committee may deem necessary or desirable and as consistent with the terms of the Plan, including, without limitation, the following: (i) the Eligible Recipients to be selected as Participants; (ii) the nature and extent of the Incentive Awards to be made to each Participant (including the number of shares of Common Stock to be subject to each Incentive Award, any exercise price, the manner in which Incentive Awards will vest or become exercisable and whether Incentive Awards will be granted in tandem with other Incentive Awards) and the form of written agreement, if any, evidencing such Incentive Award; (iii) the time or times when Incentive Awards will be granted; (iv) the duration of each Incentive Award; and (v) the restrictions and other conditions to which the payment or vesting of Incentive Awards may be subject. In addition, the Committee will have the authority under the Plan in its sole discretion to pay the economic value of any Incentive Award in the form of cash, Common Stock or any combination of both. 3 (b) The Committee will have the authority under the Plan to amend or modify the terms of any outstanding Incentive Award in any manner, including, without limitation, the authority to modify the number of shares or other terms and conditions of an Incentive Award, extend the term of an Incentive Award, accelerate the exercisability or vesting or otherwise terminate any restrictions relating to an Incentive Award, accept the surrender of any outstanding Incentive Award or, to the extent not previously exercised or vested, authorize the grant of new Incentive Awards in substitution for surrendered Incentive Awards; provided, however that the amended or modified terms are permitted by the Plan as then in effect and that any Participant adversely affected by such amended or modified terms has consented to such amendment or modification. No amendment or modification to an Incentive Award, however, whether pursuant to this Section 3.2 or any other provisions of the Plan, will be deemed to be a regrant of such Incentive Award for purposes of this Plan. (c) In the event of (i) any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, extraordinary dividend or divestiture (including a spin-off) or any other change in corporate structure or shares, (ii) any purchase, acquisition, sale or disposition of a significant amount of assets or a significant business, (iii) any change in accounting principles or practices, or (iv) any other similar change, in each case with respect to the Company or any other entity whose performance is relevant to the grant or vesting of an Incentive Award, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) may, without the consent of any affected Participant, amend or modify the vesting criteria of any outstanding Incentive Award that is based in whole or in part on the financial performance of the Company (or any Subsidiary or division thereof) or such other entity so as equitably to reflect such event, with the desired result that the criteria for evaluating such financial performance of the Company or such other entity will be substantially the same (in the sole discretion of the Committee or the board of directors of the surviving corporation) following such event as prior to such event; provided, however, that the amended or modified terms are permitted by the Plan as then in effect. 4. SHARES AVAILABLE FOR ISSUANCE. 4.1 MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as provided in Section 4.3 of the Plan, the initial maximum number of shares of Common Stock that will be available for issuance under the Plan will be 1,250,000 shares of Common Stock; as of February 1 of each year the Plan is in effect, if the total number of shares of Class A and Class B Common Stock issued and outstanding, not including any shares of Common Stock issued under the Plan, exceeds the total number of shares of Class A and Class B Common Stock issued and outstanding as of February 1 of the preceding year, the number of shares available will be increased by an amount such that the total number of shares available for issuance under the Plan equals 10% of the total number of shares of Common Stock outstanding, not including any shares issued under the Plan. Lapsed, forfeited, or canceled awards will not count against these limits. Cash exercises of SARs and cash settlements of other awards will also not be counted against these limits but the total number of SARs and other awards settled in cash shall not exceed the total number of shares authorized for issuance under the Plan (without deduction for issuances). Notwithstanding any other provisions of the Plan to the contrary, no Participant in the Plan may be granted any Options or Stock Appreciation Rights, or any other Incentive Awards with a value based solely on an increase in the value of the Common Stock after the date of grant, relating to more than 125,000 shares of Common Stock in the aggregate in any fiscal year of the Company (subject to adjustment as provided in Section 4.3 of the Plan); provided, however, that a Participant who is first 4 appointed or elected as an officer, hired as an employee or retained as a consultant by the Company or who receives a promotion that results in an increase in responsibilities or duties may be granted, during the fiscal year of such appointment, election, hiring, retention or promotion, Options, Stock Appreciation Rights or such other Incentive Awards relating to up to 250,000 shares of Common Stock (subject to adjustment as provided in Section 4.3 of the Plan). 4.2 ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock that are issued under the Plan or that are subject to outstanding Incentive Awards will be applied to reduce the maximum number of shares of Common Stock remaining available for issuance under the Plan. Any shares of Common Stock that are subject to an Incentive Award that lapses, expires, is forfeited or for any reason is terminated unexercised or unvested and any shares of Common Stock that are subject to an Incentive Award that is settled or paid in cash or any form other than shares of Common Stock will automatically again become available for issuance under the Plan. Any shares of Common Stock that constitute the forfeited portion of a Restricted Stock Award, however, will not become available for further issuance under the Plan. 4.3 ADJUSTMENTS TO SHARES AND INCENTIVE AWARDS. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, divestiture or extraordinary dividend (including a spin-off) or any other change in the corporate structure or shares of the Company, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) will make appropriate adjustment (which determination will be conclusive) as to the number and kind of securities or other property (including cash) available for issuance or payment under the Plan and, in order to prevent dilution or enlargement of the rights of Participants, (a) the number and kind of securities or other property (including cash) subject to outstanding Options, and (b) the exercise price of outstanding Options. 5. PARTICIPATION. Participants in the Plan will be those Eligible Recipients who, in the judgment of the Committee, have contributed, are contributing or are expected to contribute to the achievement of economic objectives of the Company or its Subsidiaries. Eligible Recipients may be granted from time to time one or more Incentive Awards, singly or in combination or in tandem with other Incentive Awards, as may be determined by the Committee in its sole discretion. Incentive Awards will be deemed to be granted as of the date specified in the grant resolution of the Committee, which date will be the date of any related agreement with the Participant. 6. OPTIONS. 6.1 GRANT. An Eligible Recipient may be granted one or more Options under the Plan, and such Options will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. The Committee may designate whether an Option is to be considered an Incentive Stock Option or a Non-Statutory Stock Option. To the extent that any Incentive Stock Option granted under the Plan ceases for any reason to qualify as an "incentive stock option" for purposes of Section 422 of the Code, such Incentive Stock Option will continue to be outstanding for purposes of the Plan but will thereafter be deemed to be a Non-Statutory Stock Option. 6.2 EXERCISE PRICE. The per share price to be paid by a Participant upon exercise of an Option will be determined by the Committee in its discretion at the time of the Option grant; provided, 5 however, that (a) such price will not be less than 100% of the Fair Market Value of one share of Common Stock on the date of grant with respect to an Incentive Stock Option (110% of the Fair Market Value if, at the time the Incentive Stock Option is granted, the Participant owns, directly or indirectly, more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary corporation of the Company), and (b) such price will not be less than 85% of the Fair Market Value of one share of Common Stock on the date of grant with respect to a Non-Statutory Stock Option. 6.3 EXERCISABILITY AND DURATION. An Option will become exercisable at such times and in such installments as may be determined by the Committee in its sole discretion at the time of grant; provided, however, that (a) except for Options to new directors, no Option may be exercisable prior to six months from its date of grant (other than as provided in Section 11 of the Plan), and (b) no Option may be exercisable after 10 years from its date of grant. 6.4 PAYMENT OF EXERCISE PRICE. The total purchase price of the shares to be purchased upon exercise of an Option will be paid entirely in cash (including check, bank draft or money order); provided, however, that the Committee, in its sole discretion and upon terms and conditions established by the Committee, may allow such payments to be made, in whole or in part, by tender of a Broker Exercise Notice, Previously Acquired Shares, a promissory note (on terms acceptable to the Committee in its sole discretion) or by a combination of such methods. 6.5 MANNER OF EXERCISE. An Option may be exercised by a Participant in whole or in part from time to time, subject to the conditions contained in the Plan and in the agreement evidencing such Option, by delivery in person, by facsimile or electronic transmission or through the mail of written notice of exercise to the Company (Attention: Chief Financial Officer) at its principal executive office in Fargo, North Dakota and by paying in full the total exercise price for the shares of Common Stock to be purchased in accordance with Section 6.4 of the Plan. 7. STOCK APPRECIATION RIGHTS. 7.1 GRANT. An Eligible Recipient may be granted one or more Stock Appreciation Rights under the Plan, and such Stock Appreciation Rights will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. 7.2 EXERCISE PRICE. The exercise price of a Stock Appreciation Right will be determined by the Committee, in its discretion, at the date of grant but may not be less than 100% of the Fair Market Value of one share of Common Stock on the date of grant. 7.3 EXERCISABILITY AND DURATION. A Stock Appreciation Right will become exercisable at such time and in such installments as may be determined by the Committee in its sole discretion at the time of grant; provided, however, that no Stock Appreciation Right may be exercisable after 10 years from its date of grant. A Stock Appreciation Right will be exercised by giving notice in the same manner as for Options, as set forth in Section 6.5 of the Plan. 8. RESTRICTED STOCK AWARDS. 8.1 GRANT. An Eligible Recipient may be granted one or more Restricted Stock Awards under the Plan, and such Restricted Stock Awards will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole 6 discretion. The Committee may impose such restrictions or conditions, not inconsistent with the provisions of the Plan, to the vesting of such Restricted Stock Awards as it deems appropriate, including, without limitation, that the Participant remain in the continuous employ or service of the Company or a Subsidiary for a certain period or that the Participant or the Company (or any Subsidiary or division thereof) satisfy certain performance goals or criteria. 8.2 RIGHTS AS A STOCKHOLDER; TRANSFERABILITY. Except as provided in Sections 8.1, 8.3 and 14.3 of the Plan, a Participant will have all voting, dividend, liquidation and other rights with respect to shares of Common Stock issued to the Participant as a Restricted Stock Award under this Section 8 upon the Participant becoming the holder of record of such shares as if such Participant were a holder of record of shares of unrestricted Common Stock. 8.3 DIVIDENDS AND DISTRIBUTIONS. Unless the Committee determines otherwise in its sole discretion (either in the agreement evidencing the Restricted Stock Award at the time of grant or at any time after the grant of the Restricted Stock Award), any dividends or distributions (including regular quarterly cash dividends) paid with respect to shares of Common Stock subject to the unvested portion of a Restricted Stock Award will be subject to the same restrictions as the shares to which such dividends or distributions relate. In the event the Committee determines not to pay such dividends or distributions currently, the Committee will determine in its sole discretion whether any interest will be paid on such dividends or distributions. In addition, the Committee in its sole discretion may require such dividends and distributions to be reinvested (and in such case the Participants consent to such reinvestment) in shares of Common Stock that will be subject to the same restrictions as the shares to which such dividends or distributions relate. 8.4 ENFORCEMENT OF RESTRICTIONS. To enforce the restrictions referred to in this Section 8, the Committee may place a legend on the stock certificates referring to such restrictions and may require the Participant, until the restrictions have lapsed, to keep the stock certificates, together with duly endorsed stock powers, in the custody of the Company or its transfer agent or to maintain evidence of stock ownership, together with duly endorsed stock powers, in a certificateless book-entry stock account with the Company's transfer agent. 9. PERFORMANCE UNITS. An Eligible Recipient may be granted one or more Performance Units under the Plan, and such Performance Units will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. The Committee may impose such restrictions or conditions, not inconsistent with the provisions of the Plan, to the vesting of such Performance Units as it deems appropriate, including, without limitation, that the Participant remain in the continuous employ or service of the Company or any Subsidiary for a certain period or that the Participant or the Company (or any Subsidiary or division thereof) satisfy certain performance goals or criteria. The Committee will have the sole discretion to determine the form in which payment of the economic value of vested Performance Units will be made to the Participant (i.e., cash, Common Stock or any combination thereof) or to consent to or disapprove the election by the Participant of the form of such payment. 10. STOCK BONUSES. An Eligible Recipient may be granted one or more Stock Bonuses under the Plan, and such Stock Bonuses will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee. The Participant will have all voting, dividend, liquidation and 7 other rights with respect to the shares of Common Stock issued to a Participant as a Stock Bonus under this Section 10 upon the Participant becoming the holder of record of such shares; provided, however, that the Committee may impose such restrictions on the assignment or transfer of a Stock Bonus as it deems appropriate. 11. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. 11.1 TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In the event a Participant's employment or other service with the Company and all Subsidiaries is terminated by reason of death, Disability or Retirement: (a) All outstanding Options and Stock Appreciation Rights then held by the Participant will become immediately exercisable in full and will remain exercisable for a period of one year after such termination (but in no event after the expiration date of any such Option or Stock Appreciation Right); (b) All Restricted Stock Awards then held by the Participant will become fully vested; and (c) All Performance Units and Stock Bonuses then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units or Stock Bonuses. 11.2 TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT. (a) In the event a Participant's employment or other service is terminated with the Company and all Subsidiaries for any reason other than death, Disability or Retirement, or a Participant is in the employ or service of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the Company (unless the Participant continues in the employ or service of the Company or another Subsidiary), all rights of the Participant under the Plan and any agreements evidencing an Incentive Award will immediately terminate without notice of any kind, and no Options or Stock Appreciation Rights then held by the Participant will thereafter be exercisable, all Restricted Stock Awards then held by the Participant that have not vested will be terminated and forfeited, and all Performance Units and Stock Bonuses then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units or Stock Bonuses; provided, however, that if such termination is due to any reason other than termination by the Company or any Subsidiary for "cause," all outstanding Options or Stock Appreciation Rights then held by such Participant will remain exercisable to the extent exercisable as of such termination for a period of three months after such termination (but in no event after the expiration date of any such Option or Stock Appreciation Right). (b) For purposes of this Section 11.2, "cause" (as determined by the Committee) will be as defined in any employment or other agreement or policy applicable to the Participant or, if no such agreement or policy exists, will mean (i) dishonesty, fraud, misrepresentation, embezzlement or deliberate injury or attempted injury, in each case related to the Company or any Subsidiary, (ii) any unlawful or criminal activity of a serious nature, (iii) any intentional and deliberate breach of a duty or duties that, individually or in the aggregate, are material in relation to the Participant's overall duties, or (iv) any material breach of any employment, service, confidentiality or noncompete agreement entered into with the Company or any Subsidiary. 8 11.3 MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding the other provisions of this Section 11, upon a Participant's termination of employment or other service with the Company and all Subsidiaries, the Committee may, in its sole discretion (which may be exercised at any time on or after the date of grant, including following such termination), cause Options and Stock Appreciation Rights (or any part thereof) then held by such Participant to become or continue to become exercisable and/or remain exercisable following such termination of employment or service and Restricted Stock Awards, Performance Units and Stock Bonuses then held by such Participant to vest and/or continue to vest or become free of transfer restrictions, as the case may be, following such termination of employment or service, in each case in the manner determined by the Committee; provided, however, that no Option or Stock Appreciation Right may remain exercisable beyond its expiration date. 11.4 BREACH OF CONFIDENTIALITY OR NONCOMPETE AGREEMENTS. Notwithstanding anything in the Plan to the contrary, in the event that a Participant materially breaches the terms of any confidentiality or noncompete agreement entered into with the Company or any Subsidiary, whether such breach occurs before or after termination of such Participant's employment or other service with the Company or any Subsidiary, the Committee in its sole discretion may immediately terminate all rights of the Participant under the Plan and any agreements evidencing an Incentive Award then held by the Participant without notice of any kind. 11.5 DATE OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. Unless the Committee otherwise determines in its sole discretion, a Participant's employment or other service will, for purposes of the Plan, be deemed to have terminated on the date recorded on the personnel or other records of the Company or the Subsidiary for which the Participant provides employment or other service, as determined by the Committee in its sole discretion based upon such records. 12. PAYMENT OF WITHHOLDING TAXES. 12.1 GENERAL RULES. The Company is entitled to (a) withhold and deduct from future wages of the Participant (or from other amounts that may be due and owing to the Participant from the Company or a Subsidiary), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any and all federal, state and local withholding and employment-related tax requirements attributable to an Incentive Award, including, without limitation, the grant, exercise or vesting of, or payment of dividends with respect to, an Incentive Award or a disqualifying disposition of stock received upon exercise of an Incentive Stock Option, or (b) require the Participant promptly to remit the amount of such withholding to the Company before taking any action, including issuing any shares of Common Stock, with respect to an Incentive Award. 12.2 SPECIAL RULES. The Committee may, in its sole discretion and upon terms and conditions established by the Committee, permit or require a Participant to satisfy, in whole or in part, any withholding or employment-related tax obligation described in Section 12.1 of the Plan by electing to tender Previously Acquired Shares, a Broker Exercise Notice or a promissory note (on terms acceptable to the Committee in its sole discretion), or by a combination of such methods. 9 13. CHANGE IN CONTROL. 13.1 CHANGE IN CONTROL. For purposes of this Section 13, a "Change in Control" of the Company will mean the following: (a) the sale, lease, exchange or other transfer, directly or indirectly, of substantially all of the assets of the Company (in one transaction or in a series of related transactions) to a person or entity that is not controlled by the Company; (b) the approval by the stockholders of the Company of any plan or proposal for the liquidation or dissolution of the Company; (c) a merger or consolidation to which the Company is a party if the stockholders of the Company immediately prior to effective date of such merger or consolidation have "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), immediately following the effective date of such merger or consolidation, of securities of the surviving corporation representing (i) more than 50%, but less than 80%, of the combined voting power of the surviving corporation's then outstanding securities ordinarily having the right to vote at elections of directors, unless such merger or consolidation has been approved in advance by the Continuity Directors (as defined in Section 13.2 below), or (ii) 50% or less of the combined voting power of the surviving corporation's then outstanding securities ordinarily having the right to vote at elections of directors (regardless of any approval by the Continuity Directors); (d) any person becomes after the effective date of the Plan the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of (i) 20% or more, but not 50% or more, of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors, unless the transaction resulting in such ownership has been approved in advance by the Continuity Directors, or (ii) 50% or more of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors (regardless of any approval by the Continuity Directors); or (e) the Continuity Directors cease for any reason to constitute at least a majority of the Board. Notwithstanding anything in this Section 13.1 to the contrary, none of the following events, in and of itself, will be deemed to constitute a Change in Control for purposes of this Section 13: (i) the transfer by Ronald D. Offutt ("Offutt") of shares of Common Stock or shares of Class B Common Stock of the Company to a trust, provided that, Offutt retains voting control with respect to such shares; (ii) the distribution to his heirs or beneficiaries upon Offutt's death, or (iii) the conversion of shares of Class B Common Stock into shares of Common Stock, provided that this exception from the definition of Change in Control for conversions relates only to the conversion itself and not to any transfers that may occur in conjunction with such conversions. 13.2 CONTINUITY DIRECTORS. For purposes of this Section 13, "Continuity Directors" of the Company will mean any individuals who are members of the Board on the effective date of the Plan and any individual who subsequently becomes a member of the Board whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the Continuity Directors (either by specific vote or by approval of the Company's proxy statement in which such individual is named as a nominee for director without objection to such nomination). 10 13.3 ACCELERATION OF VESTING. Without limiting the authority of the Committee under Sections 3.2 and 4.3 of the Plan, if a Change in Control of the Company occurs, then, unless otherwise provided by the Committee in its sole discretion either in the agreement evidencing an Incentive Award at the time of grant or at any time after the grant of an Incentive Award, (a) all outstanding Options and Stock Appreciation Rights that have been held at least six months will become immediately exercisable in full and will remain exercisable for the remainder of their terms, regardless of whether the Participant to whom such Options or Stock Appreciation Rights have been granted remains in the employ or service of the Company or any Subsidiary; (b) all outstanding Restricted Stock Awards will become immediately fully vested and non-forfeitable; and (c) all outstanding Performance Units and Stock Bonuses then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units or Stock Bonuses. 13.4 CASH PAYMENT FOR OPTIONS. If a Change in Control of the Company occurs, then the Committee, if approved by the Committee in its sole discretion either in an agreement evidencing an Incentive Award at the time of grant or at any time after the grant of an Incentive Award, and without the consent of any Participant effected thereby, may determine that some or all Participants holding outstanding Options will receive, with respect to some or all of the shares of Common Stock subject to such Options, as of the effective date of any such Change in Control of the Company, cash in an amount equal to the excess of the Fair Market Value of such shares immediately prior to the effective date of such Change in Control of the Company over the exercise price per share of such Options. 13.5 LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything in Section 13.3 or 13.4 of the Plan to the contrary, if, with respect to a Participant, the acceleration of the vesting of an Incentive Award as provided in Section 13.3 or the payment of cash in exchange for all or part of an Incentive Award as provided in Section 13.4 (which acceleration or payment could be deemed a "payment" within the meaning of Section 280G(b)(2) of the Code), together with any other "payments" that such Participant has the right to receive from the Company or any corporation that is a member of an "affiliated group" (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), or would otherwise be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by the Participant with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Participant shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Participant of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax, the Participant will be in the same after-tax position as if no Excise Tax had been imposed. The Committee may, from time to time, adopt policies and procedures with respect to the calculation and payment of these amounts. 14. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY. 14.1 EMPLOYMENT OR SERVICE. Nothing in the Plan will interfere with or limit in any way the right of the Company or any Subsidiary to terminate the employment or service of any Eligible Recipient or Participant at any time, nor confer upon any Eligible Recipient or Participant any right to continue in the employ or service of the Company or any Subsidiary. 14.2 RIGHTS AS A STOCKHOLDER. As a holder of Incentive Awards (other than Restricted Stock Awards and Stock Bonuses), a Participant will have no rights as a stockholder unless and until such Incentive Awards are exercised for, or paid in the form of, shares of Common Stock and the Participant becomes the holder of record of such shares. Except as otherwise provided in the Plan, no adjustment 11 will be made for dividends or distributions with respect to such Incentive Awards as to which there is a record date preceding the date the Participant becomes the holder of record of such shares, except as the Committee may determine in its discretion. 14.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or the laws of descent and distribution or as otherwise expressly permitted by the Plan, unless approved by the Committee in its sole discretion, no right or interest of any Participant in an Incentive Award prior to the exercise or vesting of such Incentive Award will be assignable or transferable, or subjected to any lien, during the lifetime of the Participant, either voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise. A Participant will, however, be entitled to designate a beneficiary to receive an Incentive Award upon such Participant's death, and in the event of a Participant's death, payment of any amounts due under the Plan will be made to, and exercise of any Options (to the extent permitted pursuant to Section 11 of the Plan) may be made by, the Participant's legal representatives, heirs and legatees. 14.4 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended to modify or rescind any previously approved compensation plans or programs of the Company or create any limitations on the power or authority of the Board to adopt such additional or other compensation arrangements as the Board may deem necessary or desirable. 15. SECURITIES LAW AND OTHER RESTRICTIONS. Notwithstanding any other provision of the Plan or any agreements entered into pursuant to the Plan, the Company will not be required to issue any shares of Common Stock under this Plan, and a Participant may not sell, assign, transfer or otherwise dispose of shares of Common Stock issued pursuant to Incentive Awards granted under the Plan, unless (a) there is in effect with respect to such shares a registration statement under the Securities Act and any applicable state securities laws or an exemption from such registration under the Securities Act and applicable state securities laws, and (b) there has been obtained any other consent, approval or permit from any other regulatory body which the Committee, in its sole discretion, deems necessary or advisable. The Company may condition such issuance, sale or transfer upon the receipt of any representations or agreements from the parties involved, and the placement of any legends on certificates representing shares of Common Stock, as may be deemed necessary or advisable by the Company in order to comply with such securities law or other restrictions. 16. PLAN AMENDMENT, MODIFICATION AND TERMINATION. The Board may suspend or terminate the Plan or any portion thereof at any time, and may amend the Plan from time to time in such respects as the Board may deem advisable in order that Incentive Awards under the Plan will conform to any change in applicable laws or regulations or in any other respect the Board may deem to be in the best interests of the Company; provided, however, that no amendments to the Plan will be effective without approval of the stockholders of the Company if stockholder approval of the amendment is then required pursuant to Section 422 of the Code or the rules of any stock exchange or Nasdaq. No termination, suspension or amendment of the Plan may adversely affect any outstanding Incentive Award without the consent of the affected Participant; provided, however, that this sentence will not impair the right of the Committee to take whatever action it deems appropriate under Sections 3.2, 4.3 and 13 of the Plan. 12 17. EFFECTIVE DATE AND DURATION OF THE PLAN. The Plan is effective as of October 1, 1996. The Plan will terminate at midnight on September 31, 2006, and may be terminated prior to such time to by Board action, and no Incentive Award will be granted after such termination. Incentive Awards outstanding upon termination of the Plan may continue to be exercised, or become free of restrictions, in accordance with their terms. 18. MISCELLANEOUS. 18.1 GOVERNING LAW. The validity, construction, interpretation, administration and effect of the Plan and any rules, regulations and actions relating to the Plan will be governed by and construed exclusively in accordance with the laws of the State of Delaware, notwithstanding the conflicts of laws principles of any jurisdictions. 18.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure to the benefit of the successors and permitted assigns of the Company and the Participants. 13 INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT is entered into and effective as of this ____ day of _______, ____ (the "Date of Grant"), by and between RDO Equipment Co. (the "Company") and _______________ (the "Optionee"). A. The Company has adopted the RDO Equipment Co. 1996 Stock Incentive Plan (the "Plan") authorizing the Board of Directors of the Company, or a committee as provided for in the Plan (the Board or such a committee to be referred to as the "Committee"), to grant incentive stock options to employees of the Company and its Subsidiaries (as defined in the Plan). B. The Company desires to give the Optionee an inducement to acquire a proprietary interest in the Company and an added incentive to advance the interests of the Company by granting to the Optionee an option to purchase shares of Class A Common Stock of the Company pursuant to the Plan, subject to the satisfaction of any conditions to such award as the Committee may have made to the grant of such option. C. The grant of this option is expressly conditioned upon the delivery by Optionee to the Company of an assignment of invention, confidentiality and/or non-compete agreement acceptable to the Company. Accordingly, the parties agree as follows: 1. GRANT OF OPTION. The Company hereby grants to the Optionee the right, privilege, and option (the "Option") to purchase ____________________ (_________) shares (the "Option Shares") of the Company's Class A Common Stock, $0.01 par value (the "Class A Common Stock"), according to the terms and subject to the conditions hereinafter set forth and as set forth in the Plan. The Option is intended to be an "incentive stock option," as that term is used in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. OPTION EXERCISE PRICE. The per share price to be paid by Optionee in the event of an exercise of the Option will be $_____. 3. DURATION OF OPTION AND TIME OF EXERCISE. 3.1 INITIAL PERIOD OF EXERCISABILITY. The Option will become exercisable with respect to the Option Shares in ____ (__) installments. The following table sets forth the initial dates of exercisability of 23 each installment and the number of Option Shares as to which this Option will become exercisable on such dates: Initial Date of Number of Option Shares Exercisability Available for Exercise --------------- ----------------------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- The foregoing rights to exercise this Option will be cumulative with respect to the Option Shares becoming exercisable on each such date, but in no event will this Option be exercisable after, and this Option will become void and expire as to all unexercised Option Shares at, 5:00 p.m. (Fargo, North Dakota time) on _______ __, ____ (the "Time of Termination"). 3.2 TERMINATION OF EMPLOYMENT. (a) TERMINATION DUE TO DEATH OR DISABILITY. In the event that the Optionee's employment with the Company and all Subsidiaries is terminated by reason of the Optionee's death or Disability (as defined in the Plan), this Option will become immediately exercisable in full and will remain exercisable for a period of one year after such termination (but in no event after the Time of Termination). (b) TERMINATION DUE TO RETIREMENT. In the event that the Optionee's employment with the Company and all Subsidiaries is terminated by reason of Retirement (as defined in the Plan), all outstanding Options then held by the Optionee will remain exercisable to the extent exercisable as of such termination for a period of 90 days after such termination (but in no event after the Time of Termination). (c) TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT. In the event the Optionee's employment with the Company and all Subsidiaries is terminated for any reason other than death, Disability or Retirement, or the Optionee is in the employ of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the Company (unless the Optionee continues in the employ of the Company or another Subsidiary), all outstanding Options then held by the Optionee will remain exercisable to the extent exercisable as of such termination for a period of 90 days after such termination (but in no event after the Time of Termination); provided however, that if the Optionee materially breaches the terms of any confidentiality or noncompete agreement entered into with the Company or any Subsidiary, whether such breach occurs before or after termination of the Optionee's employment with the Company or any Subsidiary, the Committee, in its sole discretion and without the consent of the Optionee, may immediately terminate all rights of the Optionee under the Plan and this Agreement. 3.3 CHANGE IN CONTROL. (a) IMPACT OF CHANGE IN CONTROL. If any events constituting a Change in Control (as defined in the Plan) of the Company occur, this Option will become immediately exercisable in full and will remain exercisable until the Time of Termination, regardless of whether the Optionee remains in the employ of the Company or any Subsidiary. In addition, if a Change in Control of 24 the Company occurs, the Committee, in its sole discretion and without the consent of the Optionee, may determine that the Optionee will receive, with respect to some or all of the Option Shares, as of the effective date of any such Change in Control of the Company, cash in an amount equal to the excess of the Fair Market Value (as defined in the Plan) of such Option Shares immediately prior to the effective date of such Change in Control of the Company over the option exercise price per share of this Option. (b) Excess Parachute Payment Tax Gross-Up: (i) The parties hereto acknowledge that the protections set forth in this Paragraph 3.3(b) are important, and it is agreed that the Optionee should not have to bear the burden of any excise tax that might be levied under Section 4999 of the Code in the event that a portion of the payments or benefits payable to the Optionee by the Company or others, either pursuant to this Agreement or otherwise, are treated as an excess parachute payment. The parties, therefore, have agreed as set forth in this Paragraph 3.3(b). (ii) Anything in this Agreement to the contrary notwithstanding, if it shall be determined that any payment or benefit provided by the Company, or any other person to or for the benefit of the Optionee (whether paid or payable or provided or providable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 3.3(b)) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Optionee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay to or on behalf of the Optionee an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Optionee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax, Optionee will be in the same after-tax position as if no Excise Tax had been imposed. 4. MANNER OF OPTION EXERCISE. 4.1 NOTICE. This Option may be exercised by the Optionee in whole or in part from time to time, subject to the conditions contained in the Plan and in this Agreement, by delivery, in person, by facsimile or electronic transmission or through the mail, to the Company at its principal executive office in Fargo, North Dakota (Attention: Chief Financial Officer), of a written notice of exercise. Such notice must be in a form satisfactory to the Committee, must identify the Option, must specify the number of Option Shares with respect to which the Option is being exercised, and must be signed by the person or persons so exercising the Option. Such notice must be accompanied by payment in full of the total purchase price of the Option Shares purchased. In the event that the Option is being exercised, as provided by the Plan and Section 3.2 above, by any person or persons other than the Optionee, the notice must be accompanied by appropriate proof of right of such person or persons to exercise the Option. As soon as practicable after the effective exercise of the Option, the Optionee will be recorded on the stock transfer books of the Company as the owner of the Option Shares purchased, and the Company will deliver to the Optionee one or more duly issued stock certificates evidencing such ownership. 25 4.2 PAYMENT. At the time of exercise of this Option, the Optionee must pay the total purchase price of the Option Shares to be purchased entirely in cash (including a check, bank draft or money order, payable to the order of the Company); provided, however, that the Committee, in its sole discretion and upon terms and conditions established by the Committee, may allow such payment to be made, in whole or in part, by tender of Previously Acquired Shares (as such term is defined in the Plan), or by a combination of cash and tender of Previously Acquired Shares. In the event the Optionee is permitted to pay the total purchase price of this Option in whole or in part with Previously Acquired Shares, the value of such shares will be equal to their Fair Market Value (as defined in the Plan) on the date of exercise of this Option. 5. RIGHTS OF OPTIONEE; TRANSFERABILITY. 5.1 EMPLOYMENT. Nothing in this Agreement will interfere with or limit in any way the right of the Company or any Subsidiary to terminate the employment of the Optionee at any time, nor confer upon the Optionee any right to continue in the employ of the Company or any Subsidiary at any particular position or rate of pay or for any particular period of time. 5.2 RIGHTS AS A SHAREHOLDER. The Optionee will have no rights as a shareholder unless and until all conditions to the effective exercise of this Option (including, without limitation, the conditions set forth in Sections 4 and 6 of this Agreement) have been satisfied and the Optionee has become the holder of record of such shares. No adjustment will be made for dividends or distributions with respect to this Option as to which there is a record date preceding the date the Optionee becomes the holder of record of such shares, except as may otherwise be provided in the Plan or determined by the Committee in its sole discretion. 5.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or the laws of descent and distribution or as otherwise expressly permitted by the Plan, no right or interest of the Optionee in this Option prior to exercise may be assigned or transferred, or subjected to any lien, during the lifetime of the Optionee, either voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise. The Optionee will, however, be entitled to designate a beneficiary to receive this Option upon such Optionee's death, and, in the event of the Optionee's death, exercise of this Option (to the extent permitted pursuant to Section 3.2(a) of this Agreement) may be made by the Optionee's legal representatives, heirs and legatees. 6. WITHHOLDING TAXES. The Company is entitled to (a) withhold and deduct from future wages of the Optionee (or from other amounts that may be due and owing to the Optionee from the Company), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any federal, state or local withholding and employment-related tax requirements attributable to the grant or exercise of, or a disqualifying disposition with respect to, this Option or otherwise incurred with respect to this Option, or (b) require the Optionee promptly to remit the amount of such withholding to the Company before acting on the Optionee's notice of exercise of this Option. In the event that the Company is unable to withhold such amounts, for whatever reason, the Optionee agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under federal, state or local law. 7. ADJUSTMENTS. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, divestiture or extraordinary dividend (including a spin-off), or any other change in the corporate structure or shares of the 26 Company, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation), in order to prevent dilution or enlargement of the rights of the Optionee, will make appropriate adjustment (which determination will be conclusive) as to the number, kind and exercise price of securities subject to this Option. 8. LIMITATION OF LIABILITY. Nothing in this Agreement will be construed to (a) limit in any way the right of the Company to terminate the employment or service of the Optionee at any time, or (b) be evidence of any agreement or understanding, express or implied, that the Company will retain the Optionee in any particular position, at any particular rate of compensation or for any particular period of time. 9. SUBJECT TO PLAN. The Option and the Option Shares granted and issued pursuant to this Agreement have been granted and issued under, and are subject to the terms of, the Plan. The terms of the Plan are incorporated by reference in this Agreement in their entirety, and the Optionee, by execution of this Agreement, acknowledges having received a copy of the Plan. The provisions of this Agreement will be interpreted as to be consistent with the Plan, and any ambiguities in this Agreement will be interpreted by reference to the Plan. In the event that any provision of this Agreement is inconsistent with the terms of the Plan, the terms of the Plan will prevail. 10. MISCELLANEOUS. 10.1 BINDING EFFECT. This Agreement will be binding upon the heirs, executors, administrators and successors of the parties to this Agreement. 10.2 GOVERNING LAW. This Agreement and all rights and obligations under this Agreement will be construed in accordance with the Plan and governed by the laws of the State of Delaware, without regard to conflicts of laws provisions. Any legal proceeding related to this Agreement will be brought in an appropriate Delaware or North Dakota (which is to apply the law of Delaware) court, and the parties to this Agreement consent to the exclusive jurisdiction of such court for this purpose. 10.3 ENTIRE AGREEMENT. This Agreement and the Plan set forth the entire agreement and understanding of the parties to this Agreement with respect to the grant and exercise of this Option and the administration of the Plan and supersede all prior agreements, arrangements, plans and understandings relating to the grant and exercise of this Option and the administration of the Plan. 10.4 AMENDMENT AND WAIVER. Other than as provided in the Plan, this Agreement may be amended, waived, modified or canceled only by a written instrument executed by the parties to this Agreement or, in the case of a waiver, by the party waiving compliance. 27 The parties to this Agreement have executed this Agreement effective the day and year first above written. RDO EQUIPMENT CO. By --------------------------- Its -------------------------- By execution of this Agreement, OPTIONEE the Optionee acknowledges having received a copy of the Plan. ------------------------------ (Signature) ------------------------------ (Name and Address) ------------------------------ ------------------------------ 28 NON-STATUTORY STOCK OPTION AGREEMENT THIS AGREEMENT is entered into and effective as of this ____ day of ______________, ____ (the "Date of Grant"), by and between RDO Equipment Co. (the "Company") and ___________________ (the "Optionee"). A. The Company has adopted the RDO Equipment Co.. 1996 Stock Incentive Plan (the "Plan") authorizing the Board of Directors of the Company, or a committee as provided for in the Plan (the Board or such a committee to be referred to as the "Committee"), to grant non-statutory stock options to employees, non-employee directors, consultants and independent contractors of the Company and its Subsidiaries (as defined in the Plan). B. The Company desires to give the Optionee an inducement to acquire a proprietary interest in the Company and an added incentive to advance the interests of the Company by granting to the Optionee an option to purchase shares of Class A Common Stock of the Company pursuant to the Plan, subject to the satisfaction of any conditions to such award as the Committee may have made to the grant of such option. Accordingly, the parties agree as follows: 1. GRANT OF OPTION. The Company hereby grants to the Optionee the right, privilege, and option (the "Option") to purchase ____________________________ (________) shares (the "Option Shares") of the Company's Class A Common Stock, $0.01 par value (the "Common Stock"), according to the terms and subject to the conditions hereinafter set forth and as set forth in the Plan. The Option is not intended to be an "incentive stock option," as that term is used in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. OPTION EXERCISE PRICE. The per share price to be paid by Optionee in the event of an exercise of the Option will be $______. 3. DURATION OF OPTION AND TIME OF EXERCISE. 3.1 INITIAL PERIOD OF EXERCISABILITY. The Option will become exercisable with respect to the Option Shares in _____________ (_____) installments. The following table sets forth the initial dates of exercisability of each installment and the number of Option Shares as to which this Option will become exercisable on such dates: Initial Date of Number of Option Exercisability Shares Available for Exercise -------------- ----------------------------- _____________, ______ _________ _____________, ______ _________ _____________, ______ _________ _____________, ______ _________ _____________, ______ _________ The foregoing rights to exercise this Option will be cumulative with respect to the Option Shares becoming exercisable on each such date, but in no event will this Option be exercisable after, and this Option will become void and expire as to all unexercised Option Shares at 5:00 p.m. (Fargo, North Dakota time) on ___________ __, ____ (the "Time of Termination"). 3.2 TERMINATION OF EMPLOYMENT OR OTHER SERVICE. (a) TERMINATION DUE TO DEATH OR DISABILITY. In the event that the Optionee's employment or other service with the Company and all Subsidiaries is terminated by reason of the Optionee's death or Disability (as defined in the Plan), this Option will become immediately exercisable in full and will remain exercisable for a period of one year after such termination (but in no event after the Time of Termination). (b) TERMINATION DUE TO RETIREMENT. In the event that the Optionee's employment or other service with the Company and all Subsidiaries is terminated by reason of Retirement (as defined in the Plan), all outstanding Options then held by the Optionee will remain exercisable to the extent exercisable as of such termination for a period of 90 days after such termination (but in no event after the Time of Termination). (c) TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT. In the event the Optionee's employment or other service with the Company and all Subsidiaries is terminated for any reason other than death, Disability or Retirement, or the Optionee is in the employ or other service of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the Company (unless the Optionee continues in the employ or other service of the Company or another Subsidiary), all outstanding Options then held by the Optionee will remain exercisable to the extent exercisable as of such termination for a period of 90 days after such termination (but in no event after the Time of Termination), provided however, that if the Optionee materially breaches the terms of any confidentiality or noncompete agreement entered into with the Company or any Subsidiary, whether such breach occurs before or after termination of the Optionee's employment or other service with the Company or any Subsidiary, the Committee may, in its sole discretion and without the consent of the Optionee, immediately terminate all rights of the Optionee under this Plan and this Agreement. 3.3 CHANGE IN CONTROL. (a) IMPACT OF CHANGE IN CONTROL. If any events constituting a Change in Control (as defined in the Plan) of the Company occur, this Option will become immediately exercisable in full and will remain exercisable until the Time of Termination, regardless of whether the Optionee remains in the employ or service of the Company or any Subsidiary. In addition, if a Change in Control of the Company occurs, the Committee, in its sole discretion and without the consent of the Optionee, may determine that the Optionee will receive, with respect to some or all of the Option Shares, as of the effective date of any such Change in Control of the Company, cash in an amount equal to the excess of the Fair Market Value (as defined in the Plan) of such Option Shares immediately prior to the effective date of such Change in Control of the Company over the option exercise price per share of this Option. 2 (b) Excess Parachute Payment Tax Gross-Up: (i) The parties hereto acknowledge that the protections set forth in this Paragraph 3.3(b) are important, and it is agreed that the Optionee should not have to bear the burden of any excise tax that might be levied under Section 4999 of the Code in the event that a portion of the payments or benefits payable to the Optionee by the Company or others, either pursuant to this Agreement or otherwise, are treated as an excess parachute payment. The parties, therefore, have agreed as set forth in this Paragraph 3.3(b). (ii) Anything in this Agreement to the contrary notwithstanding, if it shall be determined that any payment or benefit provided by the Company, or any other person to or for the benefit of the Optionee (whether paid or payable or provided or providable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 3.3(b)) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Optionee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay to or on behalf of the Optionee an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Optionee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax, Optionee will be in the same after-tax position as if no Excise Tax had been imposed. 4. MANNER OF OPTION EXERCISE. 4.1 NOTICE. This Option may be exercised by the Optionee in whole or in part from time to time, subject to the conditions contained in the Plan and in this Agreement, by delivery, in person, by facsimile or electronic transmission or through the mail, to the Company at its principal executive office in Fargo, North Dakota (Attention: Chief Financial Officer), of a written notice of exercise. Such notice must be in a form satisfactory to the Committee, must identify the Option, must specify the number of Option Shares with respect to which the Option is being exercised, and must be signed by the person or persons so exercising the Option. Such notice must be accompanied by payment in full of the total purchase price of the Option Shares purchased. In the event that the Option is being exercised, as provided by the Plan and Section 3.2 above, by any person or persons other than the Optionee, the notice will be accompanied by appropriate proof of right of such person or persons to exercise the Option. As soon as practicable after the effective exercise of the Option, the Optionee will be recorded on the stock transfer books of the Company as the owner of the Option Shares purchased, and the Company will deliver to the Optionee one or more duly issued stock certificates evidencing such ownership. 4.2 PAYMENT. At the time of exercise of this Option, the Optionee will pay the total purchase price of the Option Shares to be purchased entirely in cash (including a check, bank draft 3 or money order, payable to the order of the Company); provided, however, that the Committee, in its sole discretion and upon terms and conditions established by the Committee, may allow such payment to be made, in whole or in part, by tender of Previously Acquired Shares (as such term is defined in the Plan), or by a combination of cash and tender of Previously Acquired Shares. In the event the Optionee is permitted to pay the total purchase price of this Option in whole or in part with Previously Acquired Shares, the value of such shares will be equal to their Fair Market Value (as defined in the Plan) on the date of exercise of this Option. 5. RIGHTS OF OPTIONEE; TRANSFERABILITY. 5.1 EMPLOYMENT OR SERVICE. Nothing in this Agreement will interfere with or limit in any way the right of the Company or any Subsidiary to terminate the employment or service of the Optionee at any time, nor confer upon the Optionee any right to continue in the employ or service of the Company or any Subsidiary at any particular position or rate of pay or for any particular period of time. 5.2 RIGHTS AS A SHAREHOLDER. The Optionee will have no rights as a shareholder unless and until all conditions to the effective exercise of this Option (including, without limitation, the conditions set forth in Sections 4 and 6 of this Agreement) have been satisfied and the Optionee has become the holder of record of such shares. No adjustment will be made for dividends or distributions with respect to this Option as to which there is a record date preceding the date the Optionee becomes the holder of record of such shares, except as may otherwise be provided in the Plan or determined by the Committee in its sole discretion. 5.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or the laws of descent and distribution or as otherwise expressly permitted by the Plan, no right or interest of the Optionee in this Option prior to exercise may be assigned or transferred, or subjected to any lien, during the lifetime of the Optionee, either voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise. The Optionee will, however, be entitled to designate a beneficiary to receive this Option upon such Optionee's death, and, in the event of the Optionee's death, exercise of this Option (to the extent permitted pursuant to Section 3.2(a) of this Agreement) may be made by the Optionee's legal representatives, heirs and legatees. 6. WITHHOLDING TAXES. The Company is entitled to (a) withhold and deduct from future wages of the Optionee (or from other amounts that may be due and owing to the Optionee from the Company), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any federal, state or local withholding and employment-related tax requirements attributable to the grant or exercise of this Option or otherwise incurred with respect to this Option, or (b) require the Optionee promptly to remit the amount of such withholding to the Company before acting on the Optionee's notice of exercise of this Option. In the event that the Company is unable to withhold such amounts, for whatever reason, the Optionee agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under federal, state or local law. 4 7. ADJUSTMENTS. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, divestiture or extraordinary dividend (including a spin-off), or any other change in the corporate structure or shares of the Company, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation), in order to prevent dilution or enlargement of the rights of the Optionee, will make appropriate adjustment (which determination will be conclusive) as to the number, kind and exercise price of securities subject to this Option. 8. LIMITATION OF LIABILITY. Nothing in this Agreement will be construed to (a) limit in any way the right of the Company to terminate the employment or service of the Optionee at any time, or (b) be evidence of any agreement or understanding, express or implied, that the Company will retain the Optionee in any particular position, at any particular rate of compensation or for any particular period of time. 9. SUBJECT TO PLAN. The Option and the Option Shares granted and issued pursuant to this Agreement have been granted and issued under, and are subject to the terms of, the Plan. The terms of the Plan are incorporated by reference in this Agreement in their entirety, and the Optionee, by execution of this Agreement, acknowledges having received a copy of the Plan. The provisions of this Agreement will be interpreted as to be consistent with the Plan, and any ambiguities in this Agreement will be interpreted by reference to the Plan. In the event that any provision of this Agreement is inconsistent with the terms of the Plan, the terms of the Plan will prevail. 10. MISCELLANEOUS. 10.1 BINDING EFFECT. This Agreement will be binding upon the heirs, executors, administrators and successors of the parties to this Agreement. 10.2 GOVERNING LAW. This Agreement and all rights and obligations under this Agreement will be construed in accordance with the Plan and governed by the laws of the State of Delaware, without regard to conflicts of laws provisions. Any legal proceeding related to this Agreement will be brought in an appropriate Delaware or North Dakota (which is to apply the law of Delaware) court, and the parties to this Agreement consent to the exclusive jurisdiction of the court for this purpose. 10.3 ENTIRE AGREEMENT. This Agreement and the Plan set forth the entire agreement and understanding of the parties to this Agreement with respect to the grant and exercise of this Option and the administration of the Plan and supersede all prior agreements, arrangements, plans and understandings relating to the grant and exercise of this Option and the administration of the Plan. 10.4 AMENDMENT AND WAIVER. Other than as provided in the Plan, this Agreement may be amended, waived, modified or canceled only by a written instrument executed by the parties to this Agreement or, in the case of a waiver, by the party waiving compliance. 5 The parties to this Agreement have executed this Agreement effective as of the day and year first above written. RDO EQUIPMENT CO. By________________________________ Its_______________________________ By execution of this Agreement, OPTIONEE the Optionee acknowledges having received a copy of the Plan. ---------------------------------- (Signature) ---------------------------------- (Name and Address) ---------------------------------- ---------------------------------- 6 EX-10.15 3 EXHIBIT 10.15 Exhibit 10.15 FORM OF AGREEMENT RE: CONFIDENTIALITY, ASSIGNMENT OF INVENTIONS, AND NON-COMPETITION This Agreement is made as of _____________ between RDO Equipment Co. (the "Company") (which, for purposes of this Agreement includes any subsidiary of the Company) and ____________, who is an employee of the Company (the "Employee"). WHEREAS, the Company currently is engaged in the selling, servicing and renting of industrial and agricultural equipment throughout the United States; and WHEREAS, the Company has in place a stock incentive plan which provides for the granting of options to acquire shares of the Company's Class A Common Stock; and WHEREAS, the Company desires to grant a stock option to Employee, subject to the express condition that Employee execute and deliver to the Company this Agreement; and WHEREAS, Employee has reviewed this Agreement and understands its terms and conditions, and in consideration of a stock option grant desires to execute and deliver to the Company this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do agree as follows: 1. INVENTIONS. (a) "Inventions", as used in this Agreement, means any discoveries, improvements and ideas (whether or not they are in writing or reduced to practice) or works of authorship (whether or not they can be patented or copyrighted) that the Employee makes, authors, or conceives (either alone or with others) and that: (1) concern directly the Company's business or the Company's present or demonstrably anticipated future business or development; (2) result from any work the Employee performs for the Company; (3) use the Company's equipment, supplies, facilities, or trade secret information; or (4) the Employee develops during the time the Employee is performing employment duties for the Company. (b) The Employee agrees that all Inventions made by the Employee during or within six (6) months after the term of this Agreement will be the Company's sole and exclusive property. The Employee will, with respect to any Invention: 29 (1) keep current, accurate and complete records, which will belong to the Company and be kept and stored on the Company's premises while the Employee is employed by the Company; (2) promptly and fully disclose the existence and describe the nature of the Invention to the Company in writing (and without request); (3) assign (and the Employee does hereby assign) to the Company all of his rights to the Invention, any application Employee makes for patents or copyrights in any country, and any patents or copyrights granted to Employee in any country; and (4) acknowledge and deliver promptly to the Company any written instruments, and perform any other acts necessary in the Company's opinion to preserve property rights in the Invention against forfeiture, abandonment or loss and to obtain and maintain letters, patents and/or copyrights on the Invention and to vest the entire right and title to the Invention in the Company. The requirements of this Agreement do not apply to an Invention for which no equipment, supplies, facility or trade secret information of the Company was used and which was developed entirely on the Employee's own time, and (1) which does not relate directly to the Company's business or to the Company's actual or demonstrably anticipated business or development, or (2) which does not result from any work the Employee performed for the Company. Except as previously disclosed to the Company in writing, the Employee does not have, and will not assert, any claims to or rights under any Inventions as having been made, conceived, authored or acquired by the Employee prior to his employment by the Company. With respect to any obligations performed by the Employee under this Agreement following termination of employment, the Company will pay the Employee reasonable hourly compensation and will pay or reimburse all reasonable out-of-pocket expenses. (c) Employee will sign and execute all instruments of assignment and other papers to evidence the assignment of Employee's entire right, title and interest in such inventions, improvements, discoveries, software, writings or other works of authorship to the Company, at the request and the expense of the Company, and Employee will do all acts and sign all instruments of assignment and other papers the Company may reasonably request relating to applications for patents, copyrights, and the enforcement and protection thereof. If the Employee is needed, at any time, to give testimony, evidence, or opinions in any litigation or proceeding involving any patents or copyrights or applications for patents or copyrights, both domestic and foreign, relating to inventions, improvements, discoveries, software, writings or other works of authorship conceived, developed or reduced to practice by the Employee, the Employee agrees to do so, and if the Employee leaves the employ of the Company, the Company will pay the Employee at a rate mutually agreeable to the Employee and the Company, plus reasonable traveling or other expenses. (d) The obligations of this Section 1 will survive the expiration or termination of this Agreement. 2. CONFIDENTIAL INFORMATION. (a) "Confidential Information", as used in this Agreement, means information or material which is not generally available to or used by others, or the utility or value of which is not generally 30 known or recognized as standard practice, whether or not the underlying details are in the public domain, including: (1) information or material relating to the Company, and its businesses as conducted or anticipated to be conducted, business plans, marketing or sales plans, operations, past, current or anticipated software, products or services, customers or prospective customers, or development, purchasing, accounting, or marketing activities; (2) information or material relating to the Company's inventions, improvements, discoveries, "know-how," technological developments, or unpublished writings or other works of authorship, or to the materials, apparatus, processes, formulae, plans or methods used in the development, or marketing of the Company's products or services; (3) information which when received is marked as "proprietary," "private," or "confidential"; (4) trade secrets; and (5) any similar information of the type described above which the Company obtained from another party and which the Company treats as or designates as being proprietary, private or confidential, whether or not owned or developed by the Company. Notwithstanding the foregoing, "Confidential Information" does not include any information which is properly published or in the public domain; provided, however, that information which is published by or with the aid of the Employee outside the scope of employment or contrary to the requirements of this Agreement will not be considered to have been properly published, and therefore will not be in the public domain for purposes of this Agreement. (b) The Employee will never, either during or after the Employee's employment by the Company, use Confidential Information for any purpose other than the business of the Company or publish or disclose it to any person who is not also an employee of the Company subject to a confidentiality agreement with the Company. When the Employee's employment with the Company ends, the Employee will promptly deliver to the Company all records and any compositions, articles, devices, apparatus and other items that disclose, describe or embody Confidential Information, including all copies, reproductions and specimens of the Confidential Information in the Employee's possession, regardless of who prepared them, and will promptly deliver any other property of the Company in the Employee's possession, whether or not Confidential Information. 3. NON-COMPETITION. (a) During the period Employee is employed by the Company and for a further period of two (2) years after termination of employment with the Company for any reason, Employee will not, directly or indirectly, either for Employee's own benefit or for the benefit of any other person, firm or corporation whatsoever, other than the Company, (i) directly engage in any commercial activity that competes with the Company in the geographic areas where the Company has conducted its business during the three years before the Employee's employment with the Company ends, (ii) serve any of the then-existing clients or customers of the Company, any clients or customers that have had a relationship with the Company during the preceding twelve (12) months, or any potential clients or customers that were solicited by the Company 31 during the preceding twelve (12) months, (iii) in any way interfere or attempt to interfere with the Company's relationships with any of its current or potential customers, or (iv) employ or attempt to employ any of the Company's then employees on behalf of any other entity competing with the Company. Employee acknowledges that if Employee breaches this covenant, the Company will be irreparably and immeasurably injured. Therefore, Employee agrees that in addition to any other remedies available to the Company, the Company may apply to a court of competent jurisdiction for a temporary and/or permanent injunction and that such court may grant such injunction to restrain and prohibit such breach by Employee. Notwithstanding the foregoing, it is understood that the restrictions contained in this Section 3 will cease to be applicable to any activity of the Employee from and after such time as the Company (i) will have ceased all business activities for a period of sixty (60) days or (ii) will have made a decision through the Board of Directors not to continue, or will have ceased for a period of sixty (60) days, the business activities with which such activity of Employee would be competitive. (b) In the event Employee's employment terminates for any reason, no additional compensation will be paid for this non-competition obligation. (c) The obligations of this Section 3 will survive the expiration or termination of this Agreement. 4. MISCELLANEOUS. (a) CONFLICTS OF INTEREST. The Employee agrees that Employee will not, directly or indirectly, transact business with the Company personally, or as an agent, owner, partner or shareholder of any other entity; provided, however, that any such transaction may be entered into if approved by the Company's Board of Directors in accordance with its policies. (b) NO ADEQUATE REMEDY. The Employee understands that if the Employee fails to fulfill the Employee's obligations under this Agreement the damages to the Company would be very difficult to determine. Therefore, in addition to any other rights or remedies available to the Company at law, in equity, or by statute, the Employee hereby consents to the specific enforcement of this Agreement by the Company through an injunction or restraining order issued by an appropriate court. (c) SUCCESSORS AND ASSIGNS. This Agreement is binding on and inures to the benefit of the Company's successors and assigns, all of which are included in the term the "Company" as it is used in this Agreement; provided, however, that the Company may assign this Agreement only in connection with a merger, consolidation, assignment, sale or other disposition of substantially all of its assets or business. (d) MODIFICATION. This Agreement may be modified or amended only by a written statement signed by both the Company and the Employee. (e) GOVERNING LAW. It is the intention of both parties that the terms of this Agreement be strictly enforced and be governed by the law of the Company's state of incorporation (Delaware), corporate headquarters (North Dakota), or the Employee's residence, whichever such law would enforce the terms of this Agreement to the greatest extent. Any legal proceeding, regardless of the governing law, related to this Agreement will be brought in an appropriate 32 North Dakota court, and both the Company and the Employee hereby consent to the exclusive jurisdiction of that court for this purpose. (f) CONSTRUCTION. Wherever possible, each provision of this Agreement will be interpreted so that it is valid under the applicable law. If any provision of this Agreement is to any extent invalid under the applicable law, that provision will still be effective to the extent it remains valid. The remainder of this Agreement also will continue to be valid, and the entire Agreement will continue to be valid in other jurisdictions. (g) WAIVERS. No failure or delay by either the Company or the Employee in exercising any right or remedy under this Agreement will waive any provision of the Agreement. Nor will any single or partial exercise by either the Company or the Employee of any right or remedy under this Agreement preclude either of them from otherwise or further exercising these rights or remedies, or any other rights or remedies granted by any law or any related document. (h) CAPTIONS. The headings in this Agreement are for convenience only and do not affect this Agreement's interpretation. (i) ENTIRE AGREEMENT. This Agreement supersedes all previous and contemporaneous oral negotiations, commitments, writings and understandings between the parties concerning the matters in this Agreement, including without limitation any policy or personnel manuals of the Company. (j) NOTICES. All notices and other communications required or permitted under this Agreement will be in writing and will be hand delivered or sent by registered or certified first class mail, postage prepaid, and will be effective upon delivery if hand delivered, or three (3) days after mailing if mailed to the address stated below. These addresses may be changed at any time by like notice. IN WITNESS WHEREOF, the Company and the Employee have executed this Agreement as of the date first written above. RDO Equipment Co. 2829 South University Drive Fargo, ND 58103 By ---------------------- Its --------------------- EMPLOYEE - ------------------------- - ------------------------- - ------------------------- - ------------------------- 33 EX-11.1 4 EXHIBIT 11.1 Exhibit 11.1 RDO EQUIPMENT CO. AND SUBSIDIARY COMPUTATION OF PER SHARE EARNINGS FISCAL YEAR ENDED JANUARY 31, ----------------------------- 1997 1996 ---- ---- Pro forma net income $ 6,483 $ 4,841 -------- -------- -------- -------- Weighted average number of common shares outstanding 8,400 8,370 Dilutive effect of shares for which proceeds were necessary to fund the $15 million distribution of accumulated S corporation earnings 1,059 1,059 -------- -------- Weighted average number of common shares outstanding 9,459 9,429 -------- -------- -------- -------- Pro forma net income per common share $ 0.68 $ 0.51 -------- -------- -------- -------- 34 EX-13.1 5 EXHIBIT 13.1 Exhibit 13.1 1997 ANNUAL REPORT TO SHAREHOLDERS (pages 13 through 35 and selected portions of page 37) 35 SELECTED FINANCIAL DATA
FISCAL YEAR ENDED JANUARY 31, (in thousands, except store and per share data) 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA: Revenues: Wholegoods sales $224,094 $164,054 $135,704 $106,600 $ 73,516 $ 49,097 Parts and service 75,820 58,998 48,206 37,512 31,862 22,129 Rental 2,499 505 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ Total revenues 302,413 223,557 183,910 144,112 105,378 71,226 Cost of sales 245,287 180,839 148,111 116,369 83,548 56,422 - ------------------------------------------------------------------------------------------------------------------------------ Gross profit 57,126 42,718 35,799 27,743 21,830 14,804 Selling, general, and administrative expense 41,275 31,655 24,893 20,577 16,737 11,929 - ------------------------------------------------------------------------------------------------------------------------------ Operating income 15,851 11,063 10,906 7,166 5,093 2,875 Interest expense, net (5,046) (2,994) (1,093) (1,334) (908) (1,126) - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 10,805 8,069 9,813 5,832 4,185 1,749 Pro forma provision for income taxes (1) 4,322 3,228 3,925 2,332 1,674 700 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Pro forma net income $ 6,483 $ 4,841 $ 5,888 $ 3,500 $ 2,511 $ 1,049 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Pro forma net income per share $ .68 $.51 - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- Weighted average shares outstanding 9,459 9,429 - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- SELECTED OPERATING DATA: Comparable store sales increase 26% 11% 25% 32% 12% -- Stores open at beginning of period 26 22 22 21 17 15 Stores opened 1 2 0 0 0 1 Stores acquired 5 2 0 1 4 1 - ------------------------------------------------------------------------------------------------------------------------------ Stores open at end of period 32 26 22 22 21 17 - ------------------------------------------------------------------------------------------------------------------------------ Capital expenditures $ 3,656 $ 9,993 $ 1,208 $ 627 $ 681 $ 561 Depreciation and amortization 2,606 1,326 690 668 584 504 AS OF JANUARY 31, - ------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET Working capital $ 72,744 $ 26,596 $ 26,700 $ 22,019 $ 15,284 $ 9,846 Inventories 130,955 115,616 77,204 64,768 55,582 40,175 Total assets 181,551 148,093 98,315 83,341 68,660 46,129 Floor plan payables (2) 64,331 91,614 53,581 46,644 45,149 28,067 Total debt 14,409 10,638 3,277 2,946 6,698 6,283 Stockholders' equity 87,795 34,284 30,467 24,503 11,105 7,006
(1) Prior to January 20, 1997, the Company elected to be treated as an S corporation under the Internal Revenue Code. The pro forma provision for income taxes is computed as if the Company were subject to corporate income taxes based on the tax laws in effect during these fiscal years. (2) Includes interest bearing and non-interest bearing liabilities incurred in connection with inventory financing. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company distributes, sells, services and rents construction and agricultural equipment to customers primarily operating in the construction, materials handling and agricultural industries, as well as to units of state, local and federal government and utility companies. The Company's primary supplier of new equipment and parts is Deere & Company (Deere). The Company operates the largest network of John Deere construction retail equipment stores and agricultural retail equipment stores in the United States. The Company's stores are located in Arizona, California, Minnesota, North Dakota, South Dakota, Texas and Washington. The Company's growth in recent years has been due to its ability to grow market share within its existing Deere areas of responsibility, to increase same store sales, to open additional retail locations, and to acquire additional construction and agricultural dealerships. The acquisitions are primarily the result of consolidation trends among Deere dealers, Deere's support of the trend and Deere's support of the Company as an acquirer. 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, have been or will be 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 future acquisitions, new stores, internal growth and working capital needs. The Company generates its revenues from sales of new and used equipment (wholegoods), sales of parts and service, and the rental of equipment. In addition to sales of new and used equipment, wholegoods 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. Rental includes only rental income derived from the Company's dedicated rental fleet and does not include rental payments made on rent-to-purchase equipment. The Company's highest gross margins have historically been generated from its parts and service revenues. One of the Company's operating strategies is to increase the demand for parts and service by establishing, and then increasing, the base of wholegoods held by its customers. Due to product warranty time frames and usage patterns by customers, there generally is a time lag between wholegoods 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 wholegoods sales. In addition, due to differences in gross margins between wholegoods sales and parts and service revenues, gross margin percentages may decline as the Company builds wholegoods market share. The Company generally experiences lower levels of equipment sales during the period from November through April, affecting its first and fourth fiscal quarters, due to the crop growing season and winter weather conditions in the Midwest. Typically, farmers purchase agricultural equipment immediately prior to planting or harvesting crops, which occurs during the Company's second and third fiscal quarters. As a result, sales of agricultural equipment generally are lower in the Company's first and fourth fiscal quarters. Winter weather in the Midwest also limits construction activity and, therefore, also typically results in lower sales of construction equipment in the first and fourth fiscal quarters. The Company requires cash primarily for financing its inventory of wholegoods and replacement parts, acquisitions of additional dealerships 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, Deere Credit Services, Inc. ("Deere Credit"), Ag Capital Company ("Ag Capital"), and commercial banks. Floor plan financing from Deere and 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Deere Credit represents the primary source of financing for wholegoods inventories, particularly for equipment supplied by Deere. All lenders receive a security interest in the inventory financed. 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. 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. The Company believes that it has benefited from generally favorable economic conditions during recent years, including, with respect to its Agricultural Division, favorable grain prices which have resulted in a strong farming economy and, with respect to its Construction Division, favorable construction markets. Price increases by suppliers of the Company's products have not historically had a significant impact on the Company's results of operations. The results of operations of the following acquisitions have been included with the Company's results of operations only for the periods specified: In February 1995, the Company purchased the assets and assumed certain liabilities of a Deere construction equipment dealership in Southern California which consisted of two full-service construction stores located in San Diego and Riverside, California with a Deere area of responsibility contiguous with the Company's area of responsibility in Arizona, resulting in operating efficiencies. The results of operations of the acquired business are included in the Company's results of operations beginning in February 1995. Effective July 1, 1996, the Company completed the acquisition of a Deere construction equipment dealership in Central Texas, with three stores located in the Dallas-Fort Worth and Waco, Texas metropolitan areas with a Deere area of responsibility covering the 35 surrounding counties. The Company acquired certain assets and assumed certain liabilities. The purchase price for the net assets was approximately $8.4 million, which was financed through a note payable to Ag Capital, with an interest rate at the prime rate (which was 8.25%), which note was repaid out of the net proceeds of the Offering. The acquisition was accounted for under the purchase method of accounting and the results of operations of the Central Texas stores are included in the Company's results of operations beginning July 1, 1996. Effective October 1, 1996, the Company completed the acquisition of a Deere agricultural equipment dealership with two stores located in Pasco and Sunnyside, Washington. The Company acquired certain assets and assumed certain liabilities. The purchase price for the net assets was approximately $2.7 million, and was financed in part by a $1.0 million note payable to the seller, with the remainder financed through a note payable to Ag Capital with an interest rate at the prime rate (which was 8.25%), which note was repaid out of the net proceeds of the Offering. This acquisition was accounted for under the purchase method of accounting and the results of operations of the Washington stores are included in the Company's results of operations beginning October 1, 1996. Beginning November 1, 1989, the Company was an S corporation and not subject to tax on its net income. The Company's S election was terminated in January 1997. The pro forma provision for taxes and net income reflect the impact of the tax provision as if the Company were subject to income taxes (at an assumed rate of 40%) for the periods presented. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenues:
FISCAL YEAR ENDED JANUARY 31, 1997 1996 1995 - ------------------------------------------------------------------ Revenues Wholegoods sales 74.1% 73.4% 73.8% Parts and service 25.1 26.4 26.2 Rental 0.8 0.2 -- - ------------------------------------------------------------------ Total revenues 100.0% 100.0% 100.0% - ------------------------------------------------------------------ - ------------------------------------------------------------------ Gross profit 18.9% 19.1% 19.5% Selling, general, and administrative expense 13.6 14.2 13.5 - ------------------------------------------------------------------ Operating income 5.3 4.9 6.0 Interest expense, net 1.7 1.3 0.6 Pro forma provision for taxes (1) 1.5 1.4 2.2 - ------------------------------------------------------------------ Pro forma net income (1) 2.1% 2.2% 3.2% - ------------------------------------------------------------------ - ------------------------------------------------------------------
(1) Pro forma provision for taxes and pro forma net income reflect the impact of the tax provision as if the Company were a C corporation subject to income taxes (at an assumed rate of 40%) during these periods. FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED TO FISCAL YEAR ENDED JANUARY 31, 1996 REVENUES Revenues increased approximately $78.8 million, or 35.3%, from $223.6 million for fiscal 1996 to $302.4 million for fiscal 1997. Construction operations contributed approximately $52.5 million of this increase, with revenues increasing 37.8% to $191.5 million. The increase in construction revenues was due in part to a change in the discount program offered by Deere on governmental sales. During fiscal 1996, Deere significantly reduced the discounts it offered for sales to the government sector. As a result, the Company's pricing on governmental sales was less competitive and it lost market share and sales in fiscal 1996. In fiscal 1997, Deere reversed the adjustments it had made to the discounts, resulting in the Company being able to be more competitive and increase sales. Also adding to the increase in construction revenues was a substantial increase in market share and an increase in product support, resulting from the continued implementation of the Company's operating model. In addition, $15.0 million of the increase in revenues from construction operations resulted from the inclusion of seven months of operations of the Central Texas operations, the acquisition of which was effective July 1, 1996. The May 1995 opening of a construction store in Prescott, Arizona, the addition of an undercarriage service facility at the Company's construction store in Riverside, California, and the November 1995 addition of a dedicated construction equipment rental fleet in the Southwest region also contributed to the increase in total revenues. Agricultural operations contributed the remaining increase in revenues of approximately $26.3 million, with revenues in fiscal 1997 increasing 31.1% to $110.9 million. Of this increase in agricultural revenues, $6.1 million was due to the Company's October 1, 1996 acquisition of the Washington operations. A portion of the increase in total revenues was the result of a shift in business from the fourth quarter of the previous fiscal year due to the cold weather and farmer uncertainty about the United States farm program. In addition, a highly positive outlook of farmers for the agricultural economy generated increased activity in all aspects of the Company's agricultural operations. Wholegoods sales increased approximately $60.0 million in fiscal 1997, or 36.6%, from $164.1 million for fiscal 1996 to $224.1 million for fiscal 1997. Construction operations contributed approximately $38.7 million of this increase, with sales increasing 38.9% to $138.1 million. Of this increase, $10.5 million was due to the acquisition of the Central Texas operations. Agricultural operations contributed the remaining increase of approximately $21.3 million, with sales increasing 32.9% to $86.0 million. Of this increase, $4.3 million was due to the acquisition of the Washington agricultural operations. The increase in wholegoods sales in fiscal 1997 for both the Construction and Agricultural Divisions was due to the factors discussed in the preceding paragraphs. Wholegoods sales also increased as a result of the Company's marketing strategy, 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS which focuses on increased market share, customer relationship training of its sales force, and utilization of software to track and manage sales calls. Parts and service revenue increased approximately $16.8 million, or 28.5%, from $59.0 million for fiscal 1996 to $75.8 million for fiscal 1997. Of this increase, $6.2 million was due to the acquisitions of the Central Texas and Washington operations and the majority of the remaining portion of the increase was due to the increase in the base of wholegoods owned by the Company's customers. Parts and service revenue did not grow at the same rate as wholegoods sales, partially due to the time lag factor discussed above and partially due to service capacity constraints, both in facilities and personnel. The Company has added, and continues to add, service bay facilities and personnel to its stores to expand its service capacity. The May 1995 opening of the undercarriage service facility at the construction store in Riverside, California contributed approximately $1.1 million of parts and service revenue in fiscal 1996 compared to $2.2 million in fiscal 1997. Rental revenue of $2.5 million was generated in fiscal 1997 as the result of the commencement of construction equipment rental operations in the Southwest region in November 1995 compared to $505,000 in fiscal 1996. GROSS PROFIT Gross profit increased approximately $14.4 million, or 33.7%, from $42.7 million for fiscal 1996 to $57.1 million for fiscal 1997. Gross profit as a percentage of total revenues for fiscal 1997 and 1996 was 18.9% and 19.1%, respectively. The Company's highest gross margins are derived from its parts and service revenues. For these periods, there was a small change in the revenue mix between wholegoods sales and parts and service revenues which contributed to the reduction in gross margin percent. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE Selling, general, and administrative expense as a percentage of total revenues decreased from 14.2% for fiscal 1996 to 13.6% for fiscal 1997, due primarily to relatively stable fixed costs compared to a larger base of total revenues. Total selling, general, and administrative expense increased approximately $9.6 million, from $31.7 million for fiscal 1996 to $41.3 million for fiscal 1997. Approximately $3.7 million of the increase was due to the operations acquired during fiscal 1997. The remaining portion of the increase was primarily due to increases in variable expenses, such as commissions and bonus incentives, incurred in connection with generating higher total revenues and net income. INTEREST EXPENSE Interest expense increased approximately $1.9 million, or 50%, from $3.8 million for fiscal 1996 to $5.7 million for fiscal 1997. The increase was due primarily to the increased levels of floor plan payables associated with higher inventory levels, the financing of the construction equipment rental fleet discussed above, and the acquisition debt associated with the acquisitions of the Central Texas and Washington operations. PRO FORMA PROVISION FOR TAXES In the fourth quarter of fiscal 1997, the Company recognized a one-time income tax benefit of $300,000 due to changing its status from an S corporation to a C corporation during the period. This benefit is excluded from pro forma net income and pro forma net income per share which are being reported as if the Company had been a taxable entity for fiscal 1997 and 1996. The pro forma provision for taxes as a percentage of pretax income was consistent between these two periods at an assumed rate of 40%. PRO FORMA NET INCOME Pro forma net income increased approximately $1.7 million, or 35.4%, to $6.5 million, or $0.68 per share, for fiscal 1997, compared to $4.8 million, or $0.51 per share, for fiscal 1996. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL YEAR ENDED JANUARY 31, 1996 COMPARED TO FISCAL YEAR ENDED JANUARY 31, 1995 REVENUES Revenues increased approximately $39.7 million, or 21.6%, from $183.9 million for fiscal 1995 to $223.6 million for fiscal 1996. Construction operations contributed approximately $28.3 million of this increase with revenues increasing 25.7% to $139.0 million. Approximately $16.9 million of the increase in construction revenues was due to the Company's February 1995 acquisition of the California operations. Approximately $2.0 million of the construction revenues increase was due to the Prescott, Arizona store, which opened in May 1995. Excluding the California and Prescott operations, same store construction revenues increased approximately $9.4 million, or 8.5%, from $110.6 million in fiscal 1995 to $120.0 million in fiscal 1996. The same store construction revenues increased at a lower rate than in prior fiscal years due in part to a change in the discount program offered by Deere on sales to the government sector. During fiscal 1996, Deere significantly reduced the discounts it offered on such sales. As a result, the Company's pricing on governmental sales was less competitive and it experienced reductions in market share and sales to the government sector. The Company was able to replace a portion of these governmental sales with other sales, but not to the extent necessary to achieve its expected growth rate in same store sales. It should be noted that in fiscal 1997 Deere reversed the adjustments it had made to the discount program on governmental sales and increased the discounts back to their previous levels. Also impacting total revenues in fiscal 1996 were weather factors in the Midwest. The winter of 1995/1996 was extremely cold, with numerous record low temperatures set in both December 1995 and January 1996. As a result, customers in the Midwest did not buy wholegoods and equipment was not able to be moved for normal servicing. Agricultural operations contributed the remaining increase in revenues of approximately $11.3 million, with agricultural revenues increasing 15.4% to $84.6 million. All of the increase in agricultural revenues was due to same store sales increases, primarily as a result of the successful implementation of the Company's strategy to increase its market share. The rate of increase in same store sales for the Agricultural Division was not as high as prior years due to the same weather factors that impacted construction sales and farmer uncertainty about the United States farm program. During fiscal 1995 and 1996, all of the Company's agricultural stores were located in the Midwest. Through the first three quarters of fiscal 1996, total agricultural revenues had increased 22.0% over the same period of fiscal 1995. The extremely cold weather in the fourth quarter of fiscal 1996 was the primary factor for a 10.5% decrease in revenues from the same quarter in fiscal 1995. Wholegoods sales increased approximately $28.3 million, or 20.9%, from $135.7 million in fiscal 1995 to $164.0 million in fiscal 1996. Construction operations contributed approximately $17.8 million of this increase, with sales increasing 21.8% to $99.4 million. Of this increase, $9.2 million was due to the acquisition of the California operations, and $1.7 million was due to the opening of the Prescott store. Excluding the California and Prescott operations, same store sales of construction wholegoods increased approximately $6.9 million, or 8.5%, to $88.5 million. Agricultural operations contributed the remaining increase in wholegoods sales of approximately $10.5 million, with sales increasing 19.4% to $64.6 million. All of the increase in agricultural wholegoods sales was due to same store sales increases. The Construction Division was affected by the change in the Deere discount program on governmental sales and the weather factors discussed above, which slowed the rate of same store sales increases, while the reduction in the rate of same store sales increases for the Agricultural Division was due to the weather factors discussed above. Wholegoods sales also increased as a result of the Company's marketing strategy, which focuses on increased market share, customer relationship training of its sales force, and utilization of software to track and manage sales calls. Parts and service revenue increased approximately $10.7 million, or 22.4%, from $48.2 million in fiscal 1995 to $59.0 million in fiscal 1996. Approximately $7.6 million of the increase was due to the acquisition of the California operations and $292,000 was due to the newly-opened Prescott store. Excluding the California and Prescott oper- 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ations, same store parts and service revenue increased approximately $2.9 million, or 6.0%, to $51.1 million in fiscal 1996. Parts and service growth did not keep pace with the rates of increase in prior years due in part to the weather factors discussed above. In addition, parts and service revenue growth did not keep pace with the growth in wholegoods sales due to service capacity constraints, both in facilities and personnel. The Company has added, and continues to add, service bay facilities and personnel to its stores to expand its service capacity. The Company commenced construction equipment rental operations in the fourth quarter of fiscal 1996 by implementing a rental fleet of construction equipment in the Southwest region. Rental revenue was $505,000 in fiscal 1996. GROSS PROFIT Gross profit increased approximately $6.9 million, or 19.3%, from $35.8 million in fiscal 1995 to $42.7 million in fiscal 1996. Gross profit as a percentage of total revenues decreased slightly from 19.5% in fiscal 1995 to 19.1% in fiscal 1996. Lower gross margins resulted in large part from reduced Deere discounts on governmental sales of construction equipment. In an effort to offset the reduction in the volume of sales to the governmental sector, the Company pursued an aggressive pricing policy with respect to other construction wholegoods sales. In addition, the Company had a marketing strategy designed to increase market share at newly-acquired construction stores by competing more aggressively on price for selected wholegoods in those markets. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE As a percentage of total revenues, selling, general, and administrative expense increased from 13.5% in fiscal 1995 to 14.2% in fiscal 1996. Total selling, general, and administrative expense increased by approximately $6.7 million, or 27.2%, from fiscal 1995 to fiscal 1996. This increase was primarily due to expenses incurred by the California construction stores acquired in fiscal 1996, which have higher compensation and occupancy costs relative to the Company's other construction stores. Approximately $4.1 million of the increase was due to expenses associated with the California and Prescott operations. Excluding these operations, selling, general, and administrative expense increased approximately $2.6 million, or 10.4%, primarily due to increases in variable expenses such as commissions and incentive bonuses incurred in connection with generating higher total revenues. INTEREST EXPENSE Interest expense increased approximately $1.9 million, or 100.0%, from $1.9 million in fiscal 1995 to $3.8 million in fiscal 1996. Approximately $400,000 of the increase was associated with inventory financing for the California and Prescott operations. Approximately $75,000 of the increase was associated with the financing of the Company's construction equipment rental fleet. The remaining $1.4 million increase was a result of increased levels of floor plan payables incurred as a result of higher inventory levels, a change in Deere floor plan payment terms, which shortened the interest-free period on certain purchases of construction equipment, and an increase in the weighted average interest rate on interest bearing floor plan financing from 7.25% in fiscal 1995 to 8.83% in fiscal 1996. PRO FORMA PROVISION FOR TAXES Pro forma provision for taxes as a percentage of pretax income was consistent between these two periods at an assumed rate of 40%. PRO FORMA NET INCOME Pro forma net income decreased by approximately $1.1 million, or 18.6%, from $5.9 million in fiscal 1995 to $4.8 million in fiscal 1996. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company requires cash primarily for financing its inventories of wholegoods and replacement parts, acquisitions of additional dealerships, 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, Deere Credit, Ag Capital, and commercial banks. In addition, in January 1997, the Company completed its initial public offering raising net proceeds of $68.3 million which is being used to satisfy the Company's working capital needs. Floor plan financing from Deere and Deere Credit represents the primary source of financing for wholegoods inventories, particularly for equipment supplied by Deere. All lenders receive a security interest in the inventory financed. 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 wholegoods 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. 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 manufacturers. The Company annually reviews the terms of its financing with its lenders, including the interest rate. In fiscal 1997, 1996 and 1995 the average interest rate under interest bearing floor plan financing was approximately 8.25%, 8.85%, and 7.25%, respectively. As of January 31,1997 the Company had outstanding floor plan payables of approximately $64.3 million, of which $15.3 million was then interest bearing. During fiscal 1997, operating activities used net cash of $31.9 million versus providing net cash of $12.1 million in fiscal 1996 and $3.2 million in fiscal 1995. The changes in fiscal 1997 and 1996 were primarily attributable to decreased and increased levels of floor plan payables, respectively. Cash used for investing activities in fiscal 1997, 1996 and 1995 was $14.3 million, $11.8 million and $1.3 million, respectively. The cash used in fiscal 1997 was primarily related to dealership acquisitions. The cash used in fiscal 1996 was primarily due to the purchase of construction equipment for the Company's rental operations in the Southwest and for the acquisition of dealerships. Cash provided by financing activities amounted to $45.9 million for fiscal 1997 and was primarily attributable to net proceeds of $68.3 million from the initial public offering, partially offset by the distribution to its stockholders of $25.0 million of previously undistributed accumulated S corporation earnings. In fiscal 1996 and 1995 the Company utilized net cash from financing activities of $200,000 and $1.5 million, respectively. The Company believes cash from operations, available cash and borrowing capacity will be sufficient to fund its planned capital expenditures for fiscal 1998. INCOME TAXES Prior to January 20, 1997, the Company had elected to be treated as an S corporation for income tax purposes, and the Company's stockholders paid the income taxes on the Company's taxable income directly. The Company made distributions to its stockholders of $25.0 million, $4.3 million and $3.8 million during fiscal 1997, 1996 and 1995, respectively. The increase in distributions in fiscal 1997 relates to the Company's termination of its S corporation federal tax status and the corresponding distribution of the previously undistributed accumulated S corporation earnings, of which $830,000 was unpaid as of January 31, 1997. As a result of the termination of its S corporation election in fiscal 1997, the Company recorded a net deferred income tax asset of $300,000, which relates primarily to 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the timing differences between financial and income tax reporting of certain items attributable to the periods in which the Company elected to be treated as an S corporation. 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. SEASONALITY The Company generally experiences a higher volume of wholegoods sales in the second and third fiscal quarters of each fiscal year due to the crop growing season and winter weather conditions in the Midwest. Typically, farmers purchase agricultural equipment immediately prior to planting or harvesting crops, which occurs during the Company's second and third fiscal quarters. As a result, sales of agricultural equipment generally are lower in the first and fourth fiscal quarters. Winter weather in the Midwest also limits construction to some degree and, therefore, also typically results in lower sales of construction equipment in the first and fourth fiscal quarters. If the Company acquires operations in geographical areas other than where it currently has operations, it may be affected by other seasonal or equipment buying trends. 9 CONSOLIDATED STATEMENTS OF OPERATIONS RDO EQUIPMENT CO. AND SUBSIDIARY
FOR THE YEARS ENDED JANUARY 31 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 - ----------------------------------------------------------------------------------------- REVENUES: Wholegoods sales $224,094 $164,054 $135,704 Parts and service 75,820 58,998 48,206 Rental 2,499 505 -- - ----------------------------------------------------------------------------------------- Total revenues 302,413 223,557 183,910 COST OF SALES 245,287 180,839 148,111 - ----------------------------------------------------------------------------------------- GROSS PROFIT 57,126 42,718 35,799 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 41,275 31,655 24,893 - ----------------------------------------------------------------------------------------- Operating income 15,851 11,063 10,906 INTEREST EXPENSE (5,720) (3,817) (1,895) INTEREST INCOME 674 823 802 - ----------------------------------------------------------------------------------------- Income before income taxes 10,805 8,069 9,813 INCOME TAX BENEFIT 300 -- -- - ----------------------------------------------------------------------------------------- NET INCOME $ 11,105 $ 8,069 $ 9,813 - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- UNAUDITED PRO FORMA DATA (Note 7): Income before income taxes $ 10,805 $ 8,069 $ 9,813 Pro forma provision for income taxes 4,322 3,228 3,925 - ----------------------------------------------------------------------------------------- Pro forma net income $ 6,483 $ 4,841 $ 5,888 - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Pro forma net income per share $ .68 $ .51 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- Weighted average shares outstanding 9,459 9,429 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
10 CONSOLIDATED BALANCE SHEETS RDO EQUIPMENT CO. AND SUBSIDIARY
AS OF JANUARY 31 (IN THOUSANDS) 1997 1996 - --------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 459 $ 787 Accounts receivable (less allowance for doubtful accounts of $929 and $555) 24,982 15,533 Receivables from affiliates -- 490 Inventories 130,955 115,616 Prepaid expenses 499 312 Deferred income tax benefit 540 -- - --------------------------------------------------------------------------------------------------------- Total current assets 157,435 132,738 PROPERTY AND EQUIPMENT, net 15,642 13,039 OTHER ASSETS: Deposits 1,360 1,579 Goodwill and other, net of accumulated amortization of $185 and $41 7,114 737 - --------------------------------------------------------------------------------------------------------- Total assets $181,551 $148,093 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Floor plan payables $ 64,331 $ 91,614 Notes payable and current maturities of long-term debt- Banks and others 4,933 2,835 Affiliates 651 136 Accounts payable 5,153 4,104 Accrued liabilities 5,652 3,350 Customer advance deposits 3,141 4,103 Dividends payable 830 -- - --------------------------------------------------------------------------------------------------------- Total current liabilities 84,691 106,142 LONG-TERM DEBT, net of current maturities: Banks and others 3,522 6,469 Affiliates 5,303 1,198 DEFERRED INCOME TAXES 240 -- - --------------------------------------------------------------------------------------------------------- Total liabilities 93,756 113,809 - --------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Note 9) STOCKHOLDERS' EQUITY (Note 8): Preferred stock -- -- Common stocks- Class A 57 9 Class B 75 75 Additional paid-in capital 84,447 16,284 Retained earnings 3,216 17,916 - --------------------------------------------------------------------------------------------------------- Total stockholders' equity 87,795 34,284 - --------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $181,551 $148,093 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated balance sheets. 11 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY RDO EQUIPMENT CO. AND SUBSIDIARY
FOR THE YEARS ENDED JANUARY 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) COMMON STOCK --------------------------------------- ADDITIONAL TOTAL PAID-IN RETAINED CLASS A CLASS B AMOUNT CAPITAL EARNINGS TOTAL - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 1994 891,508 7,458,492 $ 84 $16,216 $ 8,203 $24,503 Net income -- -- -- -- 9,813 9,813 Dividends paid -- -- -- -- (3,849) (3,849) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 1995 891,508 7,458,492 84 16,216 14,167 30,467 Issuance of common stock 20,383 -- -- 68 -- 68 Net income -- -- -- -- 8,069 8,069 Dividends paid -- -- -- -- (4,320) (4,320) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 1996 911,891 7,458,492 84 16,284 17,916 34,284 Issuance of common stock 4,830,000 -- 48 68,231 -- 68,279 Purchase of common stock (20,383) -- -- (68) -- (68) Net income -- -- -- -- 11,105 11,105 Dividends paid and payable -- -- -- -- (25,805) (25,805) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 1997 5,721,508 7,458,492 $132 $84,447 $ 3,216 $87,795 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
12 CONSOLIDATED STATEMENTS OF CASH FLOWS RDO EQUIPMENT CO. AND SUBSIDIARY
FOR THE YEARS ENDED JANUARY 31 (IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net income $ 11,105 $8,069 $9,813 Adjustments to reconcile net income to net cash provided by (used for) operating activities- Depreciation and amortization 2,606 1,326 690 Deferred tax benefit (300) -- -- Change in operating assets and liabilities: Accounts and notes receivable (8,959) (432) (5,285) Inventories (1,330) (29,266) (12,436) Prepaid expenses (185) (36) (199) Deposits 218 (343) (405) Floor plan payables (37,193) 32,723 8,995 Accounts payable and accrued liabilities 3,085 (125) 971 Customer advance deposits (962) 184 1,072 - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities (31,915) 12,100 3,216 - ------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Purchase of property and equipment (3,656) (9,993) (1,208) Purchase of net assets of dealerships (10,100) (1,263) -- Other, net (516) (571) (46) - ------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (14,272) (11,827) (1,254) - ------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 7,432 5,862 250 Payments on long-term debt (2,757) (510) (565) Net payments of bank lines and short-term notes payable (2,052) (1,269) (1,711) Proceeds from collection of notes receivable from affiliates -- -- 1,259 Issuance of common stock, net of issuance costs 68,279 68 -- Purchase of common stock (68) -- -- Payment of dividends (24,975) (4,320) (761) - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 45,859 (169) (1,528) - ------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH (328) 104 434 CASH AND CASH EQUIVALENTS, beginning of year 787 683 249 - ------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS, end of year $ 459 $ 787 $ 683 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of these consolidated financial statements.
13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARY 1. NATURE OF BUSINESS: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the results of RDO Equipment Co. (RDO) and its wholly owned subsidiary, Minnesota Valley Irrigation, Inc. (MVI). RDO acquired MVI in January 1997 when both were owned and controlled by the same majority stockholder. The acquisition was effected through the issuance of 191,725 shares of RDO common stock. Because RDO and MVI were under common control, the acquisition was accounted for essentially as a pooling of interests. RDO and MVI, collectively, are referred to herein as the Company. BUSINESS The Company is engaged in the sale, servicing and rental of construction and agricultural equipment to customers primarily in the construction and agricultural industries and to governmental agencies. The Company's headquarters are located in Fargo, North Dakota. The Company owns and operates construction and agricultural equipment dealerships located in Arizona, California, Minnesota, North Dakota, South Dakota, Texas and Washington. Accordingly, the Company's results of operations can be significantly impacted by the general economic health of the construction and agricultural industries. MVI is a dealer involved in the sales and service of irrigation equipment and vegetable storage ventilation systems. The Company's major supplier of new equipment and parts for sale is Deere & Company (Deere), which accounted for 49%, 48% and 47% of total revenues for fiscal years 1997, 1996 and 1995, respectively. No other supplier's equipment accounted for more than 10% of total revenues. As discussed in Note 10, the Company has significant transactions with related parties, primarily related to financing arrangements. 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. The Company's principal stockholder 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 the controlling stockholder and a subsequent change in control, as defined. The Company was in compliance with the terms of the Deere agreements at January 31, 1997. 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 inventory, depreciable lives of property and equipment, allowance for uncollectible accounts, inventory reserves and guarantees. 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. Cash equivalents consist primarily of certificates of deposit. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARY 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 and parts inventory. The specific identification method is used to determine cost for used equipment. Inventories consisted of the following (in thousands): 1997 1996 - -------------------------------------------------------------------------------- New equipment $ 75,233 $ 72,647 Used equipment 40,094 32,056 Parts and other 15,628 10,913 - -------------------------------------------------------------------------------- Total $130,955 $115,616 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Major betterments and 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. In fiscal 1996, the Company began using the straight-line method of depreciation exclusively for all new additions. The impact on net income resulting from this change was not material. Property and equipment consisted of the following as of January 31 (in thousands): 1997 1996 - -------------------------------------------------------------------------------- Land $ 850 $ 488 Buildings and improvements 3,919 3,394 Equipment, furniture and fixtures 8,064 5,585 Rental equipment 8,624 7,750 Construction in progress 198 18 - -------------------------------------------------------------------------------- Total 21,655 17,235 Accumulated depreciation (6,013) (4,196) - -------------------------------------------------------------------------------- Property and equipment, net $15,642 $13,039 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- REVENUE RECOGNITION Revenue on equipment and parts sales is recognized upon delivery of product to customers. Rental and service revenue is recognized at the time such services are provided. PRO FORMA NET INCOME PER SHARE Pro forma net income per share is computed based on weighted average shares outstanding, adjusted for the number of shares for which proceeds were necessary to fund the $15 million distribution of accumulated undistributed S corporation earnings discussed in Note 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121) requires companies to review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This pronouncement also provides guidance to be considered in performing such reviews. The Company adopted SFAS 121 in the year ended January 31, 1997. The adoption of SFAS 121 did not have a material impact on the Company's financial position or results of operations. In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which changes the way companies calculate their earnings per share (EPS). SFAS 128 replaces primary EPS with basic EPS. Basic EPS is computed by dividing reported earnings by weighted average shares outstanding, excluding potentially dilutive securities. Fully diluted EPS, termed diluted EPS under SFAS 128, is also to be disclosed. The Company is required to adopt SFAS 128 in fiscal 1998 at which time all prior year EPS are to be restated in accordance with SFAS 128. If the Company had adopted the pronouncement during fiscal 1997, the effect of this accounting change on reported earnings per share data would not have been material. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARY 3. BUSINESS COMBINATIONS: On October 1, 1996, the Company purchased certain assets and assumed certain liabilities of Liberty Agricultural, Inc. (Washington), a full-service agricultural equipment dealership with two stores located in Pasco and Sunnyside, Washington. The total purchase price for the net assets of Washington was approximately $2.7 million and was financed with debt, a portion of which was repaid with net proceeds from the Offering (see Note 8). The purchase agreement also calls for future contingent consideration of up to $750,000 in the event certain performance criteria are met over a three-year period. The Company anticipates accounting for the contingent consideration paid, if any, as compensation expense. The acquisition resulted in goodwill of approximately $1.6 million, which will be amortized over 30 years. On July 1, 1996, the Company acquired certain assets and assumed certain liabilities of Mega Equipment Company (Central Texas), which consists of three full-service construction stores located in the Dallas/Fort Worth metropolitan area and Waco, Texas. Total consideration for the net assets acquired was approximately $8.4 million and was financed with debt from Ag Capital Company (Ag Capital), which was repaid with a portion of the net proceeds from the Offering (see Note 8). Resulting goodwill of approximately $4.4 million is being amortized over 30 years. The Company also acquired certain new equipment and parts inventory from Deere to stock the Central Texas dealership. Total consideration for such inventory of approximately $7.7 million was financed through Deere floor plan financing arrangements. In October 1995, the Company acquired all the common stock of Cass County Equipment Co. (Cass), which was controlled by the Company's majority stockholder, in exchange for 233,559 shares of the Company's common stock, $520,000 in cash and a note payable for $375,000. Because the Company and Cass were under common control, the merger has been accounted for essentially as a pooling of interests. Accordingly, the Company's financial statements include the historical carrying amounts of the consolidated net assets and results of the operations of the consolidated entities for all periods presented. In February 1995, the Company purchased the assets and assumed certain liabilities of Whitney Machinery, Inc. (Whitney). Total consideration for the net assets was $2,699,000. Resulting goodwill of $625,000 is being amortized over 30 years. The Central Texas, Washington and Whitney acquisitions have been accounted for using the purchase method of accounting, and accordingly, the assets acquired and liabilities of Central Texas, Washington and Whitney have been recorded based upon fair value as of the dates of acquisition. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed has been recorded as goodwill. Results of operations for these acquisitions have been included in the accompanying consolidated financial statements since the dates of acquisition. The accompanying unaudited consolidated pro forma results of operations for the years ended January 31, 1997 and 1996, give effect to the Offering (see Note 8) and the acquisitions of Central Texas, Washington and Whitney as if they were completed at the beginning of the respective periods. 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 (in thousands, except per share data): 1997 1996 - -------------------------------------------------------------------------------- Revenues $330,977 $265,478 - -------------------------------------------------------------------------------- Net income $ 9,877 $ 8,376 - -------------------------------------------------------------------------------- Weighted average shares outstanding 13,185 13,200 - -------------------------------------------------------------------------------- Net income per common and common equivalent share $ .75 $ .63 - -------------------------------------------------------------------------------- 4. FLOOR PLAN PAYABLES: Floor plan payables include borrowings from Deere, Ag Capital and other vendors under floor plan financing arrangements for inventory. The terms of these arrangements generally 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 equipment or in accordance with the 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARY terms of the financing arrangements. All amounts owed to Deere are guaranteed by the majority stockholder of the Company and are collateralized by inventory. Floor plan payables consist of the following as of January 31 (in thousands):
1997 1996 - ---------------------------------------------------------------------------------------------------------- Interest-bearing: Deere Credit Services inventory notes, due as inventory is sold, interest at various rates, 8.25% during fiscal 1997 and 5.65% to 9.25% during fiscal 1996 $10,927 $20,015 Deere & Company payables, due as inventory is sold, interest at various rates, 8.75% during fiscal 1997 and 8.25% to 9.00% during fiscal 1996 3,744 17,487 Ag Capital Company, interest based on prime (8.25% and 8.5% at January 31, 1997 and 1996, respectively) 347 7,299 Other 325 363 - ---------------------------------------------------------------------------------------------------------- 15,343 45,164 - ---------------------------------------------------------------------------------------------------------- Noninterest-bearing: Deere & Company 46,860 45,147 Deere Credit Services 1,580 -- Other 548 1,303 - ---------------------------------------------------------------------------------------------------------- 48,988 46,450 - ---------------------------------------------------------------------------------------------------------- Total $64,331 $91,614 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
5. NOTES PAYABLE AND LONG-TERM DEBT: BANKS AND OTHERS Notes payable and long-term debt to banks and others consisted of the following as of January 31 (in thousands):
1997 1996 - ---------------------------------------------------------------------------------------------------------- Deere Credit Services rental equipment notes, due in various amounts through January 2001, interest at various rates from 8.25% to 9.5%, collateralized by rental equipment $5,115 $3,533 Bank lines of credit (see below) 1,420 3,472 Other 1,920 2,299 - ---------------------------------------------------------------------------------------------------------- Total 8,455 9,304 Less short-term notes and current maturities of long-term debt (4,933) (2,835) - ---------------------------------------------------------------------------------------------------------- $3,522 $6,469 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
The Company has bank lines of credit totaling $3,000,000 available through May 1, 1997 at variable interest rates. Bank lines of credit are guaranteed by the majority stockholder of the Company. During the fiscal years ended January 31, 1997, 1996 and 1995, the highest balances outstanding under these lines were $3,000,000, $2,972,000 and $750,000, respectively. The weighted average interest rates on these lines during such periods were 8.58%, 8.41% and 7.94%, respectively. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARY AFFILIATES Notes payable and long-term debt due to affiliates consisted of the following as of January 31 (in thousands):
1997 1996 - ----------------------------------------------------------------------------------------------------- Ag Capital Company, interest (variable 8.25% to fixed 8.61%), collateralized by substantially all assets of the Company $5,954 $1,334 Less- Short-term notes and current maturities of long-term debt (651) (136) - ----------------------------------------------------------------------------------------------------- $5,303 $1,198 - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
Future maturities of all debt as of January 31, 1997 are as follows (in thousands): 1998 $ 5,584 1999 3,155 2000 2,312 2001 1,485 2002 1,072 Thereafter 801 - -------------------------------------------------------------------------------- $14,409 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Company's debt agreements contain 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, 1997. 6. EMPLOYEE BENEFIT PLANS: 401(k) EMPLOYEE SAVINGS PLAN The Company's employees participate in a 401(k) employee savings plan sponsored by an affiliate 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 $214,000, $194,000 and $151,000 for the fiscal years ended January 31, 1997, 1996 and 1995, 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 adopted the 1996 Stock Incentive Plan (the Plan) to provide 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 such that the total number of shares available for issuance under the Plan equals 10% of the total number of shares of Class A 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 of any stock options granted under the Plan. Information regarding the Plan as of January 31, 1997 is as follows: SHARES UNDER EXERCISE OPTION PRICE - -------------------------------------------------------------------------------- Outstanding, end of year 560,000 $15.50 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Exerciseable, end of year 40,000 $15.50 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Company accounts for this stock option plan under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for this 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 not be materially different from reported amounts. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARY 7. INCOME TAXES: Prior to January 20, 1997, the Company had elected to be treated as an S corporation under the Internal Revenue Code. Under this election, the Company was not directly subject to income taxes. Instead, corporate taxable earnings were passed through to the stockholders, who were responsible for any taxes which may have been due. The Company previously made distributions to its stockholders to enable them to pay the corresponding taxes on such corporate taxable earnings. In connection with the reorganization and Offering described in Note 8, the Company terminated S corporation federal tax status and changed to a C corporation and, accordingly, is subject to federal and certain state income taxes. In conjunction with this termination, the Company distributed to its stockholders the previously undistributed accumulated S corporation earnings accumulated as of the termination date. Pro forma net income and pro forma net income per share for the years ended January 31, 1997, 1996 and 1995, have been determined assuming that the Company had been taxed as a C corporation for federal and certain state income tax purposes for such periods. Unaudited pro forma income taxes represent the estimated income taxes that would have been reported had the Company been a taxable entity for both federal and state income tax purposes for all periods presented. The components of the pro forma income tax provision are summarized as follows as of January 31 (in thousands): 1997 1996 1995 - -------------------------------------------------------------------------------- Currently payable: Federal $3,386 $2,433 $3,319 State 979 757 992 Deferred income tax provision (benefit) (43) 38 (386) - -------------------------------------------------------------------------------- Pro forma provision for income taxes $4,322 $3,228 $3,925 - -------------------------------------------------------------------------------- For fiscal years ended January 31, 1997, 1996 and 1995, the difference between the federal statutory rate of 34% and the pro forma provision for income taxes represents the impact of state income taxes, net of the federal benefit. Effective with the termination of the Company's S corporation status, the Company provided for deferred income taxes for cumulative temporary differences between the tax basis and financial reporting basis of its assets and liabilities at the date of termination totaling $300,000. 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, 1997 (in thousands): Accruals and other reserves $560 Inventory (250) Compensation accruals 230 - ------------------------------------------------------------ Net current deferred tax asset 540 Property and equipment (240) - ------------------------------------------------------------ $300 - ------------------------------------------------------------ - ------------------------------------------------------------ 8. INITIAL PUBLIC OFFERING, REORGANIZATION AND CAPITAL STOCK: INITIAL PUBLIC OFFERING The Company completed the sale of 4,830,000 shares (including the Underwriters' overallotment option) of Class A common stock (the Offering) for net proceeds of $68,279,000. The Company used a portion of the net proceeds of this Offering to fund the distribution of accumulated S corporation dividends (see Note 7), repay certain notes issued in connection with the acquisitions of Central Texas and Washington (see Note 3), pay down inventory floor plan financing, fund subsequent acquisitions (see Note 13) and for general corporate purposes. REORGANIZATION The Company's Board of Directors approved the reclassification and split of each share of common stock into 44.5 shares of either Class A or Class B common stock effective immediately prior to the Offering. This reclassification and stock split has been retroactively reflected in the accompanying consolidated financial statements. 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 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARY 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, 1997: Class A shares 5,721,508 Class B shares 7,458,492 - --------------------------------------------------------- Total shares 13,180,000 - --------------------------------------------------------- - --------------------------------------------------------- 9. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES The Company leases retail space and vehicles under various noncancelable operating leases. The leases have varying terms and expire at various dates through 2007. Generally, the leases require the Company to pay taxes, insurance and maintenance costs. Lease expense was $2,733,000, $2,055,000 and $1,386,000 for fiscal 1997, 1996 and 1995, 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): 1998 $3,069 1999 2,760 2000 2,441 2001 2,038 2002 1,541 Thereafter 5,992 - ---------------------------------------------------- Total $17,841 - ---------------------------------------------------- - ---------------------------------------------------- GUARANTEES The Company has guaranteed a portion of the remaining outstanding balances of certain customer notes and lease contracts financed by credit companies. The Company has made deposits with the finance companies to partially fund contingent liabilities which may come due. These customer notes are collateralized by equipment. As of January 31, 1997, the contingent liability and off-setting deposits are as follows (in thousands): FINANCE GUARANTEED DEPOSITS AMOUNTS RECEIVABLE - -------------------------------------------------------------------- Ag Capital Company (affiliate) $2,097 $ -- ACL Company, LLC (affiliate) 1,223 -- Farmers Equipment Rental, Inc. (affiliate) 721 -- Deere Credit Services 778 778 Other 118 -- - -------------------------------------------------------------------- Total $4,937 $ 778 - -------------------------------------------------------------------- - -------------------------------------------------------------------- MINIMUM REPURCHASE GUARANTEES The Company has entered into various 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 exceed the guaranteed repurchase prices. The Company accounts for significant transactions which have a guaranteed repurchase feature as leases. The Company's existing repurchase agreements expire as follows (in thousands): 1998 $1,449 1999 1,049 2000 2,438 2001 3,760 2002 2,603 Thereafter 266 - ------------------------------------------------------------------------ Total $ 11,565 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARY 10. RELATED-PARTY TRANSACTIONS: The Company has transactions with companies which are related through common ownership. A summary of significant related-party transactions is as follows: a. Ag Capital, 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 entities on a portion of this customer financing as summarized in Note 9. b. In addition, the Company has floor plan payables, notes payable and long-term debt owed to Ag Capital and Farmers Equipment Rental, Inc. to finance inventory as summarized in Notes 4 and 5. Interest expense paid to related entities totaled $1,354,000, $849,000 and $627,000 in fiscal 1997, 1996 and 1995, respectively. c. The Company had sales to related entities totaling $11,198,000, $5,492,000 and $3,450,000 in fiscal 1997, 1996 and 1995, respectively. The Company also leases certain retail space and vehicles from related entities. Total lease expense for these leases totaled $1,793,000, $1,089,000 and $737,000 in fiscal 1997, 1996 and 1995, respectively. 11. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Supplemental cash flow disclosures for the Company are as follows (in thousands): 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ Cash payments for interest $ 5,640 $3,820 $1,937 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Supplemental disclosures of noncash investing and financing activities: Increase in assets related to acquisitions of dealerships through issuance and assumption of debt and issuance of common stock $11,325 $9,991 $ -- - ------------------------------------------------------------------------------------------------------------------------ Dividends declared, accrued and unpaid $ 830 $ -- $ -- - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Reduction of notes receivable from affiliates and other receivables through payment of dividends $ -- $ -- $3,088 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
12. SEGMENT INFORMATION: The Company's operations are classified into two business segments: construction and agricultural. 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. Operating earnings by business segment are defined as revenues less operating costs and expenses. 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, deferred income taxes and goodwill. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARY The following table shows sales, operating income and other financial information by business segment for the fiscal years 1997, 1996 and 1995 (in thousands):
CORPORATE CONSTRUCTION AGRICULTURAL AND OTHER TOTAL - ------------------------------------------------------------------------------------------ 1997: Revenues $191,461 $110,952 $ -- $302,413 Operating income 9,783 6,068 -- 15,851 Depreciation and amortization 2,199 364 43 2,606 Identifiable assets 111,175 62,841 7,535 181,551 Capital expenditures 2,723 871 62 3,656 1996: Revenues 138,972 84,585 -- 223,557 Operating income (loss) 6,604 4,826 (367) 11,063 Depreciation and amortization 987 303 36 1,326 Identifiable assets 102,289 45,591 213 148,093 Capital expenditures 7,855 2,001 137 9,993 1995: Revenues 110,546 73,364 -- 183,910 Operating income (loss) 6,709 4,796 (599) 10,906 Depreciation and amortization 444 239 7 690 Identifiable assets 59,573 37,110 1,632 98,315 Capital expenditures 540 643 25 1,208
13. ACQUISITIONS COMPLETED SUBSEQUENT TO JANUARY 31, 1997: Effective February 1, 1997, the Company purchased certain net assets and assumed certain liabilities of Sun Valley Equipment Corp., a construction equipment rental company with five retail stores in Arizona. Total consideration for the net assets acquired was $2.7 million. The Company assigned these net assets to a newly formed subsidiary, RDO Rental Co., of which the Company owns 80% of the outstanding common stock. Effective March 3, 1997, the Company purchased certain net assets and assumed certain liabilities of a Mack Truck dealership located in Fargo, North Dakota. Total consideration for the net assets acquired was $2.1 million. 14. UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS):
FIRST SECOND THIRD FOURTH TOTAL YEAR - -------------------------------------------------------------------------------------------------------------- Fiscal 1997: Total revenues $70,886 $82,887 $75,487 $73,153 $302,413 Gross profit 12,168 14,936 15,705 14,317 57,126 Pro forma net income 1,597 2,262 2,041 583 6,483 Pro forma net income per share 0.17 0.24 0.22 0.06 0.68 Fiscal 1996: Total revenues 52,029 57,718 67,078 46,732 223,557 Gross profit 9,765 10,863 12,480 9,610 42,718 Pro forma net income 1,130 1,618 1,847 246 4,841 Pro forma net income per share 0.12 0.17 0.19 0.03 0.51
The sum of the per share amounts for fiscal 1997 does not equal the total for the year due to the effects of rounding. 22 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 Subsidiary as of January 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. 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. The financial statements of RDO Equipment Co. and Subsidiary as of January 31, 1995 were audited by other auditors whose report dated December 15, 1995 expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. 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 Subsidiary as of January 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, March 18, 1997 23 COMMON STOCK INFORMATION RDO Equipment Co. Class A Common Stock is listed on the New York Stock Exchange and is traded under the symbol "RDO." The high and low reported sales prices on the New York Stock Exchange from January 24, 1997 (the day the Company's Class A Common Stock began trading) through January 31, 1997 (the last day of the fiscal year) were $19.00 and $17.125, respectively. As of April 25, 1997, the Company had approximately 2,200 holders of its Class A Common Stock, and one holder of its Class B Common Stock. 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. 24 EX-21.1 6 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF RDO EQUIPMENT CO.
Name Under Which Subsidiary State of Incorporation Subsidiary Does Business - ---------- ---------------------- ------------------------ Minnesota Valley Irrigation, Inc. Minnesota Corporate Name (100% owned) RDO Mack Sales and Service, Inc. North Dakota Corporate Name (100% owned) RDO Rental Co. Minnesota Sun Valley Equipment (80% owned)
36 EX-27.1 7 EX 27-1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1997 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. 1,000 YEAR JAN-31-1997 FEB-01-1996 JAN-31-1997 459 0 25,911 929 130,955 157,435 21,655 6,013 181,551 84,691 8,825 0 0 132 87,663 181,551 302,413 302,413 245,287 245,287 41,275 0 5,720 10,805 4,322 6,483 0 0 0 6,483 .68 0
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