-----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, BB2LtOZpyEsfhBkiCHjJPyheJwFNjf/kfugEtGijvLp8P5Lzb5trmNP8tdPt07Ut Qfeg/ML1sPMKG1yAHYi1PQ== 0000891020-98-001630.txt : 19981118 0000891020-98-001630.hdr.sgml : 19981118 ACCESSION NUMBER: 0000891020-98-001630 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RITCHIE BROS AUCTIONEERS INC CENTRAL INDEX KEY: 0001046102 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] STATE OF INCORPORATION: A6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: SEC FILE NUMBER: 001-13425 FILM NUMBER: 98749499 BUSINESS ADDRESS: STREET 1: 9200 BRIDGEPORT RD STREET 2: RICHMOND, BRITISH COLUMBIA CITY: CANADA STATE: A1 ZIP: V6X 151 BUSINESS PHONE: 6042737964 6-K 1 FORM 6-K FOR THE PERIOD ENDED SEPTEMBER 30, 1998 1 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------------------------- Form 6-K REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended September 30, 1998 -------------------------------------- RITCHIE BROS. AUCTIONEERS INCORPORATED 9200 Bridgeport Road Richmond, BC, Canada V6X 1S1 (604) 273 7564 (Address of principal executive offices) -------------------------------------- [indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F] Form 20-F __ Form 40-F X [indicate by check mark whether the registrant by furnishing information contained in this Form is also thereby furnishing the information to the Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of 1934] Yes __ No X ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ 2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements do not include all information and footnotes required by Canadian or United States generally accepted accounting principles. However, in the opinion of management, all adjustments (which consist only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the relevant periods have been made. Results for the interim periods are not necessarily indicative of the results to be expected for the year or any other period. These financial statements should be read in conjunction with the summary of accounting policies and the notes to the consolidated financial statements for the periods ended April 30, 1997 and December 31, 1997 included in the Company's Rule 424(b) Prospectus dated March 9, 1998 filed with the United States Securities and Exchange Commission. Effective December 31, 1997, the Company changed its fiscal year end from April 30 to December 31. 2 3 RITCHIE BROS. AUCTIONEERS INCORPORATED CONSOLIDATED BALANCE SHEETS (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 89,681 $27,149 Accounts receivable....................................... 16,123 6,744 Inventory................................................. 9,139 7,081 Advances against auction contracts........................ 10,480 1,261 Prepaid expenses and deposits............................. 1,329 1,218 -------- ------- 126,752 43,453 Fixed assets (note 2)....................................... 50,413 27,007 Deferred income taxes (note 3).............................. 1,635 -- -------- ------- $178,800 $70,460 ======== ======= LIABILITIES AND EQUITY Current liabilities: Auction proceeds payable.................................. $ 62,232 $17,728 Accounts payable and accrued liabilities.................. 14,947 17,131 Current bank loans........................................ 4,025 730 Income taxes payable...................................... 474 4,542 -------- ------- 81,678 40,131 Bank term loans............................................. 4,008 4,623 -------- ------- 85,686 44,754 SHAREHOLDERS' EQUITY Share capital (note 4).................................... 64,816 10,866 Retained earnings......................................... 30,811 16,958 Foreign currency translation adjustment................... (2,513) (2,118) -------- ------- 93,114 25,706 -------- ------- $178,800 $70,460 ======== =======
See accompanying notes to consolidated financial statements. 3 4 RITCHIE BROS. AUCTIONEERS INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT PER SHARE AMOUNTS) (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Auction revenues............................ $ 13,869 $ 15,629 $ 64,286 $ 59,864 Direct expenses............................. 2,566 3,481 11,029 11,471 ---------- ---------- ---------- ---------- 11,303 12,148 53,257 48,393 Expenses: Depreciation.............................. 713 678 1,969 1,838 General and administrative................ 9,382 9,814 30,257 25,439 Employee equity participation............. -- 7,733 -- 7,733 ---------- ---------- ---------- ---------- 10,095 18,225 32,226 35,010 ---------- ---------- ---------- ---------- Income (loss) from operations............... 1,208 (6,077) 21,031 13,383 Other income (expenses): Interest expense.......................... (117) (659) (1,288) (1,329) Other..................................... 2,074 279 2,651 514 ---------- ---------- ---------- ---------- 1,957 (380) 1,363 (815) ---------- ---------- ---------- ---------- Income (loss) before income taxes........... 3,165 (6,457) 22,394 12,568 Income taxes -- current (note 5)............ 621 3,543 7,981 4,853 Income taxes -- deferred.................... 540 -- 540 -- ---------- ---------- ---------- ---------- Net income (loss)........................... $ 2,004 $ (10,000) $ 13,873 $ 7,715 ========== ========== ========== ========== Net income per share (note 6)............... $ 0.12 $ (0.77) $ 0.88 $ 0.60 ========== ========== ========== ========== Net income per share -- diluted (note 6).... $ 0.12 $ (0.77) $ 0.87 $ 0.60 ========== ========== ========== ========== Weighted average number of shares outstanding............................... 16,548,666 12,971,602 15,705,754 12,801,916 ========== ========== ========== ========== Diluted weighted average number of shares outstanding............................... 16,756,391 13,059,787 15,900,758 12,831,634 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 4 5 RITCHIE BROS. AUCTIONEERS INCORPORATED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (unaudited)
FOREIGN CURRENCY TOTAL SHARE RETAINED TRANSLATION SHAREHOLDERS' CAPITAL EARNINGS ADJUSTMENT EQUITY ------- -------- ----------- ------------- Balance, December 31, 1997.................... $10,866 $16,958 $(2,118) $25,706 Common shares issued........................ 51,911 -- -- 51,911 Net income.................................. -- 3,377 -- 3,377 Foreign currency translation adjustment..... -- -- (53) (53) ------- ------- ------- ------- Balance, March 31, 1998....................... 62,777 20,335 (2,171) 80,941 Net income.................................. -- 8,492 -- 8,492 Tax recovery on amortization of underwriting costs.................................... 2,175 -- -- 2,175 Additional costs of issuance of common shares................................... (136) -- -- (136) Additional costs of reorganization.......... -- (20) -- (20) Foreign currency translation adjustment..... -- -- (264) (264) ------- ------- ------- ------- Balance, June 30, 1998........................ 64,816 28,807 (2,435) 91,188 Net income.................................. -- 2,004 -- 2,004 Foreign currency translation adjustment..... -- -- (78) (78) ------- ------- ------- ------- Balance, September 30, 1998................... $64,816 $30,811 $(2,513) $93,114 ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 5 6 RITCHIE BROS. AUCTIONEERS INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1998 ----------------- Cash provided by (used in) Operations: Net income................................................ $ 13,873 Items not involving the use of cash Depreciation........................................... 1,969 Deferred income taxes.................................. 540 Changes in non-cash working capital: Accounts receivable.................................... (9,379) Inventory.............................................. (2,058) Advances against auction contracts..................... (9,219) Prepaid expenses and deposits.......................... (111) Auction proceeds payable............................... 44,504 Accounts payable and accrued liabilities............... (2,184) Income taxes payable................................... (4,068) Foreign currency translation adjustment................... (395) -------- 33,472 Financing: Issuance of share capital, net of issue costs............. 51,775 Additional costs of reorganization........................ (20) Bank loans................................................ 2,680 -------- 54,435 Investments: Fixed asset additions, net................................ (25,375) -------- Increase in cash and cash equivalents....................... 62,532 Cash and cash equivalents, beginning of period.............. 27,149 -------- Cash and cash equivalents, end of period.................... $ 89,681 ========
See accompanying notes to consolidated financial statements. 6 7 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) SEPTEMBER 30, 1998 (Information as at September 30, 1998 and for the periods ended September 30, 1998 and 1997 is unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES: (a) BASIS OF PRESENTATION: These unaudited consolidated financial statements present the financial position, results of operations and changes in shareholders' equity and cash flows of Ritchie Bros. Auctioneers Incorporated (the "Company") and its predecessor businesses. These predecessor businesses comprised the Ritchie Bros. Auctioneers group of companies and partnerships. A reorganization of the Company and its predecessor businesses (the "Reorganization") was completed in December 1997 and is described more fully in the consolidated financial statements and notes thereto included in the Company's Rule 424(b) Prospectus dated March 9, 1998 filed with the United States Securities and Exchange Commission. These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles for interim financial information. Except as disclosed in note 7, these consolidated financial statements comply, in all material respects, with generally accepted accounting principles in the United States. 2. FIXED ASSETS Fixed assets at September 30, 1998 were as follows:
ACCUMULATED NET BOOK COST DEPRECIATION VALUE ------- ------------ -------- Land and improvements..................................... $32,758 $ 874 $31,883 Buildings................................................. 14,698 2,905 11,793 Automotive equipment...................................... 5,073 1,547 3,526 Computer equipment........................................ 1,642 646 996 Yard equipment............................................ 2,296 1,042 1,254 Office equipment.......................................... 1,781 980 801 Leasehold improvements.................................... 200 41 160 ------- ------ ------- $58,448 $8,035 $50,413 ======= ====== =======
Fixed assets at December 31, 1997 were as follows:
ACCUMULATED NET BOOK COST DEPRECIATION VALUE ------- ------------ -------- Land and improvements..................................... $12,830 $ 535 $12,295 Buildings................................................. 11,490 2,726 8,764 Automotive equipment...................................... 3,974 1,002 2,972 Computer equipment........................................ 1,384 433 951 Yard equipment............................................ 2,320 1,082 1,238 Office equipment.......................................... 1,454 874 580 Leasehold improvements.................................... 225 18 207 ------- ------ ------- $33,677 $6,670 $27,007 ======= ====== =======
7 8 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (TABULAR DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) SEPTEMBER 30, 1998 (Information as at September 30, 1998 and for the periods ended September 30, 1998 and 1997 is unaudited) 3. DEFERRED INCOME TAXES Deferred income taxes recoverable of $1,635,000 have been recorded to give net effect to (i) future reductions in income taxes payable by the Company resulting from tax deductible financing costs incurred in the course of the Company's initial public offering completed in March 1998, and (ii) future income taxes payable by the Company relating to a gain on sale of land during September 1998. 4. SHARE CAPITAL: SHARES ISSUED: In March 1998, the Company issued 3,335,000 common shares in connection with its initial public offering. Net proceeds raised from the offering, after deducting underwriting commissions and other direct costs, were $51.8 million. OPTIONS: During the nine months ended September 30, 1998, options to purchase 36,000 common shares were granted to an employee of the Company and options to purchase 25,333 common shares expired when certain other individuals ceased to be employees of the Company. 5. INCOME TAXES: For the three months and nine months ended September 30, 1997, not all income earned by the Group was subject to tax as, during the period prior to the Reorganization, many of the Company's predecessor entities were partnerships and not subject to corporate income tax. 6. NET INCOME PER SHARE: Net income per share has been calculated based on the weighted average number of shares outstanding after giving retroactive effect to the 12,715,667 common shares issued on the Reorganization. 7. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: The consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles for interim financial information which differ, in certain respects, from accounting practices generally accepted in the United States and from requirements promulgated by the United States Securities and Exchange Commission. 8 9 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (TABULAR DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) SEPTEMBER 30, 1998 (Information as at September 30, 1998 and for the periods ended September 30, 1998 and 1997 is unaudited) Material differences to the consolidated financial statements and related notes of the Company are as follows: (a) CONSOLIDATED STATEMENT OF CASH FLOWS: United States accounting principles require the following supplementary information be presented to a statement of cash flows:
NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------- Interest paid............................................... $ 1,288 Income taxes paid........................................... $12,951
(b) NET INCOME PER SHARE: Under United States generally accepted accounting principles, basic and diluted net income per share are not materially different than the corresponding basic and diluted net income per share computed under Canadian generally accepted accounting principles. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion summarizes the significant factors affecting the consolidated operating results and financial condition of Ritchie Bros. Auctioneers Incorporated ("Ritchie Bros." or the "Company") for the three-month and nine-month periods ended September 30, 1998 compared to the three-month and nine-month periods ended September 30, 1997. This discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements thereto included in the Company's Rule 424(b) Prospectus dated March 9, 1998 filed with the United States Securities and Exchange Commission. Effective December 31, 1997, the Company changed its fiscal year end from April 30 to December 31. Data for the three-month and nine-month periods ended September 30, 1997 is based on management estimates. Ritchie Bros. is the world's leading auctioneer of industrial equipment, operating through over 50 locations, including 13 permanent auction sites and 8 regional auction units, in 13 countries in North America, Europe, Asia, Australia and the Middle East. The Company sells, through unreserved public auctions, a broad range of used equipment, including equipment utilized in the construction, transportation, mining, forestry, petroleum and agricultural industries. Gross auction sales represent the aggregate selling prices of all items sold at Ritchie Bros. auctions during the periods indicated. Gross auction sales are key to understanding the financial results of the Company, since the amount of auction revenues and to a lesser extent, certain expenses, are dependent on it. Auction revenues include commissions earned as agent for consignors through both straight commission and gross guarantee contracts, plus the net profit on the sale of equipment purchased and sold by the Company as principal. Under a gross guarantee contract, the consignor is guaranteed a minimum amount of proceeds on the sale of its equipment. When the Company guarantees gross proceeds, it earns a commission on the guaranteed amount and typically participates in a negotiated percentage of proceeds, if any, in excess of the guaranteed amount. If auction proceeds are less than the guaranteed amount, the Company's commission would be reduced, or, if sufficiently lower, the Company would incur a loss. Auction revenues are reduced by the amount of any losses on gross guarantee consignments and sales by the Company as principal. Auction revenues also include interest income earned that is incidental to the auction business. The Company's gross auction sales and auction revenues are affected by the seasonal nature of the auction business. Gross auction sales and auction revenues tend to increase during the second and fourth calendar quarters during which the Company generally conducts more auctions than in the first and third calendar quarters. The Company's gross auction sales and auction revenues are also affected on a period-to-period basis by the timing of major auctions. In newer markets where the Company is developing operations, the number and size of auctions and, as a result, the level of gross auction sales and auction revenues, is likely to vary more dramatically from period-to-period than in the Company's established markets where the number, size and frequency of the Company's auctions are more consistent. Finally, economies of scale are achieved as the Company's operations in a region mature from conducting intermittent auctions, establishing a regional auction unit, and ultimately to developing a permanent auction site. Economies of scale are also achieved when the size of the Company's auctions increases. The Company is aware of potential restrictions that may affect the ability of equipment owners to transport certain equipment between some jurisdictions. Management believes that these potential restrictions have not had a significant impact on the Company's business, financial condition or results of operations to date. However, the extent of any future impact on the Company's business, financial condition or results of operations from these potential restrictions cannot be predicted at this time. Income taxes reported in periods prior to the completion of the reorganization (as described in the Company's Rule 424(b) Prospectus dated March 9, 1998, the "Reorganization") in December 1997 are not indicative of taxes that would normally be incurred on reported income. Prior to the Reorganization, the majority of Ritchie Bros.' business operations was carried on by predecessor entities to the Company that were 10 11 partnerships. Consequently, most of the income of the predecessor partnerships was included for income tax purposes in the income of the partner entities, many of which were not predecessor entities to the Company. As a result of the Reorganization, the Company is subject to income taxation in all relevant jurisdictions. Prior to the Reorganization the Company's general and administrative expense fluctuated significantly from period to period, primarily as a result of the amount and timing of profit distributions paid as bonuses to certain of the beneficial owners of the Company's predecessor entities. During this period, certain other beneficial owners were remunerated through profit distributions that did not result in charges against the Company's income. The differences in timing, magnitude and characterization of remuneration will affect the quarter-to-quarter comparability of general and administrative expense as between the year ended December 31, 1997 and the year ending December 31, 1998, with some quarters reflecting increased expenses, and others reflecting decreased expenses. Although the Company cannot accurately anticipate the future effect of inflation, inflation historically has not had a material effect on the Company's operations. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Auction Revenues Auction revenues of $64.3 million for the nine months ended September 30, 1998 increased by $4.4 million, or 7.39%, from the comparable period in 1997 due to increased gross auction sales, partially offset by a lower average percentage of auction revenues earned by the Company on gross auction sales. Gross auction sales of $750.5 million for the nine months ended September 30, 1998 increased by $110.4 million, or 17.25%, from the comparable period in the prior year, primarily as a result of increased gross auction sales in the United States and Europe. Results for the 1998 period included significant gross auction sales for certain auctions held by the Company in Rotterdam, the Netherlands, Fort Worth, Texas, and Dubai, the United Arab Emirates. Auction revenues as a percentage of gross auction sales have averaged 8.80% on a long-term basis. In the 1998 period, the average commission rate of 8.57% was lower than the long-term average and lower than the unusually high 9.35% rate in the comparable 1997 period. The Company's expectations with respect to the long-term average auction revenue rate remain unchanged. Direct Expenses Direct expenses are expenses that are incurred as a direct result of an auction sale being held. Direct expenses include the costs of hiring personnel to assist in conducting the auction, lease expenses for temporary auction sites, travel costs for full-time employees to attend and work at the auction site, security hired to safeguard equipment while at the auction site, and advertising costs specifically related to the auction. Direct expenses decreased by $0.4 million for the nine months ended September 30, 1998 compared to the comparable period in the prior year. As a percentage of gross auction sales, direct expenses were 1.47% for the nine-month period ending September 30, 1998, lower than the 1.79% experienced during the comparable period in 1997. This decrease was primarily a result of fewer but larger auctions being held in the 1998 period as compared to the 1997 period and the related expense efficiencies arising from conducting large auctions. As a percentage of gross auction sales, direct expenses incurred in both periods were lower than the Company's long-term average of 1.90%. This difference is a result of relatively more large auctions being held by the Company during both the 1998 and 1997 periods than in other prior periods. The Company anticipates that it will continue to hold these large auctions and that direct expenses as a percentage of gross auction sales will, in future periods, be lower than the average that the Company has experienced over the last several years. Depreciation Expense Depreciation is calculated on capital assets employed in the Company's business, including building and site improvements, automobiles, yard equipment, and computers. In the nine-month period ending September 30, 1998, depreciation increased marginally from the comparable 1997 period, due to an increase in 11 12 depreciable fixed assets. Management anticipates that depreciation expense will increase as existing auction sites are improved and additional permanent auction sites are acquired and developed. General and Administrative Expense General and administrative expense ("G&A") includes employee expenses, such as salaries, wages, performance bonuses and benefits, non-auction related travel, institutional advertising, insurance, general office, and computer expenses. For the nine months ended September 30, 1998, the Company incurred G&A of $30.3 million. Management does not consider G&A of $25.4 million in the 1997 period to be meaningful as a comparable number since the expenses incurred in the 1997 period reflect results prior to the Reorganization (as outlined in the Company's Prospectus dated March 9, 1998) and, as a result, certain components are not comparable on a period to period basis with the expenses incurred in the 1998 period. See "-- Overview." Management anticipates that G&A will increase in the future due to an increased level of administrative infrastructure to support expansion of the Company's operations. EMPLOYEE EQUITY PARTICIPATION EXPENSE Employee equity participation expense of $7.7 million incurred in the nine-month period ended September 30, 1997 related to the issuance of shares and options to employees of the Company on a discounted basis pursuant to the Employee Equity Participation Program described in the Company's Prospectus dated March 9, 1998. Shares and options were also issued to employees of the Company in the final quarter of 1997 under the same program. In 1998, no such discounted shares or options have been issued and management does not anticipate further issuances of shares or grants of options under the Employee Equity Participation Program. Income from Operations Income from operations was $21.0 million for the nine months ended September 30, 1998. Management does not consider the 1997 results to be meaningful as a comparable number because certain components of G&A are not comparable on a period to period basis, and because of the effect of the employee equity participation expense in the 1997 period. Interest Expense Interest expense includes interest and bank charges paid on term bank debt. Interest expense of $1.3 million for the nine months ended September 30, 1998 was unchanged from the comparable period in 1997. Management plans to partially finance the acquisition of additional permanent auction sites by incurring debt, which should result in an increase in interest expense in the future. Other Income Other income arises from equipment appraisals performed by the Company, and other miscellaneous sources. Other income for the nine months ended September 30, 1998 of $2.7 million increased by $2.1 million from the comparable period in 1997 due primarily to $1.8 million of non-recurring income ($1.2 million after giving effect to income tax) during the 1998 period. This non-recurring income was generated primarily as a result of a gain on the disposal of a permanent auction site that has been replaced with a new facility. Income Taxes Income taxes of $8.5 million for the nine months ended September 30, 1998 have been computed based on rates of tax that apply in each of the tax jurisdictions in which the Company operates. The effective rate of tax on net income for the 1998 period of 38.1% is marginally higher than the rate the Company would normally expect for the full 1998 year. Income taxes for the nine months ended September 30, 1997 are not meaningful as a comparable number because of the non-comparability of net income before tax and, since 12 13 during the 1997 period prior to the Reorganization, many of the predecessor entities to the Company were partnerships not subject to corporate income taxation. See "-- Overview." THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Auction Revenues Auction revenues of $13.9 million for the three months ended September 30, 1998 decreased by $1.8 million, or 11.26%, from the comparable period in 1997 due to a lower average percentage of auction revenues earned on gross auction sales. Gross auction sales of $183.6 million for the three months ended September 30, 1998 increased by $20.2 million, or 12.34%, from the comparable period in the prior year, primarily as a result of increased gross auction sales in the United States. Results for the 1998 period included a record-high gross auction sale for the Company's auction site in Olympia, Washington. The auction revenue rate for the three-month period in 1998 was 7.55%, below the Company's long-term average commission rate of 8.80% and below the unusually high rate in the comparable 1997 period of 9.56%. Direct Expenses Direct expenses decreased by $0.9 million for the three months ended September 30, 1998 compared to the comparable period in the prior year. As a percentage of gross auction sales, direct expenses were 1.40% for the three-month period ending September 30, 1998, lower than the 2.13 experienced during the 1997 period and lower than the Company's longer-term average rate of 1.9%. This decrease was primarily a result of fewer but larger auctions being held in the 1998 period as compared to the 1997 period, as certain expense efficiencies are gained when the Company conducts large auctions. Depreciation Expense In the three-month period ending September 30, 1998, depreciation of $0.7 million was unchanged from the comparable 1997 period. Management anticipates that depreciation expense will increase as existing auction sites are improved and additional permanent auction sites are acquired and developed as part of the Company's growth strategy. General and Administrative Expense For the three months ended September 30, 1998, the Company incurred G&A of $9.4 million. Management does not consider G&A of $9.8 million in the corresponding 1997 period to be meaningful as a comparable number since the expenses incurred in the 1997 period reflect results prior to the Reorganization (as outlined in the Company's Prospectus dated March 9, 1998) and, as a result, certain components are not comparable on a period to period basis with the expenses incurred in the 1998 period. See "-- Overview." Management anticipates that G&A will increase in the future due to an increased level of administrative infrastructure to support expansion of the Company's operations. Employee Equity Participation Expense Employee equity participation expense of $7.7 million incurred in the three-month period ended September 30, 1997 related to the issuance of shares and options to employees of the Company on a discounted basis pursuant to the Employee Equity Participation Program described in the Company's Prospectus dated March 9, 1998. Shares and options were also issued to employees of the Company in the final quarter of 1997 under the same program. In 1998, no such discounted shares or options have been issued and management does not anticipate further issuances of shares or grants of options under the Employee Equity Participation Program. Income from Operations Income from operations was $1.2 million for the three months ended September 30, 1998. Management does not consider the 1997 results to be meaningful as a comparable number because certain components of 13 14 G&A are not comparable on a period to period basis, and because of the effect of the employee equity participation expense in the 1997 period. Interest Expense Interest expense of $0.1 million for the three months ended September 30, 1998 decreased by $0.5 million from the comparable period in 1997 due to lower bank operating loans during the period. Management plans to partially finance the acquisition of additional permanent auction sites by incurring debt, which should result in an increase in interest expense in the future. Other Income Other income for the three months ended September 30, 1998 of $2.1 million increased from $0.3 million in the comparable period in 1997 due to $1.8 million of non-recurring income ($1.2 million after giving effect to income tax) during the 1998 period. This non-recurring income was generated primarily as a result of a gain on the disposal of a permanent auction site that has been replaced with a new facility. Income Taxes Income taxes of $1.2 million for the three months ended September 30, 1998 have been computed based on rates of tax that apply in each of the tax jurisdictions in which the Company operates. The effective rate of tax on net income for the 1998 period of 36.7% is marginally lower than the rate the Company would normally expect for the full 1998 year. Income taxes for the three months ended September 30, 1997 are not meaningful as a comparable number because of the non-comparability of net income before tax and, since during the 1997 period prior to the Reorganization, many of the predecessor entities to the Company were partnerships not subject to corporate income taxation. See "-- Overview." LIQUIDITY AND CAPITAL RESOURCES The Company's cash can fluctuate significantly from period to period, largely due to differences in timing of receipt of gross sale proceeds from buyers and the payment of net amounts due to consignors. If auctions are conducted near a period end, the Company may hold cash in respect of those auctions that will not be paid to consignors until after the period end. Accordingly, Management believes a more meaningful measure of the Company's liquidity is working capital, including cash. At September 30, 1998 and December 31, 1997, working capital was $45.1 million and $3.3 million respectively. The increase in working capital of $41.8 million resulted primarily from the receipt of proceeds from the Company's initial public offering in March 1998 of approximately $51.8 million, and from net income earned during the nine months ended September 30, 1998. This increase was partially offset by capital expenditures incurred by the Company during the period. Net capital expenditures by the Company during the nine-month period ending September 30, 1998 were $25.4 million as compared to $3.2 million for the eight months ended December 31, 1997. In the 1998 period, the Company acquired land for use as permanent auction sites and incurred site development costs in the United States, Canada, Australia and Europe. The Company is continuing with its plan to add additional permanent auction sites around the world and is presently in various stages of commitments to acquire land for development in the United States and Canada. The Company has substantially completed negotiations of credit facilities with financial institutions in the United States, Canada, Europe, and Australia. The Company presently has access to credit lines for operations exceeding $95.0 million and to credit lines for funding property acquisitions exceeding $35.0 million. At September 30, 1998, bank debt relating to operations totaled $0.2 million and bank debt related to property acquisitions totaled $7.8 million. 14 15 YEAR 2000 COMPLIANCE The Company relies on computer systems and software to operate its business, including applications used to control information about bidders and consignors and to operate certain of its marketing, finance and administrative functions. The Company initiated its "Year 2000" compliance efforts in 1997. Management believes that only minor modifications remain to be completed to make its systems Year 2000 compliant and that related costs incurred to date have not, and estimated future costs will not, have a material impact on the Company's business, financial condition, or results of operations. The most reasonably likely worst case Year 2000 scenario would involve the failure of one or more of the Company's key suppliers to become Year 2000 compliant. In such a scenario, the Company's ability to adequately advertise its auctions and account for receipts and payments as efficiently as it does at present could be negatively affected. The Company is presently developing contingency plans in the event of the Company's or its key suppliers' failure to achieve full Year 2000 compliance and management anticipates these will be completed prior to June, 1999. The plan includes identifying alternate organizations that may act as replacements for those with which the Company presently conducts business and which may not achieve full year 2000 compliance, including one or more of its lenders, marketing service suppliers, or external software providers. The Plan also includes development of internal back-up systems and identification of available replacement resources to restore operations to present levels in the event of Year 2000 non-compliance. Failure by the Company or any of its key suppliers to achieve full Year 2000 compliance in a timely manner or consistent with its current cost estimates, or to rectify deficiencies through any contingency plans, could have a material adverse effect on the Company's business, financial condition and results of operations. FORWARD-LOOKING STATEMENTS Certain statements contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Report on Form 6-K are forward-looking statements (as defined in Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties including, in particular, statements relating to auction revenue rates, direct expense rates, G&A increases, income tax rates, the anticipated improvement, acquisition and development of permanent auction sites, and financing available to the Company. The following important factors, among others, could affect the Company's actual results and could cause such results to differ materially from those expressed in the Company's forward-looking statements: the many factors that impact on the supply of and demand for used equipment; fluctuations in the market values of used equipment; periodic and seasonal variations in operating results or financial conditions; potential delays in construction or development of auction sites; actions of competitors; adverse changes in economic conditions; restrictions affecting the ability of equipment owners to transport equipment between jurisdictions; and other risks and uncertainties as detailed in the Company's Rule 424(b) Prospectus dated March 9, 1998. Forward-looking statements should be considered in light of these factors. 15 16 PART II. OTHER INFORMATION ITEM 6. EXHIBITS
NUMBER - ------ DESCRIPTION *3.1 Articles of Amalgamation, as amended *3.2 By-laws *4.1 Form of common share certificate 4.2 Description of capital shares contained in the Articles of Amalgamation (see Exhibit 3.1) 4.3 Description of rights of securityholders contained in the By-laws (see Exhibit 3.2) *10.1 1997 Stock Option Plan, as amended *10.2 Form of Indemnity Agreement for directors and officers
- --------------- * Incorporated by reference to the same exhibit number from the Registration Statement on Form F-1 filed on September 26, 1997, as amended (File No. 333-36457). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RITCHIE BROS. AUCTIONEERS INCORPORATED (Registrant) Date November 13, 1998 By /s/ PETER J. BLAKE ---------------------------------------------- Peter J. Blake, Vice President, Finance and Chief Financial Officer
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