-----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, HrAwSROgX7H7AzXXdrXMDw83RS67WrQ6XiI9Qcg7CKnieq4wGVDuS3OJlfOMjB8B R1ft0GeASXVSiv8wQprs5Q== 0000891020-99-001024.txt : 19990618 0000891020-99-001024.hdr.sgml : 19990618 ACCESSION NUMBER: 0000891020-99-001024 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990617 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: ARS SEC ACT: SEC FILE NUMBER: 001-13425 FILM NUMBER: 99647661 BUSINESS ADDRESS: STREET 1: 9200 BRIDGEPORT RD STREET 2: RICHMOND, BRITISH COLUMBIA CITY: CANADA STATE: A1 ZIP: V6X 151 BUSINESS PHONE: 6042737964 ARS 1 FORM 40-F 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ Form 40-F (Check One) [ ] Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934 or [X] Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 Commission File Number 001-13475
------------------------------------ RITCHIE BROS. AUCTIONEERS INCORPORATED (Exact Name of Registrant as Specified in Its Charter) NOT APPLICABLE CANADA NOT APPLICABLE (Translation of Registrant's (Province or Other (I.R.S. Employer Name Into English (if Jurisdiction of Identification Number (if Applicable) Incorporation or Applicable) Organization)
7389 (Primary Standard Industrial Classification Code Number (if Applicable) 9200 BRIDGEPORT ROAD, RICHMOND, BRITISH COLUMBIA V6X 1S1 (604) 273-7564 (Address and Telephone Number of Registrant's Principal Executive Offices) LAWCO OF OREGON, INC. 1211 S.W. FIFTH AVENUE, SUITE 1500, PORTLAND, OREGON 97204-3715 (503) 727-2000 (Name, Address (Including Zip Code) and Telephone Number (Including Area Code) of Agent For Service in the United States) Securities registered or to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Shares............................. New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: NOT APPLICABLE (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NOT APPLICABLE (Title of Class) For annual reports, indicate by check mark the information filed with this Form: [X] Annual information form [X] Audited annual financial statements
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. COMMON SHARES: 16,548,666 Indicate by check mark whether the Registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Act. If "Yes" is marked, indicate the filing number assigned to the Registrant in connection with such Rule. Yes [ ] 82- No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act 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 [ ]
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 UNDERTAKING AND CONSENT TO SERVICE OF PROCESS The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities. SIGNATURES Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized. RITCHIE BROS. AUCTIONEERS INCORPORATED By: /s/ ROBERT S. ARMSTRONG ------------------------------------ Name: Robert S. Armstrong Title: Corporate Secretary Date: June 16, 1999 3 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NO. DESCRIPTION NUMBERED PAGES - ----------- ----------- -------------- 1. Annual Information Form of the Registrant dated May 20, 1999 (which includes management's discussion and analysis for the year ended December 31, 1998). 2. The following audited consolidated financial statements of the Registrant, together with the independent auditors' report dated February 26, 1999 of KPMG LLP, Chartered Accountants: a. Consolidated Statements of Income for the year ended December 31, 1998, for the eight months ended December 31, 1997 and the year ended April 30, 1997. b. Consolidated Balance Sheets as of December 31, 1998 and 1997. c. Consolidated Statements of Shareholders' Equity for the year ended December 31, 1998, the eight months ended December 31, 1997 and the year ended April 30, 1997. d. Consolidated Statements of Cash Flows for the year ended December 31, 1998, the eight months ended December 31, 1997 and the year ended April 30, 1997. e. Notes to Consolidated Financial Statements (which includes reconciliation with United States generally accepted accounting principles). 3. Consent dated June 16, 1999 of KPMG LLP, Chartered Accountants.
EX-1 2 EXHIBIT 1 - ANNUAL INFORMATION FORM 1 EXHIBIT NO. 1 RITCHIE BROS. AUCTIONEERS INCORPORATED ANNUAL INFORMATION FORM FOR THE YEAR ENDED DECEMBER 31, 1998 MAY 20, 1999 RITCHIE BROS. AUCTIONEERS INCORPORATED 9200 BRIDGEPORT ROAD RICHMOND, BRITISH COLUMBIA CANADA V6X 1S1 (604) 273-7564 WWW.RBAUCTION.COM 1-1 2 TABLE OF CONTENTS
PAGE ---- Definitions................................................. 1-3 The Company................................................. 1-4 Overview.................................................. 1-4 History and Development of the Business................... 1-5 Industry.................................................. 1-6 Competitive Advantages.................................... 1-7 Growth Strategies......................................... 1-8 Operations................................................ 1-9 Marketing and Sales....................................... 1-12 Competition............................................... 1-12 Facilities................................................ 1-13 Employees................................................. 1-14 Governmental and Environmental Regulations................ 1-14 Legal Proceedings......................................... 1-14 Selected Consolidated Financial Information................. 1-15 Five Year Summary......................................... 1-15 Segmented Information..................................... 1-16 Quarterly Summary......................................... 1-17 Dividend Policy............................................. 1-17 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 1-18 Overview.................................................. 1-18 Results of Operations..................................... 1-20 Liquidity and Capital Resources........................... 1-21 Year 2000 Compliance...................................... 1-22 Forward-Looking Statements................................ 1-22 Market for Securities....................................... 1-23 Directors and Officers...................................... 1-23 Additional Information...................................... 1-25
1-2 3 DEFINITIONS Unless the context otherwise requires, "Ritchie Bros." or the "Company" refers to Ritchie Bros. Auctioneers Incorporated and its predecessor entities, either alone or together with its subsidiaries. Unless otherwise specified, references to years are references to calendar years and references to quarters are references to calendar quarters. All dollar amounts are denominated in U.S. Dollars. Effective December 31, 1997, the Company changed its fiscal year end from April 30 to December 31. As used in this Annual Information Form, - "auction revenues" include commissions earned from consignors through both straight commission and gross guarantee contracts, plus the net profit on the sale of lots purchased and sold by the Company as principal; - "bidder" refers to a person or company that registers to bid at an auction; - "buyer" refers to a person or company that makes the highest bid on a particular lot and is therefore the purchaser of that lot; - "Common Shares" means the common shares without par value of the Company; - "consignor" refers to a person or company that is selling a lot or lots at an auction; - "Forke" refers to Forke, Inc. and its predecessor entities, either alone or together with its subsidiaries; - "gross auction sales" represent the aggregate selling prices of all lots sold at an auction or auctions; and - "lot" refers to an item being sold at auction. 1-3 4 THE COMPANY Ritchie Bros. Auctioneers Incorporated was amalgamated on December 12, 1997 under, and is governed by, the Canada Business Corporation Act. The registered office of the Company is located at 1300 - 777 Dunsmuir Street, Vancouver, British Columbia, Canada V7Y 1K2. The Company's executive office is located at 9200 Bridgeport Road, Richmond, British Columbia, Canada V6X 1S1 and its telephone number is (604) 273-7564. The Company maintains a website at www.rbauction.com. The following diagram illustrates the primary intercorporate relationships of the Company and its principal operating subsidiaries: [Intercorporate Relationships] - --------------- Notes: 1. Ritchie Bros. Holdings Ltd. is a corporation continued under the laws of Canada. 2. Ritchie Bros. Holdings Inc. is a corporation amalgamated under the laws of the state of Washington, U.S.A. 3. Ritchie Bros. Auctioneers (Canada) Ltd. is a corporation incorporated under the laws of Canada. 4. Ritchie Bros. Properties Ltd. is a corporation incorporated under the laws of Canada. 5. Ritchie Bros. Auctioneers B.V. is a corporation incorporated under the laws of The Netherlands. 6. Ritchie Bros. Auctioneers Limited is a corporation incorporated under the laws of Cyprus. 7. Ritchie Bros. Auctioneers (America) Inc. is a corporation incorporated under the laws of the state of Washington, U.S.A. 8. Ritchie Bros. Properties Inc. is a corporation incorporated under the laws of the state of Washington, U.S.A. OVERVIEW Ritchie Bros. is the world's leading auctioneer of industrial equipment, operating through more than 50 locations throughout North America, Europe, Asia, Australia and the Middle East. The Company sells, through public auctions, a broad range of used industrial equipment, including equipment used in the construction, transportation, mining, forestry, petroleum and agricultural industries. In its 36 years of operation, Ritchie Bros. has auctioned over $8.5 billion worth of equipment in over 1,750 auctions in 16 countries. In 1998, the Company sold over $1 billion worth of industrial equipment. Ritchie Bros. conducts its auctions on an unreserved basis. There are no minimum prices and consignors are not permitted to bid on their own equipment or in any way artificially affect selling prices. Every item is sold to the highest bidder on the day of the auction. 1-4 5 The Company's worldwide marketing efforts and reputation for conducting fair auctions, together with the fact that it does not charge buyers' premiums, enable Ritchie Bros. to attract a broad international base of customers to its auctions, thereby providing a global marketplace that can transcend local market conditions. Management believes that the Company's reputation and leading market position, as well as the breadth and international composition of the customers at Ritchie Bros.' auctions, result in a greater volume of consigned equipment and higher gross auction sales than in other auction venues. Ritchie Bros.' auction business has experienced significant growth over the last five years. During that period, the Company's gross auction sales have grown from $567.5 million in its fiscal year ended April 30, 1994 to $1,087.8 million in its fiscal year ended December 31, 1998, representing a compound annual growth rate of 14.9%. During the same period, the Company's annual auction revenues have grown from $50.1 million to $94.9 million, representing a compound annual growth rate of 14.7%. HISTORY AND DEVELOPMENT OF THE BUSINESS Ritchie Bros. held its first major industrial auction in 1963, selling over $600,000 worth of construction equipment in Radium, British Columbia. The success of this auction prompted Ken, John and Dave Ritchie to focus their attention on industrial auctions. While the Company's early auction sales were held primarily in Western Canada, Ritchie Bros. expanded eastward through the 1960s. By 1970, the Company had established operations in the U.S. and held its first U.S. sale in Beaverton, Oregon. Throughout the 1970s and 1980s, additional auctions were held across Canada and in an increasing number of American states. In 1987, the Company held its first European auctions, in Liverpool and Rotterdam. Ritchie Bros.' first Australian auction was held in 1990. This was followed by expansion into Asia and subsequent sales in Hong Kong, Japan, the Philippines and Thailand. The Company held its first Mexican auction in 1995 and its first Middle Eastern auction, in Dubai, in 1997. By the end of 1998, Ritchie Bros. had conducted over 1,750 auctions in 16 countries. In 1994, Ritchie Bros. introduced its prototype auction facility, opening new permanent auction sites in Fort Worth, Texas and Olympia, Washington that represented significant improvements over the facilities being used at the time by equipment auctioneers. The Company has since constructed similar buildings in various locations in Canada, the U.S., Europe and Australia. The Company has always used available technologies to augment its live auctions and enhance customer service. Ritchie Bros. maintains a website at and has been active on the internet since 1996 when it introduced its first website as a marketing tool, allowing the Company to communicate with international customers who otherwise would not have timely access to auction information. The Company's current website provides customers with a wide range of features in multiple languages, giving customers current information about the equipment consigned to Ritchie Bros. auctions. The site also facilitates internet-based absentee bidding, on-line consignments and the ability to broadcast live auctions. In March 1998, Ritchie Bros. completed its initial public offering (the "IPO") of Common Shares, selling 3,335,000 Common Shares at $17.00 per share. The Company allocated the net proceeds of approximately $54.0 million to the acquisition and development of additional permanent auction sites, the replacement or upgrade of certain existing permanent sites and general corporate purposes. Ritchie Bros.' Common Shares trade on the New York Stock Exchange under the ticker symbol "RBA." On April 1, 1999, Ritchie Bros. completed the acquisition (the "Forke Acquisition") of the industrial auction business of Forke, a major auctioneer of industrial equipment that operated primarily in the United States. Consideration paid to Forke consisted of $25.0 million in cash, 100,000 Common Shares and warrants to acquire 400,000 Common Shares prior to April 1, 2001 at an exercise price of $26.69 per share. In related transactions, Ritchie Bros. has acquired an office building in Nebraska and has agreed to acquire land, buildings and other tangible assets, subject to satisfactory completion of customary due diligence. The office building and these other assets are being acquired for a combined purchase price of $12.4 million. These potential acquisitions include permanent auction sites in Albuquerque, New Mexico; Statesville, North Carolina; and Ocala, Florida. Assuming completion of these real property acquisitions, and after the planned 1-5 6 opening of additional permanent auction sites in Rotterdam, The Netherlands (which will replace an existing regional auction unit), Morris (near Chicago), Illinois and Perris (near Los Angeles), California, the Company expects to be operating 17 permanent auction sites and five regional auction units. INDUSTRY Ritchie Bros. operates in the auction segment of the used equipment marketplace. Management believes that of the approximately $1 trillion of used industrial equipment in existence worldwide, an estimated $100 billion of used equipment changes ownership each year. Of this total, only a fraction is currently traded through auctions, with the majority being sold directly or through dealers and brokers. The international used equipment market includes both mobile and stationary equipment, trucks and trailers produced by manufacturers such as Case, Caterpillar, Hitachi, Ingersoll Rand, John Deere, Kenworth, Komatsu, Mack and Volvo for the construction, mining, forestry, petroleum, agriculture and transportation industries, among others. Examples of industrial equipment include crawler tractors, excavators, loader backhoes and wheel loaders. Much of the equipment can be used in multiple industries and in diverse geographic locations. Growing Market for Used Industrial Equipment. The international used industrial equipment market has experienced substantial growth in recent years as a result of the following factors: - An increasing, cumulative supply of used equipment, as a result of the substantial ongoing production of new industrial equipment by the major manufacturers. - Rising turnover rates among equipment owners and sales of idle or underutilized equipment, resulting from the increase in the size of rental fleets as well as the global trends toward outsourcing and reducing investment in capital assets. - Growing demand for used industrial equipment caused by increased infrastructure expenditures in emerging markets and worldwide economic growth. - Increasing preference of equipment users to purchase high quality used equipment instead of purchasing new equipment at a higher initial cost, particularly in times of economic uncertainty. Growth of the Auction Segment of the Used Industrial Equipment Market. The industrial equipment auction market has grown rapidly in recent years, as evidenced by the Company's own gross auction sales having more than doubled over the last six years. Management believes that auctions represent an increasingly important distribution channel for industrial equipment for the following reasons: - The ability of auctioneers to market a wide range of equipment and related assets and therefore offer a comprehensive service to buyers and sellers. - The increasing preference of sellers to access the auction marketplace in order to achieve a sale quickly and to maximize proceeds. - The ability of auctioneers to deliver high net proceeds on the sale of equipment. - The convenience of the auction marketplace to buyers, who often want to purchase many different types of equipment produced by different manufacturers. - The increasing acceptance of the auction method of buying and selling all manner of goods, due in part to the recent high profile of internet auction companies. Attractiveness of Industrial Equipment Auction Market. In addition to the growth of both the used equipment market and the auction segment of that market, management believes that there are certain compelling characteristics of the industrial equipment auction business model: - The industrial equipment auction business is relatively insulated from cyclical economic trends. In many cases, economic fluctuations or downturns can lead to increased levels of used equipment for consignment, and in greater demand for used, rather than new, equipment. For example, Ritchie Bros.' gross auction sales increased during the economic recessions of the 1980's and 1990's. 1-6 7 - Industrial equipment auctioneers typically are not restricted to selling lines of equipment provided by a particular manufacturer or manufactured for a particular industry, or to holding auctions in particular geographic regions. As a result, auction companies can respond quickly to changing market forces and address a variety of customer demands. - The industrial equipment auction business is not capital intensive and auction companies do not bear the risks associated with holding inventory over extended periods. - The industrial equipment auction industry is generally fragmented and Ritchie Bros. is the only participant that conducts auctions on a global scale. - Used industrial equipment is well-suited to the auction method of buying and selling because items of used equipment cannot be valued on a commodity basis. The unreserved auction method gives buyers and sellers confidence that the equipment has traded for a fair market price. COMPETITIVE ADVANTAGES Ritchie Bros. has several key strengths that provide distinct competitive advantages. Management believes that these advantages have enabled the Company to attract an increasing number of consignors and bidders to its auctions, thereby achieving significant and profitable growth. Reputation for Conducting Only Unreserved Auctions. Management believes that the Company's highly publicized commitment to fair dealing and the unreserved auction process is a key contributor to the Company's growth and success. All Ritchie Bros. auctions are unreserved, meaning that there are no minimum prices; each and every item is sold to the highest bidder on the day of the auction. Each consignor is prohibited by contract from bidding on its own consigned items at the auction or in any way artificially affecting the auction result. In addition, the Company adheres to a policy prohibiting it from artificially affecting the auction result by bidding on any items being auctioned. Each bidder has confidence that if he or she makes the highest bid for an item, even if that bid is less than the item's anticipated sale price, the item will be sold to that bidder. Management believes that Ritchie Bros.' reputation for conducting only unreserved auctions is a major reason why bidders are willing to travel to a Ritchie Bros. auction, making the Company's commitment to the unreserved auction method a significant competitive advantage. Ability to Transcend Local Market Conditions. Ritchie Bros. markets each auction to a global customer base of potential bidders. Because bidders are willing to travel between regions and countries in order to attend Ritchie Bros.' auctions, consignors have confidence that they will receive the world market price for their equipment. Due to the Company's ability to attract a global bidding audience, the market conditions of the local region do not necessarily dictate the results of its auctions. Approximately 25% of Ritchie Bros.' gross auction sales for its fiscal year ended December 31, 1998 represented purchases by bidders from countries outside of the country in which the auction was held. Depending on the location of the auction, buyers from outside the auction area may account for 50% or more of the gross auction sales at a Ritchie Bros. auction. Management believes that this breadth of participants generally enables Ritchie Bros. to transcend local market conditions and to sell equipment at world market prices. International Scope. Ritchie Bros. has substantial expertise in marketing, assembling and conducting auctions in new international markets. The Company has experience in currency exchange risk management, import and export regulatory issues, local political and economic issues, licensing and other regulatory requirements, and cultural and business traditions in the international markets in which it operates. Ritchie Bros. has conducted auctions in 16 countries and regularly holds auctions in North America, Europe, Asia, Australia and the Middle East. Proprietary Databases. Ritchie Bros. maintains sophisticated databases containing information on over one million pieces of equipment sold at auctions around the world, detailed information regarding new equipment prices, and updated listings of stolen equipment. These databases and the Company's centrally-controlled appraisal process gives the Company the confidence to offer consignors gross guarantee and outright purchase contracts and enables the Company to manage the risks associated with such contracts. Together with the Company's unique and comprehensive information regarding the flow of equipment coming to 1-7 8 market, these databases give Ritchie Bros. the opportunity to identify market trends and develop marketing initiatives in response to those trends. The Company also maintains a proprietary customer information database containing information regarding potential bidders. This database contains detailed information on over 250,000 active customers from over 160 countries, including each customer's auction attendance, trade association memberships, buying and travel habits and sales tax and banking information. This database allows the Company to identify potential customers that might be interested in the equipment being sold at any particular auction. Size and Financial Resources. Ritchie Bros. is the largest company in the highly fragmented industrial equipment auction market. Based upon an industry source that reports sales by companies in the construction equipment segment of the industrial equipment auction market, the reported gross auction sales of Ritchie Bros. in 1998 in that segment exceeded the combined gross auction sales of the other 31 reported auctioneers (excluding Forke) and exceeded four times the gross auction sales of the next largest auctioneer (excluding Forke). Although the Company is not relying on such industry source as an expert, the Company believes that the information provided is reliable. In addition to its strong market position, the Company also has the financial resources to offer gross guarantee and outright purchase contracts, invest in new technologies and expand into new markets. Management believes that these are significant competitive advantages. Dedicated and Experienced Workforce. Ritchie Bros.' dedicated and motivated employees are an important strength of the Company. Including the 42 former Forke staff members who have joined Ritchie Bros. in connection with the Forke Acquisition, the Company has 420 full-time employees. Of the Company's 188 sales and managerial employees, 55 have been with the Company (or Forke) for over 10 years and an additional 33 have been with the Company (or Forke) for over five years. All employees participate in a performance bonus plan tying their overall compensation to corporate and personal performance, and none are compensated on a commission basis. In addition, key employees have a substantial equity stake in the Company. With an average of 19 years of experience in the business, the 19 senior regional and head-office managers who comprise the Ritchie Bros. Management Advisory Committee offer unique expertise and commitment to the Company. GROWTH STRATEGIES Ritchie Bros. intends to continue its growth primarily by moving into new areas in stages, committing to markets and regions that the Company has already explored, developed and in which the Company expects to be profitable. Management has successfully implemented this conservative approach to growth for 36 years. Some of the key elements of Ritchie Bros.' growth strategy are highlighted below. Enhance Profitability through the Application of the Company's Growth Model. At the core of Ritchie Bros' internal growth strategy is a five-stage approach for developing permanent auction sites. The first stage is to identify the home markets for buyers who travel to Ritchie Bros. auctions. Second, an auction is held at a temporary "off-site" location in that region with the intention of developing its consignor base in the area. Third, a modest local sales office is established and staffed with one or more territory managers. These full-time Ritchie Bros. representatives are tasked with developing the territory, organizing more off-site auctions and sourcing equipment for other regions. Generally, the fourth stage, the development of a regional auction unit, is initiated only if management believes that a minimum of $25.0 million annual gross auction sales is achievable at the proposed site. During this stage, land and facilities are leased, additional personnel are deployed and auctions are held every three to six months. The decision to move to the final stage, the development of a permanent auction site, is usually based on anticipated annual gross auction sales of at least $40.0 million. At this final stage, Ritchie Bros. purchases land and constructs purpose-built facilities that include an auction theater, administrative offices and other conveniences which are generally not available at off-site and regional facilities. In addition to enhancing the Company's corporate profile in the region and drawing more buyers, permanent sites typically generate higher net income than locations at previous stages of development. At a permanent auction site, territory managers can concentrate on signing up equipment and servicing customers, instead of spending time connecting phone and power lines, arranging for temporary permits and other infrastructure related tasks. By establishing itself 1-8 9 in its local markets and by holding frequent and regularly scheduled auctions at its permanent sites, the Company is able to enhance its profitability. The Company is currently proceeding with several specific projects, in each case developing a new permanent auction site as a replacement for a regional auction unit. In June 1999, the Company will be opening its new site in The Netherlands. In the fall of 1999, the Company expects to open new sites in Morris (near Chicago), Illinois and Perris (near Los Angeles), California. In the first half of 2000, the Company expects to open a new site in Montreal, Quebec. The Company recently chose to not renew its lease for its regional auction unit in the Philippines and is currently in negotiations for an alternate site in a superior location that will enable Ritchie Bros. to better serve the Asian market. The Company's strategic focus is on following its model of internally generated growth rather than on pursuing acquisitions; however, it is willing to consider acquisition opportunities provided they fit with the Company's overall growth strategy. Expand into New Geographic Markets. The Company intends to continue the geographic expansion of its operations by (i) establishing additional auction operations in markets where it has developed a strong long-term presence, such as parts of the United States and Canada; (ii) increasing its presence in newer markets, such as Europe, Asia, Australia and the Middle East, where it has begun to develop significant business; and (iii) entering new markets such as South America and Africa. Regions outside North America represent the majority of the global marketplace for used industrial equipment and management believes that these markets offer significant growth opportunities for Ritchie Bros. The success of the Company's auctions in diverse countries such as Australia, Germany, Hong Kong, Italy, Japan, Mexico, The Netherlands, The Philippines and the United Arab Emirates demonstrates the Company's ability to adapt its operations to, and successfully compete in, new international markets. Management believes that the Company's experience and demonstrated success in developing new geographic markets, its established international base of customers and its reputation as the world's leading industrial equipment auctioneer will provide significant advantages to the Company in its efforts to expand into new territories. Expand into New Auction Market Segments. Ritchie Bros. will continue to assess possible opportunities to expand its presence in market segments that the Company has not historically emphasized. In particular, management believes that expansion opportunities exist in the agriculture and transportation segments of the used equipment market. Ritchie Bros. intends to leverage its expertise, infrastructure and reputation to generate additional business in these segments. This lateral growth is a natural complement to the Company's traditional focus on construction equipment and will allow Ritchie Bros. to increase revenue from its existing permanent auction sites and regional auction units. Utilize New Technologies. Ritchie Bros. is committed to using new technologies to augment its live auctions, allowing customers to participate remotely if they are unable to attend the auctions in person. While the Company does not currently envision a migration of its business to a virtual internet-based auction model, it recognizes that technology can be used to enhance customer service. Ritchie Bros. maintains a website at www.rbauction.com and has been active on the internet since 1996 when it introduced its first website as a marketing tool, allowing the Company to communicate with international customers who otherwise would not have timely access to information regarding upcoming auctions. The Company's current website was introduced in March 1999 and provides customers with a range of features in multiple languages including on-line auction brochures, on-line catalogs and an equipment search engine, giving customers a wide array of current information about the equipment consigned to Ritchie Bros. auctions. This site also offers internet-based absentee bidding, on-line consignments and the ability to broadcast live auctions. Ritchie Bros. has established a track record for implementing newly developed technologies to augment and improve its auction process and the Company plans to take advantage of additional technologies as they become available. OPERATIONS Ritchie Bros. auctions are conducted by employees based at the Company's offices in North America, Europe, Asia, Australia and the Middle East. In 1998, approximately 75% of the Company's auctions were held at permanent auction sites or regional auction units. The remaining 25% were "off-site" auctions, 1-9 10 typically held on leased or consignor-owned land. The decision of whether to hold a particular auction at a Ritchie Bros. site or at an off-site location is driven by the nature, amount and location of the equipment to be sold. The Company holds over 100 auctions a year in locations around the world. A Ritchie Bros. auction typically brings together more than 1,000 buyers and sellers from multiple regions. In 1998, the average Ritchie Bros. auction attracted 1,036 bidders who bid on 973 lots selling for an average of $10,500 per lot and a total of $10.2 million per auction. Every Ritchie Bros. auction, regardless of location, is conducted in a consistent manner so that bidders from one country are comfortable attending an auction in another country. In 1994, the Company developed a specialized auction site design as a model for its permanent sites. To date, this model has been used to construct sites in Fort Worth, Texas; Olympia, Washington; Atlanta, Georgia; Toronto, Ontario; Brisbane, Australia and Rotterdam, The Netherlands. Similar facilities are at various stages of development in Morris (near Chicago), Illinois; Perris (near Los Angeles), California and Montreal, Quebec. The main building on each site is approximately 25,000 square feet including offices, covered theatre style seating for approximately 900 bidders, an auction display area, space for bidder registration, catering and restrooms, and meeting areas for representatives from transportation companies, finance companies and customs brokers. Management believes that Ritchie Bros.' auctions generally draw a larger number of bidders than other industrial equipment auctions. The larger bidder audience at a Ritchie Bros. auction attracts potential consignors who reason that a large international audience of bidders competing for the same items will result in world market prices being achieved, thereby maximizing the proceeds on the sale of their equipment. Greater volume and selection of consigned equipment at an auction, in turn, attracts more bidders to the auction in a process that is self-reinforcing. The following are some of the key elements of Ritchie Bros.' auction process: Attracting the Bidders. The Company's customer information database contains comprehensive and detailed information regarding potential bidders that, in the view of management, significantly enhances the Company's ability to effectively market its auction services. This proprietary database contains information on over 250,000 active customers from over 160 countries including each customer's auction attendance, trade association memberships, buying and travel habits and sales tax and banking information. This database allows the Company to identify which customers might be interested in the equipment being sold at a particular auction. Prior to each auction, an average of 50,000 strategically selected customers receive full-color auction brochures for that particular auction. In conjunction with this direct mail campaign, the Company conducts targeted regional and industry-specific advertising and marketing campaigns. In addition, information about all of the consigned equipment is posted on the Ritchie Bros. web site where potential bidders can review the information using customized search engines. Management believes that assembling a wide selection of equipment displayed in a central location is a critical element of a successful auction of used equipment. The Company's carefully planned layout of the auction yard enables bidders to evaluate and compare the equipment. Easy access to the equipment, repair records and other relevant information allows bidders to determine the fair value of the equipment and bid with confidence. During 1998, Ritchie Bros. registered over 109,000 bidders, ranging from small contractors and owner-operators to Fortune 100 companies and government agencies. Of these bidders, 32% purchased one or more items. During this period, no one buyer accounted for more than 1% of gross auction sales, and the top 10 represented less than 4% of gross auction sales. Attracting the Equipment. The Company solicits equipment consignments of any magnitude, ranging from single pieces of equipment consigned by local owner-operators to large equipment fleets offered by multi-national consortiums upon the completion of major construction projects. While the majority of the Company's gross auction sales comes from items that sell for less than $100,000, the Company also sells items with values exceeding $500,000. For consignors, Ritchie Bros.' comprehensive services typically begin with an 1-10 11 equipment appraisal that gives the prospective consignor a reliable and credible estimate of the value of the appraised equipment. Ritchie Bros.' willingness to take consignment of a customer's full equipment fleet (and all ancillary assets, including inventories, parts, tools, attachments and construction materials), rather than only the most desirable items, is another important service offered by Ritchie Bros. to the consignor. During 1998, Ritchie Bros. sold equipment for over 14,000 consignors. During this period, no one consignor accounted for more than 2% of gross auction sales, and the top 10 represented less than 10% of gross auction sales. Attractive Contract Options. Ritchie Bros. offers consignors several contract options to meet their individual needs. These can include a straight commission contract whereby the seller receives the gross proceeds on the sale minus an agreed commission rate, as well as alternate arrangements including guaranteed proceeds or an outright purchase of the equipment. Straight Commission. Under a straight commission consignment, Ritchie Bros. earns a commission based on the auction sale price of the equipment. The commission rate is negotiated on a consignor-by-consignor basis. Straight commission consignments typically represent approximately two-thirds of the Company's gross auction sales (67% in 1998). Gross Guarantee. Under this type of consignment, Ritchie Bros. guarantees the consignor a minimum level of gross sale proceeds, regardless of the actual results of the auction. When the Company guarantees gross proceeds, it earns a commission on the guaranteed amount and typically participates in a negotiated percentage of any proceeds in excess of the guaranteed amount. If auction proceeds are less than the guaranteed amount, the Company would not earn its full commission or, if sufficiently lower, the Company would incur a loss. Outright Purchase. Under the outright purchase method, Ritchie Bros. purchases the equipment from the consignor and then auctions the equipment as principal. Ritchie Bros.' commission structure reflects the degree of risk assumed by the Company with respect to the equipment being sold. In general, lower commissions are charged for straight commission sales than for gross guarantee sales. In the case of outright purchases, pricing takes into account the risk of ownership that is assumed by the Company. Management believes that the Company's ability to offer these alternatives is a significant competitive advantage that helps the Company promote the unreserved auction method of buying and selling used equipment and, in particular, the use of Ritchie Bros. auctions. Occasionally, the Company advances to consignors a portion of the estimated auction proceeds prior to the auction. The Company generally makes such advances only after taking possession of the equipment and upon receipt of a security interest in the equipment to secure the obligation. Value-Added Services. Ritchie Bros. provides a wide array of services to make the auction process convenient for buyers and sellers of equipment: - Ritchie Bros. personnel perform extensive title searches on the equipment consigned and the Company warrants free and clear title on each piece of equipment that it sells. - Equipment being offered at the auction is available for inspection by prospective buyers or their representatives prior to the auction and service records are made available for inspection. Where possible, prospective buyers are put in touch with the consignors so that bidders can conduct their own investigations before bidding. - Regular customers are invited to become "Express Bidders" and thereby benefit from expedited check-in procedures. Additional privileges are extended to the Company's largest customers. - To assist bidders with their prospective purchases, Ritchie Bros. arranges for representatives of finance companies, transportation companies, customs brokerages and other service providers to be present at the auction site. 1-11 12 - Where relevant, translation services are provided and in some cases, the auctioneer's current "ask" number is displayed on large screens (in multiple currencies, if necessary). - A reception is typically held on the evening before the auction to give customers a chance to network among themselves and meet various Company representatives. - The Company contracts with selected painters and other trade service providers at each of its auction sites and often provides facilities for on-site cleaning and refurbishment of equipment. - Ritchie Bros. handles all marketing, the collection and disbursement of auction proceeds and the coordination of payments to lienholders. - The Company arranges for on-site catering, public telephones and other services. MARKETING AND SALES Since the IPO, Ritchie Bros.' marketing and sales force has grown from 124 regional and territory managers to 157, including additions related to the Forke Acquisition. These representatives are deployed by geographic region around the world. Each territory manager is primarily responsible for the development of customer relationships and solicitation of consignments in the manager's region. Each territory manager is also involved in the appraisal and proposal presentation process. To encourage global teamwork and superior customer service, none of the Company's employees is paid a commission. Territory managers, and all other Ritchie Bros. employees, are compensated by a combination of base salary and performance bonus. In support of Ritchie Bros. territory managers, the Company follows a dual marketing strategy, promoting both Ritchie Bros. and the auction industry in general, and marketing specific auctions. The dual strategy is designed to attract both consignors and bidders. These advertising and promotional efforts include the use of trade journals and magazines and attendance at numerous trade shows held around the world. The Company also participates in international, national and local trade associations. The auction specific advertising consists of the production and mailing of full color pictorial auction brochures to a targeted selection from the Company's proprietary database of over 250,000 active customers. Trade journal, newspaper, radio and television advertising augment the effort. In addition, the Company's website is updated daily by the addition of major items committed that day to upcoming auctions, and gives customers access to auction brochures, catalogs and other marketing materials. In addition to regional marketing through its territory managers, the Company markets through its national accounts team to large national customers, typically consisting of major equipment owners (such as rental companies), manufacturers or finance companies who have recurring, large scale equipment disposition requirements in various regions and countries and can therefore benefit from Ritchie Bros.' international network of auction sites. Building strong name recognition throughout its target markets is an important part of the Company's marketing program. Accordingly, the Company has implemented programs to continually enhance recognition of the Ritchie Bros. corporate name and logo through consistent design elements in its advertising, signage, facilities and employee uniforms. COMPETITION Both the international used equipment market and the auction segment of that market are highly fragmented. The Company competes for potential consignors with other auction companies and with equipment dealers (both franchised and independent) and brokers. When competing for potential purchasers of equipment, the Company competes against other auction companies, equipment manufacturers, distributors and dealers that sell new or used equipment, and equipment rental companies. The Company believes that the principal competitive factors in the industrial equipment market are reputation, customer service, commission pricing and structure, and the ability to deliver the highest net return to the equipment seller. 1-12 13 While Ritchie Bros. is significantly larger than its largest auction competitor, some of the equipment dealers that compete against the Company have significantly greater financial and marketing resources and name recognition than the Company. FACILITIES Ritchie Bros.' head office is located in Vancouver, Canada. The Company also owns an office building in Lincoln, Nebraska which was acquired in connection with the Forke Acquisition and which now serves as the Company's main administrative office for U.S. operations. With respect to auction sites, the Company attempts to establish sites in industrial areas close to major cities. Although the Company leases some temporary auction sites, the Company prefers to purchase land and construct purpose-built facilities once it has determined that a region can generate sufficient gross auction sales. Permanent sites generally range in size from 20 to 60 acres. The following table lists Ritchie Bros.' existing permanent sites, sites expected to be acquired in connection with the Forke Acquisition and sites under development:
YEAR PLACED IN SERVICE SIZE LOCATION BY RITCHIE BROS. (ACRES) STATUS - -------- ---------------- ------- ------ United States Atlanta, Georgia................ 1996..... 40 Denver, Colorado................ 1985..... 39 Fort Worth, Texas............... 1994..... 60 Houston, Texas.................. 1993..... 25 Minneapolis, Minnesota.......... 1991 29 Olympia, Washington............. 1994 26 Phoenix, Arizona................ 1987 9 Tampa, Florida.................. 1995 48 To be replaced by Ocala site being acquired in connection with the Forke Acquisition Canada Edmonton, Alberta............... 1976 25 Halifax, Nova Scotia............ 1997 26 Prince George, British 32 Columbia..................... 1980 Toronto, Ontario................ 1998 65 Vancouver, British Columbia..... 1979 8 Other Brisbane, Australia............. 1999 42 First auction: April 20, 1999 Rotterdam, The Netherlands...... 1999 53 First auction: June 16, 1999 Sites to be Acquired in Connection with the Forke Acquisition Albuquerque, New Mexico*........ 16 Fort Worth, Texas*.............. 27 Not expected to be used for auctions Ocala, Florida*................. 64 Will replace existing site in Tampa Statesville, North Carolina*.... 40 Sites under Development Morris, Illinois................ 60 Expected completion: Q4 1999 Perris, California.............. 66 Expected completion: Q4 1999 Montreal, Quebec................ 60 Expected completion: Q2 2000
- --------------- * acquisition is dependent on satisfactory completion of customary due diligence 1-13 14 Certain of these properties are subject to encumbrances granted as security for term loans of the Company. Following the acquisition of sites in connection with the Forke Acquisition (noted above *) and the opening of a permanent auction site in Rotterdam (which is replacing an existing regional auction unit), the Company expects to be operating 17 permanent auction sites and five regional auction units. The regional auction units, which have been conducting recurring auctions, typically on premises that are leased on a short-term basis, are located in Baltimore, Maryland; Chicago, Illinois; Riverside, California; Montreal, Quebec; and Toluca, Mexico. EMPLOYEES The Company had 369 full-time employees at December 31, 1998. At May 20, 1999, the Company had 420 full-time employees, including 42 employees who have joined the Company in connection with the Forke Acquisition. The Company also employs approximately 300 employees on a recurring temporary basis in connection with its auctions. The Company expects to increase its customer service and auction yard employees as it expands its operations. The Company is not subject to any collective bargaining agreements and believes that its relationships with its employees are good. GOVERNMENTAL AND ENVIRONMENTAL REGULATIONS In the countries in which it operates, the Company is subject to a variety of federal, provincial, state and local laws, rules and regulations relating to, among other things, the auction business, imports and exports of equipment, worker safety and the use, storage, discharge and disposal of environmentally sensitive materials. In addition, the Company is subject to various local zoning requirements with regard to the location of its auction sites, which vary from location to location. Under certain of the laws regulating the use, storage, discharge and disposal of environmentally sensitive materials, an owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such property, as well as related costs of investigation and property damage. Such laws often impose liability without regard to whether the owner or lessee knew of, or was responsible for, the presence of such hazardous or toxic substances. In connection with its site acquisitions, including the properties related to the Forke Acquisition, the Company obtains Phase I environmental assessment reports prepared by independent environmental consultants. A Phase I assessment consists of a site visit, historical record review, interviews and reports, with the purpose of identifying potential environmental conditions associated with the subject property. There can be no assurance, however, that acquired or leased sites have been operated in compliance with environmental laws and regulations or that future uses or conditions will not result in the imposition of environmental liability upon the Company or expose the Company to third-party actions such as tort suits. The Company believes that it is in compliance in all material respects with all laws, rules, regulations and requirements that affect its business, and that compliance with such laws, rules, regulations and requirements do not impose a material impediment on the Company's ability to conduct its business. LEGAL PROCEEDINGS From time to time the Company has been, and expects to continue to be, subject to legal proceedings and claims in the ordinary course of its business. Such claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. The Company is not aware of any legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on the Company or on its financial condition or results of operation. 1-14 15 SELECTED CONSOLIDATED FINANCIAL INFORMATION The selected consolidated financial information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" (included elsewhere in this Annual Information Form) and the Company's audited financial statements for the year ended December 31, 1998. Effective December 31, 1997, the Company changed its fiscal year end from April 30 to December 31. All dollar amounts in the table are in thousands, except per share data. FIVE YEAR SUMMARY
EIGHT YEAR ENDED MONTHS DECEMBER 31, ENDED FISCAL YEAR ENDED APRIL 30, ------------------------ DECEMBER 31, ------------------------------------------------- 1998 1997(1) 1997(1) 1997(1) 1996(1) 1995(1) 1994(1) ---------- ----------- ------------ ---------- ---------- ---------- ---------- (UNAUDITED) INCOME STATEMENT DATA: Auction revenues.................. $ 94,899 $ 85,009 $ 60,034 $ 72,186 $ 65,306 $ 51,326 $ 50,066 Direct expenses................... (16,010) (17,351) (13,041) (13,908) (13,138) (12,979) (11,925) ---------- ---------- ---------- ---------- ---------- ---------- ---------- 78,889 67,658 46,993 58,278 52,168 38,347 38,141 Depreciation...................... (2,752) (2,548) (1,540) (2,014) (1,820) (1,708) (1,327) General and administrative expense......................... (39,315) (37,724) (27,414) (31,099) (26,848) (24,628) (20,801) Employee equity participation expense(2)...................... -- (10,346) (10,346) -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income from operations............ 36,822 17,040 7,693 25,165 23,500 12,011 16,013 Interest expense.................. (1,569) (2,034) (1,380) (1,081) (1,104) (1,274) (611) Other income...................... 3,251 754 576 917 1,179 677 1,336 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes........ 38,504 15,760 6,889 25,001 23,575 11,414 16,738 Income taxes...................... (13,670) (7,438) (4,491) (5,992) (4,428) (2,975) (2,456) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income........................ $ 24,834 $ 8,322 $ 2,398 $ 19,009 $ 19,147 $ 8,439 $ 14,282 ========== ========== ========== ========== ========== ========== ========== Net income per share -- basic........................ $ 1.56 $ 0.65 $ 0.19 $ 1.49 $ 1.51 $ 0.66 $ 1.12 -- diluted...................... 1.54 0.64 0.18 1.49 1.51 0.66 1.12 US GAAP -- Net income(3).......... $ 24,814 $ 6,969 $ 1,045 $ 19,009 $ 19,147 $ 8,439 $ 14,282 ========== ========== ========== ========== ========== ========== ========== US GAAP -- Net income per share -- basic........................ $ 1.56 $ 0.54 $ 0.08 $ 1.49 $ 1.51 $ 0.66 $ 1.12 -- diluted...................... 1.54 0.54 0.08 1.49 1.51 0.66 1.12 Weighted average number of shares outstanding(4) -- basic........................ 15,918,214 12,877,777 12,958,753 12,715,667 12,715,667 12,715,667 12,715,667 -- diluted...................... 16,116,242 12,933,701 13,042,069 12,715,667 12,715,667 12,715,667 12,715,667 BALANCE SHEET DATA (END OF PERIOD): Working capital (including cash)........................... $ 49,149 $ 3,322 $ 3,322 $ 39,707 $ 33,132 $ 21,822 $ 23,900 Total assets...................... 152,593 70,460 70,460 142,858 150,969 98,621 87,802 Long term debt.................... 8,768 4,623 4,623 5,755 6,547 6,985 7,282 Total shareholders' equity........ 104,172 25,706 25,706 59,325 48,801 37,718 35,449 SELECTED OPERATING DATA: Gross auction sales (5)........... $1,087,800 $ 946,415 $ 681,425 $ 792,865 $ 752,735 $ 634,058 $ 567,506 Auction revenues as percentage of gross auction sales............. 8.72% 8.98% 8.81% 9.10% 8.68% 8.09% 8.82% Number of consignors.............. 14,432 13,636 9,985 12,088 10,744 10,460 8,650 Number of buyers.................. 34,613 33,340 23,917 30,630 27,837 27,401 25,812 Number of permanent auction sites (end of period)................. 13 13 13 13 12 11 10
1-15 16 (1) For all pre-1998 periods presented, the majority of the Company's business operations was conducted by predecessor entities that were partnerships. Consequently, many financial statement items for or in these prior periods are not comparable with post-1997 results. In particular, the pre-1998 balances of the following line items are not meaningful for comparative purposes: general and administrative expense, income from operations, income before income taxes, income taxes, net income and net income per share. (2) Non-recurring employee equity participation expense for the periods ended December 31, 1997 reflects grants to employees of options to purchase 196,333 Common Shares with an exercise price of $0.10 per share, and issuances to other employees of 497,999 Common Shares at the price of $0.10 per share. These option grants and Common Share issuances were made prior to the IPO. (3) Net income under US GAAP for the periods ended December 31, 1997 reflects restructuring expenses and taxes of $1.4 million incurred in connection with a corporate reorganization (these expenses are reflected under Canadian GAAP as reductions to shareholders' equity in the Company's consolidated financial statements). (4) Weighted average number of shares outstanding for all periods has been calculated after giving retroactive effect to the 12,715,667 Common Shares issued in connection with a corporate reorganization that was completed in 1997 as if those Common Shares had been issued at the beginning of the earliest period presented. (5) Gross auction sales represent the aggregate selling prices of all items sold at Ritchie Bros.' auctions. Gross auction sales are key to understanding the financial results of the Company, since the amount of revenues and, to a lesser extent, certain expenses, are dependent upon them. SEGMENTED INFORMATION The Company's principal business activity is the sale of consignment and self-owned equipment at auctions. This business represents a single operating segment. In 1998, auction revenues derived from auction sales in the United States represented 52.4% of the Company's total auction revenues. Summarized information on the Company's activities generated by geographic segment are as follows:
UNITED STATES CANADA OTHER COMBINED ------------- ------- ------- -------- (DOLLAR AMOUNTS IN THOUSANDS) Year ended December 31, 1998 Auction revenues.............................. $49,747 $16,105 $29,047 $ 94,899 Identifiable assets........................... 73,045 21,850 57,698 152,593 Year ended December 31, 1997 (Unaudited) Auction revenues.............................. 44,615 16,095 24,299 85,009 Identifiable assets........................... 53,441 2,357 14,662 70,460 Eight months ended December 31, 1997 Auction revenues.............................. 32,254 13,664 14,116 60,034 Identifiable assets........................... 53,441 2,357 14,662 70,460 Year ended April 30, 1997 Auction revenues.............................. 36,845 16,910 18,431 72,186 Identifiable assets........................... 82,045 27,650 33,163 142,858
1-16 17 QUARTERLY SUMMARY (UNAUDITED) (dollar amounts in thousands, except per share data)
NET INCOME PER SHARE GROSS AUCTION AUCTION --------------- PERIOD SALES REVENUE NET INCOME BASIC DILUTED - ------ ------------- ------- ---------- ----- ------- 1998 1st quarter.......................... $ 227,637 $21,229 $ 3,377 $0.24 $0.24 2nd quarter.......................... 339,219 29,188 8,492 0.51 0.51 3rd quarter(1)....................... 183,633 13,869 2,004 0.12 0.12 4th quarter.......................... 337,311 30,613 10,961 0.66 0.65 ---------- ------- ------- ----- ----- $1,087,800 $94,899 $24,834 $1.56(2) $1.54(2) ========== ======= ======= ===== ===== 1997(3) 1st quarter.......................... $ 146,915 $13,710 2nd quarter.......................... 329,700 30,525 3rd quarter.......................... 163,455 15,629 4th quarter.......................... 306,345 25,145 ---------- ------- $ 946,415 $85,009 ========== =======
- --------------- (1) Net income for the third quarter of 1998 includes non-recurring income of $1.2 million or $0.07 per share. (2) Net income per share on a full year basis does not equal the sum of the quarterly amounts because the number of Common Shares outstanding changed significantly in March 1998 when the Company completed its IPO. (3) Represents calendar quarters in the unaudited twelve-month period ended December 31, 1997. Net income and net income per share amounts for the twelve-month period ended December 31, 1997 are not meaningful for comparative purposes (see "Management's Discussion and Analysis of Financial Condition and Results of Operations"). DIVIDEND POLICY The declaration and payment of dividends on the Common Shares will be subject to the discretion of the Board of Directors and the retention of sufficient cash to fund the Company's growth initiatives. Because Ritchie Bros. is a holding company with no material assets other than the shares of its subsidiaries, its ability to pay dividends on the Common Shares is dependent on the income and cash flow of its subsidiaries. No financing agreements to which the subsidiaries of Ritchie Bros. are party currently restrict those subsidiaries from paying dividends to Ritchie Bros. The Company has not declared or paid any dividends on the Common Shares since its IPO. 1-17 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is substantially as was included in the Company's 1998 Annual Report which was published and distributed to the Company's shareholders on March 31, 1999. Certain statements made in this section relating to the Forke Acquisition have been updated from statements included in the Annual Report and certain other statements are superceded by statements contained elsewhere in this Annual Information Form. 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 year ended December 31, 1998 compared to the twelve months ended December 31, 1997. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included herein. The Company prepares its consolidated financial statements in accordance with generally accepted accounting principles in Canada which, except as set out in note 9 to the consolidated financial statements, results in materially consistent financial position and results of operations to that which would be reported under generally accepted accounting principles in the United States. Amounts discussed below are based on consolidated financial statements prepared in accordance with Canadian accounting principles. Effective December 31, 1997, the Company changed its fiscal year end from April 30 to December 31. The financial results for the year ended December 31, 1998 represent the first full fiscal year on the basis of the Company's new reporting year. The financial results for the transition period from May 1, 1997 to December 31, 1997 are also reported in the consolidated financial statements. Results for the transition period are not necessarily indicative of operations for a full year. For comparative information purposes, unaudited consolidated statements of income and cash flows prepared by management are presented for the twelve-month period ended December 31, 1997. Such information reflects all adjustments that are, in the opinion of management, necessary to reflect a fair presentation of the results of operations for such period. The discussion that follows compares the audited results for the year ended December 31, 1998 to the unaudited results for the twelve months ended December 31, 1997. The Company believes that this approach provides readers with the most meaningful information. 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 14 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 1-18 19 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 a corporate 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 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 affect the comparability of general and administrative expense between 1997 and 1998. On April 1, 1999, Ritchie Bros. acquired the auction business of Forke, Inc. ("Forke"), a major auctioneer of industrial equipment headquartered in Lincoln, Nebraska. Whereas Ritchie Bros. operates through over 50 locations throughout North America, Europe, Asia, Australia and the Middle East, Forke operated primarily in the United States. Forke had been conducting industrial auctions since 1921 and pioneered the industrial auction business in the United States. In related transactions, the Company has acquired an office building in Nebraska and has entered into agreements to acquire four permanent auction sites in Florida, North Carolina, Texas and New Mexico, subject to satisfactory completion of customary due diligence. The Company did not acquire Forke's equipment finance business. To acquire Forke's auction business, the Company paid cash of $25 million, issued 100,000 common shares of the Company, and granted warrants to acquire 400,000 common shares of the Company at an exercise price of $26.69 per share. To acquire the four permanent auction sites and the office building referred to above, and certain other tangible assets, the Company has agreed to pay $12.4 million. The Company is financing these transactions substantially with a term loan facility. The Company expects that the Forke transaction will give rise to incremental operating costs commencing April 1, 1999. Incremental gross auction sales and auction revenues are not expected to commence until July 1999. These incremental amounts are expected to be material, but the actual amounts are unknown as they will be dependent, in part, on the productivity of the new employees. Although the Company cannot accurately anticipate the future effect of inflation, inflation historically has not had a material effect on the Company's operations. 1-19 20 RESULTS OF OPERATIONS AUCTION REVENUES Auction revenues of $94.9 million for the year ended December 31, 1998 increased by $9.9 million, or 11.6%, from the twelve months ended December 31, 1997 due to increased gross auction sales, partially offset by a marginally lower average percentage of auction revenues earned by the Company on gross auction sales. Gross auction sales of $1.088 billion for the year ended December 31, 1998 increased by $141.3 million, or 14.9%, from the prior period, primarily as a result of increased gross auction sales in the United States and Europe. Results for 1998 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 1998, the auction revenue rate of 8.72% was fractionally lower than the long-term average and lower than the 8.98% rate experienced in 1997. 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 $1.3 million to $16.0 million for the year ended December 31, 1998 compared to the prior period. As a percentage of gross auction sales, direct expenses were 1.47% for the year ending December 31, 1998, lower than the 1.83% experienced during 1997. This decrease was primarily a result of fewer but larger auctions being held in 1998 as compared to 1997 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 1998 and 1997 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 year ending December 31, 1998, depreciation increased marginally from 1997, due to an increase in 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 year ended December 31, 1998, the Company incurred G&A of $39.3 million. Management does not consider G&A of $37.7 million in 1997 to be meaningful as a comparable number since the expenses incurred in 1997 reflect results prior to the reorganization and, as a result, certain components are not comparable on a period to period basis with the expenses incurred in 1998. 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 $10.3 million incurred in the twelve months ended December 31, 1997 related to the issuance of shares and options to employees of the Company on a 1-20 21 discounted basis pursuant to the Employee Equity Participation Program described in note 5 to the consolidated financial statements. In 1998, no such discounted shares or options were 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 $36.8 million in the year ended December 31, 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 1997. INTEREST EXPENSE Interest expense includes interest and bank charges paid on term bank debt. Interest expense for the year ended December 31, 1998 decreased $0.4 million to $1.6 million, compared to $2.0 million incurred in the twelve months ended December 31, 1997. Management plans to partially finance the acquisition of additional permanent auction sites and the Forke assets 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 year ended December 31, 1998 of $3.3 million increased by $2.5 million from 1997 due primarily to $1.8 million of non-recurring income ($1.2 million after giving effect to income tax) during 1998. 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. The balance of the increase resulted primarily from increased appraisal revenues and the recovery of miscellaneous prior period charges. INCOME TAXES Income taxes of $13.7 million for the year ended December 31, 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 1998 of 35.5% is marginally lower than the rate the Company would normally expect for subsequent years because, during 1998, the Company earned a slightly higher than usual percentage of its income in lower tax rate jurisdictions. Income taxes for the twelve months ended December 31, 1997 are not meaningful as a comparable number because of the non-comparability of net income before tax and, since 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 December 31, 1998 and December 31, 1997, working capital was $49.1 million and $3.3 million respectively. The increase in working capital of $45.8 million resulted primarily from the receipt of proceeds from the Company's initial public offering in March 1998 of approximately $51.6 million, and from net income earned during the year ended December 31, 1998. This increase was partially offset by capital expenditures incurred by the Company during the period. Net capital expenditures by the Company during the year ended December 31, 1998 were $37.1 million as compared to $5.1 million for the twelve months ended December 31, 1997. In 1998, the Company acquired 1-21 22 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 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 $40.0 million. Of these credit lines, at December 31, 1998, the Company had no bank debt relating to operations, and bank debt related to property acquisitions totaled $9.6 million. 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 reasonable 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 This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Information Form contain forward-looking statements that involve risks and uncertainties. These statements are based on current expectations and estimates about the Company's business. These statements include, 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, the anticipated acquisition of Forke assets, financing available to the Company, and the future-oriented comments contained throughout this Annual Information Form. Words such as "expects", "intends", "plans", "believes", "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. 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; the possibility that the Forke acquisition will not be completed; adverse changes in economic conditions; restrictions affecting the ability of equipment owners to 1-22 23 transport equipment between jurisdictions; and other risks and uncertainties as detailed in the Company's Rule 424(b) Prospectus dated March 9, 1998. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements should be considered in light of these factors. MARKET FOR SECURITIES The Common Shares of the Company are listed and traded on the New York Stock Exchange (the "NYSE") under the ticker symbol "RBA". The NYSE is the principal market for the Common Shares. DIRECTORS AND OFFICERS The names and municipalities of residence of the directors and officers of the Company and their principal occupations are set forth below. DIRECTORS
DIRECTOR NAME AND MUNICIPALITY OF RESIDENCE PRINCIPAL OCCUPATION SINCE - ---------------------------------- -------------------- -------- DAVID E. RITCHIE...................... Chief Executive Officer of the Company 1997 Leduc, Alberta C. RUSSELL CMOLIK(2).................. President and Chief Operating Officer of the 1997 Surrey, British Columbia Company PETER J. BLAKE(1)..................... Vice President - Finance and Chief Financial 1997 Vancouver, British Columbia Officer of the Company CHARLES E. CROFT(1)(2)................ President and Director of Falcon Pacific 1998 Salt Spring, British Columbia Financial Corp. and its subsidiaries G. EDWARD MOUL(1)(2).................. Director and officer of The McEmcy Company of 1998 West Vancouver, British Columbia Canada Ltd., Peace Portal Properties Ltd. and certain other private real estate holding companies
- --------------- (1) Member of the Audit Committee (2) Member of the Compensation Committee The Company does not have an Executive Committee and is required to have an Audit Committee. Each director will serve until the next annual general meeting or until his successor is elected or appointed. OFFICERS
NAME AND MUNICIPALITY OF RESIDENCE POSITION WITH THE COMPANY - ---------------------------------- ------------------------- DAVID E. RITCHIE....................... Chief Executive Officer Leduc, Alberta C. RUSSELL CMOLIK...................... President and Chief Operating Officer Surrey, British Columbia PETER J. BLAKE......................... Vice President - Finance and Chief Financial Officer Vancouver, British Columbia JOHN T. WILD........................... Vice President - Administration Surrey, British Columbia ROBERT J. CARSWELL..................... Vice President/Senior Valuations Analyst Langley, British Columbia
1-23 24
NAME AND MUNICIPALITY OF RESIDENCE POSITION WITH THE COMPANY - ---------------------------------- ------------------------- FRANK S. MCFADDEN...................... Vice President/Senior Valuations Analyst Surrey, British Columbia DONALD F. CHALMERS..................... Vice President - Western Canada and Prairie Divisions Sherwood Park, Alberta MARVIN R. CHANTLER..................... Vice President - Eastern Canada and Great Lakes Loretto, Ontario Divisions SYLVAIN M. TOUCHETTE................... Vice President - Quebec Division Carignan, Quebec ROGER W. RUMMEL........................ Vice President - Northwest, Southwest and Mexico Phoenix, Arizona Divisions KENNETH D. ASBURY...................... Vice President - Central and North Central Divisions Arvada, Colorado EDWARD H. BANSER....................... Vice President - South Central Division Fort Worth, Texas MICHAEL J. RITCHIE..................... Vice President - Northeast Division Annapolis, Maryland MARTIN E. POPE......................... Vice President - Southeast Division Newnan, Georgia ROBERT K. MACKAY....................... Vice President - Asia Pacific Division Delta, British Columbia ROBERT K. WHITSIT...................... Vice President - US Operations Lincoln, Nebraska C. DENIS PREVOST....................... Vice President - National Accounts Surrey, British Columbia ROBERT L. BRAWLEY...................... Vice President Aurora, Colorado RANDALL J. WALL........................ Managing Director - Europe and Middle East Divisions Braaschaat, Belgium GARY CAUFIELD.......................... Senior Manager - Special Projects Coquitlam, British Columbia HELEN MENGES........................... Manager - Search Department Vancouver, British Columbia ROBERT S. ARMSTRONG.................... Manager - Finance and Corporate Relations, Corporate New Westminster, British Columbia Secretary ROBERT MCLEOD.......................... Manager - Finance and Administration, US Operations Vancouver, British Columbia DEBORA JOHNSON......................... Controller - Canadian Operations Surrey, British Columbia ERROL OLSEN............................ Controller - US Operations North Vancouver, British Columbia
As of April 30, 1999, the directors and senior officers (the senior officers are the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Corporate Secretary) of the Company, as a group, beneficially owned, directly or indirectly, or exercised control or direction over 42.8% of the outstanding Common Shares of the Company. 1-24 25 ADDITIONAL INFORMATION The Company shall provide to any person, upon request to the Corporate Secretary of the Company: (a) when the securities of the Company are in the course of a distribution pursuant to a short form prospectus or a preliminary short form prospectus has been filed in respect of a distribution of its securities; (i) one copy of this Annual Information Form, together with one copy of any document, or the pertinent pages of any document, incorporated by reference in this Annual Information Form; (ii) one copy of the comparative financial statements of the Company for its most recently completed financial year together with the accompanying report of the auditor and one copy of any interim financial statements of the Company subsequent to the financial statements for the Company's most recently completed financial year; (iii) one copy of the Information Circular of the Company in respect of its most recent annual meeting of shareholders that involved the election of directors; and (iv) one copy of any other documents that are incorporated by reference into the preliminary short form prospectus or the short form prospectus and are not required to be provided under (i) to (iii) above; or (b) at any other time, one copy of any of the documents referred to in (a)(i), (ii) and (iii) above, provided that the Company may require the payment of a reasonable charge if the request is made by a person who is not a security holder of the Company. Additional information, including directors' and officers' remuneration and indebtedness to the Company, principal holders of the Company's securities, options to purchase securities and interests of insiders in material transactions, where applicable, is contained in the Company's Information Circular for its most recent annual meeting of shareholders that involved the election of directors, and additional financial information is provided in the Company's comparative financial statements for its most recently completed financial year. Copies of these documents may be obtained upon request from the Corporate Secretary of the Company, 9200 Bridgeport Road, Richmond, British Columbia, V6X 1S1 (telephone number: (604) 273-7564). 1-25 EX-2 3 EXHIBIT 2 - FINANCIAL STATEMENTS 1 EXHIBIT NO. 2 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), THE EIGHT-MONTH PERIOD ENDED DECEMBER 31, 1997 AND THE YEAR ENDED APRIL 30, 1997 2-1 2 INDEPENDENT AUDITORS' REPORT To the Shareholders of Ritchie Bros. Auctioneers Incorporated We have audited the consolidated balance sheets of Ritchie Bros. Auctioneers Incorporated (the "Company") as at December 31, 1998 and 1997 and the consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 1998 and 1997 (Unaudited), for the eight months ended December 31, 1997 and the year ended April 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1998 and 1997 and the results of its operations and the changes in its cash flows for the years ended December 31, 1998 and 1997 (Unaudited), for the eight months ended December 31, 1997 and the year ended April 30, 1997 in accordance with generally accepted accounting principles in Canada. Significant measurement differences between Canadian and United States accounting principles are explained and quantified in note 9. /s/ KPMG LLP - ------------------------------------------------------ Chartered Accountants Vancouver, Canada February 26, 1999 2-2 3 RITCHIE BROS. AUCTIONEERS INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
EIGHT MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30, 1998 1997 1997 1997 ------------ ------------ ------------ ----------- (UNAUDITED) Auction revenues........................ $ 94,899 $ 85,009 $ 60,034 $ 72,186 Direct expenses......................... (16,010) (17,351) (13,041) (13,908) ----------- ----------- ----------- ----------- 78,889 67,658 46,993 58,278 Expenses: Depreciation.......................... 2,752 2,548 1,540 2,014 General and administrative............ 39,315 37,724 27,414 31,099 Employee equity participation (note 5(d)).............................. -- 10,346 10,346 -- ----------- ----------- ----------- ----------- 42,067 50,618 39,300 33,113 ----------- ----------- ----------- ----------- Income from operations.................. 36,822 17,040 7,693 25,165 Other income (expenses) Interest expense...................... (1,569) (2,034) (1,380) (1,081) Other................................. 3,251 754 576 917 ----------- ----------- ----------- ----------- 1,682 (1,280) (804) (164) ----------- ----------- ----------- ----------- Income before income taxes.............. 38,504 15,760 6,889 25,001 Income taxes (note 7) Current............................... 13,962 7,438 4,491 5,992 Future................................ (292) -- -- -- ----------- ----------- ----------- ----------- 13,670 7,438 4,491 5,992 ----------- ----------- ----------- ----------- Net income.............................. $ 24,834 $ 8,322 $ 2,398 $ 19,009 =========== =========== =========== =========== Net income per share (note 1(l)) Basic................................. $ 1.56 $ 0.65 $ 0.19 $ 1.49 Diluted............................... 1.54 0.64 0.18 1.49 Weighted average number of shares outstanding........................... 15,918,214 12,877,777 12,958,753 12,715,667 =========== =========== =========== ===========
Approved on behalf of the Board of Directors /s/ C. RUSSELL CMOLIK /s/ PETER J. BLAKE C. Russell Cmolik Peter J. Blake Director Director
See accompanying notes to consolidated financial statements. 2-3 4 RITCHIE BROS. AUCTIONEERS INCORPORATED CONSOLIDATED BALANCE SHEETS (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ ASSETS Current assets Cash and cash equivalents................................. $ 73,620 $27,149 Accounts receivable....................................... 6,771 6,744 Inventory................................................. 2,355 7,081 Advances against auction contracts........................ 5,345 1,261 Prepaid expenses and deposits............................. 711 1,218 -------- ------- 88,802 43,453 Capital assets (note 3)..................................... 61,324 27,007 Future income taxes (note 7)................................ 2,467 -- -------- ------- $152,593 $70,460 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Auction proceeds payable.................................. $ 14,030 $17,728 Accounts payable and accrued liabilities.................. 21,751 17,131 Current bank loans (note 4)............................... 793 730 Income taxes payable...................................... 3,079 4,542 -------- ------- 39,653 40,131 Bank term loans (note 4).................................... 8,768 4,623 -------- ------- 48,421 44,754 Shareholders' equity Share capital (note 5).................................... 64,728 10,866 Retained earnings......................................... 41,772 16,958 Foreign currency translation adjustment................... (2,328) (2,118) -------- ------- 104,172 25,706 Subsequent event (note 10) -------- ------- $152,593 $70,460 ======== =======
See accompanying notes to consolidated financial statements. 2-4 5 RITCHIE BROS. AUCTIONEERS INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
FOREIGN CURRENCY TOTAL SHARE RETAINED TRANSLATION SHAREHOLDERS' CAPITAL EARNINGS ADJUSTMENT EQUITY ------- -------- ----------- ------------- Balance, April 30, 1996......................... $ 3,337 $47,015 $(1,551) $ 48,801 Net proceeds on common shares issued............ 28 -- -- 28 Capital contributions to partnerships........... -- 166 -- 166 Net income...................................... -- 19,009 -- 19,009 Drawings and dividends.......................... -- (8,073) -- (8,073) Refundable taxes on investment income........... -- (29) -- (29) Foreign currency translation adjustment......... -- -- (577) (577) ------- ------- ------- -------- Balance, April 30, 1997......................... 3,365 58,088 (2,128) 59,325 Common shares redeemed.......................... (2,845) -- -- (2,845) Employee equity participation (note 5(d))....... 10,346 -- -- 10,346 Net income...................................... -- 2,398 -- 2,398 Drawings and dividends.......................... -- (42,175) -- (42,175) Reorganization costs............................ -- (1,353) -- (1,353) Foreign currency translation adjustment......... -- -- 10 10 ------- ------- ------- -------- Balance, December 31, 1997...................... 10,866 16,958 (2,118) 25,706 Net proceeds on common shares issued............ 53,862 -- -- 53,862 Net income...................................... -- 24,834 -- 24,834 Reorganization costs............................ -- (20) -- (20) Foreign currency translation adjustment......... -- -- (210) (210) ------- ------- ------- -------- Balance, December 31, 1998...................... $64,728 $41,772 $(2,328) $104,172 ======= ======= ======= ========
See accompanying notes to consolidated financial statements. 2-5 6 RITCHIE BROS. AUCTIONEERS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
EIGHT YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30, 1998 1997 1997 1997 ------------ ------------ ------------ ---------- (UNAUDITED) Cash provided by (used in) Operations: Net income................................. $24,834 $ 8,322 $ 2,398 $19,009 Items not involving the use of cash Depreciation............................ 2,752 2,548 1,540 2,014 Employee equity participation........... -- 10,346 10,346 -- Future income taxes..................... (2,467) -- -- -- Changes in non-cash working capital Accounts receivable..................... (27) (2,389) 7,363 20,788 Inventory............................... 4,726 455 11,073 (8,148) Advances against auction contracts...... (4,084) 1,395 5,211 (351) Prepaid expenses and deposits........... 507 (711) (446) (202) Auctions proceeds payable............... (3,698) 10,434 (35,749) (22,526) Accounts payable and accrued liabilities........................... 4,620 9,329 8,203 (1,272) Payables to affiliated entities......... -- (3,078) (3,818) 459 Income taxes payable.................... (1,463) 2,077 (540) 1,845 Foreign currency translation adjustment.... (210) (417) 10 (577) ------- -------- -------- ------- 25,490 38,311 5,591 11,039 ------- -------- -------- ------- Financing: Issuance (redemption) of share capital..... 53,862 (2,833) (2,845) 28 Payables to employees and others........... -- (1,317) (1,279) 57 Bank loans................................. 4,208 (1,326) (5,596) 2,802 Drawings and dividends paid................ -- (42,756) (42,175) (8,073) Capital contributions...................... -- -- -- 166 Refundable taxes on investment income...... -- (29) -- (29) Reorganization costs....................... (20) (1,353) (1,353) -- ------- -------- -------- ------- 58,050 (49,614) (53,248) (5,049) ------- -------- -------- ------- Investments: Capital asset additions, net............... (37,069) (5,120) (3,174) (5,171) ------- -------- -------- ------- Increase (decrease) in cash and cash equivalents................................ 46,471 (16,423) (50,831) 819 Cash and cash equivalents, beginning of period..................................... 27,149 43,572 77,980 77,161 ------- -------- -------- ------- Cash and cash equivalents, end of period..... $73,620 $ 27,149 $ 27,149 $77,980 ======= ======== ======== ======= Supplemental disclosure of cash flow information Interest paid.............................. $ 1,570 $ 1,853 $ 1,242 $ 1,068 Income taxes paid.......................... $16,735 $ 5,098 $ 5,332 $ 4,147
See accompanying notes to consolidated financial statements. 2-6 7 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997 (Tabular dollar amounts expressed in thousands of United States Dollars) 1. SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF PRESENTATION These 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"), a company incorporated in July 1997 under the Canada Business Corporations Act, and its subsidiary predecessor businesses. These predecessor businesses comprised the Ritchie Bros. Auctioneers group of companies and partnerships (the "Group"). In the eight-month period ended December 31, 1997, the businesses of the partnerships within the Group were transferred into corporations, the shares of which, together with the shares of the corporations within the Group, were exchanged by their owners for shares of the Company (the "Reorganization"). All inter-entity accounts and transactions have been eliminated on consolidation. On November 1, 1997, prior to completion of the Reorganization, the owners of the Group entered into the Equity Interest and Income Sharing Agreement (the "Agreement") which confirmed the existing voting, earnings allocation and liquidation rights of each owner. These rights were based upon the owners' interests in the Group, taken as a whole, which was treated as a single global enterprise since prior to May 1, 1992. The rights and obligations specified in the Agreement were those of an agreement which has been in effect at all times since May 1, 1992 and which modified the terms of any written agreements containing provisions that may have been inconsistent with the Agreement. Each owner's rights under the Agreement were determined in accordance with such owner's ownership percentage of the Group ("Global Ownership Percentage"), which was equal to the number of units of ownership of the Group allocated to the owner divided by the total number of units outstanding. The owners' respective Global Ownership Percentages were determined on the basis of the Group taken as a whole, and not on the basis of the documentation governing the owners' equity interests in the predecessor entities within the Group. The Group has been legally obligated to make and has made earnings allocations in accordance with the terms of the Agreement since prior to May 1, 1992. As a result of these agreements and practices, each owner's ownership interest in the Company upon completion of the Reorganization represents a substantially identical interest to such owner's ownership interest in the Group prior to the Reorganization. Because the Reorganization was a non-substantive exchange, the Group's assets, liabilities, revenues and expenses have been consolidated at the historical cost amounts recorded in the individual entity accounts, and carried forward into the consolidated accounts of the Company together with costs of the Reorganization. The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in Canada which, except as disclosed in note 9, also comply, in all material respects, with generally accepted accounting principles in the United States. The Group included three partnerships, one situated in Canada and two situated in the United States, all of which were non-taxable entities. The Group also included the companies that were partners of the United States partnerships and certain, but not all, of the companies that were partners of the Canadian partnership. To the extent that the Group included these partner entities, these consolidated financial statements include provisions for taxes chargeable against partnership income. To the extent that the partner entities did not form part of the Group, no taxes have been provided on the net income allocated to those companies. Note 9 sets out the pro forma impact as if all income were taxed within the Group. These consolidated financial statements also do not include any of the other assets, liabilities, revenues or expenses of the partner entities not included in the Group. 2-7 8 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997 (Tabular dollar amounts expressed in thousands of United States Dollars) 1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) In calendar 1997, the Company changed its fiscal year-end from April 30 to December 31. As a result, the transition period from May 1, 1997 to December 31, 1997 is separately reported herein. In addition, for information purposes only, the consolidated statements of income and cash flows for the 12 months ended December 31, 1997 have been presented. The financial information for the year ended December 31, 1997 is unaudited; however, in the opinion of management, such information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such financial information. (b) CASH EQUIVALENTS Cash equivalents consist of highly liquid investments having an original term to maturity of three months or less when acquired. (c) INVENTORY Inventory is primarily represented by goods held for auction and has been valued at the lower of cost, determined by the specific identification method, and net realizable value. (d) ADVANCES AGAINST AUCTION CONTRACTS Advances against auction contracts represent funds advanced to consignors against proceeds from future auctions. (e) CAPITAL ASSETS All capital assets are stated at cost. Depreciation is provided to charge the cost of the assets to operations over their estimated useful lives based on their usage predominantly as follows: Improvements.................................. 30 years straight-line Buildings..................................... 30 years straight-line Automotive equipment.......................... 30% declining balance Computer equipment............................ 30% declining balance Yard equipment................................ 20-30% declining balance Office equipment.............................. 20% declining balance Leasehold improvements........................ Term of leases
(f) REVENUE RECOGNITION Auction revenues are recognized when the specific items are sold and title passes to the purchaser and are represented by the commissions received from the consignor and the net proceeds received from the sale of self-owned equipment. (g) INCOME TAXES Income taxes are accounted for using the asset and liability method pursuant to Section 3465, Income Taxes, of The Handbook of the Canadian Institute of Chartered Accountants. Future taxes are recognized for 2-8 9 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997 (Tabular dollar amounts expressed in thousands of United States Dollars) 1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. In addition, Section 3465 requires the recognition of future tax benefits to the extent that realization of such benefits is more likely than not. (h) FOREIGN CURRENCY TRANSLATION The Company's reporting currency is the United States dollar. The functional currency for each of the Company's operations is the country of residency. Each of these operations is considered to be self-sustaining. Accordingly, the financial statements of operations of the Company that are not located in the United States have been translated into United States dollars using the exchange rate at the end of each reporting period for asset and liability amounts and the average exchange rate for each reporting period for amounts included in the determination of income. Any gains or losses from this translation have been included in the foreign currency translation adjustment account which is included in equity. Monetary assets and liabilities recorded in foreign currencies are translated into the appropriate functional currency at the rate of exchange in effect at the balance sheet date. Foreign currency denominated transactions are translated into the appropriate functional currency at the exchange rate in effect on the date of the transaction. Any exchange gains and losses are included in the determination of income. (i) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from such estimates and assumptions. (j) FINANCIAL INSTRUMENTS Carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, auction proceeds payable and accounts payable and accrued liabilities, approximate fair value due to their short maturities. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of its bank loans approximates fair value. (k) CREDIT RISK The Company does not extend credit to purchasers of auctioned items. Equipment is not normally released to the purchasers until it is paid for in full. (l) NET INCOME PER SHARE Net income per share has been calculated based on the weighted average number of common shares outstanding after giving retroactive effect to the 12,715,667 common shares issued on the reorganization. Diluted net income per share has been calculated after giving effect to the outstanding options. 2-9 10 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997 (Tabular dollar amounts expressed in thousands of United States Dollars) 2. CHANGE IN ACCOUNTING POLICY In the fourth quarter of 1998, the Company changed its policy for accounting for income taxes by adopting the provisions of Section 3465, Income Taxes, of The Handbook of the Canadian Institute of Chartered Accountants. Under this standard, current income taxes are recognized for the estimated income taxes payable for the current period. Future income tax assets and liabilities are recognized for temporary differences between the tax and accounting bases of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes that are likely to be realized. The adoption of Section 3465 did not impact amounts reported in the prior period. 3. CAPITAL ASSETS Capital assets at December 31, 1998 are as follows:
ACCUMULATED NET BOOK COST DEPRECIATION VALUE ------- ------------ -------- Land and improvements....................................... $36,631 $ 900 $35,731 Buildings................................................... 21,056 2,825 18,231 Automotive equipment........................................ 5,164 1,606 3,558 Computer equipment.......................................... 1,920 739 1,181 Yard equipment.............................................. 2,619 1,124 1,495 Office equipment............................................ 1,996 1,018 978 Leasehold improvements...................................... 200 50 150 ------- ------ ------- $69,586 $8,262 $61,324 ======= ====== =======
Capital assets at December 31, 1997 are 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 ======= ====== =======
2-10 11 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997 (Tabular dollar amounts expressed in thousands of United States Dollars) 4. BANK TERM LOANS
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ 7.88% term loan, due in monthly instalments of $31,162 including interest, settled September 8, 1998............. $ -- $1,720 8.75% term loan, due in monthly instalments of $60,967 including interest, settled September 8, 1998............. -- 3,633 6.90% term loan, due in monthly instalments of $81,200 including interest, with the final payment occurring on July 1, 2004.............................................. 4,499 -- Term loan, bearing interest at the Amsterdam Interbank Offered Rate plus 7/8%, due in quarterly instalments of $66,600 including interest, with the final payment occurring on June 30, 2013................................ 5,062 -- ------ ------ 9,561 5,353 Less current portion........................................ (793) (730) ------ ------ $8,768 $4,623 ====== ======
At December 31, 1998, the Company had undrawn operating credit lines available of in excess of $95,000,000. In addition, the Company had undrawn credit lines of approximately $31,000,000 available to fund property acquisitions. The bank term loans are secured by deeds of trust on specific property. As at December 31, 1998, principal repayments are required as follows in the next five years: 1999........................................................ $ 793 2000........................................................ 1,001 2001........................................................ 1,053 2002........................................................ 1,109 2003........................................................ 1,169 Thereafter.................................................. 4,436 ------ $9,561 ======
2-11 12 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997 (Tabular dollar amounts expressed in thousands of United States Dollars) 5. SHARE CAPITAL (a) AUTHORIZED Unlimited number of common shares, without par value Unlimited number of senior preferred shares, without par value, issuable in series Unlimited number of junior preferred shares, without par value, issuable in series (b) ISSUED Number of common shares issued during the period ended December 31, 1997: For cash, pursuant to the Employee Equity Participation Program................................................ 497,999 On reorganization......................................... 12,715,667 ---------- Balance December 31, 1997................................... 13,213,666 Number of common shares issued during the year ended December 31, 1998, pursuant to an equity offering......... 3,335,000 ---------- Issued and outstanding, December 31, 1998................... 16,548,666 ==========
(c) OPTIONS The Company has adopted a stock option plan which provides for the award of stock options to selected employees, directors and officers of the Company and to other persons approved by the Board of Directors. Stock option activity for 1997 and 1998 is presented below:
NUMBER OF EXERCISE PRICE SHARES PER SHARE --------- -------------- Outstanding, April 30, 1997................................. -- $ -- Granted (note 5(d))....................................... 196,333 0.10 ------- ------------- Outstanding, December 31, 1997.............................. 196,333 0.10 Granted................................................... 36,000 26.12 Cancelled................................................. (25,333) 0.10 ------- ------------- Outstanding, December 31, 1998.............................. 207,000 $0.10 - 26.12 ======= =============
The options outstanding at December 31, 1998 expire from dates ranging to July 31, 2004. (d) EMPLOYEE EQUITY PARTICIPATION Substantially all the full-time employees who were not beneficial owners of the predecessor entities to the Company have been granted an equity interest in the Company pursuant to the Employee Equity Participation Program by means of issuances of common shares at a cash price of $0.10 per share or grants of stock options having an exercise price of $0.10 per share. During the year ended December 31, 1997, the Company issued 497,999 common shares and granted stock options to purchase 196,333 common shares under the Program. The shares issued and options granted have fully vested with the holders. The excess of the estimated mid-point of the offering price range of the shares estimated at the time to be issued to the public of $15.00 over the issuance price of the shares or the exercise price of the options granted, as applicable in the 2-12 13 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997 (Tabular dollar amounts expressed in thousands of United States Dollars) 5. SHARE CAPITAL -- (CONTINUED) circumstances, pursuant to the Program is considered to be compensatory for accounting purposes and has been recorded as employee equity participation expense in the accompanying consolidated financial statements. (e) OFFERING The Company filed a registration statement with the Securities and Exchange Commission in the United States pursuant to which the Company issued and sold 3,335,000 common shares (the "Offering"). For services provided in connection with the Offering, the Company paid the underwriters a per share commission. 6. SEGMENTED INFORMATION The Company's principal business activities include the sale of consignment and self-owned equipment at auctions. This business represents a single operating segment. Summarized information on the Company's activities generated by geographic segment are as follows:
UNITED STATES CANADA OTHER COMBINED ------------- ------- ------- -------- Year ended December 31, 1998 Auction revenues.............................. $49,747 $16,105 $29,047 $94,899 Identifiable assets........................... 73,045 21,850 57,698 152,593 Year ended December 31, 1997 (Unaudited) Auction revenues.............................. 44,615 16,095 24,299 85,009 Identifiable assets........................... 53,441 2,357 14,662 70,460 Eight months ended December 31, 1997 Auction revenues.............................. 32,254 13,664 14,116 60,034 Identifiable assets........................... 53,441 2,357 14,662 70,460 Year ended April 30, 1997 Auction revenues.............................. 36,845 16,910 18,431 72,186 Identifiable assets........................... 82,045 27,650 33,163 142,858
2-13 14 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997 (Tabular dollar amounts expressed in thousands of United States Dollars) 7. INCOME TAXES Income tax expense differs from that determined by applying the United States statutory tax rate to the Company's results of operations as follows:
EIGHT YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30, 1998 1997 1997 1997 ------------ ------------ ------------ ---------- (UNAUDITED) Statutory tax rate in the United States... 39% 39% 39% 39% ------- ------- ------ ------- Expected income tax expense............... $15,017 $ 6,147 $2,687 $ 9,750 Differences Different tax rates in non-U.S. jurisdictions........................ (2,028) (831) (247) (411) Partnership income not taxed in Group... -- (1,566) (806) (3,899) U.S. income taxed at lower graduated rates................................ -- (397) (128) (548) Employee equity participation expense not tax deductible................... -- 2,894 2,894 -- Other................................... 681 1,191 91 1,100 ------- ------- ------ ------- Actual income tax expense............... $13,670 $ 7,438 $4,491 $ 5,992 ======= ======= ====== =======
If all partnership income had been taxed in the Group, income taxes would have been as follows:
EIGHT YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30, 1998 1997 1997 1997 ------------ ------------ ------------ ---------- (UNAUDITED) Income taxes.............................. $13,670 $9,004 $5,297 $9,891 ======= ====== ====== ======
FUTURE INCOME TAXES
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Future income tax benefit of options granted................ $ 853 $ -- Future income tax benefit resulting from tax deductible financing costs incurred in the course of the Company's initial public offering in March 1998..................... 1,740 -- Future income tax recovery on unused tax losses, expiring on December 31, 2005......................................... 324 -- Future income tax liabilities arising from temporary differences between the tax basis of net assets and their carrying value Capital assets......................................... (475) -- Accounts payable....................................... 25 -- ------ ---- $2,467 $ -- ====== ====
2-14 15 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997 (Tabular dollar amounts expressed in thousands of United States Dollars) 8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 9. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The consolidated financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") in Canada which differ, in certain respects, from accounting practices generally accepted in the United States and from requirements promulgated by the Securities and Exchange Commission. Material measurement differences to these consolidated financial statements are as follows: CONSOLIDATED STATEMENTS OF COMPREHENSIVE NET INCOME AND NET INCOME PER SHARE
EIGHT YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30, 1998 1997 1997 1997 ------------ ------------ ------------ ---------- (UNAUDITED) Net income in accordance with Canadian GAAP....................................... $24,834 $8,322 $2,398 $19,009 Effect of differences in accounting for reorganization costs (note 9(i))........... (20) (434) (434) -- Income tax effect from the reorganization (note 9(i))................................ -- (919) (919) -- ------- ------ ------ ------- Net income in accordance with United States GAAP....................................... 24,814 6,969 1,045 19,009 Other comprehensive income (loss) adjustments (note 9(ii)) Foreign currency translation............... (210) (417) 10 (577) ------- ------ ------ ------- Comprehensive net income in accordance with United States GAAP......................... $24,604 $6,552 $1,055 $18,432 ======= ====== ====== ======= Net income per share in accordance with United States GAAP Basic...................................... $ 1.56 $ 0.54 $ 0.08 $ 1.49 Diluted.................................... 1.54 0.54 0.08 1.49
2-15 16 RITCHIE BROS. AUCTIONEERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997 (Tabular dollar amounts expressed in thousands of United States Dollars) 9. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- (CONTINUED) (i) Reorganization costs In accordance with generally accepted accounting principles in Canada, costs incurred with respect to the Reorganization have been charged, net of tax, against equity. Under generally accepted accounting principles in the United States, such amounts are required to be charged against income. Such costs have only been incurred in the eight months ended December 31, 1997 and the years ended December 31, 1998 and 1997 (Unaudited). (ii) Other comprehensive income (loss) Beginning in fiscal year 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income". This statement established standards for reporting and display of comprehensive income and its components. Comprehensive income includes the change in equity or net assets of the Company during the period from non-owner sources, including foreign exchange adjustments, included as separate components of shareholders' equity. 10. SUBSEQUENT EVENT On February 19, 1999, the Company entered into an agreement to acquire the auction business and certain assets of Forke Auctioneers, Inc., a major auctioneer of industrial equipment headquartered in Lincoln, Nebraska. The transaction is expected to close in March or April of 1999, subject to regulatory clearance and other customary conditions. Terms and conditions of this acquisition, by agreement, cannot be disclosed until closing. The Company intends to finance this acquisition substantially with a bank term loan. 2-16 EX-3 4 EXHIBIT 3 - KPMG CONSENT 1 EXHIBIT NO. 3 CONSENT OF KPMG LLP, CHARTERED ACCOUNTANTS To the Board of Directors Ritchie Bros. Auctioneers Incorporated Dear Sirs We consent to the use of our report dated February 26, 1999, included in this annual report on Form 40-F. We also consent to the incorporation by reference of such report in Registration Statements (No. 333-65533 and No. 333-71577) on Form S-8 of Ritchie Bros. Auctioneers Incorporated filed with the Securities and Exchange Commission. /s/ KPMG LLP - --------------------------------------------------------- KPMG LLP Chartered Accountants Vancouver, Canada June 16, 1999 3-1 -----END PRIVACY-ENHANCED MESSAGE-----