10-Q 1 rdo024499_10q.txt RDO EQUIPMENT CO. FORM 10Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ COMMISSION FILE NO. 1-12641 RDO EQUIPMENT CO. (Exact name of registrant as specified in its charter) DELAWARE 45-0306084 (State of incorporation) (I.R.S. Employer Identification No.) 2829 SOUTH UNIVERSITY DRIVE FARGO, NORTH DAKOTA 58103 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (701) 297-4288 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ The number of shares outstanding of the registrant as of August 31, 2002: Class A Common Stock 5,194,108 Class B Common Stock 7,450,492 ----------- Total 12,644,600 ================================================================================ 1 PART I - FINANCIAL INFORMATON ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. RDO EQUIPMENT CO. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these condensed consolidated financial statements. 2 RDO EQUIPMENT CO. CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated financial statements. 3 RDO EQUIPMENT CO. CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated financial statements. 4 RDO EQUIPMENT CO. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these condensed consolidated financial statements. 5 RDO EQUIPMENT CO. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PREPARATION: The condensed consolidated financial statements as of July 31, 2002 and for the three and six months ended July 31, 2002 and 2001 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2002. The results of operations for the three and six months ended July 31, 2002 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made for consistent presentation. 2. NEW ACCOUNTING PRONOUNCEMENTS On February 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, in its entirety. This statement addresses accounting and financial reporting for goodwill and intangible assets. Under the new statement, goodwill and intangible assets with indefinite lives are no longer amortized, but are subject to impairment testing on at least an annual basis. Other than goodwill, the Company does not have any intangible assets with indefinite lives or other intangible assets. The Company completed the process of testing goodwill for impairment in accordance with the provisions of SFAS No. 142. An independent valuation was performed utilizing among other things the Company's best estimate of expected future cash flows. No amounts were impaired at the time of implementation, February 1, 2002. The effect of discontinuance of goodwill amortization during the three and six month periods ended July 31, 2002 was to increase net income by approximately $155,000 or $0.01 per share and $309,000 or $0.02 per share, respectively. Prior to February 1, 2002, goodwill was amortized on a straight-line basis over 30 years. The following pro forma information reflects the Company's results of operations as they would have appeared had the Company not recorded goodwill amortization and its related tax effects during fiscal 2002 (dollars in thousands, except per share amounts):

6 The Company evaluates the carrying value of goodwill on an annual basis and when events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit to which the goodwill is assigned below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in business climate or in legislation, (2) unanticipated competition, or (3) a loss of key personnel. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. The Company considers its three business segments (Note7) to be reporting units when it tests for goodwill impairment based on how it manages its business and because the segment level is where the Company believes goodwill naturally resides. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill with its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. Effective February 1, 2002, the Company also adopted SFAS No. 144. This standard broadens the presentation of discontinued operations to include more disposal transactions, thus the recognition of discontinued operations is expected to become more common under this standard. This statement retains the requirements of SFAS No. 121 (Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of) to recognize impairments on property, plant and equipment, but removes goodwill from its scope. The adoption of SFAS No. 144 did not have a material impact on the Company's consolidated financial statements. In July 2002, the Financial Accounting Standards Board issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company is reviewing the requirements of this standard and expect this to have no impact on the Company's financial statements. 3. RESTRUCTURING CHARGES During the first six months of fiscal 2003, the Company continued the execution of its plan established during the fourth quarter of fiscal 2001 to restructure management and to divest itself of the majority of its heavy-duty truck division. Severance costs paid during the first six months of fiscal 2003 totaled approximately $125,000 leaving a remaining severance accrual of approximately $34,000. Costs incurred related to lease and other obligations totaled approximately $68,000 leaving an accrual of approximately $8,000 as of July 31, 2002. The Company has actively pursued the sale of its Riverside, California, truck business since establishment of the plan. During the second quarter of fiscal 2003, the Company signed an agreement to sell the assets of its Riverside, California, truck business. The transaction is expected to close in the Company's third fiscal quarter. The assets and liabilities relating to this truck business are classified as held for sale on the balance sheet. 7 INVENTORIES: All inventories are valued at the lower of cost or market. The specific identification method is used to determine cost for new and used equipment and trucks. Cost is determined using the first-in, first-out method for parts inventory. Inventories consisted of the following at (in thousands): July 31, January 31, 2002 2002 ---- ---- New equipment & trucks $ 80,298 $ 80,013 Used equipment & trucks 33,135 27,070 Parts and other 22,242 21,421 --------- --------- $ 135,675 $ 128,504 ========= ========= 4. FLOOR PLAN/BORROWING BASE PAYABLES: Floor plan/borrowing base payables are financing arrangements for inventory and receivables. The terms of certain floor plan arrangements may include an interest-free term followed by a term during which interest is charged. Floor plan/borrowing base payables consisted of the following at (in thousands): July 31, January 31, 2002 2002 ---- ---- Interest-bearing $ 72,097 $ 66,157 Noninterest-bearing 30,236 31,259 --------- --------- $ 102,333 $ 97,416 ========= ========= 5. EARNINGS PER SHARE: Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted net income per share is computed by dividing net income by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares related to stock options had been issued. The following table reconciles the number of shares utilized in the net income per common share calculations:

8 Options to purchase 908,199 and 704,474 shares of common stock were outstanding as of July 31, 2002 and 2001, respectively. Outstanding options of 686,850 and 704,474 were not included in the computations of diluted earnings per share for the six months ended July 31, 2002 and 2001, respectively, because the exercise prices were greater than the average market prices of the common shares for the periods. 6. SEGMENT INFORMATION: The Company's operations are classified into three business segments, based upon the way the Company manages its business: construction, agricultural, and truck. In past reporting, the corporate business segment was designated as financial services and corporate. Due to the current size and function of financial services operations, current and future segment reporting will include financial services information in the operating segment that generated the financial services revenues and expense. For comparison, this change has also been reflected in the historical data presented. Construction operations include the sale, service and rental of construction and material handling equipment to customers primarily in the construction, manufacturing, warehousing and utility industries and to units of government. Agricultural operations include the sale, service and rental of agricultural equipment primarily to customers in the agricultural industry. Truck operations include the sale and service of heavy-duty and medium-duty trucks to customers primarily in the transportation and construction industries and to units of government. Identifiable assets are those used exclusively in the operations of each business segment or which are allocated when used jointly. Corporate assets are principally comprised of cash, income tax receivables, certain property and equipment, and deferred income taxes. 9 The following table shows the Company's business segments and related financial information for the three and six months ended July 31, 2002 and 2001 (in thousands):

(a) Approximately $400,000 of income before taxes in fiscal 2003 is attributable to the settlement of a vendor obligation that originated in fiscal 1999 associated with the Riverside truck dealership. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CAUTIONARY STATEMENT REGARDING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS The future results of RDO Equipment Co. (the "Company"), including results reflected in any forward-looking statement made by or on behalf of the Company, will be impacted by a number of important factors. The factors identified below under the subsection entitled "Safe Harbor Statement" are important factors (but not necessarily all important factors) that could cause the Company's actual future results to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company. Any statements contained or incorporated by reference in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "estimate" or "continue" or comparable terminology are intended to identify forward-looking statements. Forward-looking statements, by their nature, involve substantial risks and uncertainties. THE BUSINESS The Company specializes in the distribution, sale, service, rental and finance of equipment and trucks to the agricultural, construction, manufacturing, transportation and warehousing industries, as well as to public service entities, government agencies and utilities. On July 31, 2002, the Company operated 47 retail stores in nine states - Arizona, California, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Texas and Washington. Its stores include one of the largest networks of Deere & Company ("Deere") construction equipment dealerships and agricultural equipment dealerships in North America. The Company generates its revenues from sales of new and used equipment and trucks, sales of parts and service, rental of equipment, customer financing and related products and services. In addition to outright sales of new and used equipment, sales include equipment purchased under rent-to-purchase agreements. Generally under such agreements, the customer is given a period of several months to exercise the option to purchase the rented equipment and is allowed to apply a portion of the rental payments to the purchase price. This rent-to-purchase equipment is included in the Company's inventory until the option is exercised and the equipment is purchased. The Company's highest gross margins have historically been generated from its parts and service revenues. One of the Company's operating strategies is to increase the demand for parts and service by establishing, and then increasing, the base of equipment and trucks held by its customers. Due to product warranty time frames and usage patterns by customers, there generally is a time lag between equipment and truck sales and the generation of significant parts and service revenues from such sales. As a result of this time lag, increases in parts and service revenues do not necessarily coincide with increases in equipment and truck sales. In addition, due to differences in gross margins between equipment and truck sales and parts and service revenues, gross margin percentages may increase during periods of declining equipment and truck sales and decline when equipment and truck sales are strong. Deere, a leading manufacturer and supplier of construction and agricultural equipment, is the primary supplier of new products sold by the Company. Sales of new Deere products accounted for approximately 49% of the Company's sales for the first six months of fiscal 2003. No other supplier accounted for more than 10% of the Company's new product sales for this period. The Company's stores also offer complementary products from other suppliers, used products, new and used parts, product servicing, product rental, loans, leases and other related products and services. 11 The Company was incorporated in April 1968 and re-incorporated in Delaware in January 1997. The Company's executive offices are located at 2829 South University Drive, Fargo, North Dakota 58103. The Company's phone number is (701) 297-4288. References to the Company in this Form 10-Q include its subsidiaries. NEW ACCOUNTING PRONOUNCEMENTS On February 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, in its entirety. This statement addresses accounting and financial reporting for goodwill and intangible assets. Under the new statement, goodwill and intangible assets with indefinite lives are no longer amortized, but are subject to impairment testing on at least an annual basis. Other than goodwill, the Company does not have any intangible assets with indefinite lives or other intangible assets. The effect of discontinuing goodwill amortization during the three and six month periods ended July 31, 2002 was to increase net income by approximately $155,000, or $0.01 per share, and $309,000, or $0.02 per share, respectively. Effective February 1, 2002, the Company also adopted SFAS No. 144. This standard broadens the presentation of discontinued operations to include more disposal transactions, thus the recognition of discontinued operations is expected to become more common under this standard. This statement retains the requirements of SFAS No. 121 (Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of) to recognize impairments on Property, Plant and Equipment, but removes goodwill from its scope. The adoption of SFAS No. 144 did not have a material impact on the Company's consolidated financial statements. In July 2002, the Financial Accounting Standards Board issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company is reviewing the requirements of this standard and expect this to have no impact on the Company's financial statements. CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The Company believes the following accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. INVENTORIES. All inventories are valued at the lower of cost or market. The specific identification method is used to determine cost for new and used equipment and trucks. Cost is determined using the first-in, first-out method for parts inventory. The Company regularly evaluates the lower of cost or market for specific products at both the store and corporate levels which includes reference to secondary wholesale markets. 12 REVENUE RECOGNITION. Revenue on equipment, truck and parts sales is recognized upon delivery of product to customers. Rental and service revenue is recognized at the time such services are provided. In addition to outright sales of new and used equipment, certain rentals include rent-to-purchase option agreements. Under such agreements, customers are given a period of several months to exercise the option to purchase the rented equipment and may be allowed to apply a portion of the rental payments to the purchase price. This rent-to-purchase equipment is included in the Company's inventory until the option is exercised and the equipment is purchased. Rental revenue is recognized during the rental period of rent-to-purchase transactions and equipment sales revenue is recognized when the purchase option is exercised. GOODWILL. The Company evaluates the carrying value of goodwill on an annual basis and when events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit to which the goodwill is assigned below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in business climate or in legislation, (2) unanticipated competition, or (3) a loss of key personnel. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill with its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. USE OF ESTIMATES In the normal course of business, the Company must make continuing estimates of potential future costs and accrue for them. These costs include but are not limited to tax, health and general liability self-insurance, uncollectible accounts receivable, and inventory valuation adjustments. These accruals require the use of management's judgement on the outcome of various issues. Management's estimates for these items are based on the best available evidence, but due to changes in facts and circumstances, the ultimate outcomes of these accruals could be different than management estimates. GENERAL During the first six months of fiscal 2003, the Company continued the execution of its plan established during the fourth quarter of fiscal 2001 to restructure management and to divest itself of the majority of its heavy-duty truck division. Severance costs paid during the first six months of fiscal 2003 totaled approximately $125,000 leaving a remaining severance accrual of approximately $34,000. Costs incurred related to lease and other obligations totaled approximately $68,000 leaving an accrual of approximately $8,000 as of July 31, 2002. The Company has actively pursued the sale of its Riverside, California, truck business since establishment of the plan. During the second quarter of fiscal 2003, the Company signed an agreement to sell the assets of its Riverside, California, truck business. The transaction is expected to close in the Company's third fiscal quarter. The assets and liabilities relating to this truck business are classified as held for sale on the balance sheet. 13 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain financial data:

14 THREE MONTHS ENDED JULY 31, 2002 COMPARED TO THREE MONTHS ENDED JULY 31, 2001 NET INCOME The Company reported net income of $1,333,000, or $0.10 per share, for the second quarter of fiscal 2003, compared to a net income of $478,000, or $0.4 per share, for the second quarter of fiscal 2002. REVENUES Total revenues of $144.6 million during the second quarter of fiscal 2003 were $4.3 million, or 2.9%, lower than revenues during the second quarter of the previous year. Construction revenues, which represent the largest segment of the Company, were $71.2 million during the quarter, a $13.8 million, or 16.2%, decrease in revenue in the segment compared to the prior year due to the current soft demand for construction equipment, especially in the Company's southern regions. Agricultural revenues of $55.5 million in the second quarter of fiscal 2003 were $10.8 million, or 24.2%, higher than in the second quarter of fiscal 2002. The Company's agricultural dealerships are located in areas experiencing favorable crop growing conditions, thus creating farmer optimism which supports higher sales. Truck revenues of $17.9 million were down $1.3 million, or 6.8%, compared to the same period last year. The sale of the Texas truck dealerships in May 2001 accounted for $600,000 of the decrease. The remaining decline is attributable to the reduced market demand for trucks. Equipment and truck sales were $103.3 million during the second quarter of fiscal 2003, a decrease of $2.0 million, or 1.9%, from the second quarter of fiscal 2002. Construction equipment sales decreased $11.7 million, or 19.6%, to $47.9 million. The sale of truck dealerships caused $400,000 of the change and reduced demand for trucks resulted in an additional $700,000 in sales reductions. Offsetting these sales decreases, agricultural equipment sales increased $10.7 million, or 33.4%, to $42.7 million. Parts and service revenues were $41.2 million in the second quarter of fiscal 2003, representing a decrease of $2.4 million, or 5.5%, from the prior year. Parts and service revenues from truck operations decreased approximately $400,000, or 7.3%, to $5.1 million. The decrease in truck parts and service revenues was primarily due to the sale of truck dealerships. Construction parts and service revenues decreased approximately $2.1 million, or 8.3%, to $23.3 million. Agricultural parts and service revenues increased approximately $100,000, or 0.8%, as sales increased to $12.8 million. GROSS PROFIT Gross profit for the second quarter of fiscal 2003 was approximately $25.3 million, or 17.5% of total revenues, compared to $25.6 million, or 17.2% of total revenues in fiscal 2002. Although equipment and truck sales dollars declined 1.9% in the second quarter of fiscal 2003 compared to the second quarter of fiscal 2002, gross margin dollars for equipment and trucks for the quarter increased approximately $800,000, as a result, as a percentage of equipment and truck sales, there was an increase from 8.8% for the second quarter of fiscal 2002, to 9.7% for fiscal 2003. Approximately $400,000 of the $800,000 increase was attributable to the finalization and discount of a manufacturer sponsored obligation that originated in fiscal 1999 as part of the Company's acquisition of the Riverside truck dealership. Parts and service gross margins were approximately $15.2 million, or 36.9% of revenues, and $16.2 million, or 37.3% of revenues, for the second quarter of fiscal 2003 and 2002, respectively. 15 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative (SG&A) expenses decreased $400,000, from $23.2 million for the second quarter of fiscal 2002 to $22.8 million for the second quarter of fiscal 2003. Approximately $250,000 of the decrease occurred as a result of the discontinuance of amortization of goodwill in fiscal 2003. Total SG&A expenses as a percentage of total revenues for fiscal 2003 and 2002 were 15.8% and 15.6%, respectively. INTEREST EXPENSE Interest expense decreased approximately $1.5 million, or 68.2%, from $2.2 million for the second quarter of fiscal 2002 to $700,000 for the same period in fiscal 2003. Interest expense as a percentage of total revenues decreased from 1.5% for the second quarter of fiscal 2002 to 0.5% for fiscal 2003. Lower levels of interest-bearing floor plan payables and reductions in interest rates as well as the sale of truck dealerships were the contributing factors to the decrease in interest expense. OTHER INCOME Other income decreased approximately $100,000, or 16.7%, from the second quarter of fiscal 2002 to the second quarter of fiscal 2003. Other income is primarily comprised of finance charges from trade receivables along with national direct sales income. National direct sales income is a commission awarded when a manufacturer/supplier sells directly to a national account that is located in the Company's areas of responsibility. INCOME TAXES The estimated provision for income taxes as a percentage of pretax income was 41.0% for the second quarter of fiscal 2003, compared to the estimated provision for income taxes as a percentage of pretax loss of 40.0% for the second quarter of fiscal 2002. SIX MONTHS ENDED JULY 31, 2002 COMPARED TO SIX MONTHS ENDED JULY 31, 2001 NET INCOME The Company reported net income of $2,367,000, or $0.18 per share, for the first six months of fiscal 2003, compared to a net income of $122,000, or $0.01 per share, for the first six months of fiscal 2002. REVENUES Total revenues of $292.9 million during the first six months of fiscal 2003 were $10.7 million, or 3.5%, lower than revenues during the first six months of the previous year. Construction revenues, which represent the largest segment of the Company, were $149.8 million during the first six months of fiscal 2003, a $13.0 million, or 8.0%, decrease in revenue in the segment compared to the prior year due to the current soft demand for construction equipment, especially in the Company's southern regions. Agricultural revenues of $105.1 million in the first six months of fiscal 2003 were $11.9 million, or 12.8%, higher than in the first six months of fiscal 2002. The Company's agricultural dealerships are located in areas experiencing favorable crop growing conditions, thus creating farmer optimism which supports higher sales. Truck revenues of $38.0 million were down $9.6 million, or 20.2%, compared to the same period last year. The sale of the Texas truck dealerships in May 2001 accounted for $7.4 million of the decrease. The remaining decline is attributable to the reduced market demand for trucks. 16 Equipment and truck sales were $213.6 million during the first six months of fiscal 2003, a decrease of $4.8 million, or 2.2%, from the first six months of fiscal 2002. Construction equipment sales decreased $10.0 million, or 8.7%, to $104.8 million. The sale of truck dealerships caused $4.5 million of the change and reduced demand for trucks resulted in an additional $1.8 million in sales reductions. Offsetting these sales decreases, agricultural equipment sales increased $11.5 million, or 16.6%, to $81.0 million. Parts and service revenues were $79.2 million in the first six months of fiscal 2003, representing a decrease of $5.9 million, or 6.9%, from the prior year. Parts and service revenues from truck operations decreased approximately $3.3 million, or 24.4%, to $10.2 million. The decrease in truck parts and service revenues was primarily due to the sale of truck dealerships. Construction parts and service revenues decreased approximately $2.9 million, or 6.1%, to $45.0 million. Agricultural parts and service revenues increased approximately $300,000, or 1.3%, as sales increased to $24.0 million. GROSS PROFIT Gross profit for the first six months of fiscal 2003 was approximately $49.9 million, or 17.0% of total revenues, compared to $51.3 million, or 16.9% of total revenues in fiscal 2002. Although equipment and truck sales dollars declined 2.2% in the first six months of fiscal 2003 compared to the first six months of fiscal 2002, gross margin dollars for equipment and trucks for the first six months of fiscal 2003 increased approximately $800,000, as a result, as a percentage of equipment and truck sales, there was an increase from 9.0% for the first six months of fiscal 2002, to 9.6% for fiscal 2003. Approximately $400,000 of the $800,000 increase was attributable to the finalization and discount of a manufacturer sponsored obligation that originated in fiscal 1999 as part of the Company's acquisition of the Riverside truck dealership. Parts and service gross margins were approximately $29.5 million, or 37.2% of revenues, and $31.6 million, or 37.1% of revenues, for the first six months of fiscal 2003 and 2002, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative (SG&A) expenses decreased $2.2 million, from $47.2 million for the first six months of fiscal 2002 to $45.0 million for the first six months of fiscal 2003. Total SG&A expenses as a percentage of total revenues for fiscal 2003 and 2002 were 15.4% and 15.5%, respectively. Approximately $500,000 of the decrease occurred as a result of the discontinuance of amortization of goodwill in fiscal 2003. The remaining reduction of SG&A costs is largely attributable to the restructuring accomplished in the second half of fiscal 2002, and continuing costs controls. SG&A expenses are affected by the contribution of revenues by business segment and by the mix of revenues within each business segment. As a percentage of revenues, SG&A expenses are generally higher for construction operations than for agricultural and truck operations, and lower for equipment and truck sales than for parts and service revenues. The truck dealership downsizing as previously discussed along with streamlining the management structure and tight expense controls throughout the Company, were and will continue through fiscal 2003 to be the primary contributing factors to the decrease in fiscal 2003 SG&A expenses compared to fiscal 2002. INTEREST EXPENSE Interest expense decreased approximately $3.3 million, or 67.4%, from $4.9 million for the first six months of fiscal 2002 to $1.6 million for the same period in fiscal 2003. Interest expense as a percentage of total revenues decreased from 1.6% for the first six months of fiscal 2002 to 0.5% for fiscal 2003. Lower levels of interest-bearing floor plan payables and reductions in interest rates as well as the sale of truck dealerships were the contributing factors to the decrease in interest expense. 17 OTHER INCOME Other income decreased approximately $300,000, or 30.0%, from the first six months of fiscal 2002 to the first six months of fiscal 2003. Other income is primarily comprised of finance charges from trade receivables along with national direct sales income. National direct sales income is a commission awarded when a manufacturer/supplier sells directly to a national account that is located in the Company's areas of responsibility. INCOME TAXES The estimated provision for income taxes as a percentage of pretax income was 41.0% for the first six months of fiscal 2003, compared to the estimated provision for income taxes as a percentage of pretax loss of 40.0% for the first six months of fiscal 2002. LIQUIDITY AND CAPITAL RESOURCES The Company requires cash primarily for financing its inventories of equipment, trucks and replacement parts, rental equipment, receivables and capital expenditures, including acquisitions and openings of additional retail locations. Historically, the Company has met these liquidity requirements primarily through cash flow generated from operating activities, floor plan financing, and borrowings under credit agreements with Deere & Company (Deere), Deere Credit Services, Inc. (Deere Credit), Ag Capital Company (Ag Capital), Deutsche Financial Services Corporation (Deutsche Financial), Volvo Commercial Finance LLC The Americas (Volvo Finance), General Motors Acceptance Corporation (GMAC), CitiCapital Commercial Corporation (CitiCapital) and commercial banks. Deere and Deere Credit provide the primary source of financing for equipment inventories, particularly for equipment supplied by Deere. The Deere and Deere Credit financings are provided through two vehicles, the dealer statement and a borrowing base revolving credit facility. The dealer statement provides extended terms and varying interest-free periods, depending on the type of equipment, to enable dealers to carry representative inventories of equipment and to encourage the purchase of goods by dealers in advance of seasonal retail demand. Down payments are not required and interest might not be charged for a substantial part of the period for which inventories are financed. Often, purchase discounts are available in lieu of interest-free periods. Variable market rates of interest based on the prime rate are charged on balances outstanding after any interest-free periods, which in the past have generally been four to twelve months for agricultural equipment and four months for construction equipment. These interest-free periods may be changed at Deere and Deere Credit's discretion and may be longer depending on special financing programs offered from time to time. Deere and Deere Credit also provide dealer statement financing to dealers on used equipment accepted in trade and approved equipment from other suppliers. The Deere Credit borrowing base revolving credit facility provides financing for eligible equipment inventories (generally equipment inventories not financed through the dealer statement) and receivables. GMAC, Volvo Finance and CitiCapital provide truck floor plan financing with variable market rates of interest based on the prime or LIBOR rate. On July 31, 2002, in addition to manufacturer provided dealer statement and floor plan financing, the Company had unused credit commitments related to borrowing base inventory and receivable financing and operating lease financing of dedicated rental equipment of $52.9 million. The Company had outstanding floor plan/borrowing base payables of approximately $102.3 million, of which $72.1 million was interest-bearing as of July 31, 2002. The collateral of equipment and truck inventories along with eligible receivables would support $18.1 million of additional borrowing at July 31, 2002. During the first six months of fiscal 2003 and 2002 the average interest rate under interest-bearing floor plan/borrowing base financing was approximately 5.31% and 7.85%, respectively. 18 Currently, the Company has an unsecured bank line of credit totaling $1.9 million with a maturity date of July 1, 2003 and with a variable interest rate based on the prime rate (4.75% at July 31, 2002). The Company had approximately $355,000 of unused availability relating to this line of credit at July 31, 2002. The average interest rates on the Company's lines of credit during the first six months of fiscal 2003 and 2002 were 5.67% and 7.53%, respectively. The Company believes it has sufficient credit availability from its existing credit facilities and manufacturers to finance its current and future operations. Various credit facilities are reviewed and renewed annually. As the credit facilities approach maturity, the Company believes it will be able to renew or extend these facilities, or replace these facilities with other facilities. Subsequent to the end of the Company's second fiscal quarter, the Company completed a two year renewal of its revolving credit facility with Deere Credit. The Company believes cash from operations, available cash and borrowing capacity will be sufficient to fund its planned internal capital expenditures and other cash needs for fiscal 2003. The Company's financing agreements contain various covenants which, among other matters, require the Company to maintain minimum financial ratios, as defined, and a minimum level of tangible equity. The Company was in compliance with all covenants as of July 31, 2002. The Company has various commitments relating to its operations. The following is a summary of these commitments as of July 31, 2002. Contractual Obligations and Commercial Commitments --------------------------------------------------

The Company's long-term debt is primarily related to the financing of dedicated rental assets and one dealership location facility. Operating lease and other commitments are primarily related to dealership locations of $31.9 million, dedicated rental assets and equipment of $10.0 million and vehicles of $0.9 million. In addition to the above commitments, certain credit companies provide direct customer financing (secured by customer owned equipment) and credit accounts with recourse to the Company totaling $15.2 million and $2.0 million as of July 31, 2002, respectively. These commitments have off-balance sheet credit risk because the risk represents generally only a small portion of the total related accounts, thus only accruals and payments for probable losses are recognized until the recourse (guarantee) expires. Credit risk represents the accounting loss that would be recognized at the reporting date if the counter-parties failed to perform completely as contracted. The credit risk amounts are equal to the recourse (guaranteed) portion of the contractual amounts. Operating activities used net cash of $2.2 million for the first six months of fiscal 2003. Increased levels of receivable and inventory along with decreases in floor plan payables and customer deposits were the primary contributing factors to cash used by operating activities for the first six months of fiscal 2003. The cash provided by operating activities of $18.9 million for the first six months of fiscal 2002 primarily resulted from decreased levels of inventory and receivables and increased levels of 19 floor plan payables which were somewhat offset by decreased levels of accounts payable, accrued liabilities and customer deposits. Cash used for investing activities was $477,000 for the first six months of fiscal 2003, which was primarily related to purchases of property and equipment. Cash provided by investing activities in the first six months of fiscal 2002 was $2.4 million, primarily related to the net proceeds from the sale of the Company's Texas truck dealerships partially offset by the Company's purchase of the remaining 8% minority interest in Salinas Equipment Distributors, Inc. and purchases of property and equipment. Cash provided by financing activities was $2.7 million for the first six months of fiscal 2003. Borrowings on the Company's revolving credit facilities was the primary source of cash from financing activities which was used to make payments on long-term debt, purchase treasury stock and fund increases in receivables and inventories during the first six months of fiscal 2003. Cash used for financing activities was $27.2 million for the first six months of fiscal 2002. Cash used for financing activities was primarily due to payments on the Company's revolving credit facilities and long-term debt with cash being generated from decreases in receivables, inventories and with proceeds from floor plan financing and the sale of the Company's Texas truck dealerships. During the first half of fiscal 2003, the Company continued its previously announced stock repurchase program and expanded the program, approving the repurchase of an additional five percent of the outstanding shares of Class A common stock bringing the total authorized to 15% of the outstanding shares of Class A common stock. At July 31, 2002, the Company had repurchased 516,200 shares, or 9.1%, of the outstanding shares of Class A common stock at a total cost of $2,058,000. The Company expects to continue to repurchase shares in the future as deemed appropriate. CYCLICALITY Sales of equipment and trucks, particularly new units, historically have been cyclical, fluctuating with general economic cycles. During economic downturns, equipment and truck retailers tend to experience similar periods of decline and recession as the general economy. The impact of an economic downturn on retailers is generally less than the impact on manufacturers due to the sale of parts and service by retailers to maintain used equipment and trucks. The Company believes that its businesses are influenced by worldwide and local economic conditions (see "Safe Harbor Statement") and that its geographic and business diversification may generally reduce the overall impact of economic cycles on the Company's operations. SEASONALITY The Company's agricultural operations, particularly in the Midwest, generally experience a higher volume of equipment sales in the second and third fiscal quarters due to the crop-growing season. Typically, farmers purchase equipment prior to planting or harvesting crops. Winter weather conditions in the Midwest limit equipment purchases during the Company's first and fourth fiscal quarters. This seasonal effect can be diminished during periods of significant and sustained weakness in the agricultural economy during which farmers generally purchase less equipment. The Company's construction operations generally experience a higher volume of equipment sales in the second and third fiscal quarters due to favorable weather patterns, particularly in the Midwest. The general slowdown in construction activity at the end of the calendar year influences the fourth fiscal quarter. Further, winter weather conditions in parts of the Southwest and South Central also limit construction activity to some degree, typically resulting in lower sales and rentals of construction equipment. 20 SAFE HARBOR STATEMENT This statement is made under the Private Securities Litigation Reform Act of 1995. The future results of the Company, including results related to forward-looking statements in this Report, involve a number of risks and uncertainties. Important factors that will affect future results of the Company, including factors that could cause actual results to differ materially from those indicated by forward-looking statements, include, but may not be limited to, those set forth under the caption "Certain Important Factors" in Item 1 of the Company's Form 10-K dated April 29, 2002 and in other filings with the Securities and Exchange Commission. The important factors discussed in the aforementioned Form 10-K include: o Dependence on Deere o Deere termination rights o Effects of downturn in general economic conditions, cyclicality, seasonality and weather o Competition o Available financing for customers o Substantial inventory financing requirements and lending industry changes o Dependence on key personnel o Growth by acquisition and store openings In general, the factors that will affect the Company, which are subject to change, include: general economic conditions worldwide and locally; global acts of terrorism; interest rates; housing starts; fuel prices; the factors that affect the construction contractors' confidence and financial health including construction demand, the amount of government sponsored projects and weather; the many interrelated factors that affect farmers' confidence, including farm cash income, farmer debt levels, credit availability, worldwide demand for agricultural products, world grain stocks, commodity prices, weather, animal and plant diseases, crop pests, harvest yields, real estate values and government farm programs; legislation, primarily legislation relating to agriculture, the environment, commerce, transportation and government spending on infrastructure; climatic phenomena such as flooding, droughts, La Nina and El Nino; pricing, product initiatives and other actions of competitors in the various industries in which the Company competes, including manufacturers and retailers; the levels of new and used inventories in these industries; the Company's relationships with its suppliers; production difficulties, including capacity and supply constraints experienced by the Company's suppliers; practices by the Company's suppliers; changes in governmental regulations; labor shortages; employee relations; currency exchange rates; availability, sufficiency and cost of insurance; financing arrangements relating to the Company's financial services operations, including credit availability and customer credit risks; dependence upon the Company's suppliers; termination rights and other provisions which the Company's suppliers have under dealer and other agreements; risks associated with growth, expansion and acquisitions; the positions of the Company's suppliers and other manufacturers with respect to publicly-traded dealers, dealer consolidation and specific acquisition opportunities; the Company's acquisition strategies and the integration and successful operation of acquired businesses; capital needs and capital market conditions; operating and financial systems to manage operations; dependence upon key personnel; accounting standards; technological difficulties, especially involving the Company's suppliers and other third parties which could cause the Company to be unable to process customer orders, deliver products or services, or perform other essential functions; the successful closing of the sale of the Company's Riverside , CA truck dealership; and other risks and uncertainties. The Company's forward-looking statements are based upon assumptions relating to these factors. These assumptions are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources, which are often revised. The Company makes no commitment to revise forward-looking statements, or to disclose subsequent facts, events or circumstances that may bear upon forward-looking statements. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. There has been no material change in the information set forth in Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2002. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. Exhibits filed with this report are listed in the Exhibit Index on page 24. (b) REPORTS ON FORM 8-K. The Company filed a Current Report on Form 8-K dated May 17, 2002 under Item 4 regarding the decision by the Company's Board of Directors to dismiss Arthur Andersen LLP as the Company's independent public accountants and engage PricewaterhouseCoopers LLP to serve as the Company's independent public accountants for fiscal year 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RDO EQUIPMENT CO. (Registrant) Date: September 11, 2002 By: /s/ Steven B. Dewald ----------------------------- Steven B. Dewald Chief Financial Officer (principal financial officer) 22 CERTIFICATIONS I, Ronald D. Offutt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of RDO Equipment Co.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 11, 2002 /s/ Ronald D. Offutt --------------------------- Ronald D. Offutt Chief Executive Officer I, Steven B. Dewald, certify that: 1. I have reviewed this quarterly report on Form 10-Q of RDO Equipment Co.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 11, 2002 /s/ Steven B. Dewald --------------------------- Steven B. Dewald Chief Financial Officer The written statements of our Chief Executive Officer and Chief Financial Officer required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, accompanied the filing of this report by correspondence to the Securities and Exchange Commission. 23 EXHIBIT INDEX ITEM NO. ITEM PAGE OF THIS REPORT -------- ---- ------------------- 10.1 Second Amended and Restated Loan Agreement between John Deere Construction & Forestry Company, Deere Credit, Inc., and John Deere Company and RDO Agriculture Equipment Co., RDO Construction Equipment Co., RDO Financial Services Co. and RDO Material Handling Co. 25 10.2 Guaranty by RDO Equipment Co. of Loan Agreement between John Deere Construction & Forestry Company, Deere Credit, Inc., and John Deere Company and RDO Agriculture Equipment Co., RDO Construction Equipment Co., RDO Financial Services Co. and RDO Material Handling Co. 44 24

RDO EQUIPMENT CO 10-Q