EXHIBIT NO. 2
Consolidated Financial Statements of
RITCHIE BROS. AUCTIONEERS INCORPORATED
Years ended December 31, 2004 and 2003
INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Ritchie Bros. Auctioneers Incorporated (the “Company”) as at December 31, 2004 and 2003 and the consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. 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, 2004 and 2003 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004 in accordance with Canadian generally accepted accounting principles.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
February 11, 2005
RITCHIE BROS. AUCTIONEERS INCORPORATED
Consolidated Statements of Operations
(Expressed in thousands of United States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
2004 | 2003 | 2002 | ||||||||||
Auction revenues | $ | 182,257 | $ | 161,542 | $ | 133,552 | ||||||
Direct expenses | 23,472 | 22,099 | 19,684 | |||||||||
158,785 | 139,443 | 113,868 | ||||||||||
Expenses: | ||||||||||||
Depreciation and amortization | 12,708 | 11,773 | 9,208 | |||||||||
General and administrative | 85,667 | 71,265 | 63,786 | |||||||||
98,375 | 83,038 | 72,994 | ||||||||||
Earnings from operations | 60,410 | 56,405 | 40,874 | |||||||||
Other income (expenses): | ||||||||||||
Interest | (3,217 | ) | (4,772 | ) | (4,302 | ) | ||||||
Other | 1,053 | 1,060 | 2,455 | |||||||||
(2,164 | ) | (3,712 | ) | (1,847 | ) | |||||||
Earnings before income taxes | 58,246 | 52,693 | 39,027 | |||||||||
Income taxes (note 9): | ||||||||||||
Current | 22,251 | 14,738 | 8,097 | |||||||||
Future | 1,096 | 1,361 | 2,559 | |||||||||
23,347 | 16,099 | 10,656 | ||||||||||
Net Earnings | $ | 34,899 | $ | 36,594 | $ | 28,371 | ||||||
Net earnings per share (notes 1(l) and 7(e)): | ||||||||||||
Basic | $ | 1.02 | $ | 1.08 | $ | 0.84 | ||||||
Diluted | 1.01 | 1.07 | 0.84 | |||||||||
Weighted average number of shares outstanding | 34,160,678 | 33,795,978 | 33,586,404 | |||||||||
Approved on behalf of the Board:
/s/ G. Edward Moul | /s/ Peter J. Blake | |
G. Edward Moul Director | Peter J. Blake Director |
See accompanying notes to consolidated financial statements.
-3-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Consolidated Balance Sheets
(Expressed in thousands of United States dollars)
December 31, 2004 and 2003
2004 | 2003 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 132,632 | $ | 119,009 | ||||
Accounts receivable | 19,281 | 17,064 | ||||||
Inventory | 13,091 | 9,580 | ||||||
Advances against auction contracts | 968 | 110 | ||||||
Funds committed for debt repayment (note 6) | 1,857 | 13,000 | ||||||
Prepaid expenses and deposits | 2,323 | 2,553 | ||||||
Net investment in lease (note 4) | 654 | — | ||||||
Current future income tax asset (note 9) | 496 | 354 | ||||||
171,302 | 161,670 | |||||||
Capital assets (note 3) | 226,624 | 210,416 | ||||||
Net investment in lease (note 4) | 1,267 | — | ||||||
Funds committed for debt repayment (note 6) | 5,108 | 5,107 | ||||||
Other assets | 609 | 537 | ||||||
Goodwill | 37,499 | 35,632 | ||||||
$ | 442,409 | $ | 413,362 | |||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Auction proceeds payable | $ | 47,581 | $ | 44,186 | ||||
Accounts payable and accrued liabilities | 45,334 | 35,150 | ||||||
Income taxes payable | 6,383 | 3,196 | ||||||
Current portion of long-term debt (note 6) | 35,133 | 43,438 | ||||||
134,431 | 125,970 | |||||||
Long-term debt (note 6) | 10,792 | 27,350 | ||||||
Other liabilities (note 5) | 1,563 | 2,375 | ||||||
Future income tax liability (note 9) | 6,359 | 4,888 | ||||||
153,145 | 160,583 | |||||||
Shareholders’ equity: | ||||||||
Share capital (note 7) | 76,445 | 72,794 | ||||||
Additional paid-in capital | 7,859 | 6,075 | ||||||
Retained earnings | 183,438 | 161,183 | ||||||
Foreign currency translation adjustment | 21,522 | 12,727 | ||||||
289,264 | 252,779 | |||||||
$ | 442,409 | $ | 413,362 | |||||
Commitments and contingencies (note 10)
Subsequent events (note 7(c))
See accompanying notes to consolidated financial statements.
-4-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Consolidated Statements of Shareholders’ Equity
(Expressed in thousands of United States dollars)
Foreign | ||||||||||||||||||||
Additional | Currency | Total | ||||||||||||||||||
Share | Paid-In | Retained | Translation | Shareholders' | ||||||||||||||||
Capital | Capital | Earnings | Adjustment | Equity | ||||||||||||||||
Balance, December 31, 2001 | $ | 69,134 | $ | 4,332 | $ | 101,311 | $ | (8,844 | ) | $ | 165,933 | |||||||||
Net proceeds on stock options exercised | 365 | — | — | — | 365 | |||||||||||||||
Stock compensation tax adjustment | — | 314 | — | — | 314 | |||||||||||||||
Net earnings | — | — | 28,371 | — | 28,371 | |||||||||||||||
Foreign currency translation adjustment | — | — | — | 4,391 | 4,391 | |||||||||||||||
Balance, December 31, 2002 | 69,499 | 4,646 | 129,682 | (4,453 | ) | 199,374 | ||||||||||||||
Net proceeds on stock options exercised | 3,295 | — | — | — | 3,295 | |||||||||||||||
Stock compensation tax adjustment | — | 382 | — | — | 382 | |||||||||||||||
Stock compensation expense | — | 1,047 | — | — | 1,047 | |||||||||||||||
Net earnings | — | — | 36,594 | — | 36,594 | |||||||||||||||
Cash dividends paid | — | — | (5,093 | ) | — | (5,093 | ) | |||||||||||||
Foreign currency translation adjustment | — | — | — | 17,180 | 17,180 | |||||||||||||||
Balance, December 31, 2003 | 72,794 | 6,075 | 161,183 | 12,727 | 252,779 | |||||||||||||||
Net proceeds on stock options exercised | 3,651 | — | — | — | 3,651 | |||||||||||||||
Stock compensation tax adjustment | — | 317 | — | — | 317 | |||||||||||||||
Stock compensation expense | — | 1,467 | — | — | 1,467 | |||||||||||||||
Net earnings | — | — | 34,899 | — | 34,899 | |||||||||||||||
Cash dividends paid | — | — | (12,644 | ) | — | (12,644 | ) | |||||||||||||
Foreign currency translation adjustment | — | — | — | 8,795 | 8,795 | |||||||||||||||
Balance, December 31, 2004 | $ | 76,445 | $ | 7,859 | $ | 183,438 | $ | 21,522 | $ | 289,264 | ||||||||||
See accompanying notes to consolidated financial statements.
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RITCHIE BROS. AUCTIONEERS INCORPORATED
Consolidated Statements of Cash Flows
(Expressed in thousands of United States dollars)
Years ended December 31, 2004, 2003 and 2002
2004 | 2003 | 2002 | ||||||||||
Cash provided by (used in): | ||||||||||||
Operations: | ||||||||||||
Net earnings | $ | 34,899 | $ | 36,594 | $ | 28,371 | ||||||
Items not involving cash: | ||||||||||||
Depreciation | 12,708 | 11,773 | 9,208 | |||||||||
Stock compensation expense | 1,467 | 1,047 | — | |||||||||
Future income taxes | 1,329 | 1,361 | 2,559 | |||||||||
Net gain on disposition of capital assets | (229 | ) | (17 | ) | (758 | ) | ||||||
Changes in non-cash working capital: | ||||||||||||
Accounts receivable | (2,217 | ) | (3,364 | ) | (1,325 | ) | ||||||
Inventory | (3,511 | ) | (2,357 | ) | (4,283 | ) | ||||||
Advances against auction contracts | (858 | ) | 69 | (92 | ) | |||||||
Prepaid expenses and deposits | 230 | (493 | ) | (733 | ) | |||||||
Income taxes payable | 3,504 | 3,578 | — | |||||||||
Income taxes recoverable | — | 2,485 | (761 | ) | ||||||||
Auction proceeds payable | 3,395 | 26,826 | 5,553 | |||||||||
Accounts payable and accrued liabilities | 10,184 | 1,606 | 10,270 | |||||||||
Other | (2,245 | ) | (1,276 | ) | (653 | ) | ||||||
58,656 | 77,832 | 47,356 | ||||||||||
Investing activities: | ||||||||||||
Acquisition of business | (1,265 | ) | — | (8,743 | ) | |||||||
Capital asset additions | (23,448 | ) | (16,273 | ) | (29,037 | ) | ||||||
Proceeds on disposition of capital assets | 2,151 | 5,368 | 4,789 | |||||||||
Investment in lease | (1,921 | ) | — | — | ||||||||
Increase in other assets | (72 | ) | (116 | ) | (421 | ) | ||||||
(24,555 | ) | (11,021 | ) | (33,412 | ) | |||||||
Financing activities: | ||||||||||||
Issuance of share capital | 3,651 | 3,295 | 365 | |||||||||
Dividends on common shares | (12,644 | ) | (5,093 | ) | — | |||||||
Issuance of long term debt | 32,500 | — | 5,000 | |||||||||
Repayment of long term debt | (58,459 | ) | (3,747 | ) | (3,628 | ) | ||||||
Decrease in other liabilities | (812 | ) | (383 | ) | 2,758 | |||||||
Decrease in short term debt | — | (2,758 | ) | (2,556 | ) | |||||||
Decrease (increase) in funds committed for debt repayment | 11,142 | (5,107 | ) | (5,107 | ) | |||||||
(24,622 | ) | (13,793 | ) | (3,168 | ) | |||||||
Effect of foreign currency rates on cash and cash equivalents | 4,144 | 3,769 | 1,913 | |||||||||
Increase in cash and cash equivalents | 13,623 | 56,787 | 12,689 | |||||||||
Cash and cash equivalents, beginning of year | 119,009 | 62,222 | 49,533 | |||||||||
Cash and cash equivalents, end of year | $ | 132,632 | $ | 119,009 | $ | 62,222 | ||||||
Supplemental information: | ||||||||||||
Interest paid | $ | 3,092 | $ | 4,675 | $ | 3,951 | ||||||
Income taxes paid | $ | 18,831 | $ | 8,675 | $ | 8,861 | ||||||
See accompanying notes to consolidated financial statements.
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RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
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 subsidiaries. All significant intercompany balances and transactions have been eliminated. | ||||
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 12, also comply, in all material respects, with generally accepted accounting principles in the United States. | ||||
(b) | Cash and 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) | Capital assets: | |||
All capital assets are stated at cost and include capitalized interest on property under development. Depreciation is provided to charge the cost of the assets to operations over their estimated useful lives based on their usage as follows: |
Asset | Basis | Rate/term | ||||||
Buildings | straight-line | 30 years | ||||||
Improvements | declining balance | 10 | % | |||||
Automotive equipment | declining balance | 30 | % | |||||
Yard equipment | declining balance | 20-30 | % | |||||
Office equipment | declining balance | 20 | % | |||||
Computer equipment | straight-line | 3 years | ||||||
Computer software | straight-line | 3 years | ||||||
Leasehold improvements | straight-line | Terms of leases | ||||||
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In such situations, long-lived assets are considered impaired when undiscounted estimated future cash flows resulting from the use of the asset and its eventual disposition are less than the asset’s carrying amount. |
-7-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
1. | Significant accounting policies (continued): |
(e) | Goodwill: | |||
Goodwill represents non-identifiable intangible assets acquired on business combinations. Goodwill is not amortized and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test compares the carrying amount of the goodwill against its implied fair value. To the extent that the carrying amount of goodwill exceeds its fair value, an impairment loss is charged against earnings. | ||||
(f) | Revenue recognition: | |||
Auction revenues earned by the Company acting as an agent for consignors of equipment are comprised mostly of auction commissions, but also include net profits on the sale of inventory, incidental interest income, Internet and proxy purchase fees, and handling fees on the sale of certain lots. All revenue is recognized when the auction sale is complete and the Company has determined that the auction proceeds are collectible. | ||||
Auction commissions represent the percentage earned by the Company on the gross proceeds from equipment sold at auction. The majority of auction commissions is earned as a fixed rate of the gross selling price. Other commissions are earned when the Company guarantees a certain level of proceeds to a consignor. This type of commission includes a percentage of the guaranteed gross proceeds plus a percentage of proceeds in excess of the guaranteed amount. If actual auction proceeds are less than the guaranteed amount, commission is reduced; if proceeds are sufficiently lower, the Company can incur a loss on the sale. Losses, if any, resulting from guarantee contracts are recorded in the period in which the relevant auction is completed. If a loss relating to a guarantee contract to be sold after a period end is known at the financial statement reporting date, the loss is accrued in the financial statements for that period. The Company’s exposure from these guarantee contracts fluctuates over time (see note 10(b)). | ||||
Auction revenues also include net profit on the sale of inventory items. In some cases, incidental to its regular commission business, the Company temporarily acquires title to items for a short time prior to a particular auction sale. The auction revenue recorded is the net gain or loss on the sale of the items. | ||||
(g) | Income taxes: | |||
Income taxes are accounted for using the asset and liability method, whereby future taxes are recognized for the tax consequences of temporary differences by applying substantively enacted or 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 future taxes of a change in tax rates is recognized in earnings in the period in which the new tax rate is substantively enacted. Future tax benefits, such as non-capital loss carry forwards, are recognized to the extent that realization of such benefits is considered more likely than not. |
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RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
1. | Significant accounting policies (continued): |
(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 usually the currency of the country of residency; in some cases it is the United States dollar. Each of the Company’s operations is considered to be self-sustaining. Accordingly, the financial statements of the Company’s operations 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 earnings. Any gains or losses from the translation of asset and liability amounts have been included in the foreign currency translation adjustment account, which is included as a separate component of shareholders’ 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 gain and losses on these transactions are included in the determination of earnings. | ||||
(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. Significant financial statement items requiring the use of estimates include the determination of useful lives for depreciation, the valuation of goodwill and capital assets, and the estimation of future income tax balances. 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, income taxes recoverable, income taxes payable, auction proceeds payable, accounts payable and accrued liabilities and short-term debt, approximate their fair value due to their short terms to maturity. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of its bank term loans approximates fair value. | ||||
(k) | Credit risk: | |||
The Company is not exposed to any significant credit risk because it does not extend credit to buyers at its auctions. In addition, items purchased at the Company’s auctions are not normally released to the buyers until they are paid for in full. | ||||
(l) | Net earnings per share: | |||
Net earnings per share has been calculated based on the weighted average number of common shares outstanding. Diluted net earnings per share has been calculated after giving effect to outstanding dilutive options calculated by the treasury stock method (note 7(e)). |
-9-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
1. | Significant accounting policies (continued): |
(m) | Stock-based compensation: | |||
The Company has a stock-based compensation plan, which is described in note 7(c) and (d). The Company recognizes compensation expense using the fair value method at the date of grant (note 2). Under the fair value based method, compensation cost attributable to options granted to employees and directors is measured at the fair value of the underlying option at the grant date using the Black-Scholes option pricing model. Compensation expense is recognized over the vesting period of the underlying option. Any consideration paid by employees on exercise of stock options or purchase of stock is credited to share capital. If stock or stock options are repurchased from employees, the excess of the consideration paid over the carrying amount of the stock or stock option cancelled is charged to retained earnings. No compensation cost is recognized for options that employees forfeit if they fail to satisfy the service requirement for vesting. | ||||
(n) | Comparative figures: | |||
Certain comparative figures have been reclassified to conform with the presentation adopted in the current year. |
2. | Change in accounting policy: | |||
Prior to January 1, 2003, the Company recognized stock-based compensation expense using the intrinsic value method at the date of grant of the underlying option. Under the intrinsic value method, no compensation costs were recognized in the financial statements for stock options granted to employees and directors at market value. The Company adopted, on a prospective basis, the fair value based method to account for employee stock based compensation effective January 1, 2003. Under the fair value based method, compensation cost is measured using the Black-Scholes option pricing model at the date of grant of the option and is expensed over the award’s vesting period (note 7(d)). | ||||
For the year ended December 31, 2004, the stock-based compensation expense (net of future income tax impact of $476,000) was $991,000, or $0.03 per common share basic and diluted (2003 — $880,000 or $0.03 per common share basic and diluted). No fair value stock-based compensation expense has been recognized for any stock option grants in any years prior to January 1, 2003. |
-10-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
3. | Capital assets: |
Accumulated | Net book | |||||||||||
2004 | Cost | depreciation | value | |||||||||
Buildings | $ | 113,742 | $ | 18,588 | $ | 95,154 | ||||||
Land and improvements | 100,154 | 4,125 | 96,029 | |||||||||
Land and buildings under development | 13,538 | — | 13,538 | |||||||||
Automotive equipment | 11,389 | 4,272 | 7,117 | |||||||||
Yard equipment | 9,540 | 4,685 | 4,855 | |||||||||
Office equipment | 6,169 | 3,799 | 2,370 | |||||||||
Computer equipment | 5,784 | 2,940 | 2,844 | |||||||||
Computer software | 11,114 | 8,766 | 2,348 | |||||||||
Leasehold improvements | 3,321 | 952 | 2,369 | |||||||||
$ | 274,751 | $ | 48,127 | $ | 226,624 | |||||||
Accumulated | Net book | |||||||||||
2003 | Cost | depreciation | value | |||||||||
Buildings | $ | 112,133 | $ | 15,198 | $ | 96,935 | ||||||
Land and improvements | 94,253 | 3,453 | 90,800 | |||||||||
Land and buildings under development | 3,143 | — | 3,143 | |||||||||
Automotive equipment | 10,219 | 3,766 | 6,453 | |||||||||
Yard equipment | 8,558 | 3,951 | 4,607 | |||||||||
Office equipment | 5,716 | 3,245 | 2,471 | |||||||||
Computer equipment | 4,076 | 2,032 | 2,044 | |||||||||
Computer software | 8,751 | 5,531 | 3,220 | |||||||||
Leasehold improvements | 1,430 | 687 | 743 | |||||||||
$ | 248,279 | $ | 37,863 | $ | 210,416 | |||||||
During the year, interest of $297,000 (2003 — $161,000) was capitalized to the cost of land and buildings under development. |
-11-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
4. | Net investment in lease: | |||
During the year ended December 31, 2004, the Company entered into a sales type lease with a term of two years for the sale of certain redundant property. Finance income in respect of this lease for the year ended December 31, 2004 was not significant. | ||||
5. | Acquisition: | |||
On August 1, 2002, the Company acquired certain assets of All Peace Auctions (2001) Ltd., an industrial and agricultural equipment auctioneer, and All Peace Auctions Ltd., the owner of the property on which the majority of the auction business was conducted (collectively, “All Peace”). All Peace was based in Grande Prairie, Alberta, Canada. | ||||
The aggregate purchase price of $9,190,000 was settled through the payment of $5,409,000 of cash and future annual installments totalling $3,781,000 with a present value of $3,255,000 at the date of acquisition. To reflect the fact that the future payments are due over time, $526,000 was recorded as a discount to the long-term liability and is being amortized to interest expense over the four-year term of repayment. The future installments are unsecured and non-interest bearing. | ||||
Other liabilities are as follows: |
2004 | 2003 | |||||||
Present value of future payments | $ | 2,752 | $ | 3,338 | ||||
Current portion | (1,189 | ) | (963 | ) | ||||
$ | 1,563 | $ | 2,375 | |||||
-12-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
6. | Long-term debt: |
2004 | 2003 | |||||||
Term loans, unsecured, bearing interest between 5.95% and 7.91%, due in minimum annual installments of $2.9 million ($1.0 million towards principal, $1.9 million towards a sinking fund), with final payments occurring in 2005 and 2006. | $ | 17,000 | $ | 17,250 | ||||
Revolving loans, denominated in Canadian dollars, unsecured, bearing interest at the Canadian Prime Rate plus 0.25%, due in monthly installments of interest only, with the full amount of the principal due in 2005. | 12,505 | 11,568 | ||||||
Revolving loans, unsecured, bearing interest between 3.165% and 3.175%, due in monthly installments of interest only, with the full amount of the principal due in 2005. | 15,500 | — | ||||||
Term loan, denominated in Australian dollars, secured by deeds of trust on specific property, bearing interest between the Australian prime rate and 6.5%, due in quarterly installments of AUD75,000, plus interest, with final payment occurring in 2008. | 920 | 1,111 | ||||||
Revolving loans, unsecured, bearing interest at 1.95%, due in minimum annual installments of $5 million ($1.75 million towards principal, $3.25 million towards a sinking fund) plus interest, with the final payment occurring in 2004. | — | 28,000 | ||||||
Term loans, unsecured, bearing interest between 2.60% and 7.91%, due in minimum annual installments of $500,000 plus interest, with final payment occurring in 2005. The loans were repaid in full in 2004. | — | 8,500 | ||||||
Term loan denominated in Euros, secured by deeds of trust on specific property, bearing interest at the Amsterdam Interbank Offered Rate plus 0.88%, due in quarterly installments of EUR56,723 including interest, with the final payment occurring in 2013. The loan was repaid in full in 2004. | — | 4,359 | ||||||
45,925 | 70,788 | |||||||
Current portion | (35,133 | ) | (43,438 | ) | ||||
Non-current portion | 10,792 | 27,350 | ||||||
Funds committed for debt payments | (6,965 | ) | (18,107 | ) | ||||
$ | 3,827 | $ | 9,243 | |||||
-13-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
6. | Long-term debt (continued): | |||
As at December 31, 2004, principal repayments including sinking fund requirements are as follows for the next five years: |
2005 | $ | 35,133 | ||
2006 | 10,342 | |||
2007 | 235 | |||
2008 | 215 | |||
2009 | — | |||
$ | 45,925 | |||
The Company expects to refinance certain of its long-term debt in 2005. If this occurs, the funds committed for debt repayment recorded in current assets on the balance sheet, in excess of any amounts used to repay debt, will become cash and cash equivalents and available for general purposes. | ||||
7. | 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: | |||
No preferred shares have been issued. | ||||
Common shares issued and outstanding are as follows: |
Issued and outstanding, December 31, 2001 | 33,534,460 | |||
Issued for cash, pursuant to stock options exercised | 84,204 | |||
Issued and outstanding, December 31, 2002 | 33,618,664 | |||
Issued for cash, pursuant to stock options exercised | 348,980 | |||
Issued and outstanding, December 31, 2003 | 33,967,644 | |||
Issued for cash, pursuant to stock options exercised | 294,656 | |||
Issued and outstanding, December 31, 2004 | 34,262,300 | |||
During 2004, the Company’s common shares were split on a two-for-one basis. All share, per share and stock option information in the consolidated financial statements gives effect to the stock split on a retroactive basis. |
-14-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
7. | Share capital (continued): |
(c) | Stock option plan: | |||
The Company has a stock option plan that 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 options are granted at the fair market value of the Company’s common shares at the grant date, with various vesting periods and a term not exceeding 10 years. At December 31, 2004, there were 1,326,034 (2003 – 1,616,234) shares authorized and available for grants of options under the stock option plan. Stock option activity for 2002, 2003 and 2004 is presented below: |
Number of | Weighted average | |||||||
options outstanding | exercise price | |||||||
Outstanding, December 31, 2001 | 753,438 | $ | 9.81 | |||||
Granted | 186,400 | 13.05 | ||||||
Exercised | (84,204 | ) | 4.34 | |||||
Outstanding, December 31, 2002 | 855,634 | 11.06 | ||||||
Granted | 308,800 | 15.53 | ||||||
Cancelled | (2,000 | ) | 15.53 | |||||
Exercised | (348,980 | ) | 9.45 | |||||
Outstanding, December 31, 2003 | 813,454 | 13.32 | ||||||
Granted | 292,000 | 26.47 | ||||||
Cancelled | (1,800 | ) | 26.46 | |||||
Exercised | (294,656 | ) | 12.39 | |||||
Outstanding, December 31, 2004 | 808,998 | $ | 18.38 | |||||
Exercisable, December 31, 2004 | 534,798 | $ | 14.44 | |||||
The options outstanding at December 31, 2004 expire on dates ranging to September 22, 2014. | ||||
The following is a summary of stock options outstanding and exercisable at December 31, 2004: |
Options outstanding | Options exercisable | |||||||||||||||||||
Weighted | ||||||||||||||||||||
average | Weighted | Weighted | ||||||||||||||||||
Range of | Number | remaining life | average | Number | average | |||||||||||||||
exercise prices | outstanding | (years) | exercise price | exercisable | exercise price | |||||||||||||||
$11.675 - $13.050 | 222,800 | 6.6 | $ | 12.30 | 214,800 | $ | 12.30 | |||||||||||||
$13.344 - $15.525 | 295,998 | 7.3 | 15.01 | 295,998 | 15.01 | |||||||||||||||
$26.460 - $28.170 | 290,200 | 9.1 | 26.47 | 24,000 | 26.46 | |||||||||||||||
808,998 | 534,798 | |||||||||||||||||||
Subsequent to December 31, 2004, the Company granted options to purchase a total of 200,800 of its common shares to certain employees and directors of the Company. The options have an exercise price of $32.41 and an expiry date of January 25, 2015. |
-15-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
7. | Share capital (continued): |
(d) | Stock-based compensation: | |||
Prior to January 1, 2003, the Company used the intrinsic value method to account for stock-based compensation awards. This method did not result in any compensation expense in 2002. Had compensation expense for option grants made under the Company’s stock option plan during the year ended December 31, 2002 been recorded in accordance with the fair value method at the applicable grant dates, the Company’s net earnings for 2002 would have been as indicated by the pro forma amounts below: |
Net | Per share amount | |||||||||||
Earnings | Basic | Diluted | ||||||||||
Net earnings — as reported | $ | 28,371 | $ | 0.84 | $ | 0.84 | ||||||
Stock-based compensation expense | (727 | ) | (0.02 | ) | (0.02 | ) | ||||||
Net earnings — pro forma | $ | 27,644 | $ | 0.82 | $ | 0.82 | ||||||
During 2004, the Company recognized compensation cost of $1,467,000 (2003 - $1,047,000) in respect of options granted under its stock option plan. This amount was calculated in accordance with the fair value method of accounting. | ||||
For the purposes described above, the fair value of the stock option grants was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions: |
2004 | 2003 | 2002 | ||||||||||
Risk free interest rate | 3.0 | % | 3.1 | % | 4.9 | % | ||||||
Expected dividend yield | 1.15 | % | 0 | % | 0 | % | ||||||
Expected lives of options | 5 years | 5 years | 5 years | |||||||||
Expected volatility | 19.6 | % | 18.3 | % | 27.0 | % | ||||||
The weighted average grant date fair value of options granted during the year ended December 31, 2004 was $5.34 per option (2003 - $3.67; 2002 - $4.37). The fair value method requires that this amount be amortized over the relevant vesting periods of the underlying options. | ||||
(e) | Net earnings per share: |
Per share | ||||||||||||
Year ended December 31, 2004 | Earnings | Shares | amount | |||||||||
Basic net earnings per share | $ | 34,899 | 34,160,678 | $ | 1.02 | |||||||
Effect of dilutive securities: | ||||||||||||
Stock options | — | 338,544 | (0.01 | ) | ||||||||
Diluted net earnings per share | $ | 34,899 | 34,499,222 | $ | 1.01 | |||||||
-16-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
7. | Share capital (continued): |
(e) | Net earnings per share: |
Per share | ||||||||||||
Year ended December 31, 2003 | Earnings | Shares | amount | |||||||||
Basic net earnings per share | $ | 36,594 | 33,795,978 | $ | 1.08 | |||||||
Effect of dilutive securities: | ||||||||||||
Stock options | — | 341,574 | (0.01 | ) | ||||||||
Diluted net earnings per share | $ | 36,594 | 34,137,552 | $ | 1.07 | |||||||
Per share | ||||||||||||
Year ended December 31, 2002 | Earnings | Shares | amount | |||||||||
Basic net earnings per share | $ | 28,371 | 33,586,404 | $ | 0.84 | |||||||
Effect of dilutive securities: | ||||||||||||
Stock options | — | 244,444 | — | |||||||||
Diluted net earnings per share | $ | 28,371 | 33,830,848 | $ | 0.84 | |||||||
8. | Segmented information: | |||
The Company’s principal business activity is the sale of consignment and self-owned equipment at auctions. This business represents a single reportable segment. | ||||
The Company determines its activities by geographic segment based on the location of its auctions. Summarized information by geographic segment is as follows: |
United States | Canada | Europe | Other | Combined | ||||||||||||||||
Year ended December 31, 2004: | ||||||||||||||||||||
Auction revenues | $ | 104,618 | $ | 36,258 | $ | 26,988 | $ | 14,393 | $ | 182,257 | ||||||||||
Capital assets and goodwill | 145,208 | 78,354 | 26,048 | 14,513 | 264,123 | |||||||||||||||
Year ended December 31, 2003: | ||||||||||||||||||||
Auction revenues | $ | 92,273 | $ | 30,752 | $ | 21,262 | $ | 17,255 | $ | 161,542 | ||||||||||
Capital assets and goodwill | 136,624 | 72,277 | 24,086 | 13,061 | 246,048 | |||||||||||||||
Year ended December 31, 2002: | ||||||||||||||||||||
Auction revenues | $ | 84,348 | $ | 17,650 | $ | 15,678 | $ | 15,876 | $ | 133,552 | ||||||||||
Capital assets and goodwill | 135,921 | 60,177 | 20,189 | 11,559 | 227,846 | |||||||||||||||
-17-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
9. | Income taxes: | |||
Income tax expense differs from that determined by applying the United States statutory tax rates to the Company’s results of operations as follows: |
2004 | 2003 | 2002 | ||||||||||
Statutory federal and state tax rate in the United States | 40 | % | 40 | % | 40 | % | ||||||
Expected income tax expense | $ | 23,298 | $ | 21,077 | $ | 15,611 | ||||||
Differences: | ||||||||||||
Earnings taxed in low rate jurisdictions | (3,014 | ) | (4,806 | ) | (5,175 | ) | ||||||
Realized foreign exchange gain | 2,106 | — | — | |||||||||
Other | 957 | (172 | ) | 220 | ||||||||
Actual income tax expense | $ | 23,347 | $ | 16,099 | $ | 10,656 | ||||||
Future income tax assets and liabilities are as follows: |
2004 | 2003 | |||||||
Future income tax assets (liabilities): | ||||||||
Working capital | $ | 496 | $ | 354 | ||||
Capital assets | 680 | 513 | ||||||
Stock-based compensation | 277 | 251 | ||||||
Unused tax losses | 1,326 | 1,070 | ||||||
Other | 1,407 | 926 | ||||||
Total future income tax assets | 4,186 | 3,114 | ||||||
Valuation allowance | (168 | ) | (168 | ) | ||||
Net future income tax assets | 4,018 | 2,946 | ||||||
Future income tax liabilities arising from temporary differences between the tax basis of net assets and their carrying value: | ||||||||
Capital assets | (3,754 | ) | (1,328 | ) | ||||
Goodwill | (3,555 | ) | (4,319 | ) | ||||
Other | (2,572 | ) | (1,833 | ) | ||||
Total future income tax liabilities | (9,881 | ) | (7,480 | ) | ||||
Net future income tax liability | (5,863 | ) | (4,534 | ) | ||||
Net current future income tax asset | 496 | 354 | ||||||
Net non-current future income tax liability | $ | (6,359 | ) | $ | (4,888 | ) | ||
-18-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
10. | Commitments and contingencies: |
(a) | Operating leases: | |||
The Company is party to certain operating leases. These operating leases relate to auction sites and offices located in the United Arab Emirates, Mexico, the United States, Canada, Australia, China and Singapore. The future minimum lease payments as at December 31, 2004 are approximately as follows: |
2005 | $ | 1,330 | ||
2006 | 1,080 | |||
2007 | 519 | |||
2008 | 483 | |||
2009 | 242 | |||
Thereafter | — | |||
Total rent expenses in respect of these leases for the year ended December 31, 2004 was $1,406,000 (2003 — $1,304,000; 2002 — $1,069,000). | ||||
(b) | Contingencies: | |||
Certain of the Company’s operating leases for auction sites contain clauses that require the Company to return the auction site to the state and condition in which it was at the inception of the lease if the Company terminates the lease or does not renew it at the end of the lease term. The occurrence and amount of the potential liability for these site restoration costs is not determinable at the date of these financial statements. | ||||
The Company is subject to legal and other claims that arise in the ordinary course of its business. The Company does not believe that the results of these claims will have a material effect on the Company’s financial position or results of operations. | ||||
In the normal course of its business, the Company will in certain situations guarantee to a consignor a minimum level of proceeds in connection with the sale at auction of that consignor’s equipment. At December 31, 2004 the Company had outstanding guarantees under contract totaling $6,202,000 (undiscounted and before estimated proceeds from sale at auction) for industrial equipment to be sold prior to March 31, 2005 (December 31, 2003 — $5,650,000). The Company also had guarantees under contract totaling $14,726,000 relating to agricultural sales to be held prior to June 16, 2005 (December 31, 2003 — $4,136,000). The Company has not recorded a liability with respect to these guarantee contracts. |
-19-
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United
States dollars, except share and per share amounts)
Years ended December 31, 2004, 2003 and 2002
11. | Transactions with related parties: | |||
During the year ended December 31, 2004, the Company paid $758,000 (2003 - $597,000; 2002 - $537,000) to a company controlled by the Chairman of the Company’s Board of Directors. The costs were incurred pursuant to agreements, approved by the Company’s Board of Directors, by which the related company agrees to provide meeting rooms, accommodations, meals and recreational activities at its facilities on Stuart Island in British Columbia, Canada, for certain of the Company’s customers and guests. The agreements set forth the fees and costs per excursion, which are based on market prices for similar types of facilities and excursions. The Company believes that the terms of the agreements were at least as favorable as could have been obtained from an independent third party. The Company has entered into similar agreements with the related party in the past and intends to do so in the future. | ||||
12. | 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. However, for the years ended December 31, 2004, 2003 and 2002, net earnings in accordance with Canadian GAAP was not significantly different from net earnings had they been presented in accordance with United States GAAP. | ||||
US GAAP requires the preparation of a statement of comprehensive income. Comprehensive income is defined as the change in equity of a business enterprise during the period from transactions and other events and circumstances from non-owner sources. The statement of comprehensive income reconciles the reported net earnings to the comprehensive income amount as follows: |
2004 | 2003 | 2002 | ||||||||||
Net earnings in accordance with Canadian and United States GAAP | $ | 34,899 | $ | 36,594 | $ | 28,371 | ||||||
Other comprehensive income: | ||||||||||||
Foreign currency translation adjustment | 8,795 | 17,180 | 4,391 | |||||||||
Comprehensive income in accordance with United States GAAP | $ | 43,694 | $ | 53,774 | $ | 32,762 | ||||||
Accumulated other comprehensive income (loss), which under United States GAAP is presented as a separate component of shareholders’ equity, is comprised of the following: |
2004 | 2003 | 2002 | ||||||||||
Foreign currency translation adjustment: | ||||||||||||
Balance, beginning of year | $ | 12,727 | $ | (4,453 | ) | $ | (8,844 | ) | ||||
Current period change | 8,795 | 17,180 | 4,391 | |||||||||
Balance, end of year | $ | 21,522 | $ | 12,727 | $ | (4,453 | ) | |||||
-20-