1
EXHIBIT NO. 2
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), THE EIGHT-MONTH
PERIOD ENDED DECEMBER 31, 1997 AND THE YEAR ENDED APRIL 30, 1997
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2
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Ritchie Bros. Auctioneers Incorporated
We have audited the consolidated balance sheets of Ritchie Bros.
Auctioneers Incorporated (the "Company") as at December 31, 1998 and 1997 and
the consolidated statements of income, shareholders' equity and cash flows for
the years ended December 31, 1998 and 1997 (Unaudited), for the eight months
ended December 31, 1997 and the year ended April 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1998 and 1997 and the results of its operations and the changes in its cash
flows for the years ended December 31, 1998 and 1997 (Unaudited), for the eight
months ended December 31, 1997 and the year ended April 30, 1997 in accordance
with generally accepted accounting principles in Canada.
Significant measurement differences between Canadian and United States
accounting principles are explained and quantified in note 9.
/s/ KPMG LLP
- ------------------------------------------------------
Chartered Accountants
Vancouver, Canada
February 26, 1999
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RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
EIGHT MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
1998 1997 1997 1997
------------ ------------ ------------ -----------
(UNAUDITED)
Auction revenues........................ $ 94,899 $ 85,009 $ 60,034 $ 72,186
Direct expenses......................... (16,010) (17,351) (13,041) (13,908)
----------- ----------- ----------- -----------
78,889 67,658 46,993 58,278
Expenses:
Depreciation.......................... 2,752 2,548 1,540 2,014
General and administrative............ 39,315 37,724 27,414 31,099
Employee equity participation (note
5(d)).............................. -- 10,346 10,346 --
----------- ----------- ----------- -----------
42,067 50,618 39,300 33,113
----------- ----------- ----------- -----------
Income from operations.................. 36,822 17,040 7,693 25,165
Other income (expenses)
Interest expense...................... (1,569) (2,034) (1,380) (1,081)
Other................................. 3,251 754 576 917
----------- ----------- ----------- -----------
1,682 (1,280) (804) (164)
----------- ----------- ----------- -----------
Income before income taxes.............. 38,504 15,760 6,889 25,001
Income taxes (note 7)
Current............................... 13,962 7,438 4,491 5,992
Future................................ (292) -- -- --
----------- ----------- ----------- -----------
13,670 7,438 4,491 5,992
----------- ----------- ----------- -----------
Net income.............................. $ 24,834 $ 8,322 $ 2,398 $ 19,009
=========== =========== =========== ===========
Net income per share (note 1(l))
Basic................................. $ 1.56 $ 0.65 $ 0.19 $ 1.49
Diluted............................... 1.54 0.64 0.18 1.49
Weighted average number of shares
outstanding........................... 15,918,214 12,877,777 12,958,753 12,715,667
=========== =========== =========== ===========
Approved on behalf of the Board of Directors
/s/ C. RUSSELL CMOLIK /s/ PETER J. BLAKE
C. Russell Cmolik Peter J. Blake
Director Director
See accompanying notes to consolidated financial statements.
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RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
Current assets
Cash and cash equivalents................................. $ 73,620 $27,149
Accounts receivable....................................... 6,771 6,744
Inventory................................................. 2,355 7,081
Advances against auction contracts........................ 5,345 1,261
Prepaid expenses and deposits............................. 711 1,218
-------- -------
88,802 43,453
Capital assets (note 3)..................................... 61,324 27,007
Future income taxes (note 7)................................ 2,467 --
-------- -------
$152,593 $70,460
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Auction proceeds payable.................................. $ 14,030 $17,728
Accounts payable and accrued liabilities.................. 21,751 17,131
Current bank loans (note 4)............................... 793 730
Income taxes payable...................................... 3,079 4,542
-------- -------
39,653 40,131
Bank term loans (note 4).................................... 8,768 4,623
-------- -------
48,421 44,754
Shareholders' equity
Share capital (note 5).................................... 64,728 10,866
Retained earnings......................................... 41,772 16,958
Foreign currency translation adjustment................... (2,328) (2,118)
-------- -------
104,172 25,706
Subsequent event (note 10)
-------- -------
$152,593 $70,460
======== =======
See accompanying notes to consolidated financial statements.
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RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
FOREIGN
CURRENCY TOTAL
SHARE RETAINED TRANSLATION SHAREHOLDERS'
CAPITAL EARNINGS ADJUSTMENT EQUITY
------- -------- ----------- -------------
Balance, April 30, 1996......................... $ 3,337 $47,015 $(1,551) $ 48,801
Net proceeds on common shares issued............ 28 -- -- 28
Capital contributions to partnerships........... -- 166 -- 166
Net income...................................... -- 19,009 -- 19,009
Drawings and dividends.......................... -- (8,073) -- (8,073)
Refundable taxes on investment income........... -- (29) -- (29)
Foreign currency translation adjustment......... -- -- (577) (577)
------- ------- ------- --------
Balance, April 30, 1997......................... 3,365 58,088 (2,128) 59,325
Common shares redeemed.......................... (2,845) -- -- (2,845)
Employee equity participation (note 5(d))....... 10,346 -- -- 10,346
Net income...................................... -- 2,398 -- 2,398
Drawings and dividends.......................... -- (42,175) -- (42,175)
Reorganization costs............................ -- (1,353) -- (1,353)
Foreign currency translation adjustment......... -- -- 10 10
------- ------- ------- --------
Balance, December 31, 1997...................... 10,866 16,958 (2,118) 25,706
Net proceeds on common shares issued............ 53,862 -- -- 53,862
Net income...................................... -- 24,834 -- 24,834
Reorganization costs............................ -- (20) -- (20)
Foreign currency translation adjustment......... -- -- (210) (210)
------- ------- ------- --------
Balance, December 31, 1998...................... $64,728 $41,772 $(2,328) $104,172
======= ======= ======= ========
See accompanying notes to consolidated financial statements.
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RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
EIGHT
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
1998 1997 1997 1997
------------ ------------ ------------ ----------
(UNAUDITED)
Cash provided by (used in)
Operations:
Net income................................. $24,834 $ 8,322 $ 2,398 $19,009
Items not involving the use of cash
Depreciation............................ 2,752 2,548 1,540 2,014
Employee equity participation........... -- 10,346 10,346 --
Future income taxes..................... (2,467) -- -- --
Changes in non-cash working capital
Accounts receivable..................... (27) (2,389) 7,363 20,788
Inventory............................... 4,726 455 11,073 (8,148)
Advances against auction contracts...... (4,084) 1,395 5,211 (351)
Prepaid expenses and deposits........... 507 (711) (446) (202)
Auctions proceeds payable............... (3,698) 10,434 (35,749) (22,526)
Accounts payable and accrued
liabilities........................... 4,620 9,329 8,203 (1,272)
Payables to affiliated entities......... -- (3,078) (3,818) 459
Income taxes payable.................... (1,463) 2,077 (540) 1,845
Foreign currency translation adjustment.... (210) (417) 10 (577)
------- -------- -------- -------
25,490 38,311 5,591 11,039
------- -------- -------- -------
Financing:
Issuance (redemption) of share capital..... 53,862 (2,833) (2,845) 28
Payables to employees and others........... -- (1,317) (1,279) 57
Bank loans................................. 4,208 (1,326) (5,596) 2,802
Drawings and dividends paid................ -- (42,756) (42,175) (8,073)
Capital contributions...................... -- -- -- 166
Refundable taxes on investment income...... -- (29) -- (29)
Reorganization costs....................... (20) (1,353) (1,353) --
------- -------- -------- -------
58,050 (49,614) (53,248) (5,049)
------- -------- -------- -------
Investments:
Capital asset additions, net............... (37,069) (5,120) (3,174) (5,171)
------- -------- -------- -------
Increase (decrease) in cash and cash
equivalents................................ 46,471 (16,423) (50,831) 819
Cash and cash equivalents, beginning of
period..................................... 27,149 43,572 77,980 77,161
------- -------- -------- -------
Cash and cash equivalents, end of period..... $73,620 $ 27,149 $ 27,149 $77,980
======= ======== ======== =======
Supplemental disclosure of cash flow
information
Interest paid.............................. $ 1,570 $ 1,853 $ 1,242 $ 1,068
Income taxes paid.......................... $16,735 $ 5,098 $ 5,332 $ 4,147
See accompanying notes to consolidated financial statements.
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RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
1. SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
These consolidated financial statements present the financial position,
results of operations and changes in shareholders' equity and cash flows of
Ritchie Bros. Auctioneers Incorporated (the "Company"), a company incorporated
in July 1997 under the Canada Business Corporations Act, and its subsidiary
predecessor businesses. These predecessor businesses comprised the Ritchie Bros.
Auctioneers group of companies and partnerships (the "Group"). In the
eight-month period ended December 31, 1997, the businesses of the partnerships
within the Group were transferred into corporations, the shares of which,
together with the shares of the corporations within the Group, were exchanged by
their owners for shares of the Company (the "Reorganization"). All inter-entity
accounts and transactions have been eliminated on consolidation.
On November 1, 1997, prior to completion of the Reorganization, the owners
of the Group entered into the Equity Interest and Income Sharing Agreement (the
"Agreement") which confirmed the existing voting, earnings allocation and
liquidation rights of each owner. These rights were based upon the owners'
interests in the Group, taken as a whole, which was treated as a single global
enterprise since prior to May 1, 1992. The rights and obligations specified in
the Agreement were those of an agreement which has been in effect at all times
since May 1, 1992 and which modified the terms of any written agreements
containing provisions that may have been inconsistent with the Agreement. Each
owner's rights under the Agreement were determined in accordance with such
owner's ownership percentage of the Group ("Global Ownership Percentage"), which
was equal to the number of units of ownership of the Group allocated to the
owner divided by the total number of units outstanding. The owners' respective
Global Ownership Percentages were determined on the basis of the Group taken as
a whole, and not on the basis of the documentation governing the owners' equity
interests in the predecessor entities within the Group. The Group has been
legally obligated to make and has made earnings allocations in accordance with
the terms of the Agreement since prior to May 1, 1992. As a result of these
agreements and practices, each owner's ownership interest in the Company upon
completion of the Reorganization represents a substantially identical interest
to such owner's ownership interest in the Group prior to the Reorganization.
Because the Reorganization was a non-substantive exchange, the Group's
assets, liabilities, revenues and expenses have been consolidated at the
historical cost amounts recorded in the individual entity accounts, and carried
forward into the consolidated accounts of the Company together with costs of the
Reorganization.
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles in Canada which, except
as disclosed in note 9, also comply, in all material respects, with generally
accepted accounting principles in the United States.
The Group included three partnerships, one situated in Canada and two
situated in the United States, all of which were non-taxable entities. The Group
also included the companies that were partners of the United States partnerships
and certain, but not all, of the companies that were partners of the Canadian
partnership. To the extent that the Group included these partner entities, these
consolidated financial statements include provisions for taxes chargeable
against partnership income. To the extent that the partner entities did not form
part of the Group, no taxes have been provided on the net income allocated to
those companies. Note 9 sets out the pro forma impact as if all income were
taxed within the Group. These consolidated financial statements also do not
include any of the other assets, liabilities, revenues or expenses of the
partner entities not included in the Group.
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RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
In calendar 1997, the Company changed its fiscal year-end from April 30 to
December 31. As a result, the transition period from May 1, 1997 to December 31,
1997 is separately reported herein. In addition, for information purposes only,
the consolidated statements of income and cash flows for the 12 months ended
December 31, 1997 have been presented.
The financial information for the year ended December 31, 1997 is
unaudited; however, in the opinion of management, such information includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of such financial information.
(b) CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments having an original
term to maturity of three months or less when acquired.
(c) INVENTORY
Inventory is primarily represented by goods held for auction and has been
valued at the lower of cost, determined by the specific identification method,
and net realizable value.
(d) ADVANCES AGAINST AUCTION CONTRACTS
Advances against auction contracts represent funds advanced to consignors
against proceeds from future auctions.
(e) CAPITAL ASSETS
All capital assets are stated at cost. Depreciation is provided to charge
the cost of the assets to operations over their estimated useful lives based on
their usage predominantly as follows:
Improvements.................................. 30 years straight-line
Buildings..................................... 30 years straight-line
Automotive equipment.......................... 30% declining balance
Computer equipment............................ 30% declining balance
Yard equipment................................ 20-30% declining balance
Office equipment.............................. 20% declining balance
Leasehold improvements........................ Term of leases
(f) REVENUE RECOGNITION
Auction revenues are recognized when the specific items are sold and title
passes to the purchaser and are represented by the commissions received from the
consignor and the net proceeds received from the sale of self-owned equipment.
(g) INCOME TAXES
Income taxes are accounted for using the asset and liability method
pursuant to Section 3465, Income Taxes, of The Handbook of the Canadian
Institute of Chartered Accountants. Future taxes are recognized for
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RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
The effect on deferred taxes for a change in tax rates is recognized in income
in the period that includes the enactment date. In addition, Section 3465
requires the recognition of future tax benefits to the extent that realization
of such benefits is more likely than not.
(h) FOREIGN CURRENCY TRANSLATION
The Company's reporting currency is the United States dollar. The
functional currency for each of the Company's operations is the country of
residency. Each of these operations is considered to be self-sustaining.
Accordingly, the financial statements of operations of the Company that are not
located in the United States have been translated into United States dollars
using the exchange rate at the end of each reporting period for asset and
liability amounts and the average exchange rate for each reporting period for
amounts included in the determination of income. Any gains or losses from this
translation have been included in the foreign currency translation adjustment
account which is included in equity.
Monetary assets and liabilities recorded in foreign currencies are
translated into the appropriate functional currency at the rate of exchange in
effect at the balance sheet date. Foreign currency denominated transactions are
translated into the appropriate functional currency at the exchange rate in
effect on the date of the transaction. Any exchange gains and losses are
included in the determination of income.
(i) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from such estimates and
assumptions.
(j) FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, auction proceeds
payable and accounts payable and accrued liabilities, approximate fair value due
to their short maturities. Based on borrowing rates currently available to the
Company for loans with similar terms, the carrying value of its bank loans
approximates fair value.
(k) CREDIT RISK
The Company does not extend credit to purchasers of auctioned items.
Equipment is not normally released to the purchasers until it is paid for in
full.
(l) NET INCOME PER SHARE
Net income per share has been calculated based on the weighted average
number of common shares outstanding after giving retroactive effect to the
12,715,667 common shares issued on the reorganization. Diluted net income per
share has been calculated after giving effect to the outstanding options.
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RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
2. CHANGE IN ACCOUNTING POLICY
In the fourth quarter of 1998, the Company changed its policy for
accounting for income taxes by adopting the provisions of Section 3465, Income
Taxes, of The Handbook of the Canadian Institute of Chartered Accountants. Under
this standard, current income taxes are recognized for the estimated income
taxes payable for the current period. Future income tax assets and liabilities
are recognized for temporary differences between the tax and accounting bases of
assets and liabilities as well as for the benefit of losses available to be
carried forward to future years for tax purposes that are likely to be realized.
The adoption of Section 3465 did not impact amounts reported in the prior
period.
3. CAPITAL ASSETS
Capital assets at December 31, 1998 are as follows:
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------- ------------ --------
Land and improvements....................................... $36,631 $ 900 $35,731
Buildings................................................... 21,056 2,825 18,231
Automotive equipment........................................ 5,164 1,606 3,558
Computer equipment.......................................... 1,920 739 1,181
Yard equipment.............................................. 2,619 1,124 1,495
Office equipment............................................ 1,996 1,018 978
Leasehold improvements...................................... 200 50 150
------- ------ -------
$69,586 $8,262 $61,324
======= ====== =======
Capital assets at December 31, 1997 are as follows:
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------- ------------ --------
Land and improvements....................................... $12,830 $ 535 $12,295
Buildings................................................... 11,490 2,726 8,764
Automotive equipment........................................ 3,974 1,002 2,972
Computer equipment.......................................... 1,384 433 951
Yard equipment.............................................. 2,320 1,082 1,238
Office equipment............................................ 1,454 874 580
Leasehold improvements...................................... 225 18 207
------- ------ -------
$33,677 $6,670 $27,007
======= ====== =======
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RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
4. BANK TERM LOANS
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
7.88% term loan, due in monthly instalments of $31,162
including interest, settled September 8, 1998............. $ -- $1,720
8.75% term loan, due in monthly instalments of $60,967
including interest, settled September 8, 1998............. -- 3,633
6.90% term loan, due in monthly instalments of $81,200
including interest, with the final payment occurring on
July 1, 2004.............................................. 4,499 --
Term loan, bearing interest at the Amsterdam Interbank
Offered Rate plus 7/8%, due in quarterly instalments of
$66,600 including interest, with the final payment
occurring on June 30, 2013................................ 5,062 --
------ ------
9,561 5,353
Less current portion........................................ (793) (730)
------ ------
$8,768 $4,623
====== ======
At December 31, 1998, the Company had undrawn operating credit lines
available of in excess of $95,000,000. In addition, the Company had undrawn
credit lines of approximately $31,000,000 available to fund property
acquisitions.
The bank term loans are secured by deeds of trust on specific property.
As at December 31, 1998, principal repayments are required as follows in
the next five years:
1999........................................................ $ 793
2000........................................................ 1,001
2001........................................................ 1,053
2002........................................................ 1,109
2003........................................................ 1,169
Thereafter.................................................. 4,436
------
$9,561
======
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RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
5. SHARE CAPITAL
(a) AUTHORIZED
Unlimited number of common shares, without par value
Unlimited number of senior preferred shares, without par value, issuable in
series
Unlimited number of junior preferred shares, without par value, issuable in
series
(b) ISSUED
Number of common shares issued during the period ended
December 31, 1997:
For cash, pursuant to the Employee Equity Participation
Program................................................ 497,999
On reorganization......................................... 12,715,667
----------
Balance December 31, 1997................................... 13,213,666
Number of common shares issued during the year ended
December 31, 1998, pursuant to an equity offering......... 3,335,000
----------
Issued and outstanding, December 31, 1998................... 16,548,666
==========
(c) OPTIONS
The Company has adopted a stock option plan which provides for the award of
stock options to selected employees, directors and officers of the Company and
to other persons approved by the Board of Directors. Stock option activity for
1997 and 1998 is presented below:
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
Outstanding, April 30, 1997................................. -- $ --
Granted (note 5(d))....................................... 196,333 0.10
------- -------------
Outstanding, December 31, 1997.............................. 196,333 0.10
Granted................................................... 36,000 26.12
Cancelled................................................. (25,333) 0.10
------- -------------
Outstanding, December 31, 1998.............................. 207,000 $0.10 - 26.12
======= =============
The options outstanding at December 31, 1998 expire from dates ranging to
July 31, 2004.
(d) EMPLOYEE EQUITY PARTICIPATION
Substantially all the full-time employees who were not beneficial owners of
the predecessor entities to the Company have been granted an equity interest in
the Company pursuant to the Employee Equity Participation Program by means of
issuances of common shares at a cash price of $0.10 per share or grants of stock
options having an exercise price of $0.10 per share. During the year ended
December 31, 1997, the Company issued 497,999 common shares and granted stock
options to purchase 196,333 common shares under the Program. The shares issued
and options granted have fully vested with the holders. The excess of the
estimated mid-point of the offering price range of the shares estimated at the
time to be issued to the public of $15.00 over the issuance price of the shares
or the exercise price of the options granted, as applicable in the
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RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
5. SHARE CAPITAL -- (CONTINUED)
circumstances, pursuant to the Program is considered to be compensatory for
accounting purposes and has been recorded as employee equity participation
expense in the accompanying consolidated financial statements.
(e) OFFERING
The Company filed a registration statement with the Securities and Exchange
Commission in the United States pursuant to which the Company issued and sold
3,335,000 common shares (the "Offering"). For services provided in connection
with the Offering, the Company paid the underwriters a per share commission.
6. SEGMENTED INFORMATION
The Company's principal business activities include the sale of consignment
and self-owned equipment at auctions. This business represents a single
operating segment.
Summarized information on the Company's activities generated by geographic
segment are as follows:
UNITED STATES CANADA OTHER COMBINED
------------- ------- ------- --------
Year ended December 31, 1998
Auction revenues.............................. $49,747 $16,105 $29,047 $94,899
Identifiable assets........................... 73,045 21,850 57,698 152,593
Year ended December 31, 1997 (Unaudited)
Auction revenues.............................. 44,615 16,095 24,299 85,009
Identifiable assets........................... 53,441 2,357 14,662 70,460
Eight months ended December 31, 1997
Auction revenues.............................. 32,254 13,664 14,116 60,034
Identifiable assets........................... 53,441 2,357 14,662 70,460
Year ended April 30, 1997
Auction revenues.............................. 36,845 16,910 18,431 72,186
Identifiable assets........................... 82,045 27,650 33,163 142,858
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RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
7. INCOME TAXES
Income tax expense differs from that determined by applying the United
States statutory tax rate to the Company's results of operations as follows:
EIGHT
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
1998 1997 1997 1997
------------ ------------ ------------ ----------
(UNAUDITED)
Statutory tax rate in the United States... 39% 39% 39% 39%
------- ------- ------ -------
Expected income tax expense............... $15,017 $ 6,147 $2,687 $ 9,750
Differences
Different tax rates in non-U.S.
jurisdictions........................ (2,028) (831) (247) (411)
Partnership income not taxed in Group... -- (1,566) (806) (3,899)
U.S. income taxed at lower graduated
rates................................ -- (397) (128) (548)
Employee equity participation expense
not tax deductible................... -- 2,894 2,894 --
Other................................... 681 1,191 91 1,100
------- ------- ------ -------
Actual income tax expense............... $13,670 $ 7,438 $4,491 $ 5,992
======= ======= ====== =======
If all partnership income had been taxed in the Group, income taxes would
have been as follows:
EIGHT
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
1998 1997 1997 1997
------------ ------------ ------------ ----------
(UNAUDITED)
Income taxes.............................. $13,670 $9,004 $5,297 $9,891
======= ====== ====== ======
FUTURE INCOME TAXES
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Future income tax benefit of options granted................ $ 853 $ --
Future income tax benefit resulting from tax deductible
financing costs incurred in the course of the Company's
initial public offering in March 1998..................... 1,740 --
Future income tax recovery on unused tax losses, expiring on
December 31, 2005......................................... 324 --
Future income tax liabilities arising from temporary
differences between the tax basis of net assets and their
carrying value
Capital assets......................................... (475) --
Accounts payable....................................... 25 --
------ ----
$2,467 $ --
====== ====
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15
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
9. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP") in Canada which differ, in
certain respects, from accounting practices generally accepted in the United
States and from requirements promulgated by the Securities and Exchange
Commission. Material measurement differences to these consolidated financial
statements are as follows:
CONSOLIDATED STATEMENTS OF COMPREHENSIVE NET INCOME AND NET INCOME PER SHARE
EIGHT
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
1998 1997 1997 1997
------------ ------------ ------------ ----------
(UNAUDITED)
Net income in accordance with Canadian
GAAP....................................... $24,834 $8,322 $2,398 $19,009
Effect of differences in accounting for
reorganization costs (note 9(i))........... (20) (434) (434) --
Income tax effect from the reorganization
(note 9(i))................................ -- (919) (919) --
------- ------ ------ -------
Net income in accordance with United States
GAAP....................................... 24,814 6,969 1,045 19,009
Other comprehensive income (loss) adjustments
(note 9(ii))
Foreign currency translation............... (210) (417) 10 (577)
------- ------ ------ -------
Comprehensive net income in accordance with
United States GAAP......................... $24,604 $6,552 $1,055 $18,432
======= ====== ====== =======
Net income per share in accordance with
United States GAAP
Basic...................................... $ 1.56 $ 0.54 $ 0.08 $ 1.49
Diluted.................................... 1.54 0.54 0.08 1.49
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16
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
9. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- (CONTINUED)
(i) Reorganization costs
In accordance with generally accepted accounting principles in Canada,
costs incurred with respect to the Reorganization have been charged, net
of tax, against equity. Under generally accepted accounting principles
in the United States, such amounts are required to be charged against
income. Such costs have only been incurred in the eight months ended
December 31, 1997 and the years ended December 31, 1998 and 1997
(Unaudited).
(ii) Other comprehensive income (loss)
Beginning in fiscal year 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130") "Reporting
Comprehensive Income". This statement established standards for
reporting and display of comprehensive income and its components.
Comprehensive income includes the change in equity or net assets of the
Company during the period from non-owner sources, including foreign
exchange adjustments, included as separate components of shareholders'
equity.
10. SUBSEQUENT EVENT
On February 19, 1999, the Company entered into an agreement to acquire the
auction business and certain assets of Forke Auctioneers, Inc., a major
auctioneer of industrial equipment headquartered in Lincoln, Nebraska. The
transaction is expected to close in March or April of 1999, subject to
regulatory clearance and other customary conditions. Terms and conditions of
this acquisition, by agreement, cannot be disclosed until closing. The Company
intends to finance this acquisition substantially with a bank term loan.
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