10-Q 1 rdo032367_10q.txt RDO EQUIPMENT CO. FORM 10-Q 4-30-2003 ================================================================================ 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 APRIL 30, 2003 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 June 10, 2003: Common Stock 100 ================================================================================ 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. NATURE OF BUSINESS: BASIS OF PREPARATION The condensed consolidated financial statements for the three months ended April 30, 2003 and April 30, 2002 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, 2003. The results of operations for the three months ended April 30, 2003 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made for consistent presentation. RECENT DEVELOPMENTS On April 28, 2003, Ronald D. Offutt, the Company's Chairman, Chief Executive Officer and President caused RDO Tender Co., a wholly owned subsidiary of RDO Holdings Co. which is owned primarily by Mr. Offutt, to commence a tender offer to acquire all of the outstanding shares of class A common stock of RDO Equipment Co. not owned by RDO Tender Co. and RDO Holdings Co. or the stockholders of RDO Holdings Co. for $6.01 in cash. The tender offer expired at 5:00 p.m., New York City time, on Monday, June 2, 2003. Upon completion of the tender offer, RDO Tender Co. held approximately 96.0% of the outstanding class A shares of RDO Equipment Co. On June 3, 2003, RDO Tender Co. was merged with and into RDO Equipment Co. pursuant to the "short form" merger provisions of the Delaware General Corporation Law. The merger was not subject to the approval of the board of directors of RDO Equipment Co. or the holders of the class A shares not tendered in the tender offer. As a result of the merger, each outstanding class A share of RDO Equipment Co. not previously purchased in the tender offer (other than shares owned by RDO Tender and shares held by stockholders who seek appraisal rights under Delaware law) was converted into the right to receive $6.01 in cash, without interest. Upon completion of the merger on June 3, 2003, RDO Equipment Co. became a wholly owned subsidiary of RDO Holdings Co. The class A common stock of RDO Equipment Co. is in the process of being delisted from the New York Stock Exchange. At the time of the NYSE delisting, RDO Equipment Co. intends to file a Form 15 suspending its periodic reporting obligations under the Securities Exchange Act of 1934, as amended. 2. 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. The first-in, first-out method is used to determine cost for parts inventory. Inventories consisted of the following at (in thousands): April 30, January 31, 2003 2003 --------- --------- New equipment & trucks $ 93,609 $ 73,908 Used equipment & trucks 36,892 30,683 Parts and other 21,560 20,457 --------- --------- $ 152,061 $ 125,048 ========= ========= 6 3. 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): April 30, January 31, 2003 2003 --------- ---------- Interest-bearing $ 57,279 $ 44,114 Noninterest-bearing 48,949 32,638 --------- ---------- $ 106,228 $ 76,752 ========= ========== 4. 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:

Options to purchase 832,966 and 722,399 shares of common stock were outstanding as of April 30, 2003 and 2002, respectively. Outstanding options of 467,950 and 495,950 were not included in the computations of diluted earnings per share for the three months ended April 30, 2003 and 2002, respectively, because the exercise prices were greater than the average market prices of the common shares for the periods. All outstanding options were cashed out in the merger on June 3, 2003. 5. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES The Company leases retail space, vehicles and rental equipment under various non-cancelable operating leases. The leases have varying terms and expire at various dates through 2013. Generally, the leases require the Company to pay taxes, insurance and maintenance costs. 7 Future minimum lease payments, by year, required under leases with initial or remaining terms of one year or more consist of the following: (IN THOUSANDS) Affiliates Other Total ------------------------------------------------------------------------------ 2004 $ 2,103 $ 2,159 $ 4,262 2005 2,511 1,989 4,500 2006 2,490 1,645 4,135 2007 2,438 1,159 3,597 2008 2,108 672 2,780 Thereafter 7,645 943 8,588 ------------------------------------------------------------------------------ Total $ 19,295 $ 8,567 $ 27,862 ============================================================================== GUARANTEES Certain credit companies provide direct customer financing (collateralized by customer owned equipment) and credit accounts with recourse to the Company. The Company would be required to perform under the recourse agreements if the Company's customers fail to perform completely as contracted. These contracts related to customer financing have various maturity dates over the next one to five years. Agricultural contracts with Deere Credit Services, Inc. ("Deere Credit") are recourse to the Company. The recourse is limited to the Company's cash deposit amounting to 3% of the aggregate outstanding contracts. The Company also factors certain accounts receivable to Deere Credit with recourse, which therefore may be charged back to the Company. The contingent liability relating to CitiCapital is limited to 5% of the originated loans for any given year. These commitments represent only a small portion of the total related account balances; thus only accruals and payments for probable losses are recognized until the recourse (guarantee) expires. The financial risk amount is equal to the recourse (guaranteed) portion of the contractual amounts. Any deposits with credit companies or Deere Credit have been classified as part of deposits and other assets in the Company's consolidated balance sheets. As of April 30, 2003, the contingent unrecorded liability and required deposits for the above guarantees are as follows: FINANCE GUARANTEED DEPOSITS (IN THOUSANDS) AMOUNTS RECEIVABLE ------------------------------------------------------------------------------ Deere Credit Services, Inc. $ 3,498 $ 1,640 CitiCapital Commercial Corporation 13,662 --- Other 252 --- ------------------------------------------------------------------------------ Total $ 17,412 $ 1,640 ============================================================================== MINIMUM REPURCHASE GUARANTEES The Company has entered into sales agreements with certain customers, which are subject to repurchase agreements. Pursuant to these agreements, the Company, at the discretion of the customer, may be required to repurchase equipment at specified future dates at specified repurchase prices. With respect to these agreements, the Company believes the estimated future retail values of the equipment equals or exceeds the guaranteed repurchase prices. The Company accounts for transactions which have a guaranteed repurchase feature as leases. 8 The Company's existing repurchase agreements as of April 30, 2003 expire as follows: (IN THOUSANDS) ------------------------------------------------------------------------- 2004 $ 1,075 2005 1,641 2006 1,752 2007 539 2008 249 ------------------------------------------------------------------------- Total $ 5,256 ========================================================================= 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. 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, medium and light-duty trucks to customers primarily in the transportation and construction industries, to units of government and retail customers. The Company's performance measurement for its operating segments is income before income taxes. In addition, all corporate expenses are allocated on a reasonable basis to the Company's operating segments. 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. The following table shows the Company's business segments and related financial information for the three months ended April 30, 2003 and 2002 (in thousands):

9 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 April 30, 2003, the Company operated 45 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 as a percentage of revenues 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 margin percentages 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 54% of the Company's sales for the first three months of fiscal 2004 with no other supplier accounting for more than 10%. 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. 10 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. 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. RECEIVABLES. Receivables are valued net of an allowance for doubtful accounts to arrive at a net realizable amount. The Company estimates its allowance for doubtful accounts considering a number of factors, including: (1) historical experience, (2) aging of the accounts receivable and (3) specific information obtained by the Company on the condition and the current creditworthiness of its customers. If the financial conditions of the Company's customers were to deteriorate and affect the ability of its customers to make payments on their accounts, the Company may be required to increase its allowance by recording additional bad debt expense. Likewise, should the financial condition of these customers improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse the recorded allowance. 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 utilizes recent sales information, third party valuation guides and recent auction results as well as judgements of various inventory managers within the Company to determine the net realizable value of inventory. An allowance is provided when it is anticipated that cost will exceed net realizable value. LONG-LIVED ASSETS. The Company's long-lived assets are stated at cost and depreciated over estimated useful lives. The Company periodically reviews its long-lived assets for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated by the excess of the asset's carrying value over its fair value. GOODWILL. Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a purchase of a business combination. Prior to February 1, 2002, goodwill was amortized on a straight-line basis over 30 years. Effective February 1, 2002, the Company ceased amortization of goodwill balances. See discussion under "New Accounting Pronouncements." Goodwill is tested for impairment on an annual basis or at the time of a triggering event in accordance with the provisions of SFAS No. 142. Fair values are estimated based on the Company's best estimate of the expected present value of future cash flows compared with the corresponding carrying value of the reporting unit, including goodwill. Currently, the Company has identified three reporting units under the criteria set forth by SFAS No. 142. On February 1, 2002, goodwill was tested for impairment in this manner, and the estimated fair value of the reporting units 11 exceeded their carrying amounts, indicating no impairment of goodwill. The Company performs its annual goodwill impairment testing during its first quarter. DEFERRED TAX ASSETS AND LIABILITIES. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to reverse. The realization of the Company's deferred tax assets is dependent upon the ability to generate sufficient future taxable income which is believed to be more likely than not. The Company anticipates future taxable income sufficient to realize the recorded deferred tax assets. Future taxable income is based on the Company's forecasts of operating results, and there can be no assurance that such results will be achieved. 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. GENERAL During the first three months of fiscal 2004, the Company was affected by various economic conditions in all operating segments. The Company's agricultural store regions continued to benefit from the farm legislation passed last year along with generally favorable growing conditions, which resulted in increased revenues in this operating segment. Construction operations were affected by a general slowdown in equipment purchasing by construction equipment contractors in the Company's geographic areas of responsibility, especially in the Company's southern regions. These conditions provided for increased competitive pressures and a decline in unit market potential in the Company's operating regions during the first quarter. The Company believes these competitive pressures will continue to affect this operating segment in the rest of fiscal 2004. The Company's truck revenues continued to decline reflecting the sale of the Company's Riverside, California truck operations during the third quarter of fiscal 2003. Remaining truck store revenues were unchanged during the first three months of fiscal 2004. 12 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain financial data: Three Months Ended April 30, 2003 2002 ---- ---- REVENUE DATA (IN MILLIONS): Total revenues $ 136.4 $ 148.4 Construction 51.0% 53.0% Agricultural 41.1% 33.4% Truck 7.9% 13.6% Construction revenues $ 69.6 $ 78.7 Equipment sales 68.2% 72.4% Parts and service 31.8% 27.6% Agricultural revenues $ 56.1 $ 49.6 Equipment sales 78.4% 77.3% Parts and service 21.6% 22.7% Truck revenues $ 10.7 $ 20.1 Truck sales 73.3% 74.9% Parts and service 26.7% 25.1% STATEMENT OF OPERATIONS DATA (AS A PERCENTAGE OF TOTAL REVENUES): Revenues Equipment and truck sales 72.8% 74.4% Parts and service 27.2 25.6 ------- ------- Total revenues 100.0% 100.0% Gross profit 17.8 16.6 Selling, general and administrative expenses 16.2 14.9 ------- ------- Operating income 1.6 1.7 Interest expense 0.3 0.6 Other income 0.2 0.1 -------- -------- Income before income taxes 1.5 1.2 Provision for taxes 0.6 0.5 -------- ------- Net income 0.9% 0.7% ======== ======= 13 THREE MONTHS ENDED APRIL 30, 2003 COMPARED TO THREE MONTHS ENDED APRIL 30, 2002 NET INCOME The Company reported net income of $1.2 million, or $0.10 per share, for the first three months of fiscal 2004, compared to net income of $1.0 million, or $0.08 per share, for fiscal 2003. REVENUES Total revenues of $136.4 million during the first three months of fiscal 2004 were $12.0 million, or 8.1%, lower than revenues during the first three months of the previous year. Construction revenues, which represent the largest segment of the Company, were $69.6 million during the quarter, a $9.1 million, or 11.6%, decrease in revenue in the segment compared to the prior year due to soft demand for construction equipment, especially in the Company's southern regions. Agricultural revenues of $56.1 million in the first three months of fiscal 2004 were $6.5 million, or 13.1%, higher than in fiscal 2003. The Company's agricultural dealerships are located in areas which are experiencing favorable crop growing conditions, thus creating farmer optimism supporting higher sales. Truck revenues of $10.7 million were down $9.4 million, or 46.8%, compared to last year. The sale of the Riverside, California truck business in the third quarter of fiscal 2003 accounted for the decrease. Equipment and truck sales were $99.3 million during the first three months of fiscal 2004, a decrease of $11.1 million, or 10.1%, from fiscal 2003. Agricultural equipment sales increased $5.7 million, or 14.9%, to $44.0 million. Construction equipment sales decreased $9.5 million, or 16.7% to $47.5 million. Truck sales decreased $7.3 million, or 48.3%, to $7.8 million for the quarter. Parts and service revenues were $37.1 million in the first three months of fiscal 2004, representing a decrease of $900,000, or 2.4%, from the prior year. Parts and service revenues from truck operations decreased approximately $2.1 million, or 42.0%, to $2.9 million. The decrease in truck parts and service revenues was attributable to the sale of the Riverside, California truck business. Construction parts and service revenues increased approximately $400,000, or 1.8%, to $22.1 million. Agricultural parts and service revenues increased approximately $800,000, or 7.1%, as sales increased to $12.1 million. GROSS PROFIT Gross profit of $24.3 million for the first quarter of fiscal 2004 decreased $400,000 from last fiscal year. Total gross profit as a percentage of total revenues for the first quarter of fiscal 2004 and 2003 was 17.8% and 16.6%, respectively. While overall gross profit dollars decreased during the quarter compared to fiscal 2003, gross margins realized improved on a consolidated basis by approximately 1.2%, primarily associated with agricultural equipment sales, the result of somewhat improving economic conditions in the overall agricultural economy in the Company's central and northwest regions. Parts and service gross margins were approximately $13.8 million, or 37.2% of revenues, and $14.2 million, or 37.4% of revenues, for the first quarter of fiscal 2004 and 2003, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses were steady at $22.1 million for the first three months of fiscal 2004 and 2003. Total SG&A expenses as a percentage of total revenues for the first quarter of fiscal 2004 and 2003 were 16.2% and 14.9%, respectively. 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 14 service revenues. In the first quarter of fiscal 2004, the Company's SG&A expenses included approximately $400,000 of professional fees related to legal and financial advisory services utilized by the special committee of the Company's Board of Directors to evaluate the tender offer initiated by Ronald D. Offutt, the Company's Chairman, Chief Executive Officer and President. In addition, the Company's SG&A expenses were affected by the sale of the Company's Riverside, California truck business in fiscal 2003. INTEREST EXPENSE Interest expense was $500,000 for the first quarter of fiscal 2004, a decrease of $400,000, or 44.4%, from the first quarter of fiscal 2003. Interest expense as a percentage of total revenues decreased from 0.6% for the first three months of fiscal 2003 to 0.3% for fiscal 2004. Reductions in interest rates as well as the sale of the Riverside, California truck business were the contributing factors to the decrease in interest expense. OTHER INCOME Other income increased approximately $200,000, or 200.0%, from the first three months of fiscal 2003 to the first three months of fiscal 2004. Other income is primarily comprised of finance charges from trade receivables. INCOME TAXES The estimated provision for income taxes as a percentage of pretax income was 41.0% for the first three months of fiscal 2004 and fiscal 2003. 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"), CitiCapital Commercial Corporation ("CitiCapital"), Ag Capital Company ("Ag Capital"), GE Commercial Distribution Finance Corporation ("CDF"), General Motors Acceptance Corporation ("GMAC") 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. The Deere and Deere Credit financing sources have a 15 combined maximum outstanding allowed of $125.0 million. The maximum outstanding allowed was reduced to $105.0 million beginning May 1, 2003. The total amount outstanding to Deere and Deere Credit was $79.4 million at April 30, 2003. The Company also has a borrowing base credit facility with CitiCapital to provide up to $30.0 million in financing for equipment inventories with variable rates of interest based on LIBOR. The total amount outstanding at April 30, 2003 was $19.0 million. Truck floor plan financing is primarily provided by GMAC with variable market rates of interest based on the prime rate and with no set credit limit. On April 30, 2003, the Company had unused credit commitments subject to borrowing base requirements related to inventory and receivable financing and operating lease financing of dedicated rental equipment of $67.7 million. The Company had outstanding floor plan/borrowing base payables of approximately $106.2 million, of which $57.3 million was interest-bearing as of April 30, 2003. The collateral of equipment and truck inventories along with eligible receivables would support $42.1 million of additional borrowing at April 30, 2003. During the first three months of fiscal 2004 and 2003, the average interest rate under interest-bearing floor plan/borrowing base financing was approximately 4.71% and 5.43%, respectively. Currently, the Company has an unsecured bank line of credit totaling $1,585,000 with a maturity date of July 1, 2003 and with a variable interest rate based on the prime rate (4.25% at April 30, 2003). The Company had approximately $205,000 of unused availability relating to this line of credit at April 30, 2003. The average interest rates on the Company's lines of credit during the first three months of fiscal 2004 and 2003 were 4.38% and 5.75%, 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. 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 2004. 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 April 30, 2003. The Company has various commitments relating to its operations. The following is a summary of these commitments as of April 30, 2003.

16 The Company's long-term debt is primarily related to a note payable collateralized by certain property and equipment and to the financing of dedicated rental assets and one dealership location facility. Operating lease and other commitments are primarily related to operating leases for dealership locations of $26.3 million, minimum repurchase guarantees of equipment of $5.3 million, and operating leases for dedicated rental assets of $0.8 million and vehicles of $0.7 million. In addition to the above commitments, certain credit companies provide direct customer financing (collateralized by customer owned equipment) and credit accounts with recourse to the Company totaling $17.4 million and $1.0 million as of April 30, 2003, respectively. These commitments represent only a small portion of the total related account balances (generally 5%); 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. These contracts related to customer financing have various maturity dates over the next one to five years. Cash used for operating activities was $14.6 million for the first three months of fiscal 2004. Increased levels of inventories, partially offset by increased levels of floor plan payables was the primary use of cash in the first three months of fiscal 2004. Operating activities provided net cash of $5.3 million for the first three months of fiscal 2003. Increased levels of floor plan payables, trade payables and accrued liabilities, partially offset by increased levels of trade receivables and inventories, were the primary contributing factors to cash provided by operating activities for the first three months of fiscal 2003. Cash used for investing activities was $108,000 for the first three months of fiscal 2004, which was primarily related to purchases of property and equipment, partially offset by sales of rental equipment. Cash used for investing activities was $146,000 for the first three months of fiscal 2003, which was primarily related to purchases of property and equipment. Cash provided by financing activities was $13.8 million for the first three months of fiscal 2004, primarily attributable to increased utilization of the Company's revolving credit facilities. Cash used for financing activities was $5.7 million for the first three months of fiscal 2003. The primary contributing factors for the use of cash were payments on long-term debt and revolving credit facilities along with the purchase of common stock. 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 17 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. If the Company acquires businesses in geographic areas other than where it currently has operations, or disposes of certain businesses, it may be affected more by the above-mentioned or other seasonal and equipment buying trends. 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" contained in Item 1 of the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2003 and in other filings with the Securities and Exchange Commission. The important factors discussed in the 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 18 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 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. 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, 2003. ITEM 4. CONTROLS AND PROCEDURES The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Company's Chief Executive Officer and the Chief Financial Officer have reviewed the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) within ninety days prior to the filing of this report and have concluded that the disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the last day they were evaluated by the Company's Chief Executive Officer and Chief Financial Officer. 19 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION. On April 28, 2003, Ronald D. Offutt, the Company's Chairman, Chief Executive Officer and President caused RDO Tender Co., a wholly owned subsidiary of RDO Holdings Co. which is owned primarily by Mr. Offutt, to commence a tender offer to acquire all of the outstanding shares of class A common stock of RDO Equipment Co. not owned by RDO Tender Co. and RDO Holdings Co. or the stockholders of RDO Holdings Co. for $6.01 in cash. The tender offer expired at 5:00 p.m., New York City time, on Monday, June 2, 2003. Upon completion of the tender offer, RDO Tender Co. held approximately 96.0% of the outstanding class A shares of RDO Equipment Co. On June 3, 2003, RDO Tender Co. was merged with and into RDO Equipment Co. pursuant to the "short form" merger provisions of the Delaware General Corporation Law. The merger was not subject to the approval of the board of directors of RDO Equipment Co. or the holders of the class A shares not tendered in the tender offer. As a result of the merger, each outstanding class A share of RDO Equipment Co. not previously purchased in the tender offer (other than shares owned by RDO Tender and shares held by stockholders who seek appraisal rights under Delaware law) was converted into the right to receive $6.01 in cash, without interest. Upon completion of the merger on June 3, 2003, RDO Equipment Co. became a wholly owned subsidiary of RDO Holdings Co. The class A common stock of RDO Equipment Co. is in the process of being delisted from the New York Stock Exchange. Upon effectiveness of the NYSE delisting, RDO Equipment Co. intends to file a Form 15 suspending its periodic reporting obligations under the Securities Exchange Act of 1934, as amended. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. 99.1 Certification of the CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (b) REPORTS ON FORM 8-K. The Company filed a Current Report on Form 8-K dated April 3, 2003 under Item 12 regarding the press release announcing the Company's fourth quarter and fiscal year 2003 results of operations. The Company filed a Current Report on Form 8-K dated June 3, 2003 under Item 5 regarding the press release announcing RDO Tender Co.'s completion of its cash tender offer of $6.01 per share for all outstanding shares of class A common stock of RDO Equipment not owned by RDO Tender, RDO Holdings or the stockholders of RDO Holdings. 20 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: June 12, 2003 By: /s/ Steven B. Dewald ------------------------------ Steven B. Dewald Chief Financial Officer (principal financial officer) 21 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; 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; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 12, 2003 /s/ Ronald D. Offutt ----------------------------------- Ronald D. Offutt Chief Executive Officer (principal executive officer) 22 CERTIFICATIONS 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; 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; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 12, 2003 /s/ Steven B. Dewald --------------------------------------- Steven B. Dewald Chief Financial Officer (principal financial officer) 23

RDO EQUIPMENT CO 10-Q