UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the
Fiscal Year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21220
ALAMO GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-1621248
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1502 E. WALNUT, SEGUIN, TEXAS 78155
(Address of principal executive offices)
Registrant's telephone number, including area code: (830) 379-1480
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, par value New York Stock Exchange
$.10 per share
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 requirement for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the Registrant as of February
27, 1998 (based upon the last reported sale price of $18.125 per share) was
approximately $96,609,132 on such date.
The number of shares of the issuer's Common Stock, par value $.10 per share,
outstanding as of February 27, 1998, was 9,684,874 shares.
Documents incorporated by reference: Portions of the Registrant's Proxy
Statement relating to the 1998 Annual Meeting of Stockholders to be held on
April 28, 1998, have been incorporated by reference herein (Part III).
================================================================================
ALAMO GROUP INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business................................................................. 3
Item 2. Properties............................................................... 6
Item 3. Legal Proceedings ....................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders ..................... 7
Item 4a. Executive Officers of the Company....................................... 7
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters..... 7
Item 6. Selected Financial Data.................................................. 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 9
Item 8. Financial Statements..................................................... 11
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.................................. 11
PART III
Item 10. Directors and Executive Officers........................................ 11
Item 11. Executive Compensation.................................................. 11
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 12
Item 13. Certain Relationships and Related Transactions.......................... 12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 12
Index to Consolidated Financial Statements....................................... F-1
2
PART I
ITEM 1. BUSINESS
GENERAL
Alamo Group Inc. and its subsidiaries ("Alamo Group", "Alamo", or the
"Company") is a leading manufacturer of high quality, tractor-mounted mowing and
other vegetation maintenance equipment and replacement parts for industrial and
agricultural end-users. The Company believes it is one of the only vegetation
maintenance equipment manufacturers offering a comprehensive product line that
employs the three primary heavy-duty cutting technologies: rotary, flail and
sickle-bar. The Company's history of developing innovative products, its
reputation for quality and service and its broad geographic market coverage,
principally in North America and Europe, have enabled the Company to establish
leadership positions in the niche markets it serves.
HISTORY
The predecessor corporation to the Company was incorporated in Texas in 1969
as successor to a business that began selling mowing equipment in 1955. The
Company was reincorporated in Delaware in 1987.
Since its founding in 1969, the Company has focused on satisfying customer
needs through geographic market expansion, product development and refinement
and selected acquisitions. The Company's first products were based on the rotary
cutting technology. Through acquisitions, the Company added the flail cutting
technology in 1983 and the sickle-bar technology in 1984. The Company added to
its presence in industrial and governmental markets with the acquisition of
TIGER(R) at the end of 1994.
A major thrust into agricultural mowing markets was begun in 1986 with the
acquisition of RHINO(R), a leading manufacturer in this field. With this
acquisition, the Company embarked on an aggressive strategy to increase the
RHINO dealer network during a period of industry contraction. Distribution
network expansion remains a primary focus of the Company's marketing plans for
agricultural and industrial uses. The addition of M&W GEAR COMPANY in early 1995
allowed the Company to enter into the manufacture of hay-making equipment that
complements the RHINO products, while utilizing the same dealer network. Another
strategic move was made in 1995 with the acquisition of HERSCHEL(R), a leading
manufacturer and distributor of high wear, high turnover farm equipment
replacement parts. Further, the Company has concentrated on developing new
products which meet the needs of its niche market customers and on adapting its
existing products to serve other applications.
In 1991, the Company began its international expansion with the acquisition
of MCCONNEL(R), a United Kingdom manufacturer of vegetation maintenance
equipment, principally hydraulic boom-mounted hedge and grass cutters and
related parts. Later acquisitions added BOMFORD(R) in the U.K. and SMA(R) in
France.
Other key acquisitions have expanded the Company's geographic coverage and
product offerings. Alamo's development has been enhanced by approximately twenty
acquisitions over its history.
The Company's initial public offering was in 1993, and in 1995 the Company
completed an additional equity offering. Proceeds were used to pay off debt
relating to acquisitions as well as to position the Company for further
development through internal growth and acquisitions. Alamo Group's stock was
listed on the New York Stock Exchange in 1995.
The Company emphasizes high quality, cost efficient products for its
customers and strives to develop and market innovative products while constantly
monitoring and containing its manufacturing and overhead costs. The Company has
a long-standing policy of supplementing its internal growth through acquisitions
of businesses or product lines that currently command, or have the potential to
achieve, a leading share of their niche markets. The Company has successfully
utilized its expertise in design, procurement, manufacturing and marketing to
increase the profitability of its acquired businesses.
MARKETING AND MARKETING STRATEGY
The Company's products are sold through the Company's eight marketing
organizations, and extensive, world-wide dealer networks under the ALAMO
INDUSTRIAL(R), RHINO(R), M&W(R), MCCONNEL(R), BOMFORD(R), SMA(R), TIGER(R),
HERSCHEL-ADAMS(R) and RHINO INTERNATIONAL(R) tradEMARKs.
ALAMO INDUSTRIAL equipment is principally sold to governmental end-users
and, to a lesser extent, to the agricultural market and commercial turf market.
Domestic governmental agencies and contractors that perform
3
services for such agencies purchase primarily hydraulically-powered,
tractor-mounted mowers, including boom-mounted mowers, and replacement parts for
heavy-duty, intensive use applications, including the maintenance of highway,
airport, recreational and other public areas. Municipal park agencies, golf
courses and landscape maintenance contractors purchase certain ALAMO INDUSTRIAL
mowers that deliver a fine manicured cut.
RHINO and M&W equipment is generally sold to farmers and ranchers to clear
brush, maintain pastures and unused farmland, shred crops and for hay-making. It
is also sold to other customers, such as mowing contractors and construction
contractors, for non-agricultural purposes. RHINO equipment consists principally
of a comprehensive line of tractor-mounted equipment, including rotary cutters,
finishing mowers, flail mowers and disc mowers. RHINO also sells post hole
diggers, scraper blades and replacement parts for all RHINO equipment. Farm
equipment dealers play the primary role in the sales of RHINO equipment. M&W
hay-making equipment uses a fixed chamber, round bale technology. The MCCONNEL
acquisition gave the Company an established presence in the European
agricultural equipment industry and also facilitates the international marketing
and sale of the Company's RHINO product line through MCCONNEL'S existing network
of agricultural tractor dealers in the U.K.
MCCONNEL equipment principally includes a line of hydraulic, boom-mounted
hedge and grass cutters, as well as other tractor attachments and implements
such as hydraulic backhoes, cultivators, subsoilers, buckets and other digger
implements and replacement parts. MCCONNEL also sells turf maintenance equipment
to the golf course and leisure markets. MCCONNEL equipment is sold primarily in
the U.K. and France, and to a lesser extent in other parts of Europe and
Australia. MCCONNEL primarily focuses on the agricultural and commercial
end-user. MCCONNEL products are sold in the U.K. through a network of
agricultural tractor dealers, with exports sold primarily through distributors.
BOMFORD equipment includes hydraulic, boom-mounted hedge and hedgerow
cutters, industrial grass mowers, agricultural seed bed preparation cultivators
and replacement parts. BOMFORD equipment is sold to governmental agencies,
contractors and agricultural end-users in the U.K., France, Germany, Scandinavia
and, to a lesser extent, in North America, Australia and the Far East. BOMFORD'S
sales network is very similar to that of MCCONNEL in the U.K.
SMA equipment includes hydraulic, boom-mounted hedge and hedgerow cutters
and associated replacement parts. SMA'S principal customers are the French local
authorities. SMA'S product offerings were expanded in 1994 to include certain
quick-attach boom mowers manufactured by the Company in the U.K. to expand its
presence in agricultural dealerships.
TIGER equipment includes heavy-duty, tractor-mounted mowing and growth
maintenance equipment and replacement parts. A portion of TIGER sales includes
tractors, which are not manufactured by TIGER. TIGER sells to state, county and
local governmental entities through a network of dealers. In most cases, the
larger dealers' principal product line is TIGER equipment. TIGER'S dealership
network is independent of ALAMO'S dealership network.
HERSCHEL-ADAMS replacement parts are sold for all types of tillage equipment
and tractors and certain types of mowing and construction equipment.
HERSCHEL-ADAMS products include a full range of cutting parts, chromium carbide
treated hard-faced and plain replacement tillage tools, disc blades and
fertilizer application components. HERSCHEL-ADAMS replacement tools are sold
throughout the United States, Canada and Mexico to five major customer groups:
farm equipment dealers, fleet distributors (which generally act as a buyer for a
number of farm supply stores), wholesale distributors, original equipment
manufacturers and construction equipment dealers.
RHINO INTERNATIONAL equipment includes economical, Chinese-manufactured
tractors and related service parts. RHINO INTERNATIONAL has a separate dealer
network.
In addition to the sales of HERSCHEL-ADAMS replacement parts, the Company
derives a significant portion of its revenues from sales of replacement parts
for each of its whole goods lines. Replacement parts represented approximately
34% of the Company's total sales for the year ended December 31, 1997.
Replacement parts are more profitable and generally less cyclical than whole
goods equipment.
While the Company believes that the end-user of its products evaluates the
purchase of such products on the basis of product quality, such purchases are
also based on a dealer's service and support and loyalty to the dealer based on
previous purchases.
Demand for products tends to be strongest in the spring and summer growing
seasons. The Company provides incentives for off-season purchases, including
discounts, as a way to even out seasonal variations in its manufacturing cycles.
Under incentive programs, there is no right of return.
4
PRODUCT DEVELOPMENT
The Company believes its ability to quickly provide innovative responses to
customer needs, to continue to develop and manufacture new products and to
enhance existing product lines is critical to its success. The Company
continually conducts research and development activities in an effort to improve
existing products and develop new products. The Company currently employs 76
people in its engineering department, 32 of whom are professionals and the
balance of whom are support staff. Amounts expended on research and development
activities aggregated approximately $1,712,000 in 1997, $1,747,000 in 1996, and
$1,434,000 in 1995.
SEASONALITY
The vegetation maintenance equipment industry in general tends to follow the
seasonal buying patterns of its major customers with peak sales occurring in May
through August. Agricultural end-users generally purchase equipment in the early
spring for the beginning of the mowing season. Governmental end-users typically
wait to purchase new equipment until the first and second calendar quarters. The
timing of these purchases, however, may be affected by weather conditions and
general economic conditions. In order to achieve efficient utilization of
manpower and facilities throughout the year, the Company must estimate seasonal
demand months in advance, and equipment must be manufactured in anticipation of
such demand. The Company utilizes a rolling monthly sales forecast from the
Company's marketing divisions in order to develop a master production plan for
its manufacturing facilities. Additionally, the Company attempts to equalize
demand for its products throughout the calendar year by offering seasonal sales
programs which provide additional discounts on equipment that is ordered during
off-season periods.
COMPETITION
The Company's products are sold in markets where the principal competitive
factors are price, quality, service and reputation. The Company competes with
several large national and international companies that offer a broad range of
agricultural equipment and replacement parts, as well as numerous small,
privately-held manufacturers and suppliers of a limited number of products.
However, the Company has fewer competitors in the wide-swath and boom-mounted
mowing equipment and within the governmental niche. Some of the Company's
competitors are significantly larger than the Company and have substantially
greater financial and other resources at their disposal. The Company believes
that it is able to compete successfully in its markets by containing its
manufacturing costs, offering high quality products, developing and designing
innovative products and, to some extent, by avoiding direct competition with
significantly larger competitors. There can be no assurance that such
competitors will not substantially increase the resources devoted to the
development and marketing of products competitive with those of the Company. The
Company believes that within the U.S. it is the largest supplier within
governmental markets for its kind of equipment, the third largest supplier in
the U.S. agricultural market for such equipment and one of the two largest
suppliers in the European market for such equipment.
UNFILLED ORDERS
As of December 31, 1997, the Company had unfilled customer orders of $35.0
million compared to $31.6 million at the end of 1996. Management expects that
substantially all of the Company's backlog as of December 31, 1997, will be
shipped during fiscal year 1998. The amount of unfilled orders at a particular
time is affected by a number of factors, including the scheduling of
manufacturing and shipping of the product, which in most instances is dependent
on the Company's seasonal sales programs and the needs of the customer. Certain
of the Company's orders are generally subject to cancellation anytime before
shipment; therefore, a comparison of unfilled orders from period to period is
not necessarily meaningful and may not be indicative of eventual actual
shipments.
SOURCES OF SUPPLY
The principal raw materials used by the Company include steel and purchased
components. During 1997, the raw materials needed by the Company were available
from a variety of sources in adequate quantities and at prevailing market
prices. A number of the Company's units are mounted on and shipped with a
tractor. Tractors are generally available, but in some periods delays have been
experienced. No one supplier is responsible for supplying more than 10% of the
principal raw materials used by the Company.
While the Company manufactures many of the parts for its products, a
significant percentage of parts, including most drive lines, gear boxes and
hydraulic pumps and motors, are purchased from outside suppliers which
manufacture to the Company's specifications.
5
Approximately 15% of the aggregate dollar amount of parts purchased by the
Company's U.S. operations are imported.
PATENTS AND TRADEMARKS
The Company owns numerous U.S. and foreign patents. While the Company
considers its patents to be advantageous to its business, it is not dependent on
any single patent or group of patents.
Products manufactured by the Company are advertised and sold under numerous
trademarks. The ALAMO INDUSTRIAL(R), RHINO(R), M&W(R), MCCONNEL(R), BOMFORD(R),
SMA(R), TIGER(R), HERSCHEL-ADAMS(R) and RHINO INTERNATIONAL(R) trademarks are
the primary marks for the Company's products. ThE Company also owns other
trademarks which it uses to a lesser extent such as TERRAIN KING(R), TRIUMPH(R),
MOTT(R), TURNER(R), FUERST(R) and DANDL(R). Management believes that the
COMPANY's trademarks are well known in its markets, are valuable and that their
value is increasing with the development of its business, but that the business
is not dependent on such trademarks. The Company, however, vigorously protects
its trademarks against infringement. The Company has registered its trademarks
in the appropriate jurisdictions.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS
The Company is subject to numerous environmental laws and regulations
concerning air emissions, discharges into waterways and the generation,
handling, storage, transportation, treatment and disposal of waste materials.
These laws and regulations are constantly changing and it is impossible to
predict with accuracy the effect they may have on the Company in the future.
Like other industrial concerns, the Company's manufacturing operations entail
the risk of future noncompliance, and there can be no assurance that material
costs or liabilities will not be incurred by the Company as a result thereof. It
is the Company's policy to comply with all applicable environmental, health and
safety laws and regulations, and the Company believes it is currently in
material compliance with all such applicable laws and regulations.
The Company is subject to various federal, state and local laws affecting
its business, as well as a variety of regulations relating to such matters as
working conditions, equal employment opportunities and product safety. A variety
of state laws regulate the Company's contractual relationships with its dealers,
some of which impose substantive standards on the relationship between the
Company and its dealers, including events of default, grounds for termination,
non-renewal of dealer contracts and equipment repurchase requirements. The
Company believes it is currently in material compliance with all such applicable
laws and regulations.
EMPLOYEES
As of December 31, 1997, the Company employed 1,414 full-time employees. A
subsidiary has a collective bargaining agreement which covers approximately 75
employees. The company considers its employee relations to be satisfactory.
FOREIGN OPERATIONS
See Note 15 of the accompanying consolidated financial statements.
FORWARD-LOOKING INFORMATION
This report contains a number of forward-looking statements, each of which
involve known and unknown risks and uncertainties which may cause the Company's
actual results in future periods to differ materially from forecasted results.
Among those factors which could cause actual results to differ materially are
the following: market demand, competition, weather, currency-related issues and
other risk factors listed and described in more detail from time to time in
other SEC reports of the Company.
ITEM 2. PROPERTIES
At December 31, 1997, the Company utilized eight principal manufacturing
plants located in seven U.S. states and four in Europe. In addition, there were
four principal warehouse facilities located in the United States. About 83% of
the manufacturing and office space is in owned facilities, the balance being
leased. In total the Company operates in approximately 1,447,500 square feet of
manufacturing and office space and 94,760 square feet of warehouse space. The
Company considers each of its facilities to be well maintained, in good
operating condition and adequate for its present level of operations.
6
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various unresolved legal actions which arise in
the ordinary course of its business. The most prevalent of such actions relate
to product liability, which are generally covered by insurance. While amounts
claimed may be substantial, and the ultimate liability with respect to such
litigation cannot be determined at this time, the Company believes that the
ultimate outcome of these matters will not have a material adverse effect on the
Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year ended December 31, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
Certain information is set forth below concerning the executive officers of
the Company, each of whom has been selected to serve until the 1998 annual
meeting of directors or until his successor is duly elected and qualified.
NAME AGE POSITION
------------------- ----- -------------------------------------------
Chairman of the Board and Chief Executive
Donald J. Douglass 66 Officer
President, Chief Operating Officer and a
Oran F. Logan 54 Director
Executive Vice President, Chief Financial
Jim A. Smith 59 Officer
Robert H. George 51 Vice President, Secretary and Treasurer
Donald J. Douglass founded the Company in 1969 and has served as Chairman of
the Board and Chief Executive Officer of the Company since 1969.
Oran F. Logan has been President and Chief Operating Officer of the Company
since 1984. Prior thereto, Mr. Logan served as Vice President of the Company
from 1972 to 1980. Mr. Logan was an Executive Vice President and General Manager
from 1981 to 1984. Mr. Logan has been a Director of the Company since October,
1984.
Jim A. Smith joined the Company in April, 1996. Prior to joining the
Company, Mr. Smith served as Chief Financial Officer and a Director of Tracor,
Inc., a NYSE listed Company, from 1966 to 1987 (employed in 1966 as Controller).
From 1987 to 1996, he served as financial advisor and was on the Boards of
Directors of National Instruments Corp., Mobley Environmental Services, Inc. and
Electrosource, Inc., as well as the Boards of Directors of several privately
held companies.
Robert H. George joined the Company in 1987 as Vice President and Secretary
and has served the Company in various executive capacities since then. Prior to
joining the Company, Mr. George was Senior Vice President of Frost National Bank
from 1978 to 1987.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The New York Stock Exchange under the
symbol: ALG. On February 27, 1998, there were 9,684,874 shares of common stock
outstanding, held by approximately 1,800 holders of record. On February 27,
1998, the last reported sales price of the common stock on The New York Stock
Exchange was $18.125 per share.
The following table sets forth for the period indicated, on a per share
basis, the range of high and low sales prices for the Company's common stock as
quoted by The New York Stock Exchange. These price quotations reflect
inter-dealer prices, without adjustment for retail mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions.
7
HIGH AND LOW STOCK PRICES FOR THE LAST TWO FISCAL YEARS WERE:
1997 1996
------------------------------------------------- --------------------------------------------
SALES PRICE CASH SALES PRICE CASH
-------------------- DIVIDENDS ----------------- DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED QUARTER ENDED HIGH LOW DECLARED
---------------------------- -------------------- --------------------------------------------
March 31, 1997 $18 $15-3/8 $.10 March 30, 1996 $18-1/2 $15-7/8 $.10
June 30, 1997 20-7/8 13-1/2 .10 June 29, 1996 19-7/8 17-3/8 .10
September 30, 8-11/16 September 28, 8-1/4
1997 23-3/4 1 .10 1996 1 13-3/4 .10
December 31, 1997 23-1/4 19-5/8 .10 December 31, 1996 17-1/2 14-3/8 .10
On January 6, 1998, the Board of Directors of the Company declared a
quarterly dividend of $.10 per share and on February 20, 1998, announced that it
had approved a 10% increase in the regular quarterly dividend to $.11 per share,
to be effective with the declaration and payment of the next quarterly dividend.
The Company expects to continue its policy of paying regular cash dividends,
although there is no assurance as to future dividends as they depend on future
earnings, capital requirements and financial condition. In addition, the payment
of dividends is subject to restrictions under the Company's bank revolving
credit agreement.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the consolidated
financial statements of Alamo Group Inc. and Subsidiaries. The data should be
read in conjunction with the consolidated financial statements, related notes
and other financial information included herein.
FISCAL YEAR ENDED(1)
-------------------------------------------------------
DECEMBER DECEMBER DECEMBER DECEMBER JANUARY
31, 1997 31, 1996 31, 1995(2) 31, 1994(2) 1, 1994(2)
----------- -------------------------------- ----------
OPERATIONS:
Net sales.............................. $ 203,092 $ 183,595 $ 163,852 $ 119,643 $ 88,519
Income before income taxes............. 20,595 13,722 17,779 14,255 12,225
Net income............................. 13,600 8,762 11,615 9,166 7,785
Percent of sales....................... 6.7% 4.8% 7.1% 7.7% 8.8%
Earnings per share
Basic................................ 1.42 0.91 1.36 1.21 1.09
Diluted.............................. 1.41 0.91 1.35 1.21 1.08
Dividends per share.................... 0.40 0.40 0.40 0.36 0.32
Average common shares
Basic................................ 9,602 9,585 8,541 7,547 7,159
Diluted.............................. 9,674 9,641 8,619 7,604 7,193
FINANCIAL POSITION:
Total assets........................... $ 156,124 $ 153,862 $ 151,571 $ 99,160 $ 75,091
Short-term debt and current maturities. 454 1,031 1,290 8,441 13,990
Long-term debt, excluding current
maturities............................. 28,890 35,299 37,309 24,513 8,920
Stockholders' equity .................. 106,265 97,250 90,705 50,166 41,710
(1) All references to 1995, 1994 and 1993 herein are to the fiscal years ended
December 30, 1995 (52 week period), December 31, 1994 (52 week period), and
January 1, 1994 (52 week period), respectively. Until 1996, the Company's
fiscal years comprised 52 or 53 week periods ending on the Saturday closest
to December 31. In 1996, the Company changed to a calendar year basis. There
were no material differences in the results presented that resulted from
this change.
(2) Includes the results of operations of companies acquired in the respective
year from the effective dates of acquisitions.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS ANNUAL REPORT ON FORM 10-K.
GENERAL
During 1997, the Company's sales grew by 11%, with margins returning to
historical levels. Earnings in 1996 were adversely impacted by charges and
expenses related to entities acquired in 1995. Weather patterns in 1997 returned
to more normal conditions than were experienced in 1996. European business
slowed markedly in the latter part of 1997. The Company's four 1995
acquisitions, which underperformed expectations in 1996, showed improved
performance in 1997.
Approximately 34% of the Company's 1997 sales were attributable to
replacement parts, comparable to 1996's 35%. The replacement parts business is
generally less cyclical and more profitable than wholegoods business.
The following table sets forth, for the periods indicated, certain financial
data as percentages of net sales:
FISCAL YEAR ENDED
------------------------------------
DECEMBER DECEMBER DECEMBER
31, 1997 31, 1996 30, 1995
----------- ----------- -----------
Income Statement Data:
Net sales
American
Agricultural.......................... 49.4% 46.8% 41.9%
Industrial............................ 27.8 27.3 31.8
European................................ 22.8 25.9 26.3
----------- ----------- -----------
Total net sales........................... 100.0% 100.0% 100.0%
=========== =========== ===========
Gross profit.............................. 26.2% 24.6% 26.3%
Selling, general and administrative
expense................................ 15.3 16.2 14.8
----------- ----------- -----------
Income from operations.................... 10.9 8.4 11.5
Interest expense.......................... (1.1) (1.4) (1.6)
Interest income........................... 0.3 0.3 0.3
Other income (net) ....................... 0.1 0.2 0.7
----------- -----------
-----------
Income before income taxes................ 10.2 7.5 10.9
Provision for income taxes................ 3.4 2.7 3.8
=========== =========== ===========
Net Income................................ 6.8% 4.8% 7.1%
=========== =========== ===========
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
NET SALES. Net sales in 1997 were $203,092,000, an increase of 11% from
$183,595,000 in 1996. Sales from American agricultural markets grew 17%, and
American industrial markets sales grew 12%. A return to more normal weather
patterns benefited sales along with generally favorable market conditions; parts
sales, up 8%, as well as wholegoods sales, showed increases.
European sales were down 3% year to year, with early in the year strength
offset by late year weakness caused largely by competitive impacts on U.K.
exports arising from the strength of the U.K. currency versus other European
currencies. Also affecting European markets were general retrenchments of
certain European economies and, in the U.K. the continuing impact of BSE (mad
cow disease).
GROSS PROFIT AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Gross Profit
increased from 24.6% to 26.2%. Gross profit in 1996 had been negatively impacted
by the year end charges described herein. Selling, general and administrative
expense increased from $29,785,000 to $31,026,000 reflecting increased staffing
related to growth and expenditures in strategic acquisition pursuits during
1997. Price increases during the year generally offset cost increases.
9
INTEREST EXPENSE, INTEREST INCOME, OTHER INCOME (NET) AND INCOME TAXES.
Interest Expense was reduced due to operating cash flows reducing borrowing
levels. Interest income decreased mainly due to lower aged receivable balances.
Other income (net) declined largely due to smaller realized gains on an
investment in a marketable security. Income taxes as a percent of pre-tax income
was less due primarily to reduced tax rates from state taxing entities.
1996 COMPARED TO 1995
NET SALES. 1996 sales of $183,595,000, in addition to being affected by
sales additions from the acquisitions made during the year 1995, were adversely
impacted by severe weather conditions in the U.S. during the first half of 1996,
which shortened or diminished growing seasons, thereby reducing, particularly,
replacement parts sales. American agriculture's sales of wholegoods in 1996 were
also reduced by some softness in agriculture economics, particularly in ranching
due to weak cattle prices. Further, in the final quarter of the year, shipments
were deferred by tractor supply delays (certain of the Company's products ship
with or are attached to a tractor) and by late year- end order patterns.
European operations' sales in 1996 increased 10% due to expanded distribution
throughout the markets served.
RESULTS OF OPERATIONS. Impacting costs and profitability in 1996 were slower
than expected integration of and improvements in the 1995 acquisitions and, at
one acquired company, disruptions to operations from flooding and litigation
with the former owner.
Further, contributing significantly to the decline in 1996 profitability
were charges and expenses, mainly related to inventory and accounts receivable,
as well as litigation costs, incurred in the entities acquired by Alamo during
1995. These items total $3.2 million. Further, in the final quarter of 1996, the
strength of the British Pound against the French Franc caused currency
transaction losses in the U.K. operations' French Franc business.
GROSS PROFIT AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. The gross
profit percentage decrease from 1995 and the operating costs percentage increase
are driven largely by the factors described in the preceding paragraph, along
with some margin impact from sales mix, caused largely by replacement parts
sales declines due to weather, and fixed cost impacts, given the sales
deferrals. Price increases during the year generally offset cost increases.
INTEREST EXPENSE, INTEREST INCOME, OTHER INCOME(NET) AND INCOME TAXES. The
net impact of proceeds from the 1995 common stock offering, 1995 acquisition
expenditures and working capital needs produced average borrowings during 1996
modestly below 1995 levels, thereby reducing interest expense accordingly. Other
income (net) declined in 1996 due largely to charges in 1996 for currency
transaction impacts. Income taxes as a percent of pre-tax income increased
largely due to a non-recurring 1995 tax refund.
LIQUIDITY AND CAPITAL RESOURCES
1997 operating activities generated $12.3 million in cash flow allowing the
Company to reduce debt by $6.3 million and return $3.8 million to shareholders
through dividends. 1996 cash flow was similarly positive. 1995's cash flow and
changes in balance sheet accounts were significantly impacted by acquisitions
and a common stock offering.
Capital expenditures during 1997, 1996 and 1995 were, respectively,
$4,685,000, $2,868,000 and $2,401,000. 1998 capital expenditures are expected to
be approximately $5.0 million, and will be funded from operating cash flow.
Because of seasonality in the Company's business, borrowings are heaviest in
December to March.
In May 1997 the Board of Directors authorized the repurchase of up to
1,000,000 shares of the Company's common stock to be funded through working
capital and borrowing's under the bank revolving credit facility.
Future investments in working capital are expected to be required to fund
sales growth, geographic expansion and new products. The Company's cash flow,
strong financial position, and existing and available credit opportunities
should be adequate for the Company's needs in the near and longer term.
Long-term debt as a percent of total capital at December 31, 1997 was 21%
compared to 27% at year end 1996.
As of December 31, 1997, the Company had a $45,000,000 contractually
committed, unsecured, long-term bank revolving credit facility under which the
Company can borrow and repay until December 31, 2002, with interest at various
rate options based upon Prime or Eurodollar rates, with such rates either
floating on a daily basis or fixed for periods up to 180 days. Proceeds may be
used for general corporate purposes or, subject to some limitations,
acquisitions. The loan agreement contains certain financial covenants, customary
in credit facilities of this nature,
10
including minimum financial ratio requirements and limitations on dividends,
indebtedness, liens and investments. The Company is in compliance with all
covenants at December 31, 1997. At December 31, 1997, $22,000,000 was drawn on
the revolver at various interest rate options, with an average effective rate of
6.8%. At December 31, 1997, $2,441,000 of the revolver capacity was committed to
irrevocable standby letters of credit issued in the ordinary course of business
as required by certain vendor contracts.
INFLATION
The Company believes that inflation generally has not had a material impact
on its operations or liquidity to date.
NEW ACCOUNTING DISCLOSURES
DERIVATIVE FINANCIAL INSTRUMENTS ACCOUNTING POLICY DISCLOSURE REQUIREMENTS
AND MARKET RISK DISCLOSURE RULES. During 1997, the Securities and Exchange
Commission issued expanded disclosure requirements on derivative accounting
policy disclosures and the exposure to market risk. The new rules require
enhanced descriptions of specific aspects of a registrant's accounting policies
for derivatives, as well as qualitative and quantitative disclosures about each
type of market risk. The increased policy disclosures on derivatives were
effective for all public companies for periods ending after June 15, 1997. The
qualitative and quantitative market risk disclosures must be provided in all
filings that include audited financial statements for fiscal years ending after
June 15, 1998. The Company expects compliance with these requirements to have no
material impact on the Company's consolidated results of operations, financial
position or cash flows.
ACCOUNTING AND OTHER IMPLICATIONS OF THE YEAR 2000. The Company is currently
evaluating the Year 2000 readiness of its information systems and manufacturing
equipment, as well as communicating with its significant customers and suppliers
of raw materials regarding their readiness for the Year 2000. Work plans
detailing any tasks and resources required to insure equipment and information
system Year 2000 readiness are expected to be in place in 1998. Evaluation to
date indicates that costs associated with any necessary upgrades are not
expected to be material.
NEW ACCOUNTING STANDARDS. Financial Accounting Standards Board Statements
No. 128, 130 and 131, relating to Earnings per Share, Reporting Comprehensive
Income, and Disclosures About Segments of an Enterprise and Related Information,
respectively, are described in Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS
For the financial statements and supplementary data required by this Item 8,
see the Index to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
There is incorporated herein, by reference, that portion of the Company's
definitive proxy statement for the 1998 Annual Meeting of Stockholders, which
appears therein under the captions "Item 1: Election of Directors," "Information
Concerning Directors," and "Section 16(a) Beneficial Ownership Reporting
Compliance." See also the information in Item 4a. of Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
There is incorporated in this Item 11, by reference, that portion of the
Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders, which appears under the caption "Executive Compensation."
11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated in this Item 12, by reference, that portion of the
Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders, which appears under the caption "Beneficial Owners of Common
Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated in this Item 13, by reference, that portion of the
Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders, which appears under the captions "Certain Relationships and
Related Transactions" and "Compensation Committee Interlocks and Insider
Participation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included
following the Index to Consolidated Financial Statements on page F-1 of this
Report.
PAGE
------
Report of Ernst & Young LLP, Independent Auditors............... F-2
Consolidated Statements of Income............................... F-3
Consolidated Balance Sheets..................................... F-4
Consolidated Statements of Stockholders' Equity................. F-5
Consolidated Statements of Cash Flows........................... F-6
Notes to Consolidated Financial Statements...................... F-7
(A)2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable or not
required under the instructions or the information requested is set forth in the
consolidated financial statements or related notes thereto.
12
(A)3. EXHIBITS
The following Exhibits are incorporated by reference to the filing indicated
or are included following the Index to Exhibits.
INDEX TO EXHIBITS
INCORPORATED BY REFERENCE
FROM THE FOLLOWING
EXHIBITS EXHIBIT TITLE DOCUMENTS
- - ---------- ------------------------------------------------------- ---------------------------
3.1 -- Certificate of Incorporation, as amended, of Alamo Form S-1, February 5, 1993
Group Inc.
3.2 -- By-Laws of Alamo Group Inc. Form 10-K, March 29, 1996
Warrant Agreement between Alamo Group Inc. and
10.1 -- Capital Southwest Corporation, dated November 25, Form S-1, February 5, 1993
1991
*10.2 -- 1982 Incentive Stock Option Plan, adopted by the Form S-1, February 5, 1993
Board of Directors of Alamo Group Inc. on April 26,
1982
*10.3 -- Amendment No. 2[sic] to the 1982 Incentive Stock Form S-1, February 5, 1993
Option Plan, adopted as of January 1, 1987
*10.4 -- 1993 Non-Qualified Stock Option Plan, adopted by the Form S-1, February 5, 1993
Board of Directors on February 2, 1993
*10.5 -- Alamo Group Inc. Executive Loan Program of 1991 Form S-1, March 18, 1993
*10.6 -- 1994 Incentive Stock Option Plan, adopted by the Form 10-K, March 28, 1994
Board of Directors on January 25, 1994
10.7 -- Third Amended and Restated Revolving Credit and Form 10-K, March 29, 1996
Term Loan Agreement between NationsBank of Texas,
N.A. and Alamo Group Inc. and certain subsidiaries
dated December 29, 1995
10.8 -- First Amendment to Third Amended and Restated Form 10-K, March 17, 1997
Revolving Credit and Term Loan Agreement dated
April 10, 1996
10.9 -- Second Amendment to Third Amended and Restated Form 10-K, March 17, 1997
Revolving Credit and Term Loan Agreement dated
December 23, 1996
10.10 -- Form of indemnification agreements with Directors Form 10-Q, May 15, 1997
of the Company
10.11 -- Form of indemnification agreements with certain Form 10-Q, May 15, 1997
executive officers of the Company
10.12 -- Third Amendment to Third Amended and Restated Form 10-Q, August 15,
Revolving Credit and Term Loan Agreement dated 1997
June 23, 1997
10.13 -- Fourth Amendment to Third Amended and Restated Filed Herewith
Revolving Credit and Term Loan Agreement dated
December 31, 1997
*10.14 -- Incentive Compensation Plan, adopted on December Filed Herewith
9, 1997 401(k) Restoration Plan for Highly Compensated
*10.15 -- Employees, adopted on December 9, 1997 Filed Herewith
21.1 -- Subsidiaries of the Registrant. Filed Herewith
23.1 -- Consent of Ernst & Young LLP Filed Herewith
27.1 -- Financial Data Schedule Electronic Filing Only
* Compensatory Plan
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 1997
None
13
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.
ALAMO GROUP INC.
Date: March 27, 1998 By:/s/ DONALD J. DOUGLASS
----------------------
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- - ----------------------------- ------------------------------------------------ ------------------
/s/ DONALD J. DOUGLASS Chairman of the Board March 27, 1998
Donald J. Douglass Chief Executive Officer and Director
(Principal Executive Officer)
/s/ ORAN F. LOGAN President, Chief Operating Officer and a March 27, 1998
Oran F. Logan Director (Principal Operating Officer)
/s/ JIM A. SMITH Executive Vice President, March 27, 1998
Jim A. Smith Chief Financial Officer (Principal Financial
Officer)
/s/ JOSEPH C. GRAF Director March 27, 1998
Joseph C. Graf
/s/ DAVID H. MORRIS Director March 27, 1998
David H. Morris
/s/ O. S. SIMPSON, JR. Director March 27, 1998
O.S. Simpson, Jr.
/s/ JAMES B. SKAGGS Director March 27, 1998
James B. Skaggs
/s/ WILLIAM R. THOMAS Director March 27, 1998
William R. Thomas
14
ALAMO GROUP INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors............................. F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, December 31, 1996 and December 30, 1995.. F-3
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and December 31, 1996 ................................ F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, December 31, 1996 and December 30, 1995.. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, December 31, 1996 and December 30, 1995.. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Alamo Group Inc.
We have audited the accompanying consolidated balance sheets of Alamo Group Inc.
and subsidiaries as of December 31, 1997 and December 31, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 1997, December 31, 1996 and December 30, 1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about 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.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Alamo
Group Inc. and subsidiaries at December 31, 1997 and December 31, 1996, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997, December 31, 1996 and December 30, 1995, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
March 6, 1998
F-2
ALAMO GROUP INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
-----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30,
1997 1996 1995
-------------- --------------- ---------------
Net sales........................................ $ 203,092 $ 183,595 $ 163,852
Cost of sales.................................... 149,940 138,460 120,648
-------------- --------------- ---------------
Gross profit................................... 53,152 45,135 43,204
Selling, general and administrative expense ..... 31,026 29,785 24,301
-------------- --------------- ---------------
Income from operations ....................... 22,126 15,350 18,903
Interest expense ................................ (2,262) (2,631) (2,647)
Interest income ................................. 523 664 441
Other income (net) ............................. 208 339 1,082
-------------- --------------- ---------------
Income before income taxes.................. 20,595 13,722 17,779
Provision for income taxes ...................... 6,995 4,960 6,164
============== =============== ===============
Net income ................................... $ 13,600 $ 8,762 $ 11,615
============== =============== ===============
Net income per common share:
Basic..................................... $ 1.42 $ 0.91 $ 1.36
============== =============== ===============
Diluted....................................... $ 1.41 $ 0.91 $ 1.35
============== =============== ===============
Average common shares:
Basic..................................... 9,602 9,585 8,541
============== =============== ===============
Diluted....................................... 9,674 9,641 8,619
============== =============== ===============
See accompanying notes.
F-3
ALAMO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31,
1997 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 789 $ 2,228
Accounts receivable ................................... 42,165 43,925
Inventories ........................................... 65,752 60,171
Deferred income taxes ................................. 2,288 2,206
Prepaid expenses and other ............................ 2,152 1,327
--------- ---------
Total current assets ............................... 113,146 109,857
Property, plant and equipment ............................. 51,693 48,932
Less: Accumulated depreciation ....................... (29,216) (26,546)
--------- ---------
22,477 22,386
Goodwill .................................................. 12,632 14,237
Other assets .............................................. 7,869 7,382
--------- ---------
Total assets ....................................... $ 156,124 $ 153,862
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ................................ $ 12,787 $ 11,066
Income taxes payable .................................. 266 930
Accrued liabilities ................................... 6,096 6,725
Current maturities of long-term debt .................. 727 1,031
--------- ---------
Total current liabilities .......................... 19,876 19,752
Long-term debt, net of current maturities ................. 28,617 35,299
Deferred income taxes ..................................... 1,366 1,561
Stockholders' equity:
Common stock, $.10 par value, 20,000,000 shares authorized;
9,684,874 and 9,589,851 issued at December 31, 1997
and December 31, 1996, respectively ..................... 968 959
Additional paid-in capital ................................ 50,395 49,592
Retained earnings ......................................... 54,835 45,071
Translation adjustment .................................... 67 1,628
--------- ---------
Total stockholders' equity ............................ 106,265 97,250
--------- ---------
Total liabilities and stockholders' equity ............ $ 156,124 $ 153,862
========= =========
See accompanying notes.
F-4
ALAMO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
TOTAL
COMMON STOCK ADDITIONAL STOCK-
---------------- PAID-IN TREASURY RETAINED TRANSLATION HOLDERS'
SHARES AMOUNT CAPITAL STOCK EARNINGS ADJUSTMENT EQUITY
------ ---- -------- ------- -------- ------- ---------
Balance at December 31, 1994 ....... 7,556 $756 $ 17,710 $ -- $ 31,954 $ (254) $ 50,166
Sale of common stock and related . 2,021 202 32,372 -- -- -- 32,574
Net income ....................... -- -- -- -- 11,615 -- 11,615
Dividends paid ($.40 per share) .. -- -- -- -- (3,427) -- (3,427)
Change in unrealized gains on
securities, net of
income taxes .................. -- -- (425) -- -- -- (425)
Translation adjustment ........... -- -- -- -- -- 202 202
------ ---- -------- ------- -------- ------- ---------
Balance at December 30, 1995 ....... 9,577 958 49,657 -- 40,142 (52) 90,705
Sale of common stock and related . 13 1 224 -- -- -- 225
Net income ....................... -- -- -- -- 8,762 -- 8,762
Dividends paid ($.40 per share) .. -- -- -- -- (3,833) -- (3,833)
Change in unrealized gains on
securities, net of income
taxes ......................... -- -- (289) -- -- -- (289)
Translation adjustment ........... -- -- -- -- -- 1,680 1,680
---- -------- ------- -------- ------- ---------
Balance at December 31, 1996 ....... 9,590 959 49,592 -- 45,071 1,628 97,250
Purchase of treasury stock ....... (80) -- -- (1,631) -- -- (1,631)
Sale of common stock and related . 175 9 893 1,631 -- -- 2,533
Net income ....................... -- -- -- -- 13,600 -- 13,600
Dividends paid ($.40 per share) .. -- -- -- -- (3,836) -- (3,836)
Change in unrealized gains on
securities, net of income
taxes ......................... -- -- (90) -- -- -- (90)
Translation adjustment ........... -- -- -- -- -- (1,561) (1,561)
------ ---- -------- ------- -------- ------- ---------
Balance at December 31, 1997 ....... 9,685 $968 $ 50,395 $ -- $ 54,835 $ 67 $ 106,265
====== ==== ======== ======= ======== ======= =========
See accompanying notes.
F-5
ALAMO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
----------------------------------------
DECEMBER DECEMBER DECEMBER 30,
31, 1997 31, 1996 1995
------------- ---------------------------
OPERATING ACTIVITIES
Net income ................................................ $ 13,600 $ 8,762 $ 11,615
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for doubtful accounts ....................... 675 662 331
Depreciation .......................................... 3,700 3,972 3,281
Amortization .......................................... 1,364 1,369 1,096
Provision for deferred income tax benefit ............. (286) (128) (396)
Realized gain on marketable securities ................ (70) (528) (529)
Gain on sale of equipment ............................ (152) (163) (70)
Changes in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable ................................... 321 1,836 (8,343)
Inventories ........................................... (6,367) (536) (555)
Prepaid expenses and other assets ..................... (1,655) (2,241) (5,642)
Trade accounts payable and accrued liabilities ........ 1,756 (2,431) (606)
Income taxes payable .................................. (583) (947) (64)
-------- ------- --------
Net cash provided by operating activities ................. 12,303 9,627 118
INVESTING ACTIVITIES
Acquisitions, net of cash acquired ........................ -- (941) (17,593)
Purchase of property, plant and equipment ................. (4,685) (2,868) (2,401)
Proceeds from sale of property, plant and equipment ....... 224 251 115
Purchases of long-term investments ........................ -- -- (2,480)
Proceeds from sale of marketable securities ............... 150 634 569
-------- ------- --------
Net cash (used) by investing activities ................... (4,311) (2,924) (21,790)
FINANCING ACTIVITIES
Net change in bank revolving credit facility .............. (5,500) (1,100) 27,200
Principal payments on long-term debt and capital leases ... (841) (2,265) (34,789)
Proceeds from issuance of long-term debt .................. -- 641 --
Dividends paid ............................................ (3,836) (3,833) (3,427)
Proceeds from sale of common stock and related ............ 2,533 225 32,574
Cost of common stock repurchased .......................... (1,631) -- --
-------- ------- --------
Net cash provided (used) by financing activities .......... (9,275) (6,332) 21,558
Effect of exchange rate changes on cash ................... (156) 18 80
-------- ------- --------
Net change in cash and cash equivalents ................... (1,439) 389 (34)
Cash and cash equivalents at beginning of the year ........ 2,228 1,839 1,873
-------- ------- --------
Cash and cash equivalents at end of the year .............. $ 789 $ 2,228 $ 1,839
======== ======= ========
Cash paid during the year for:
Interest ................................................ $ 2,215 $ 2,608 $ 2,632
Income taxes ............................................ 6,979 6,400 6,707
See accompanying notes.
F-6
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
The Company operates in one business segment referred to as the vegetation
maintenance equipment industry in both America and Europe. The Company
manufactures tractor-mounted mowing and vegetation maintenance equipment and
replacement parts for industrial and agricultural end-users.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Alamo Group Inc. and its subsidiaries (the Company), all of which are wholly
owned. Other investments are accounted for under the equity method or the cost
method, as appropriate. All significant intercompany accounts and transactions
have been eliminated. Certain prior year amounts have been reclassified to
conform with the 1997 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FISCAL YEAR
Until 1996, the Company's fiscal year comprised either a 52 or 53 week
period that ended on the Saturday closest to December 31. All references to 1995
herein are to the fiscal year ended December 30, 1995 (52 weeks). In 1996, the
Company changed to a calendar year basis. There are no material differences in
the results presented that result from this change.
FOREIGN CURRENCY
The Company translates the assets and liabilities of foreign-owned
subsidiaries at rates in effect at the end of the year. Revenues and expenses
are translated at average rates in effect during the reporting period.
Translation adjustments are treated as a separate component of stockholders'
equity.
The Company enters into foreign currency forward contracts to hedge its
exposure on material foreign currency transactions. The Company does not hold or
issue financial instruments for trading purposes. Changes in the market value of
the foreign currency instruments are recognized in the financial statements upon
settlement of the hedged transaction. At December 31, 1997, the Company had
contracts, maturing at various dates to June 1998, for $3,521,000. Foreign
currency transaction gains or losses are included in Other income (net). For
1997 and 1996, such transactions netted a loss of $346,000 and $436,000,
respectively.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with a maturity date no
longer than 90 days.
MARKETABLE SECURITIES
Marketable securities are carried at fair market value in Prepaid expenses
and other, with unrealized gains and losses, net of tax, reported in
Stockholders' equity.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
credit risk is limited because of the large number and types of customers and
their geographic dispersion.
F-7
INVENTORIES
Inventories of U.S. operating subsidiaries are principally stated at the
lower of cost (last-in, first-out method) ("LIFO") or market and the Company's
foreign subsidiaries' inventories are stated at the lower of cost (first-in,
first-out) ("FIFO") or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Major
renewals and betterments are charged to the property accounts while
replacements, maintenance and repairs which do not improve or extend the lives
of the respective assets are expensed currently. Depreciation is provided at
amounts calculated to amortize the cost of the assets over their estimated
useful economic lives using the straight-line method.
GOODWILL
Goodwill is related to purchase acquisitions and, with minor exceptions, is
being amortized over fifteen years from respective acquisition dates. Goodwill
is shown net of amortization of $3,531,000 and $2,630,000 for the years ended
December 31, 1997 and December 31, 1996, respectively. The Company continually
evaluates the existence of goodwill impairment on the basis of whether the
goodwill is fully recoverable from projected, undiscounted net cash flows of the
related business unit.
LONG-TERM INVESTMENTS
Included in other assets are long-term investments, accounted for under the
equity method of accounting, which consist primarily of investments in common
stocks of corporations, and other long-term investments for which no active
secondary market exists. During 1995, the Company invested approximately
$500,000 in a Small Business Investment Company; up to an additional $1,500,000
has been committed. Due to inherent risk factors in such investments, the
ultimate realization of these amounts, included in other assets in the
accompanying financial statements, is not determinable at this date.
RELATED PARTY TRANSACTIONS
Notes receivable from officers of the Company for $1,280,000 and $700,000
for the years ended 1997 and 1996, respectively, are included in other assets.
REVENUE RECOGNITION
Revenue is recognized when the product is shipped. Provisions for sales
incentives and other sales related expenses are made at the time of the sale.
RESEARCH AND DEVELOPMENT
Product development and engineering costs charged to selling, general and
administrative expense amounted to $1,712,000, $1,747,000 and $1,434,000 for the
years ended December 31, 1997, December 31, 1996 and December 30, 1995,
respectively.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between the financial reporting basis and tax basis of assets and liabilities
and are measured using presently enacted tax rates and laws.
STOCK BASED COMPENSATION
Effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, and
elected to continue to use the intrinsic value method in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized in the
financial statements for these plans. The pro forma effects of fair value
accounting for compensation costs related to options, on net income and earnings
per share, would not be material.
F-8
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to the Statement 128 requirements.
2. NEW ACCOUNTING STANDARDS AND DISCLOSURES
REPORTING COMPREHENSIVE INCOME. In June 1997, the Financial Accounting
Standards Board issued Statement No. 130, "Reporting Comprehensive Income."
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components which will, as required, be adopted in
1998. Statement 130, while having no impact on net income or stockholders'
equity, requires changes such as reporting unrealized gains or losses on
available-for-sale securities and foreign currency translation adjustments,
which are reported as line items in the Consolidated Statement of Stockholders'
Equity, to be further disclosed in "other comprehensive income."
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In June
1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information." Statement
131 specifies the computation, presentation and disclosure requirements for
business segment information, and requires that segments be identified based on,
among other factors, reporting used by the Company's management in evaluating
key business decisions. Statement 131 supersedes Statement 14, "Financial
Reporting for Segments of a Business Enterprise." Statement 131 is effective for
the Company's financial statements for the year ended December 31, 1998. The
adoption of Statement 131 will not have a material impact on the Company.
DERIVATIVE FINANCIAL INSTRUMENTS ACCOUNTING POLICY DISCLOSURE REQUIREMENTS
AND MARKET RISK DISCLOSURE RULES. During 1997, the Securities and Exchange
Commission issued expanded disclosure requirements of accounting policies for
derivative financial instruments and the exposure to market risks. The new rules
require enhanced descriptions of specific aspects of a registrant's accounting
policies for derivatives as well as qualitative and quantitative disclosures
about each type of market risk. The increased policy disclosures on derivatives
were effective for all public companies for periods ending after June 15, 1997.
The qualitative and quantitative market risk disclosures must be provided in all
filings that include audited financial statements for fiscal years ending after
June 15, 1998. The Company expects compliance with these requirements to have no
material impact on the Company's consolidated results of operations, financial
position, or cash flows.
3. EARNINGS PER SHARE
The following table sets forth the reconciliation from basic to diluted
average common shares and the calculations of net income per common share. Net
income for basic and diluted calculations do not differ. (In thousands, except
per share).
1997 1996 1995
----------- ----------- -------
Net Income .................................. $ 13,600 $ 8,762 $11,615
=========== =========== =======
Average Common Shares:
BASIC (weighted-average outstanding shares) 9,602 9,585 8,541
Dilutive potential common shares from
stock options and warrants ............. 72 56 78
=========== =========== =======
DILUTED (weighted-average outstanding
shares) ................................. 9,674 9,641 8,619
=========== =========== =======
Basic earnings per share .................... $ 1.42 $ 0.91 $ 1.36
=========== =========== =======
Diluted earnings per share .................. $ 1.41 $ 0.91 $ 1.35
=========== =========== =======
4. ACQUISITIONS
On April 27, 1995, the Company acquired M&W Gear Co. ("M&W"). The
acquisition was effective as of April 2, 1995. The purchase price was
$17,959,000. M&W is a manufacturer and distributor of primarily hay-making
equipment for agricultural end-users.
On May 12, 1995, the Company acquired Rhino International, Inc. ("Rhino
International"), an unaffiliated company which imports Chinese-manufactured
tractors for a purchase price of $2,663,000.
On May 24, 1995, the Company invested $1,980,000 to purchase 49 1/2% of the
outstanding capital stock (42% on a fully diluted basis) of Certified Power,
Inc. ("CPI"), which in turn acquired 100% of the equity of Certified Power Train
Specialists, Inc. ("CPTS") in a highly leveraged transaction. CPTS is a
distributor of hydraulic components and automotive and truck drivetrain parts.
This investment is carried in other assets and is accounted for by equity
accounting. Subsequent to December 31, 1997 the Company sold its interest,
substantially at book value.
On June 29, 1995, the Company purchased N J M Dabekausen Beheer BV and its
subsidiaries (collectively, "Dabekausen") for a purchase price of $937,000.
Dabekausen is a distributor of the Company's products in the Netherlands and
Germany.
On December 6, 1995, the Company acquired Herschel Corporation ("Herschel").
The effective date of the acquisition was November 25, 1995. The purchase price
was $14,041,000. Herschel manufactures and distributes primarily high wear, high
turnover farm equipment replacement parts.
In December 1996, the Company made two small business purchases: Forges
Gorce in France and a domestic production line (this purchase was completed in
1997), each of which makes mower blades.
The aggregate purchase price was $1,903,000.
The acquisitions have been accounted for by the purchase method of
accounting, and accordingly, the approximate purchase prices, shown above, have
been allocated to the assets acquired and the liabilities assumed based on the
estimated fair values at the dates of acquisition, with the excess of purchase
prices over assigned asset values recorded as goodwill which the Company
amortizes over 15 years. The results of operations of the acquisitions have been
included in the Company's consolidated financial statements since the
acquisition dates.
The condensed pro forma results of operations presented below summarize on
an unaudited basis approximate results of the Company's consolidated operations
for the period presented assuming that the acquisitions shown above occurred at
the beginning of the period. The two 1996 purchases were not material and 1996,
therefore, is not shown.
YEAR ENDED
DECEMBER 30, 1995
(in thousands,
except per share
amounts)
------------------
(UNAUDITED)
Net sales......................... $ 193,729
Income before income taxes........ 17,991
Net income........................ 11,983
Earnings per share (diluted)...... 1.39
5. MARKETABLE SECURITIES
The estimated fair market value of marketable securities, included in
Prepaid expenses and other, was $218,000 at December 31, 1996, and gross
unrealized gains included in such amounts was $138,000. Realized gains on sales
of such securities, included in other income, were $70,000, $528,000 and
$529,000 for the years 1997, 1996 and 1995, respectively.
F-10
6. VALUATION AND QUALIFYING ACCOUNTS
Valuation and qualifying accounts included the following (in thousands):
CHARGED NET
BALANCE TO COSTS TRANSLATIONS, WRITE-OFFS BALANCE
BEGINNING OF AND RECLASSIFICATION, OR DISCOUNTS END OF
YEAR EXPENSES AND ACQUISITIONS TAKEN YEAR
---- -------- ---------------- ----- ----
1997
Allowance for doubtful accounts. $ 1,521 675 (27) (329) $1,840
Reserve for sales discounts .... 3,866 14,177 (2) (14,557) 3,484
Reserve for inventory
obsolescence ................. 4,110 281 (113) (499) 3,779
1996
-----
Allowance for doubtful accounts. $ 1,192 662 (180) (153) $1,521
Reserve for sales discounts .... 4,303 12,883 25 (13,345) 3,866
Reserve for inventory
obsolescence ................. 4,157 450 567 (1,064) 4,110
1995
-----
Allowance for doubtful accounts. $ 592 331 467 (198) $1,192
Reserve for sales discounts .... 2,016 12,906 452 (11,071) 4,303
Reserve for inventory
obsolescence ................. 2,485 368 1,322 (18) 4,157
7. INVENTORIES
Inventories valued at LIFO cost represented 81% and 80% of total inventory
for the years ended December 31, 1997 and December 31, 1996, respectively. The
excess of current costs over LIFO valued inventories was $3,310,000 and
$3,221,000 at December 31, 1997 and December 31, 1996, respectively. Net
inventories consist of the following (in thousands):
DECEMBER 31, DECEMBER 31,
1997 1996
------------- --------------
Finished wholegoods and parts ....... $ 57,804 $ 53,748
Work in process...................... 3,792 2,858
Raw materials........................ 4,156 3,565
============= ==============
$ 65,752 $ 60,171
============= ==============
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
DECEMBER DECEMBER USEFUL
31, 1997 31, 1996 LIVES
------------- ------------- ---------
Land ...................... $ 2,012 $ 2,154
Buildings and improvements. 19,299 19,377 15-25 yrs
Machinery and equipment ... 22,413 20,081 5 yrs.
Office furniture and
equipment ................. 4,781 4,408 5 yrs.
Transportation equipment . 3,188 2,912 3-5 yrs.
------------- -------------
51,693 48,932
Accumulative
depreciation .............. (29,216) (26,546)
------------- -------------
$ 22,477 $ 22,386
------------- -------------
Buildings and improvements at December 31, 1997 and December 31, 1996
include $7,070,000 and $7,735,000, respectively, for capitalized leases.
F-11
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following balances (in thousands):
DECEMBER DECEMBER
31, 1997 31, 1996
-------- --------
Salaries, wages and bonuses ............................ $2,876 $2,810
Warranty ............................................... 1,254 1,282
Other .................................................. 1,966 2,633
====== ======
$6,096 $6,725
====== ======
10. LONG-TERM DEBT
The components of long-term debt at December 31 are as follows (in
thousands):
1997 1996
------- -------
Bank revolving credit facility ........ $22,000 $27,500
Capital lease obligations ............. 6,802 7,538
Other notes payable ................... 542 1,292
------- -------
Total long-term debt .................. $29,344 $36,330
Less current maturities ............... 727 1,031
------- -------
$28,617 $ 35,299
======= =======
As of December 31, 1997, the Company had a $45,000,000 contractually
committed, unsecured, long-term bank revolving credit facility under which the
Company can borrow and repay until December 31, 2002, with interest at various
rate options based upon Prime or Eurodollar rates, with such rates either
floating on a daily basis or fixed for periods up to 180 days. Proceeds may be
used for general corporate purposes or, subject to some limitations,
acquisitions. The loan agreement contains certain financial covenants, customary
in credit facilities of this nature, including minimum financial ratio
requirements and limitations on dividends, indebtedness, liens and investments.
The Company is in compliance with all covenants at December 31, 1997. At
December 31, 1997, $22,000,000 was drawn on the revolver at various interest
rate options, with an average effective rate of 6.8%. At December 31, 1997,
$2,441,000 of the revolver capacity was committed to irrevocable standby letters
of credit issued in the ordinary course of business as required by certain
vendor contracts.
The aggregate maturities of long-term debt for the next five years, as of
December 31, 1997, are as follows: $727,000 in 1998, $459,000 in 1999, $518,000
in 2000, $554,000 in 2001, and $22,600,000 (including the bank revolving credit
facility) in 2002.
Long-term debt is substantially floating rate debt and is stated essentially
at fair value.
11. INCOME TAXES
U. S. and non-U.S. income before income taxes is as follows (in thousands):
1997 1996 1995
------- ------- -------
Income before income taxes
Domestic ........................ $14,210 $ 7,359 $12,693
Foreign ......................... 6,385 6,363 5,086
------- ------- -------
$20,595 $13,722 $17,779
======= ======= =======
F-12
The provision for income taxes consists of (in thousands):
1997 1996 1995
------ ------- -------
Current:
Federal...................$ ...... 4,892 $ 2,860 $ 4,459
Foreign .......................... 2,176 1,987 1,773
State ............................ 419 297 328
------ ------- -------
7,487 5,144 6,560
Deferred:
Federal .......................... (492) (550) (133)
Foreign .......................... -- 366 (263)
------ ------- -------
(492) (184) (396)
------ ------- -------
Total income taxes..$ ...... 6,995 $ 4,960 $ 6,164
====== ======= =======
Reconciliation of the statutory U.S. federal rate to actual tax rate is as
follows (in thousands):
1997 1996 1995
----------- ------------- ----------
Statutory U.S. federal tax at 35% $ 7,208 $ 4,803 $ 6,223
Increase (reduction) from:
Non-U.S. taxes.......... (292) 126 (270)
U.S. State taxes........ 272 193 213
Other................... (193) (162) (2)
----------- ------------- ----------
Provision for income taxes.. $ 6,995 $ 4,960 $ 6,164
=========== ============= ==========
Actual tax rate............. 34% 36% 35%
At December 31, 1997, the Company had unremitted earnings of foreign
subsidiaries of approximately $14,465,000. These earnings, which reflect full
provision for non-U.S. income taxes, are indefinitely reinvested in non-U.S.
operations or can be remitted without substantial additional tax. Accordingly,
no provision has been made for taxes that might be payable upon remittance of
such earnings nor is it practicable to determine the amount of this liability.
The components of deferred tax assets and liabilities included in the
balance sheets are as follows (in thousands):
1997 1996
------ ------
Deferred tax asset:
Inventory ..................................... $1,242 $1,282
Accounts receivable ........................... 486 387
Depreciation .................................. 1,005 925
Net operating loss carryforwards .............. 374 638
Insurance ..................................... 280 290
Other Current ................................. 447 394
Other Non-current ............................. 783 316
------ ------
Total deferred asset ......................... $4,617 $4,232
====== ======
Deferred tax liability:
Difference between book basis and tax
basis of assets .................................. $3,079 3,207
Other ......................................... 616 380
------ ------
Total deferred liability ..................... $3,695 $3,587
====== ======
At December 31, 1997, net, current deferred tax assets were $2,288,000
($2,206,000 in 1996). Net, non-current deferred tax liabilities were $1,366,000
($1,561,000 in 1996).
F-13
12. COMMON STOCK
In conjunction with the issuance of debt in a prior year, the Company issued
warrants to purchase 62,500 shares of common stock to the lender. The exercise
price of $16 per share is subject to adjustment, and the warrants expire in
January 2000. The Company has reserved 62,500 shares of common stock for the
warrants.
The Company completed an offering of its stock and listed its shares on the
New York Stock Exchange in July 1995, trading under the symbol ALG. The number
of new shares issued was 2,000,000 at $17.50 per share, and the net proceeds to
the Company were $32,574,000. Earnings per share (diluted), calculated on a
supplemental basis as if the foregoing event had occurred at the beginning of
the year, would have been $1.21 for the year ended December 30, 1995.
Subsequent to December 31, 1997, the Company declared and paid a dividend of
$0.10 per share.
13. STOCK OPTIONS
INCENTIVE OPTIONS
In 1982, the stockholders of the Company adopted an incentive stock option
plan for key employees, reserving 350,000 shares of common stock. Under the
terms of this plan, the purchase price of the shares subject to each option
granted will not be less than the fair market value at the time the option is
granted. There are no more options available for grant under this plan.
On April 28, 1994, the stockholders approved an incentive stock option plan
for key employees, reserving 300,000 shares of common stock. Each option becomes
vested and exercisable for up to 20% of the total optioned shares each year
after grant. Under the terms of this plan, the exercise price of the shares
subject to each option granted will not be less than the fair market value of
the common stock at the date the option is granted.
Following is a summary of activity in the incentive stock option plans for
the periods indicated:
DECEMBER DECEMBER DECEMBER
31, 1997 31, 1996 30, 1995
-------- -------- --------
Options outstanding at beginning of
year ............................................. 123,373 106,711 140,837
Granted ....................................... -- 43,000 13,000
Exercised ..................................... (14,863) (12,938) (21,026)
Cancelled ..................................... (25,125) (13,400) (26,100)
-------- -------- --------
Options outstanding at end of year ............... 83,385 123,373 106,711
-------- -------- --------
Options exercisable at end of year ............... 44,385 35,098 22,961
-------- -------- --------
Options available for grant at end of
year ............................................. 224,400 199,950 230,200
======== ======== ========
PER SHARE OPTION PRICES RANGED FROM $12.00 TO $18.75.
NON-QUALIFIED OPTIONS.
On February 2, 1993, the Company granted non-qualified options for 200,000
shares of common stock to key employees of the Company at $11.50 per share. Each
option becomes vested and exercisable for up to 20% of the total optioned shares
after one year following the grant of the option and for an additional 20% of
the total optioned shares after each succeeding year until the option is fully
exercisable at the end of the fifth year. During 1997, 160,000 shares were
exercised. Options for 40,000 shares were outstanding, but not exercisable, at
December 31, 1997.
F-14
14. RETIREMENT BENEFIT PLANS
The Company provides a defined contribution 401(k) retirement and savings
plan for eligible U.S. employees. Company matching contributions are based on a
percentage of employee contributions. Company contributions to the plan during
1997, 1996 and 1995 were approximately $399,000, $458,000 and $336,000,
respectively.
Two of the Company's foreign subsidiaries also participate in a defined
contribution and savings plan covering eligible employees. The Company's foreign
subsidiaries contribute between 5.8% and 9.6% of the participant's salary up to
a specific limit. Contributions were approximately $453,000 in 1997, $508,000 in
1996, and $427,000 in 1995.
15. FOREIGN OPERATIONS
Following is selected financial information on the Company's foreign
operations (located in Europe) (in thousands):
DECEMBER DECEMBER DECEMBER
31, 1997 31, 1996 30, 1995
------- ------- -------
Net sales .......................... $46,241 $47,519 $43,183
Income from operations ............. 7,053 7,406 5,978
Income before income taxes and
allocated interest expense ....... 6,385 6,363 5,086
Identifiable assets ................ $39,744 $43,480 $38,376
16. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and transportation equipment under various
operating leases which generally are expected to be renewed or replaced by other
leases. The Company has certain capitalized leases consisting principally of
leases of buildings. At December 31, 1997, future minimum lease payments under
these noncancelable leases and the present value of the net minimum lease
payments for the capitalized leases are (in thousands):
OPERATING CAPITALIZED
LEASES LEASES
------ -------
1998 ............................................. $ 661 $ 944
1999 ............................................. 471 944
2000 ............................................. 400 964
2001 ............................................. 379 965
2002 ............................................. 92 965
Thereafter ....................................... 74 5,936
------ -------
Total minimum lease payments ..................... $2,077 $10,718
====== =======
Less amount representing interest ................ 3,916
------
Present value of net minimum lease payments ...... 6,802
Less current portion ............................. 395
======
Long-term portion ................................ $6,407
======
Rental expense for operating leases was approximately $1,176,000 for 1997,
$1,217,000 for 1996 and $1,013,000 for 1995.
F-15
OTHER
The Company is subject to various unresolved legal actions which arise in
the ordinary course of its business. The most prevalent of such actions relate
to product liability which are generally covered by insurance. While amounts
claimed may be substantial and the ultimate liability with respect to such
litigation cannot be determined at this time, the Company believes that the
ultimate outcome of these matters will not have a material adverse effect on the
Company's consolidated financial position.
The Company has been named in litigation involving Rhino International which
includes aggregate claims totaling $8.2 million. The Company believes it has
meritorious defenses against these matters and will vigorously defend the
pending claims and prosecute appropriate counterclaims. While the ultimate
outcome of this litigation cannot be determined at this time, the Company
believes these matters will not have a material adverse effect on the Company's
consolidated financial position.
The Company has an executive loan program pursuant to which the Company may
make loans to certain officers and employees of the Company as approved by the
Compensation Committee of the Board of Directors to purchase stock of the
Company. All loans are secured by the pledge of shares being purchased. The
maximum aggregate amount which officers and employees may borrow is $400,000 and
$200,000, respectively. Each loan bears interest at prime and is payable
quarterly. As of December 31, 1997 and December 31, 1996, $46,000 was
outstanding under the program and is included in stockholder equity.
Certain equipment receivables have been sold under financing agreements with
third-party lending institutions whereby the Company is potentially subject to
recourse. At December 31, 1997, $1,973,000 is outstanding under these
arrangements and management has determined no reserve is required.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 is presented below.
Seasonal influences affect the Company's sales and profits with peak business
occurring in May through August. (In thousands, except per share data).
1997 1996
----------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
----------------------------------------------------------------------------------------------------
Sales...................... $ 51,643 $58,433 $52,220 $40,796 $45,046 $50,727 $46,835 $ 40,987
Gross profit .............. 12,736 16,569 15,624 8,223 10,217 14,439 14,166 6,313
Net income ................ 3,278 5,190 4,910 222 2,326 4,234 4,185 (1,983)
Earnings per share
Diluted.................. $ .34 $ .54 $ .51 $ .02 $ .24 $ .44 $ .44 $ (.21)
Average shares
Diluted ................. 9,647 9,654 9,687 9,709 9,638 9,662 9,627 9,590
Dividends per
share...................... $ .10 $ .10 $ .10 $ .10 $ .10 $ .10 $ .10 $ .10
Market Price of
common stock
High..................... $ 18 $20-7/8 $23-3/4 $23-1/4 $18-1/2 $ 19-7/8 $18-1/4 $ 17-1/2
Low ..................... 15-3/8 13-1/2 18-11/16 19-5/8 15-7/8 17-3/8 13-3/4 14-3/8
The 1996 fourth quarter data includes charges and expenses totaling $3.2
million, pre-tax or $0.21 per share after tax. These charges and expenses,
primarily related to inventories and accounts receivable, were in the four
companies acquired in 1995 and include litigation expenses of the Rhino
International lawsuit described in Footnote 16.
F-16