Columbus McKinnon
Annual Report 1999

Plain-text annual report

T A B L E O F C O N T E N T S 01 Financial and Performance Highlights 02 Shareholders’ Letter 07 Acquisitions History 08 Products / Solutions Business Summar y 10 Review of Operations 21 Glossary 22 Selected Financial Information 24 Management’s Discussion and Analysis 30 Consolidated Statements of Income 31 Consolidated Balance Sheets 32 Consolidated Statements of Shareholders’ Equity 33 Consolidated Statements of Cash Flows 34 Notes to Consolidated Financial Statements 52 Report of Independent Auditors 53 Shareholder / Corporate Information 54 Board of Directors / Officers Back Foldout Facilities Location Map C O M P A N Y P R O F I L E Columbus McKinnon (CM) is a broad-line designer, manufacturer and supplier of sophisticated material handling products and integrated material handling solutions that are widely distributed to industrial, automotive and consumer markets worldwide. CM’s Products segment includes hoists, carbon and alloy steel chain and attachments, overhead cranes and other industrial components. Many well-known brands come together under the CM umbrella to pro v i d e material handling services for a wide range of load weights, from a few pounds to many tons. CM’s Solutions segments (Industrial and Automotive) provide integrated material handling systems that are custom designed to increase productivity and decrease production cycle times. Through its solutions businesses, CM combines its high-quality products with its state-of-the-art engineering capabilities to solve the door-to-door material handling needs of entire manufacturing facilities and other working enviro n m e n t s . C M ’s CraneMart™ strategy of assembling an integrated North American network of full-service crane builders is taking shape with the acquisitions of Abell-Howe Crane, Washington Equipment and the merger with GL International. The Company expects to expand the concept with the formation of strategic alliances — from supporting independent participants to partial or full equity ownership — in major North American industrial markets. With 4,350 employees working at 76 locations in 14 countries, and in excess of 11,000 distributors worldwide, CM has assembled the industry’s premier distribution and service network providing continuous customer support all over the world. By consistently remaining focused on its growth strategy, CM has managed over the last five years to gro w its sales by a compound annual growth rate (CAGR) of 39%, and its net income by a CAGR of 31%. This strategy of leveraging its dominant market position, continually achieving cost synergies, expanding its p resence globally and integrating complementary, non-dilutive acquisitions, has CM poised today to generate f u rther opportunities for growth, success and continued market dominance. F I N A N C I A L H I G H L I G H T S (In thousands, except per share, percent change, margin and ratio data) Net sales Income from operations Income before debt extinguishment Net income Net income per share Economic Value Added (EVA™)* Cash flow from operating activities per share Capital expenditures Working capital Shareholders’ equity Margin Data Gross margin EBITDA margin Operating income margin Pre-tax income margin Net income margin Ratio Data Return on assets Return on equity Current ratio % Change 30.9% 21.7% 14.4% 41.0% 42.3% 28.6% 51.1% 13.9% (12.0%) 10.4% Data as of or for year ended March 31, 1999 $ 735,445 $ 85,082 $ 27,436 $ 27,436 $ $ $ 1.92 3,142 4.02 $ 12,992 $ 166,473 $ 188,674 26.2% 15.5% 11.6% 6.9% 3.7% 3.6% 14.5% 2.37 : 1 1998 $ 561,823 $ 69,918 $ 23,978 $ 19,458 $ $ $ 1.35 2,444 2.66 $ 11,406 $ 188,000 $ 170,946 28.5% 16.3% 12.4% 8.3% 3.5% 2.5% 11.4% 2.63 : 1 * Excludes LICO, Abell-Howe, Raccords Gautier, Camlock/Tigrip, GLInternational, Washington Equipment. P E R F O R M A N C E H I G H L I G H T S Record High Results n Net sales increased by 30.9% over fiscal 1998 n Net income per share increased by 42.3% over fiscal 1998 n Cash flow from operating activities per share increased by 51.1% Strategic Acquisitions n Initiated CraneMart™ strategy, assembling an integrated North American network of full-service crane builders, through three acquisitions: (cid:228) Abell-Howe Crane, a Chicago-based crane manufacturer (August 1998) (cid:228) GL International, one of North America’s largest full-service crane builders (March 1999) (cid:228) Washington Equipment Company, a Central Illinois-based crane manufacturer (April 1999, FY 2000) n Acquired Raccords Gautier, a French rotary union and swivel joint manufacturer (December 1998) n Acquired Camlok, a U.K. plate clamp manufacturer, and the Tigrip product line, to complement CM’s hoist product lines (January 1999) Board Expanded and Strengthened n Appointed Carlos Pascual, Senior Vice President, Xerox Corporation and President of U.S. Customer Relations to CM’s Board of Directors (August 1998) n Appointed Richard Fleming, Chief Financial Officer and Executive Vice President of USG Corporation, to CM’s Board of Directors (March 1999) Consistent Performance Strengthens Customer Relationships n CM subsidiary Automatic Systems, Inc. (ASI, formerly LICO, Inc.), earned General Motors’ 1997 and 1998 Supplier of the Year Award The Columbus McKinnon annual re p o rt contains “forw a rd-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to differ materially fro m the results expressed or implied by such statements, including general economic and business conditions, conditions affecting the industries served by the Company and its subsidiaries, conditions affecting the Company’s customers and suppliers, competitor responses to the Company’s products and services, the overall market acceptance of such products and services, the integration of acquisitions and other factors disclosed in the Company’s periodic re p o rts filed with the Securities and Exchange Commission. Consequently, such forw a rd looking statements should be re g a rded as the Company’s current plans, estimates and beliefs. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forw a rd-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 1 1 T O O U R S H A R E H O L D E R S : Fiscal 1999 was an excellent year for Columbus McKinnon. Sales, earnings and operating cash flow all increased to re c o rd levels for the seventh consecutive year. CM also entered the strategically import a n t crane building and service markets through a merger with GL International, North America’s largest crane builder, acquisitions of two significant regional crane builders and the launch of our CraneMart™ strategy. Reflecting the diverse markets and customers served by our businesses, we organized CM into three business segments: Products, Solutions–Industrial and Solutions–Automotive. We are pleased to have produced another record year for CM, though in many respects, it was a challenging one and our growth was not as significant as initially expected. Sales and earnings were both affected by softer conditions in several markets served by our Products segment and the substantial impact of last summer’s General Motors strike on our newly formed Solutions–Automotive segment. At the same time, this year’s s t rong financial perf o rmance despite a difficult external industrial business e n v i ronment demonstrates the overall cyclical resistance and the form i d a b l e strength of CM’s broad and diverse, yet complementary businesses. Looking at CM’s financial results, net sales increased 30.9% in fiscal 1999 to $735.4 million, reflecting growth resulting from our March 1998 acquisition of LICO and three smaller acquisitions in fiscal 1999. Net income for fiscal 1999 i n c reased to $27.4 million, 41.0% and 14.4% higher than fiscal 1998 net income and income before extraordinary charge, respectively. Net income per diluted s h a re for fiscal 1999 rose to $1.92, a 42.3% increase from $1.35 in fiscal 1998 and 15.5% greater than fiscal 1998 income per share before extraord i n a ry c h a rge of $1.66. One of CM’s key operating characteristics is its ability to generate significant cash flow. CM’s growth in net cash provided by operating activities continued to be very strong, increasing 51.1% to $4.02 per diluted share. C M ’s financial perf o rmance is marked by steady and consistent growth reflected in five-year compound annual growth rates of 39% for net sales, 49% for EBITDA, 31% for net income and 59% for net cash provided by operating activities. Since management’s 1986 purchase of the company, Columbus McKinnon has grown from a nationally recognized manufacturer of chain and hoists to a leading international provider of material handling products and solutions. In just over three years since our F e b ru a ry 1996 IPO, CM has successfully established itself as a publicly held industrial growth company — more than tripling sales and net cash provided by operating activities and doubling earnings, while strategically expanding both its capabilities and markets to become well positioned for continued profitable growth. Significant advancement in that short timeframe has been driven by our thre e - p rong growth strategy which is based on core business focus, strategic acquisi- Bob Montgomery and Tim Tevens tions, and international growth. The thrust of the first 2 p ro ng — c o re business focus— is that we manage our multiple businesses as an integrated unit to maximize operating and marketing synergies, and CM’s overall pro f i t a b i l i t y. In this re g a rd, CM’s central- ized cost management and control mechanisms have proven very effective. Major contributions have come from our Purchasing Council through mutually beneficial relationships with key suppliers and central- ized purchasing control. Our CM business information system— C M B IS— which links most of the Company on one common integrated system has also substantially increased our operating eff i c i e n- cies and synergies. Within the next year, we expect that most of the North American locations will be on the CMBIS system enabling us to truly operate as one Company and maximize operating eff i c i e n c y. Our integrated approach to business also led to the recent formation of CraneMart™, under which we will build a network of owned and independent value-added crane builders that will source CM pro d u c t s when servicing end-user markets. The CraneMart™ strategy also ensures that our hoist products, other crane components and parts retain a high level of access to this important channel. Another important element of our core business focus is that we invest significant eff o rt in the integration of acquisitions to increase their contribution to CM’s productivity and profitability. With the exception of LICO’s Automatic Systems Inc. (ASI) — now CM’s Solutions–Automotive segment — all our acquisitions prior to January 1, 1999 have completed the import a n t first phase of integration into CM. Our progress in achieving the syner- gistic sales growth and cost savings anticipated with the ASI acquisition lagged our original plans given the interruption in project work occurring in fiscal 1999. With these markets just re t u rning to a more norm a l operating level, the integration is underway and ASI should be integrated into CM during fiscal 2000. Assimilating acquired companies into CM’s operations is vital to our success, as much of our successful financial growth has been driven by acquisitions, the second prong of our growth strategy. CM has success- fully completed a total of 14 strategic and accretive acquisitions in the last decade with nine completed since our 1996 IPO. In fiscal 1999, our p r i m a ry acquisition initiative was to expand into the crane building business, which led to our August 1998 acquisition of Abell-Howe Crane, our Marc h 1999 merger with GL International, and the concurrent launch of our CraneMart™ strategy, as well as our first quarter fiscal 2000 acquisition of Washington Equipment Company. During fiscal 1999, we also made two additional acquisitions which further enhanced both CM’s exceptional product breadth and the international strength of our Products segment. We added R a c c o rds Gautier, a French ro t a ry union manufacturer and Tigrip/Camlock a German and English manufac- turer of plate clamps used as below-the-hook lifting components. Thus far, acquisitions have been a significant driver both in CM’s track re c o rd of strong financial perf o r- mance and its growth as an industry leader. As a result, CM now has the scale, breadth of product line and strong market position to further build our business and profitability through internal growth. Going forward, strategic acquisitions remain an important part of our growth strategy and will be pursued selectively. Over the next year though, we expect greater focus will be placed on integrating all businesses of CM, which we expect will contribute consistent earnings and cash flow growth. 3 Expanding the markets we serve is also an important part of our growth strategy, and that links CM to its strategy’s third prong–international growth. CM’s fiscal 1999 acquisitions of Raccords Gautier and Tigrip/Camlock further expanded our already significant European presence, while the GL trans- action added Larco, a Canadian crane builder to complement our existing Canadian hoist business. In recent years, we have added to CM’s traditional global distribution network which now allows access to virtually every country in the world and can be used to leverage further international growth. Our focus on global growth has produced a nine-fold increase in CM’s international sales in the last five years. In fiscal 1999, international sales rose 52% to a record $191.6 million or 26% of sales. CM continues to see very significant long-term growth potential in international markets for several reasons. The size of the global market for the material handling industry is estimated at $121 billion (Source: Material Handling Industry Association) with half of this market outside the United States. American multinational companies continue to expand their non-domestic manufacturing operations creating new demand for material handling products and systems. To an increasing degree, foreign manufacturing facilities are being built and upgraded to fit American standards for safety and produc- t i v i t y. The combination of these favorable market factors, together with CM’s expanding global presence and established track record for success in international markets, should further increase CM’s international sales. Overall, management and the Board are very confident about CM’s future prospects for building earn i n g s and value. Our confidence is grounded in both our track record and the significant strength of CM’s business. CM’s key strengths include: The Broadest Product Line, Strong Brand Names CM offers the broadest product line with many of the most recognized and respected brand names in the industry. CM is also unique in that we have significant capabilities in five of the seven product categories defined by the Material Handling Industry Association —no other company matches the breadth of our product line. Market Leadership CM holds the leading market position in 12 of the product lines we make and sell. We believe we are the largest manufacturer of hoists and chain in North America with more overhead hoists in use than all our competitors combined. Broad Range of Customers CM sells to a very broad range of customers and industries in our Products and Solutions – Indus- trial segments which make up 78.0% of current sales. Our Products segment truly covers the market selling through a global network of over 11,000 distributors and customers with no customer accounting for more than 5% of Product segment sales. Significant Producer of Operating Cash Flow C M ’s operating cash flow generation is very strong while our businesses are not capital intensive, contributing to our ability to continue growing our business while building the profitability and intrinsic value of the Company. 4 Industry Trends Favorable to CM We also see broad general industrial trends continuing to have a favorable long-term impact on the demand for CM products and our growth prospects. Among these trends are: Increased Outsourcing of Material Handling Projects L a rge manufacturers continue to outsource the design, construction, installation and servicing of their material handling needs. As a provider of both material handling products and systems, CM will benefit from this trend. Increased Productivity/Decreased Cycle Times The industrial sector continues to make gains in profitability through a strong emphasis on increasing productivity and decreasing production cycle times. Material handling products and systems make a significant contribution to enhancing productivity and production line efficiency. Greater Safety Consciousness Making loads easier and safer to lift by a more diverse workforce continues to be a priority for industry worldwide, and CM’s entire product line of lifting, positioning and moving products serve these needs well. Fewer, Larger, More Diversified Suppliers Distributors worldwide continue to show an increasing pre f e rence for doing business with fewer suppliers, which favorably positions CM as a leading broad-line supplier of diverse material handling products through multiple distribution channels. These favorable trends and CM’s key stre n g t h s bode well for your Company’s future. Our expanded business mix also re p resents the best of both worlds to further advance CM as an industry leader. In the P roducts segment, anchored by our traditional hoist and chain business, we have a strong, steady and Per Share Value 1999 1998 Net sales $ 51.45 $ 38.94 Cash flow from operations Earnings Dividends Book value 4.02 1.92 0.28 2.66 1.35 0.28 13.20 11.85 reasonably predictable business that generates healthy cash flow and attractive margins. As a mature business already holding a dominant market position, however, CM’s growth rates in U.S. markets a re expected to be more modest. Our Solutions segments, with an engineere d - t o - o rder focus, pro v i d e significantly higher growth potential — within highly complementary businesses— based on a gro w i n g Solid Long-Term Performance Five Year Averages Gross margin EBITDA margin Operating income margin Pre-tax income margin Net income margin 27.9% 15.6% 12.0% 8.3% 4.2% demand for material handling systems and access to new markets. For example, with Solutions–Automotive, formed as a result of the ASI acquisition, CM gained as customers the world’s two largest automobile manufacture rs — G M a n d F o rd — which typically spend in excess of one billion dollars a year on material handling systems. At the same time, we a re conscious of the risks inherent in high customer concen- trations within the automotive industry. The net result of CM’s business mix is that the strength of the Products segment —70.1% of current sales — is complemented by the growth opportunity of both Solutions segments — 29.9% of current sales — providing a solid, balanced platform for sustained top- and bottom-line growth. 5 Fiscal 1999 marked CM’s third full year as a public company. Each of those years was strong from the perspective of financial performance and the building and management of CM’s business. The last year, however, was a disappointing one for all of us as shareholders, with CM’s total shareholder re t u rn declining in fiscal 1999 after perf o rming ahead of our peers following our first two years of public ownership. In assessing how CM perf o rmed as an investment over the last year, it is important to consider that equity markets did not favor either smaller capitalization or industrial companies in 1998, which is reflected in the perf o rmance of our shares and those of our peers. We are pleased to see a recent shift in market interest and sentiment in favor of both our peer group and smaller capitalization industrial stocks. We have just completed our second year as a Stern Stewart Economic Value Added ( E VA®) company and are pleased with its effectiveness in aligning our decisions and employee incentives with shareholder interests. With respect to acquisitions, our policy is to incorporate a newly acquired entity into our EVA program beginning with the first full year following the year of acquisition. This allows time for training and rollout of the program. We ' re pleased that, for those businesses included in our EVA program during fiscal 1999, we grew EVA by 28.6% over fiscal 1998. At this year’s annual meeting, Ed Duff y, Chairman of Columbus McKinnon from 1986 to 1998, will re t i re from his current post as a Dire c t o r. We will miss Ed’s counsel and expertise and appreciate all he has contributed to CM throughout his association with the Company. Joining CM’s Board in the last year were Rick Fleming, the Executive Vice President and Chief Financial Officer of USG Corporation, and Carlos Pascual, the President of U.S. Customer Operations and Senior Vice President of Xero x Corporation. Both Rick and Carlos bring us valuable perspective from their association with world leaders in their industries, along with significant expertise and experience in their respective specialties: Rick’s in corporate finance and Carlos’ in technology and international business. We are very fortunate and pleased to add business leaders of their caliber to CM’s Board . As Columbus McKinnon enters our fourth year as a public company, we are superbly positioned to build on the leadership and growth accomplished by the associates of Columbus McKinnon over the last decade. Our collective efforts have built a company possessing a dominant market position with respected brands and the broadest product offering, serving a wide range of end users, through an extensive distribution system, that can be leveraged globally for further growth. Add to that our track record of profitable growth and CM stands out as a company with the commitment and capability to create new value for you, our shareholders. We look forw a rd to further building Columbus McKinnon as a leading global provider of material handling products and solutions. Thank you for your continued confidence and support. Timothy T. Tevens Robert L. Montgomery, Jr. President & Chief Executive Officer Executive Vice President & Chief Financial Officer 6 C M A C Q U I S I T I O N S H I S T O R Y Fiscal Year 2000 Acquisition Product Line Result Washington Equipment Designer, manufacturer and servicer of overhead cranes 1999 GL International 1999 Camlok /Tigrip Full-service designer and builder of industrial overhead bridge and jib cranes, and related components Manufactures plate clamps, crane weighers and related products Extends CM’s crane lines and strengthens its CraneMart™ strategy. Provides additional engineering capabilities as well Formed the cornerstone of CM’s CraneMart™ strategy. Established CM as a significant player in the strategically important crane building and service markets, with the addition of the Gaffey and Larco product lines Makes CM the largest plate clamp manufacturer in Europe. Increases international reach and provides numerous cross-selling opportunities with CM’s hoist products 1999 Raccords Gautier 1999 Abell-Howe 1998 LICO (ASI) 1998 Univeyor 1997 Yale* 1997 Lister Rotary union and swivel joint manufacturer Complements CM’s Duff-Norton line of rotary unions, while improving CM’s international presence Manufacturer of jib, gantry and overhead cranes C o m p l e m e n t a ry product line providing numero u s c ross-selling opportunities for hoist products and solutions segments Designer and installer of automated material handling and custom conveyor systems Gave CM a significant presence in the integrated material handling industry as a full-service designer, fabricator and installer of automated material handling systems Designer and installer of turnkey integrated material handling systems Enhanced CM’s expertise in material handling solutions. Allows CM to offer material handling design and implementation services for entire facilities Hoist, lift table, jack and actuator manufacturer Specialty bolt and anchor- and kiln-chain manufacturer B roadened product lines. Access to new markets and products. Strengthened international pre s e n c e . Solidified CM as the leading domestic hoist pro d u c e r Complementary chain products. Access to new markets and products. Strengthened international presence 1996 Lift-Tech Hoist and crane component manufacturer Complementary product lines. Made CM the leading domestic hoist producer 1996 Endor Hoist manufacturer Provided a manufacturing presence and strengthened market access in Mexico 1995 Cady “Below-the-hook” lift manufacturer Custom-designed tooling complemented hoist products 1995 1994 Conco Manipulator manufacturer Enhanced existing manipulator lines Durbin Durco Load securement attachments manufacturer Provided metal stamping capabilities and complementary products 1990 Positech Manipulator manufacturer Gave CM entry to the manipulator market * In Fiscal 1999, CMdivested its Mechanical Products operation, a division of Yale Industrial Products. 7 C O L U M B U S M C K I N N O N B U S I N E S S S U M M A R Y P R O D U C T S O V E R V I E W P R O D U C T S CM is the largest North American manufacture r of overhead hoists and alloy and high-stre n g t h carbon chain, with leading market share for electric chain hoists, hand hoists, wire ro p e hoists, lever chain hoists, hoist trolleys, grades 43, 70 and 80 chain and hoist load chain. The Company also has the largest installed base of hoists and the leading market share for mechan- ical actuators and jib cranes in North America. During fiscal year ’99, the Company implemented its “CraneMart™’’ strategy, an integrated North American network of full-service crane builders. CM expects to continue the formation of strategic alliances — from supporting independent participants to partial or full equity ownership— in major North American industrial markets. Electric, Hand and Air Chain Hoists Electric Wire Rope Hoists Air Balancers Lever and Ratchet Binders and Load Securement Devices Motorized, Manual and Geared Trolleys Beam Clamps Wire Rope Worm Gear Drive Hoists Electric Chain Worm Gear Drive Hoists Crane Forks and C-Hooks Coil and Sheet Lifters Pallet Trucks F o rged Attachments (Hooks, Shackles, etc.) End Tools (Vacuum Lift, Vertical/Horizontal Core Lifters) Textile Slings High-Strength Chain and Overhead Lifting Chain Slings Mill Liner and Heavy Construction Bolts Anchors, Mooring Buoy Chain, Kiln Chain Mechanical Actuators, Rotary Unions and Industrial Jacks Single/Double Girder Overhead Bridge Cranes Jib and Gantry Cranes Light Rail Systems Financial Facts (In thousands, except percent, order size and employee data) Net sales % of total Income from operations before amortization as a % of net sales Fiscal Year 1999 1998 $ 515,701 $ 521,978 70.1% 92.9% 15.5% 14.6% Identifiable assets Capital expenditures $ 517,774 $ 11,201 $ 515,772 $ 10,580 Average order size $ 2M $ Employees 3,390 2M 3,420 Revenue per employee $ 152,200 $ 152,700 S O L U T I O N S — A U T O M O T I V E O V E R V I E W P R O D U C T S Fiscal Year 1999 1998 Financial Facts (In thousands, except percent, order size and employee data) Net sales % of total Income from operations before amortization as a % of net sales Identifiable assets Capital expenditures Average order size Employees $ 161,443 22.0% 9.2% $ 180,617 $ 321 $10-15MM 490 Revenue per employee $ 330,800 — — — — — — — — CM’s Automatic Systems, Inc. (ASI) unit, added when CM acquired LICO, specializes in overh e a d conveyors, electric monorail systems, robotic indexing systems, and automatic body transfer systems. ASI designs, fabricates and installs custom conveyor and automated material handling systems, primarily for the automotive industry, principally General Motors and Ford. Overhead Power and Free Conveyor Systems Inverted Power and Free Conveyor Systems Autoflex Power and Free Conveyor Systems Electrified Monorails Robotic Indexing Systems Special and Custom Designed Product Transfer Systems Belt Skid and Skillet Conveyors Specialized Mold, Flask and Casting Handling Equipment Aggregate and Bulk Material Handling Equipment S O L U T I O N S — I N D U S T R I A L O V E R V I E W P R O D U C T S Financial Facts (In thousands, except percent, order size and employee data) Net sales % of total Income from operations before amortization as a % of net sales Fiscal Year 1999 1998 $ 58,301 $ 39,845 7.9% 7.1% 9.6% 10.0% Identifiable assets $ 68,520 $ 71,499 Capital expenditures Average order size Employees $ $ 1,468 1MM 480 $ $ 712 1MM 500 Revenue per employee $ 122,200 $111,700 C M ’s FY ’98 acquisition of Univeyor A/S established it as a significant player in the integrated material handling industry. Univeyor designs, manufactures and supplies computer- c o n t rolled and automated powered roller conveyors, w a rehousing operations and distribution systems. CM is also the largest North American manufacturer of operator-controlled manipu- lators and manufactures one of the industry’s widest variety of standard scissor lift tables. Custom-Designed Material Handling Systems Unit Handling Powered Roller Conveyor Systems Mini-Load Systems Pneumatic, Hydraulic and Electric Manipulators Vertical Lift Cylinders Articulated Jibs Reaction and Transfer Arms Custom Engineered Tooling Single and Double Arm Scissor Lifts Tilters, Tilt Lifts, Tilt Stations Stackers, Palletizers, Inverted Lifters Stacker Cranes Light Rail Systems Tire Shredders 8 S A L E S / S E R V I C E S C O M P E T I T I V E S T R E N G T H S G R O W T H D R I V E R S Products are sold primarily to distributors in commercial and consumer distribution channels both domestically and internationally Commercial distribution channels: general, specialty and service-after-sale distributors and original equipment manufacturers (“OEMs”) General distributors (10,583) include industrial distributors, rigging shops and crane builders Specialty distributors (819) include catalog houses, material handling specialists and entertainment equipment distributors Designed and sold directly to U.S. and Canadian governments and to numerous OEM accounts worldwide CM’s extensive service-after-sale network (483) includes repair parts distribution centers, chain service centers, and hoist repair centers, trained and supported by CM More than 1,100 consumer distributors, including mass merchandisers, rental outlets, and hardware, trucking, transportation and farm hardware distributors M A R K E T S Worldwide, General Manufacturing, Overhead Crane, Automotive, Construction, Logging, Mining, Entertainment, Transportation, Power Generation, Agriculture, Marine, Consumer, Significant Parts and Service Business 81% of fiscal ’99 U.S. Products segment sales are into markets where CM is the number one supplier Largest North American manufacturer of hoisting equipment Largest installed base of hoists in North America, providing strong recurring sales and parts base Widely known and respected brand names in all product categories Number one market position in load chain for use in hoists, one of the largest markets for quality chain and in other grades of high-strength carbon steel chain used in the transportation industry for load securement and alloy chain for overhead lifting Leading supplier of marine chain to U.S. and Canadian governments Second largest North American producer of forged products and rigging accessories CraneMart™ established CM’s position as full-service supplier of hoists, cranes, and components, and expands parts and service opportunities Most facilities are certified to ISO 9000 standard s According to the U.S. Department of C o m m e rce and Bureau of Labor Statistics, material handling is one of America’s largest and fastest-growing industries U.S. material handling products market is expected to grow to a $65 billion industry by 2001 Industry trends driving material handling growth: n More outsourcing n Demands for increased productivity, reduced cycle time n Increased focus on worker safety n Growing workforce diversity n Fewer, larger, more diversified suppliers 75% of CM’s Products sales are for maintenance, repair, operating and production supplies, as contrasted with more cyclical higher cost capital goods CM’s strong global presence; 24% of FY ’99 products sales were from outside the U.S. S A L E S / S E R V I C E S C O M P E T I T I V E S T R E N G T H S G R O W T H D R I V E R S ASI provides custom engineered systems by functioning either as a turnkey contractor or as a supplier working in conjunction with the customer’s general contractor. M A R K E T S Worldwide, Automotive, Steel, Foundry CM’s ASI subsidiary enjoys preferred provider status with many key customers, bidding on virtually every GM and Ford material handling system project ASI’s engineering, estimating and bidding capabilities are among the best in the industry, along with its project implementation skills ASI was one of only 184 companies worldwide — from over 30,000 supplier companies — recognized by General Motors as a supplier of the year, a distinction awarded to ASI for two consecutive years American automotive industry trends driving material handling growth: n Shorter new model life cycles n Emphasis on rapid plant changeovers n Focus on increasing plant flexibility n Outsourcing larger internal work-flow projects to fewer preferred suppliers n Increasing work force diversity and workplace safety mandates n New assembly concepts focused on reducing costs ASI’s blue-chip client list: General Motors, Ford, Harley-Davidson, American Steel and Wire, John Deere S A L E S / S E R V I C E S C O M P E T I T I V E S T R E N G T H S G R O W T H D R I V E R S CM Solutions–Industrial sells customized systems directly to end-users. Univeyor designs, manufactures and supplies products and turnkey systems for integrated material handling systems, based on standardized products and high-tech operating systems that are tailored to the customers needs. Manipulators and scissor lifts are sold by Company sales employees and independent distributors which focus on these specialized products. M A R K E T S Worldwide, Metals, Construction, Food and Beverage, Storage and Distribution, Electronics, Consumer Products Manufacturing, Heavy Manufacturing, Pharmaceuticals, Warehousing, Aerospace, Waste Management Continual emphasis on innovation and technology with a number of proprietary material handling systems and components CM holds a leadership position in operator- controlled manipulators Manufacturing and distribution trends to outsource the design and implementation of work flow and material handling systems worldwide Manipulators provide productivity and safety enhancements CM’s blue-chip client list for Solutions– Industrial: Volvo, Saab-Scania, TRW, Apple Computer, Siemens, Chivas Regal, Dansk, Electrolux, Kellogg’s, LEGO, Mars, Nestlé, Polygram, Sony and United Biscuits Significant potential for maintenance and long-term relationships 9 P R O D U C T S 10 Hoists, cranes, chain, and other lifting and positioning products make up Columbus McKinnon’s P roducts segment, the largest contributor to CM sales. CM manufactures, supplies and serv i c e s one of the most comprehensive product lines of material handling products in the world. Long known for leadership and quality, its brand names are the industry ’s most re c o g n i z a b l e . CM’s products frequently complement each other to further increase efficiency and safety. With distribution, sales and service support locations throughout the world, CM’s sales and service-after-the-sale networks are the industry’s most extensive. 11 P R O D U C T S 70.1% of CM Fiscal 1999 Sales Columbus McKinnon’s Products segment re p resents our core products: hoists and other lifting pro d u c t s , chain and forgings, as well as our recently added crane building business. With sales of $516 million in fiscal 1999, the Products segment currently makes up over 2/3 of CM’s current net sales and collec- tively forms one of the world’s largest and most comprehensive lines of lifting and positioning devices. The products manufactured and sold by CM’s Products segment make CM the leading developer, manufac- t u rer and supplier of hoists and other related material handling products in North America. T h rough this segment, CM holds the dominant market position in 12 product lines with 81% of domestic product sales into markets where we are the largest supplier. In our Products segment, CM also has a significant and growing international presence with 24% of sales coming from markets outside the United States, up from 21% last year. With a broad and diverse product line and a reputation for quality and service after the sale, CM is f i rmly established as a pre f e rred provider to major distributors and end users. CM’s Products segment sells through a network of over 11,000 distributors and customers with no single customer accounting for more than 5% of net sales. Commercial distribution channels include general distributors, specialty distributors, serv i c e - a f t e r-sale distributors, original equipment manufacturers (OEMs), and the American and Canadian governments. Consumer distribution channels include mass merchandisers, hardware distributors, trucking and transportation distributors, farm hardware distributors and rental outlets. T h rough these multiple channels, CM covers diverse markets selling to a very broad range of industries and customers. CM products are sold to industries such as general manufacturing, crane building, mining, c o n s t ruction, entertainment, transportation, power generation, government, waste management, agricul- t u re, logging, marine and defense. T h e re are a number of general distribution trends favoring large broad-line suppliers like CM: consolidation of distributors, market share shift between distribution channels, the rise of marketing and buying consor- tiums, increasing focus on supply chain management, and the growth of electronic commerce and integrated supply contracts. With multiple product lines and distributor relationships in every major sales channel, CM has already anticipated and positioned itself to keep pace with these changes in distribution mix and pattern s . Another benefit of the diversity of CM’s product lines and markets is a reduction in the overall cyclical e x p o s u re of its Products segment. Approximately 75% of CM’s Products segment sales are for maintenance, repair, operating and production supplies (MROP), as contrasted with more cyclical, higher cost capital goods. An important strength of CM’s Products segment and a significant contributor to sales is our serv i c e - a f t e r-the-sale operations. To effectively service end users of its products, CM has built an extensive s e rv i c e - a f t e r-the-sale network of independent parts distributors and service and repair centers. The serv i c e - a f t e r-sale network includes repair parts distribution centers, chain service centers, and hoist repair centers. This network of over 483 service suppliers based in strategically located American and foreign markets a re trained and supported by CM ensuring an accessible and responsive service network. Service currently provides CM’s Products segment with 5% of its sales. The size and quality of CM’s s e rvice operations also contribute significantly to the strength of CM’s brand portfolio which is reflected in a high level of repeat business for CM’s Products segment. 12 Hoists 56% of Products segment fiscal 1999 sales Hoists are the largest selling product in CM’s Pro d u c t s segment. CM’s hoist lines cover a wide range of electric powered chain, wire rope and hand chain hoists with the most well known and established brand names in the world, including Chester, Budgit, Coffing, Yale, Shaw-Box and CM. Our hoists perf o rm a broad range of applications pro v i d i n g lifting capability from less than one ton up to 100 tons. The combination of over 30 high quality brand names and a versatile product line solidifies CM’s leadership position in many markets. CM has the largest market share of hoists The entertainment industry is among CM’s biggest purchasers of hoists and other lifting products used by theaters, stadiums and concert halls. in North America with its electric chain and wire rope hoists, hand chain hoists, lever tools and tro l l e y s , all holding the leading market position. CM also holds the leading market position in North America for hoist parts and load chain. Contributing significantly to CM’s strong leadership in hoist markets were its October 1996 acquisi- tion of Yale Industrial Products and its November 1995 acquisition of Lift-Tech. Yale, CM’s largest acquisition to date, solidified our position as the leading producer of hoists in North America while bringing complementary lifting products and a significant European presence which offers greater growth potential than domestic markets. Lift-Tech gave us electric wire rope and air chain hoists, making CM’s product line the broadest in the industry. Lift-Tech was also key in expanding CM’s sales to the crane builder market. Chain and Forged Attachments 22% of Products segment fiscal 1999 sales A major producer of high quality chain for over six decades, CM is a leading manufacturer of both alloy chain and high-strength carbon steel chain which are used in lifting and rigging applications. CM’s Herc-Alloy‚ chain — developed in 1933 — provides strength and durability in a light-weight chain and was the first welded alloy steel overhead lifting chain. Federal regulations in the United States now require the use of alloy chain for all overhead chain lifting applications. CM has the number one market position in Grades 43, 70 and 80 chain. From an end user perspective, CM holds the number one market share in high-strength carbon steel chain used in the transportation industry for load securement and the number one market position in load chain for use in hoists. These two market segments are among the largest consumers of high quality chain. CM’s December 1996 acquisition of Lister Bolt & Chain further broadened its chain product line to include anchor, buoy and kiln chain markets and established CM as a leading supplier of marine chain to the American and Canadian governments. 13 CM’s new ColorLinks™ system is designed to help simplify the sale of its chain, cable and forged attachments within the consumer market. Complementing CM’s chain products are forged attachments and rigging accessories including hooks, shackles, and load binders. CM is one of the largest North American producers of forged attach- ments, which are used in virtually all types of chain and wire rope rigging applications. Industrial Components 7% of Products segment fiscal 1999 sales C M ’s Products segment generates over $38 million in sales of additional industrial lifting and positioning equipment and components that round out our comprehensive product line. CM’s Duff-Norton, one of the largest manufacturers of heavy duty industrial jacks, rotary unions and mechanical actuators, is the leading contributor to this group. These products meet lifting, positioning and fluid transfer needs of industrial customers worldwide. CM’s December 1998 acquisition of French rotary union and swivel joint manufacturer Raccords Gautier complements Duff - N o rt o n ’s product line while expanding its global reach. Other industrial components include the products of Camlok (England) and the Tigrip line (Germany) a c q u i red in Febru a ry 1999 and now managed under the German unit of CM’s Yale Industrial Pro d u c t s . The major products of these combined lines include crane weighers and standard and specialized plate clamps, which are below-the-hook devices used in conjunction with hoists to lift large steel plates weighing up to 30 tons. Camlock and Tigrip are well known brand names in Europe and these related acquisitions make CM the European market leader for plate clamps. As a complementary product with hoists, plate clamps are sold through existing marketing channels, producing new cross-selling opportunities with hoists, particularly in North America, where CM is the market leader. Industrial Overhead Cranes 15% of Products segment fiscal 1999 sales CM entered crane building in fiscal 1999 through our August 1998 acquisition of Abell-Howe Crane, a Chicago-based regional manufacturer of jib and overhead cranes. This acquisition brought CM another complementary product line further expanding our capabilities as a full service provider of material handling products and solutions. It was also CM’s first step toward the development and introduc- tion of the CraneMart™ strategy which coincided with CM’s March 1999 merger with GL International, the largest crane builder in North America. The merger with GL International established CM as a significant player in the strategically important crane building and service market, which is a strong comple- ment to our core hoist business. With annual sales of a p p roximately $70 million, GL is a full service crane builder that is geographically dispersed over a substan- tial portion of North America including several key s o u t h e rn U.S. markets and the industrial center of e a s t e rn Canada. GL also brings to CM an extensive, successful parts and service business. It solidified an a l ready strong business re l a t i o n s h ip— CM sells about $7 million annually in hoists and crane components and p a rts to GL— an amount that is expected to gro w. 14 Abell-Howe brings numerous cross-selling opportunities to CM, while simultaneously expanding our industrial and workstation product lines. Given its size and multi-market presence, GL is also an exceptionally strong cornerstone for CM’s newly launched CraneMart™ p ro g r a m . In the first quarter of fiscal 2000, we followed the GL transaction with the acquisition of the Wa s h i n g t o n Equipment Company, a central Illinois-based crane builder with $16.5 million in annual sales. In Wa s h i n g t o n Equipment, CM gained both additional engineering capabilities and a presence in five important markets: central Illinois and eastern Iowa, significant heavy manufacturing areas and the major markets aro u n d St. Louis, Missouri and Jacksonville, Florida. Through three transactions over the course of less than a y e a r, CM has become a major crane builder with over $90 million in pro forma annual sales. The combi- nation of a strong foundation of wholly owned crane builders with the added value of CraneMart™ p o i n t s to favorable long-term growth prospects for CM’s crane-related business. CraneMart™ The launch of CraneMart™, along with our entry into the crane building market as an equity owner, is a major long-term strategic initiative for Columbus McKinnon. Our goal in this strategy is to build an integrated North American network of full-service crane builders though strategic alliances — f rom supporting independent participants to partial or full equity ownership — in major North American industrial markets. Our rationale in developing CraneMart™ is based on changing market conditions including greater compe- tition and the growing appeal of strategic alliances with major manufacturers to smaller, independently owned and regionally based manufacturers, the profile of the typical crane builder. CraneMart™ is housed in CM’s P roducts segment, reflecting the close tie of crane building markets to CM’s flagship hoist product line. Through CraneMart™, CM becomes a full service supplier of cranes, hoists, and components, with expanded parts and service offerings to meet increasing demands of end-user customers. CraneMart™ will strengthen existing customer relationships and expand business through new alliances and partnerships with crane builders throughout North America. The strong margins and growth potential of the service business for cranes are added benefits of this strategy for CM. The benefits for CraneMart™ p a rticipants are significant. Affiliation with CraneMart™, a national network s p o n s o red by an industry leader, will provide greater exposure for members and open doors to national accounts in their region. CraneMart™ participants will also gain access to CM’s extensive and sophis- ticated crane engineering capabilities. Expanded and enhanced field support through a well-trained sales force currently in place will be available to CraneMart™ members. There are also major financial advantages for members who will receive CM’s most competitive pricing, along with the ability to source and redistribute parts cost effectively through our CraneSource program. The CraneMart™ program also provides for equal treatment of independent and CM-owned participants who already operate on an arms-length basis from CM. Since CraneMart’s™ March 1, 1999 launch, CM has reviewed program parameters and benefits with a sizable targeted group in several major markets. Based on both favorable response and initial customer commitments, we anticipate most of this group will join CraneMart™ as independent participants when the fully developed program will be in place later this year. 15 S O L U T I O N S 16 C M ’s Solutions business consists of two segments: Solutions–Automotive and Solutions–Industrial. The Solutions–Automotive segment designs, fabricates and installs both custom conveyors and automated material handling systems primarily for the automotive i n d u s t ry. CM’s Solutions–Industrial segment focuses on material handling systems and workstations supporting assembly lines, warehousing operations and distribution systems for numerous industries. The systems approach of CM’s Solutions businesses provides both high growth potential and expanded cross-selling opportunities for virtually all CM pro d u c t s . 17 S O L U T I O N S Automotive 22% of CM Fiscal 1999 sales Industrial 7.9% of CM Fiscal 1999 sales C M ’s Solu tions bus in es s in cl udes t wo s egme nt s, Solutions–Automotive and Solutions–Industrial, which collectively make up just under 1/3 of CM’s current sales. The organization of CM’s Solutions business into two segments reflects the large customer concentration in the domestic automotive markets served by Automatic Systems Inc. (ASI) which was the major operating subsidiary of LICO, Inc. a c q u i red by CM in March 1998. ASI is now the primary operating unit of Solutions–Automotive while the rest of CM’s material handling systems business is organized under Solutions–Industrial, reflecting both the broader markets and customer base served by this group of five operations. As companies continue to outsource larger internal work-flow projects and demand increas- ing plant flexibility, the opportunities for CM’s Solutions business should continue to grow. C M ’s recent diversification into the design, manufacturing and installation of facility-wide material handling systems stems from our fiscal 1998 fourth quarter acquisitions of LICO and Univeyor. Both firms b rought substantial engineering and design capabilities to CM. Our prior roots as a provider of material handling solutions lie in our development of workstations, using products such as lifts, manipulators and balancers which increase productivity and safety by lifting and positioning loads with ease, flexibility and precision. Our strategic rationale for this expanded and complementary business focus remains its stronger and broader longer- t e rm growth prospects compared to our traditional products business. The persis- tent emphasis of manufacturers on optimizing productivity points to greater future demand for an integrated, technologically advanced, facility-wide approach to material handling. Adding to that demand driver is increased outsourcing of engineering and design for material handling projects which should benefit those firms with the engineering capabilities to pro d u c e systems-type solutions. As a broad line provider of material handling products in addition to solutions, CM is also focused on expanding the market for its products through this enhanced capability. Conveyor systems are the primary products designed and m a n u f a c t u red by CM’s two solutions business segments. Manufactured by ASI, Univeyor and newly added Handling Systems and Conveyors (HSC), conveyors are the most i m p o rtant component of a material handling system, re f l e c t i n g their high functionality for transporting material throughout manufacturing and warehouse facilities. Other CM products that fit the systems profile for inclusion in solutions are those 18 Increasing workplace diversity is expected to increase the demand for productivity and safety enhancing workstation products like those produced by CM’s Solutions–Industrial segment. with a workstation focus: manipulators, scissor lifts, and balancers. Conco and Positech produce manipulators while American Lifts manufactures scissor lifts. For CM's Solutions segments, the primary customers are currently concentrated in the automotive, consumer p roducts manufacturing and warehousing industries. The Solutions-Industrial segment also serves steel, c o n s t ruction, and other industrial markets. Companywide, CM's only significant customer concentration is in our Solutions-Automotive segment, which curre n t l y generates a substantial portion of its sales through General Motors and Ford, the world's two largest automobile manu- f a c t u rers. Due to this concentration, sales in our Solutions- Automotive segment were below our original expectations as a result of the mid-year General Motors strike. Additionally, a significant portion of the Solutions-Automotive segment's f u t u re growth depends on the implementation of modular automotive assembly processes by U.S. automotive manufac- t u rers. Domestic automakers have committed to the concept C M ’s ASI subsidiary enjoys pre f e rred provider status with many key customers, bidding on virtually every GM and Ford material handling system pro j e c t . of modular assembly, although a significant, previously announced program was recently deferred. Nonethe- l e s s , the frequency of model changeovers and the eff o rt to build more productive manufacturing opera- tions should continue to drive demand within this segment. As one of the largest material handling suppliers to the domestic automotive industry, ASI also enjoys s t rong established relationships, which is reflected in their inclusion on the bid list for every significant material handling project for both GM and Ford. ASI was recognized in April 1999 as a General Motors Worldwide Supplier of the Year for the second consecutive year. The award was given to only 184 firm s out of its 30,000 suppliers worldwide. Sales in the Solutions-Industrial segment increased 46.3% in fiscal 1999, primarily due to the January 1998 Univeyor acquisition. Univeyor, based in Denmark and the largest contributor to sales in the Solutions-Industrial segment, has a broad array of major industrial customers, including United Biscuits, Chivas Regal, Mars, Sony, British Telecom, Volvo and Saab Scania. Univeyor's products focus includes powered floor- mounted roller conveyor systems and sophisticated electro n i c c o n t rol systems. In addition to expanding CM's global re a c h , Univeyor has also gained new markets in the United States for its services and products through cooperation with ASI and other CM units. CM’s Univeyor subsidiary is the largest contributor to the Solutions-Industrial segment. In addition to expanding CM’s global presence, it provides numerous cross-selling opportunities for ASI and many other CM business units. 19 In March 1999, CM acquired additional capability as a material handling solutions provider through its merger with crane builder GL International. HSC, a GL unit, designs and builds overhead monorail systems for industrial customers. Based in Little Rock, Arkansas, HSC broadens the base of indus- trial customers for CM’s Solutions business. Both Solutions segments share common characteristics which distinguish them from CM’s core Products segment, which primarily sells standard manufactured products through distributors. CM’s Solutions segments focus to a large degree on engineere d - t o - o rder material handling systems primarily sold directly to end users. While the Solutions business generally produces lower gross profit marg i n s than CM’s Products business, this is favorably offset by the lower capital base needed to design and manufacture systems. Larger custom systems are typically awarded through a competitive bidding process and revenue recognition occurs as the work is performed, which can create some variability in quarterly results. This aspect of the Solutions business is balanced by the strength of our very complementary Pro d u c t s business and Solutions’ potential for generating attractive l o n g - t e rm growth and re t u rns. With the recent re t u rn of automotive markets to normal conditions and the continued integration and development of CM’s expanded solutions c a p a b i l i t y, our Solutions segments are favorably positioned to become a strong growth platform for CM. CM’s Solutions business provides engineering capabilities which often combine multiple CM products to improve ergonomics, productivity and safety, such as this combination of a Conco® manipulator and a CM MAX™ air balancer. 20 C O L U M B U S M C K I N N O N ’ S I N D U S T R Y G L O S S A R Y Actuators: both electromechanical and mechanical lifting and positioning devices. Capacities range from 100 pounds to 250 tons. A t t a c h m e n t s : f o rged, stamped and cast components most frequently used in conjunction with chain and other lift- ing mediums. Integrated Material Handling Solutions: full-scale design of material handling products and systems that, when used together, provide a customized and safe work flow throughout an entire facility. Jib Cranes: o v e rhead beam-like devices for mounting hoists to extend over a work station. Automatic Body Transfer Systems: automation used to load, unload and transfer automobiles between and off of conveyors during assembly. L i f t e r s : generally working in conjunction with a hoist, below- the-hook lifters are specialized grabs which attach, hold, pro- tect, control and orient a load in the material handling pro c e s s . Bridge Cranes: o v e rhead beams mounted across the full span of a facility, providing wall-to-wall lifting and trans- portation options via a suspended hoist for both front/back and left/right movement. Catalog Distributors: distributors who market their products through printed catalogs to industrial companies and consumers. Carbon Chain: general purpose and transportation chain for towing, pulling and securing applications. Crane End-Tru c k s : manual or powered wheeled devices affixed to the end of overhead cranes. Used to move the cranes along a steel runway. Electrified Monorail Systems: specialized types of o v e rhead conveyors that provide manufacturing flexibility and p roductivity at greater speeds in automotive assembly plants. E n t e rtainment Equipment Distributors: d i s t r i b u t o r s who specialize in lifting applications required by theaters, stadiums, sports arenas, concert halls, convention centers and discos. F o rg i n g : manufacturing technique of hammering steel into wire rope and chain attachments. Examples: hooks, shackles, load binders, masterlinks. G a n t ry Cranes: mobile overhead lifting devices that, when used in conjunction with hoists, allow for the lifting and transportation of objects throughout a work environment. H e rc - A l l o y® C h a i n : made with an alloy-steel blend, this light-weight chain offers its users extreme strength and dura- b i l i t y. An original CM innovation, it is now re q u i red by federal safety regulations for use in all overhead lifting applications. H o i s t s : o v e rhead lifting equipment which utilizes either manual, electric or air power, and either chain or wire rope as a lifting medium for capacities of up to 100 tons. Hoist Trolleys: used to affix a hoist to an overhead steel beam, safely providing balanced lateral movement after an object has been vertically lifted. Industrial Wholesale Distributors: distributors who sell a variety of products for maintenance, re p a i r, operating and p roduction applications through their own direct sales force and also provide serv i c e - a f t e r-sales support to their customers. Material Handling Products: tools which assist in lift- ing loads from point A to point B, horizontally or vertically. Material Handling Specialists: distributors who design and assemble systems such as overhead rail systems incor- porating trolleys, hoists, chain and other products. O p e r a t o r- C o n t rolled Manipulators: a rticulated mechan- ical arms with specialized end tooling designed to perf o rm lifting, rotating, turning, tilting, reaching and positioning tasks in a variety of environments both safely and pre c i s e l y. Plate Clamps: below-the-hook devices used in conjunction with hoists to lift large steel plates weighing up to 30 tons. P o w e r- a n d - F ree Conveyors: the most versatile and cost e ffective material handling system, allowing products of any size and weighing up to several tons to be delivered at high speeds to multiple locations within a facility. Rigging Shops: specialized distributors who manufac- ture and repair wire rope slings and chain slings, and sell various rigging supplies. Robotic Indexing Systems: allow for products to be indexed at very high speeds from a materials handling per- spective — up to 500 feet per minute — and with great posi- tion accuracy— from .001 to .002 inches. Roller Conveyors: floor-mounted systems designed to transport, sort and distribute products. Rotary Union: a rotating mechanical seal used to facili- tate the transfer of liquids or gases from a stationary pipe to a rotating mechanism. Scissor Lift Ta b l e s : p rovide a surface upon which objects may be placed and subsequently raised, lowered or tilted so as to make handling of the objects ergonomically corre c t . S e rv i c e - A f t e r-Sale Distributors: distributors who p rovide end-users with repair services and replacement part s . S y n e rg i e s : c ross-selling and cost-saving opportunities that make a business combination more valuable than its individual parts. Work Stations: application-specific work areas designed to ergonomically lift, position and tilt objects using multiple material handling products. 21 S E L E C T E D F I N A N C I A L I N F O R M A T I O N The following table sets forth selected consolidated financial information of the Company for each of the seven fiscal years in the period ended March 31, 1999. This information includes (i) the results of operations of Lift- Tech since its acquisition on November 1, 1995, (ii) the results of operations of Yale since its acquisition on October 17, 1996, (iii) the results of operations of Lister since its acquisition on December 19, 1996, (iv) the results of operations of Univeyor since its acquisition on January 8, 1998, (v) the results of operations of LICO since its acquisition on March 31, 1998, (vi) the results of operations of Mechanical Products through its divestiture on August 7, 1998, (vii) the results of operations of Abell-Howe since its acquisition on August 21, 1998, (viii) the results of operations of Gautier since its acquisition on December 4, 1998, (ix) the results of operations of Camlok and Tigrip since their acquisition on January 29, 1999, and (x) the results of operations of GL since its formation on April 1, 1997, including the restatement of Company data re p o rted prior to GL’s merger with the Company on March 1, 1999. This table should be read in conjunction with the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and the Consolidated Financial Statements of the Company, including the notes thereto, included elsewhere herein. Refer to the “Description of Business and Business Acquisitions” note to the Consolidated Financial Statements re g a rding the unaudited pro form a i n f o rmation presented, which reflects the fiscal 1999 and 1998 business acquisitions and divestiture, and re l a t e d capital impact, as if they occurred on April 1, 1997, which is the beginning of fiscal 1998. (Dollars in thousands, except per share data) Statement of Income Data: Net sales Cost of products sold Gross profit Selling expenses General and administrative expenses Amortization of intangibles Other charges Income from operations Interest and debt expense Interest and other income Income before income taxes, minority interest, extraordinary charge, and cumulative effect of accounting change Income tax expense Minority interest Extraordinary charge for early debt extinguishment Cumulative effect of accounting change Net income Earnings per share data — diluteda: Income before extraordinary charge and cumulative effect of accounting change Net income Cash dividend per common share a Pro Forma Statement of Income Data: Net sales Income from operations Income before extraordinary charge Net income Earnings per share data — diluted a: Income before extraord i n a ry charg e Net income Balance Sheet Data (at end of period): Total assets Total long-term debt (including cur rent maturities) Total liabilities Total shareholders’ equity Fiscal Years Ended March 31, 1998 1999 $ 735,445 542,975 192,470 52,059 39,850 15,479 — 85,082 35,923 1,565 50,724 23,288 — — — $ 561,823 401,669 160,154 46,578 33,361 10,297 — 69,918 25,104 1,940 46,754 22,776 — (4,520) — $ 27,436 $ 19,458 $ 1.92 1.92 0.28 $ 732,143 84,702 27,355 27,355 1.91 1.91 $ 766,911 423,612 578,237 188,674 $ 1.66 1.35 0.28 $ 735,525 81,963 24,354 19,834 1.69 1.37 $ 788,862 458,577 617,916 170,946 (a) Reflects a 17 to 1 stock split of the common stock effected on February 15, 1996; fiscal 1993 through 1996 per share data also impacted by the Company’s initial public offering effected on February 22, 1996. 22 22 1997 1996 Fiscal Years Ended March 31, 1995 1994 1993 $ 359,424 251,987 107,437 32,550 24,636 5,197 — 45,054 11,930 1,168 34,292 15,617 (323) (3,198) — $ 209,837 149,511 $ 172,330 124,492 $ 142,313 103,527 $ 128,338 93,220 60,326 19,120 13,941 791 672 25,802 5,292 1,134 21,644 8,657 — — — 47,838 15,915 11,449 600 1,598 18,276 2,352 472 16,396 5,892 — — — 38,786 13,828 10,105 378 2,055 12,420 2,126 371 10,665 4,637 — — 1,001 35,118 12,825 9,787 307 26 12,173 2,464 266 9,975 3,703 — — — $ 15,154 $ 12,987 $ 10,504 $ 7,029 $ 6,272 $ 1.39 1.15 0.27 $ 1.69 1.69 0.24 $ 1.48 1.48 0.21 $ 0.85 0.99 0.18 $ 0.87 0.87 0.18 $ 548,245 286,288 398,089 150,156 $ 188,734 9,744 51,112 137,622 $ 97,822 22,587 56,972 40,850 $ 93,378 20,222 60,914 32,464 $ 83,026 20,492 55,895 27,131 23 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F R E S U L T S O F O P E R A T I O N S A N D F I N A N C I A L C O N D I T I O N O V E RV I E W The Company is a broad-line designer, manufacture r, and supplier of sophisticated material handling pro d u c t s and integrated material handling solutions that are widely distributed to industrial, automotive and consumer markets worldwide. The Company’s material handling products are sold, domestically and intern a t i o n a l l y, principally to third party distributors in commercial and consumer distribution channels, and to a lesser extent d i rectly to manufacturers and other end-users. Commercial distribution channels include general distributors, specialty distributors, serv i c e - a f t e r-sale distributors, original equipment manufacturers (“OEMs”), and the U.S. and Canadian governments. The general distributors are comprised of industrial distributors, rigging shops and crane builders. Specialty distributors include catalog houses, material handling specialists and entert a i n m e n t equipment riggers. The serv i c e - a f t e r-sale network includes repair parts distribution centers, chain serv i c e centers, and hoist repair centers. Company products are also sold to OEMs, and to the U.S. and Canadian g o v e rnments. Consumer distribution channels include mass merchandisers, hard w a re distributors, trucking and t r a n s p o rtation distributors, farm hard w a re distributors and rental outlets. The Company’s integrated material handling solutions businesses primarily deal with end-users. Material handling solution sales are concentrated, domestically and internationally (primarily Europe), in the automotive industry, and consumer pro d u c t s manufacturing, warehousing and, to a lesser extent, the steel, construction and other industrial markets. On March 1, 1999, GL International, Inc. (“GL”) was merged with and into the Company through the issuance of new Company stock and options to purchase Company stock for all issued and outstanding stock and options of GL. The merger was accounted for as a pooling of interests and, accordingly, the 1999 and 1998 consolidated financial statements have been restated to include the accounts of GL from the date of GL’s formation, April 1, 1997. This section should be read in conjunction with the consolidated financial statements of the Company included elsewhere herein. R E S U L T S O F O P E R A T I O N S The following table sets forth certain income statement data for the Company, expressed as a percentage of net sales, for each of the periods presented: Fiscal Years Ended March 31, 1998 1997 1999 Products Segment sales Solutions– Industrial Segment sales Solutions – Automotive Segment sales Intercompany eliminations/Other sales Net sales Cost of products sold Gross profit Selling expenses General and administrative expenses Amortization of intangibles Income from operations Interest and debt expense Interest and other income Income before income taxes, minority interest and extraordinary charge Income tax expense Income before minority interest and extraordinary charge 71.9% 7.9 22.0 (1.8) 100.0 73.8 26.2 7.1 5.4 2.1 11.6 4.9 0.2 6.9 3.2 3.7% 93.4% 7.1 — (0.5) 100.0 71.5 28.5 8.3 5.9 1.9 12.4 4.4 0.3 8.3 4.0 4.3% 88.6% 7.9 — 3.5 100.0 70.1 29.9 9.1 6.9 1.4 12.5 3.3 0.3 9.5 4.3 5.2% Fiscal Years Ended March 31, 1999, 1998, and 1997 Sales growth during the periods was primarily due to the March 1999 GL merg e r, the March 1998 LICO acquisition, the January 1998 Univeyor acquisition, the December 1996 Lister acquisition and the October 1996 Yale acquisition, offset by the August 1998 Mechanical Products divestiture. Sales in 1999 of $735,445,000 incre a s e d $173,622,000 or 30.9% over 1998, and sales in 1998 of $561,823,000 increased $202,399,000 or 24 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F R E S U L T S O F O P E R A T I O N S A N D F I N A N C I A L C O N D I T I O N 56.3% over 1997. On a pro forma basis, considering the effects of fiscal 1999 and 1998 acquisitions and d i v e s t i t u re, the Company experienced a 0.5% decrease in sales in fiscal 1999 compared to 1998. This comparison is impacted by the following economic factors: 1) a relatively soft industrial market, 2) the effect of the mid- 1998 General Motors strike, 3) the impact of the Asian and South American economic situations, and 4) a shift in demand from small retail hardware stores to larger do-it-yourself superstores, to which the Company supplies only a small share. On a pro forma basis, considering the effects of fiscal 1998 and 1997 acquisitions, the Company experienced a 10.6% increase in sales in fiscal 1998 compared to 1997. This growth was due to strong Solutions-Automotive segment demand as well as solid demand by nearly all Products segment market channels. In addition, during these periods the Company introduced list price increases of appro x i m a t e l y 4% in both December 1998 and 1997 affecting certain of the Company’s hoist, chain and forged products sold in its domestic commercial markets. Sales in the Products, Solutions-Industrial and Solutions-Automotive segments were as follows, in thousands of dollars and with percentage changes for each segment: The addition of the Solutions–Automotive segment in fiscal 1999 is due to the March 1998 LICO acquisition. The 46.3% and 40.8% growth in the Solutions–Industrial segment in fiscal 1999 and 1998, respectively, is Change 1998 vs 1997 (In thousands, except percentages) Fiscal Years Ended March 31, 199 9 Change 1999 vs 1998 Amount Amount 1997 1998 % % Products Solutions–Industrial Solutions–Automotive Eliminations/Other $ 528,974 58,301 161,443 (13,273) $ 524,949 39,845 — (2,971) $ 318,544 28,308 — 12,572 $ 4,025 18,456 161,443 (10,302) Consolidated net sales $ 735,445 $ 561,823 $ 359,424 $ 173,622 0.8 46.3 — — 30.9 $ 206,405 11,537 — (15,543) $ 202,399 64.8 40.8 — — 56.3 due to the January 1998 Univeyor acquisition and also the October 1996 Yale acquisition, for which this segment includes a portion of that business. The 64.8% growth in the Products segment in fiscal 1998 is due to the formation of GL in April 1997, the December 1996 Lister acquisition, the October 1996 Yale acquisition and solid sales growth in nearly all market channels within this segment. The fluctuation in Eliminations/Other in each of the periods is due to the addition of intercompany sales between GL and the other businesses within the Company in fiscal 1999 and 1998, offset by the August 1998 Mechanical Products divestiture. Sales per employee increased to $169,500 in fiscal 1999 from $134,400 in fiscal 1997. The Company’s gross profit margins were approximately 26.2%, 28.5% and 29.9% for 1999, 1998 and 1997, re s p e c t i v e l y. The decrease in gross profit margin in fiscal 1999 is primarily due to the LICO acquisition which formed the Solutions–Automotive segment and generally produces lower gross profit marg i n s than the other segments. The lower profitability of this segment is offset by a lower capital base re q u i red to design and manufacture its products. After isolating the effect of the LICO acquisition, the 1999 gross profit margin increased by approximately 90 basis points. The decrease in gross profit margin in fiscal 1998 resulted primarily f rom a change in the classification of approximately $7.6 million of costs into cost of products sold which previously had been classified as general and administrative expenses. This change was made for intracorporate consistency and had a minimal effect on income from operations. In addition, the fiscal 1998 g ross profit margin was also impacted by the addition of GL, which also generates lower gross profit margins on a lower capital base as compared to the pre-existing Products segment businesses. After isolating the effect of the classification change and the GL merg e r, the 1998 gross profit margin incre a s e d by approximately 50 basis points compared to 1997. Excluding the effects of those specific items noted above, the resulting increase in gross profit marg i n in each of the periods resulted from the effects of the Company’s cost contro l e ff o rts and integration of acquisitions. Selling expenses were $52,059,000, $46,578,000 and $32,550,000 in fiscal 1999, 1998, and 1997, re s p e c t i v e l y. The 1999 expenses include the full year 25 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F R E S U L T S O F O P E R A T I O N S A N D F I N A N C I A L C O N D I T I O N of LICO activity; 1998 expenses include the full year of Yale and GL activity as compared to fiscal 1997. As a percentage of consolidated net sales, selling expenses were 7.1%, 8.3% and 9.1% in fiscal 1999, 1998 and 1997, re s p e c t i v e l y. The 1999 and 1998 improvements reflect a lower level of selling expenses incurred on behalf of the LICO and GL businesses, relative to sales. General and administrative expenses were $39,850,000, $33,361,000 and $24,636,000 in fiscal 1999, 1998 and 1997, re s p e c t i v e l y. The 1999 expenses include the full year of LICO activity; 1998 expenses include the full year of Yale and GL activity as compared to fiscal 1997. As a percentage of consolidated net sales, general and administrative expenses were 5.4%, 5.9% and 6.9% in fiscal 1999, 1998 and 1997, re s p e c t i v e l y. The 1999 improvement reflects a lower level of general and administrative expenses incurred on behalf of the LICO business, relative to sales. As noted above, the improved percentage in fiscal 1998 was primarily due to a change that reclassified approximately $7.6 million of expenses previously classified as general and administrative into costs of products sold for intracorporate consistency. This 1998 improvement was offset somewhat by a higher level of general and administrative expenses incurred on behalf of the GL business, relative to sales. A m o rtization of intangibles was $15,479,000, $10,297,000 and $5,197,000 in fiscal 1999, 1998 and 1997, re s p e c t i v e l y. Fiscal 1999 includes a full year of goodwill amortization resulting from the LICO acquisition; 1998 includes a full year of goodwill amortization resulting from the Yale acquisition; 1997 includes a partial year of Yale and a full year of goodwill amortization resulting from the Lift-Tech acquisition. I n t e rest and debt expense was $35,923,000, $25,104,000 and $11,930,000 in fiscal 1999, 1998 and 1997, respectively. The fiscal 1999 and 1998 increases were primarily due to the financing required to complete the LICO and Yale acquisitions. As a percentage of consolidated net sales, interest and debt expense was 4.9%, 4.4% and 3.3% in fiscal 1999, 1998 and 1997, respectively. Interest and other income was $1,565,000, $1,940,000 and $1,168,000 in fiscal 1999, 1998 and 1997, re s p e c t i v e l y. The fluctuations reflect changes in the investment re t u rn on marketable securities held for settlement of a portion of the Company’s general and products liability claims. Income taxes as a percentage of pre-tax accounting income were 45.9%, 48.7% and 45.5% in fiscal 1999, 1998 and 1997, re s p e c t i v e l y. The percentages reflect the effect of non-deductible goodwill amortization re s u l t i n g from the business acquisitions. In fiscal 1997, the minority interest share of Yale earnings of $323,000 resulted from the fact that the Company acquired 72% of the outstanding Yale shares on a fully diluted basis in October 1996 and the re m a i n d e r in January 1997. As a result of the above, income before extraordinary charges increased $3,458,000 or 14.4% in 1999 and $5,626,000 or 30.7% in 1998. This is based on income before extraordinary charges of $27,436,000, $23,978,000 and $18,352,000 or 3.7%, 4.3% and 5.2% as a percentage of consolidated net sales in fiscal 1999, 1998 and 1997, respectively. In fiscal 1998, the extraordinary charge for early debt extinguishment of $4,520,000 resulted from the non- cash write-off of unamortized deferred financing costs upon refinancing of the Company’s bank debt effective March 31, 1998. The charge is net of $3,012,000 of tax benefit. In 1997, the extraordinary charge for early debt extinguishment of $3,198,000 resulted from the tender in December 1996 for 11.5% acquired Yale notes. The charge consisted of redemption premiums, costs to exercise the tender offer, and write-off of previously incurred deferred financing costs, and was net of $2,133,000 of tax benefit. Net income, there f o re, increased $7,978,000 or 41.0% in 1999 and $4,304,000 or 28.4% in 1998. This is based on net income of $27,436,000, $19,458,000 and $15,154,000 in fiscal 1999, 1998 and 1997, re s p e c t i v e l y. L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S On March 1, 1999, GL was merged with and into the Company through the issuance of 897,114 shares of newly issued Company stock and options to purchase 154,848 shares of Company stock for all issued and outstanding stock and options of GL. The fair market value of the stock and options exchanged was approximately $20.6 million. 26 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F R E S U L T S O F O P E R A T I O N S A N D F I N A N C I A L C O N D I T I O N On January 29, 1999, the Company acquired all of the outstanding stock of Camlok and the net assets of the Ti g r i p p roduct line for $10.6 million in cash, financed by a German subsidiary revolving credit facility and term note. On December 4, 1998, the Company acquired all of the outstanding stock of Gautier for $3 million in cash, financed by the Company’s revolving credit facility. During October 1998, the Company’s ESOP borrowed $7,682,000 from the Company and purchased 479,900 shares of Company common stock on the open market at an average cost of $16 per share. On August 21, 1998, the Company acquired the net assets of Abell-Howe for $7 million in cash, financed by the Company’s revolving credit facility. On August 7, 1998, the Company sold its Mechanical Products division for $11.5 million, consisting of $9.1 million in cash and a $2.4 million note receivable. On March 31, 1998, the Company acquired all of the outstanding stock of LICO for approximately $155 million of cash, which was financed by proceeds from the Company’s revolving credit facility and a private placement of senior subordinated notes, both of which also closed effective March 31, 1998. The Company’s previously existing Term Loan A, Term Loan B and revolving credit facility were repaid and retired on March 31, 1998. On January 7, 1998, the Company acquired all of the outstanding stock of Univeyor for approximately $15 million of cash plus the assumption of certain debt, financed by the Company’s revolving credit facility. The 1998 Revolving Credit Facility provides availability up to $300 million, due March 31, 2003, against which $212.4 million was outstanding at March 31, 1999. Interest is payable at varying Eurodollar rates based on LIBOR plus a spread determined by the Company’s leverage ratio, amounting to 112.5 basis points at March 31, 1999. The 1998 Revolving Credit Facility is secured by all equipment, inventory, receivables, subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual property. To manage its exposure to interest rate fluctuations, the Company has an interest rate swap and cap. The senior subordinated 81⁄2% Notes issued on March 31, 1998 amounted to $199,468,000, net of original issue discount of $532,000 and are due March 31, 2008. Interest is payable semi-annually based on an eff e c t i v e rate of 8.45%, considering $1,902,000 of proceeds from rate hedging in advance of the placement. Pro v i s i o n s of the 81⁄2% Notes include, without limitation, restrictions of liens, indebtedness, asset sales, and dividends and other restricted payments. Prior to April 1, 2003, the 81⁄2% Notes are redeemable at the option of the C o m p a n y, in whole or in part, at the Make-Whole Price (as defined). On or after April 1, 2003, they are re d e e m a b l e at prices declining annually from 108.5% to 100% on and after April 1, 2006. In addition, on or prior to April 1, 2001, the Company may redeem up to 35% of the outstanding notes with the proceeds of equity offerings at a redemption price of 108.5%, subject to certain restrictions. In the event of a Change of Control (as defined), each holder of the 81⁄2% Notes may require the Company to repurchase all or a portion of such holder’s 81⁄2% Notes at a purchase price equal to 101% of the principal amount thereof. The 81⁄2% Notes are not subject to any sinking fund requirements. The Company believes that its cash on hand, cash flows, and borrowing capacity under its revolving credit facility will be sufficient to fund its ongoing operations, budgeted capital expenditures, and business acquisitions for the next twelve months. Net cash provided by operating activities increased to $57,493,000 in fiscal 1999 from $38,420,000 in 1998 and $28,886,000 in 1997. The $19,073,000 increase in net cash provided by operating activities in fiscal 1999 compared to 1998 results from increased net income of $7,978,000, increased depreciation and amortization of $7,360,000, and a decrease of changes in net working capital components, offset by the extraordinary c h a rge for early debt extinguishment of $4,520,000 in 1998. The $9,534,000 i n c rease in net cash provided by operating activities in fiscal 1998 compare d to 1997 results from increased net income of $4,304,000, and increased d e p reciation and amortization of $8,611,000, offset by decreased deferre d income tax expense by $4,761,000. Operating assets net of liabilities 27 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F R E S U L T S O F O P E R A T I O N S A N D F I N A N C I A L C O N D I T I O N decreased by $4,412,000 in fiscal 1999 and increased by $5,509,000 and $5,905,000 in fiscal 1998 and 1997, respectively. Net cash used in investing activities was $23,943,000 in fiscal 1999 compared to $185,034,000 in 1998 and $215,851,000 in 1997. The 1999 amount includes the acquisitions of Camlok/Tigrip, Gautier, and Abell- Howe for $19,021,000, net of cash acquired; it is reduced by $8,801,000 of net proceeds from the Mechanical Products divestiture and $2,182,000 of proceeds from the sale of a portion of non-operating assets acquired with Yale in fiscal 1997. The 1998 amount includes the acquisitions of LICO, Univeyor and a GL business acquisition for $175,686,000, net of cash acquired; it is reduced by $4,575,000 of proceeds from the sale of a portion of the non-operating Yale assets. The net cash used in investing activities in fiscal 1997 includes $203,577,000 for the Yale and Lister acquisitions, net of cash acquired. C A P I T A L E X P E N D I T U R E S In addition to keeping its current equipment and plants properly maintained, the Company is committed to replacing, enhancing, and upgrading its pro p e rt y, plant, and equipment to reduce production costs, increase flexibility to re s p o n d e ffectively to market fluctuations and changes, meet environmental re q u i re m e n t s , enhance safety, and promote ergonomically correct work stations. Consolidated capital expenditures for fiscal 1999, 1998 and 1997 were $12,992,000, $11,406,000 and $9,392,000, respectively, excluding those capital assets acquired in conjunction with business acquisitions. I N F L A T I O N A N D O T H E R M A R K E T C O N D I T I O N S The Company’s costs are affected by inflation in the U.S. economy, and to a lesser extent, in foreign economies including those of Europe, Canada, Mexico, and the Pacific Rim. The Company does not believe that inflation has had a material effect on results of operations over the periods presented because of low inflation levels over the periods and because the Company has generally been able to pass on rising costs through price increases. However, in the future there can be no assurance that the Company’s business will not be affected by inflation or that it will be able to pass on cost increases. S E A S O N A L I T Y A N D Q U A R T E R L Y R E S U L T S Lower than average orders and shipments during the December holiday period have a slight effect on the Company. In addition, quarterly results may be materially affected by the timing of large customer orders, by periods of high vacation concentrations, and by acquisitions and the magnitude of acquisition costs. Therefore, the operating results for any particular fiscal quarter are not necessarily indicative of results for any subsequent fiscal quarter or for the full fiscal year. Y E A R 2 0 0 0 C O N V E R S I O N S The Company’s corporate-wide Year 2000 initiative is being managed by a team of internal staff and administered by the Director of Information Services. The Company has completed the assessment phase of its Year 2000 compliance project and is currently working on remediation of affected components. The Company has determined that it needs to modify significant portions of its corporate business inform a t i o n s o f t w a re so that its computer system will function properly with respect to dates in the year 2000 and beyond. Both internal and external resources have been dedicated to identifying, implementing, and testing c o rrective action in order to make such programs Year 2000 compliant; all such work is planned to be completed by July 1999 and is currently on schedule. To date the corporate business information software has been 100% assessed, approximately 95% has been remedially re p rogrammed, and approximately 72% is now cert i f i e d 28 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F R E S U L T S O F O P E R A T I O N S A N D F I N A N C I A L C O N D I T I O N to be Year 2000 compliant. The Company believes that, with modifications to existing software, the Year 2000 issue will not pose significant operational problems for its computer systems. The Company has completed a corporate-wide assessment of the Year 2000 readiness of microprocessor c o n t rolled equipment such as robotics, CNC machines, and security and environmental systems. This assessment has revealed that at least 98% of all microprocessor-controlled equipment, including over 98% of all security and environmental systems, is currently compliant. Any necessary upgrades to ensure Year 2000 readiness are expected to be in place by the end of June 1999. In addition, the Company has determ i n e d that all of its manufactured products are 100% Year 2000 compliant. The Company has initiated communications with its suppliers and customers to determine the extent to which systems, products or services are vulnerable to failure should those third parties fail to remediate their own Ye a r 2000 issues. To date the Company has received responses to over 80% of its inquiries and no Year 2000 compliance p roblem has been identified from these responses. While we believe that our Year 2000 compliance plan adequately addresses potential Year 2000 concerns and to date no significant Year 2000 issues have been identified with our suppliers and customers, there can be no guarantee that the systems of other companies on which our operations rely will be compliant on a timely basis and will not have an effect on our operations. The Company has conducted preliminary contingency planning and identified the critical need areas. A high level approach incorporating manual workarounds, increasing critical inventories, identifying alternate suppliers, and adjusting staffing levels has been discussed and forms the basis for the initial contingency planning. The Company believes this level of planning is appropriate at the current time, however, the planning will be furt h e r expanded if warranted by future events. The cost of the Year 2000 initiatives is not expected to be material to the Company’s results of operations or financial position. The forward looking statements contained in the Year 2000 Conversions should be read in conjunction with the Company’s disclosures under the heading “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995”. E F F E C T S O F N E W A C C O U N T I N G P R O N O U N C E M E N T S The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities,” in June of 1998 which is effective for fiscal 2001. Statement No. 133 establishes accounting and reporting standards for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The intended use of the derivative and its designation as either (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (a fair value hedge) (2) a hedge of the exposure to variable cash flows of a forecasted transaction (a cash flow hedge), or (3) a hedge of the foreign currency exposure of a net investment in a foreign operation (a foreign currency hedge), will determine when the gains and losses on the derivatives are reported in earnings and when they are to be reported as a component of other comprehensive income. The impact of compliance with this Statement has not yet been determined by the Company. In March of 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” The Company adopted the provisions of the SOP in its financial statements for the year ended March 31, 1999. The SOP re q u i res the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. The impact of the SOP was not material to the Company. In April of 1998, the AICPA issued SOP 98-5, “Reporting the Costs of Start-Up Activities,” which re q u i res costs related to start-up activities be expensed as incurred. The Company adopted the provisions of the SOP in its financial statements for the year ended March 31, 1999. The adoption of SOP 98-5 had no effect on the Company’s reported earnings. 29 C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E (In thousands, except per share data) Net sales Cost of products sold Gross profit Selling expenses General and administrative expenses Amortization of intangibles Income from operations Interest and debt expense Interest and other income Income before income taxes, minority interest and extraordinary charge Income tax expense Income before minority interest and extraordinary charge Minority interest Income before extraordinary charge Extraordinary charge for early debt extinguishment 1999 Year Ended March 31, 1998 1997 $ 735,445 542,975 $ 561,823 401,669 $ 359,424 251,987 192,470 52,059 39,850 15,479 160,154 46,578 33,361 10,297 107,437 32,550 24,636 5,197 107,388 90,236 62,383 85,082 35,923 1,565 50,724 23,288 27,436 — 27,436 — 69,918 25,104 1,940 46,754 22,776 23,978 — 23,978 (4,520) 45,054 11,930 1,168 34,292 15,617 18,675 (323) 18,352 (3,198) Net income $ 27,436 $ 19,458 $ 15,154 Earnings per share data, basic: Income before extraordinary charge for debt extinguishment Extraordinary charge for debt extinguishment Net income Earnings per share data, diluted: Income before extraordinary charge for debt extinguishment Extraordinary charge for debt extinguishment Net income See accompanying notes. $ $ $ $ 1.94 — 1.94 1.92 — 1.92 $ $ $ $ 1.69 (0.32) 1.37 1.66 (0.31) 1.35 $ $ $ $ 1.39 (0.24) 1.15 1.39 (0.24) 1.15 30 C O N S O L I D A T E D B A L A N C E S H E E T S (In thousands) Assets Current assets: Cash and cash equivalents Trade accounts receivable, less allowance for doubtful accounts ($2,271 and $2,511 respectively) Unbilled revenues Inventories Net assets held for sale Prepaid expenses Total current assets Net property, plant, and equipment Goodwill and other intangibles, net Marketable securities Deferred taxes on income Other assets Total assets Liabilities and Shareholders’ Equity Current liabilities: Notes payable to banks Trade accounts payable Excess billings Accrued liabilities Current portion of long-term debt Total current liabilities Senior debt, less current portion Subordinated debt Other non-current liabilities Total liabilities Shareholders’ equity: Class A voting common stock; 50,000,000 shares authorized; 14,663,697 and 14,652,972 shares issued Additional paid-in capital Retained earnings ESOP debt guarantee; 708,382 and 325,092 shares Unearned restricted stock; 152,775 and 134,550 shares Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity See accompanying notes. 31 March 31, 1999 1998 $ 6,867 $ 22,861 136,988 9,821 115,979 8,214 8,160 286,029 90,004 357,727 19,355 5,627 8,169 124,637 19,634 115,126 10,396 10,407 303,061 87,662 368,946 16,665 7,045 5,483 $ 766,911 $ 788,862 $ 4,590 54,651 5,058 54,331 1,926 120,556 222,165 199,521 35,995 $ 5,184 58,639 4,653 44,405 2,180 115,061 256,929 199,468 46,458 578,237 617,916 146 102,313 100,455 (9,865) (1,009) (3,366) 146 100,425 76,744 (3,203) (538) (2,628) 188,674 170,946 $ 766,911 $ 788,862 C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y (In thousands, except share and per share data) Common Stock ($.01 par value) Additional Paid-in Capital Retained Earnings ESOP Debt Guarantee Unearned Restricted Stock Accumulated Other Total Comprehensive Shareholders’ Income (Loss) Equity $1 3 7 $ 9 4 , 2 8 3 $ 4 9 , 3 8 6 $ ( 5 , 2 3 8 ) $ ( 8 3 6 ) $ ( 1 1 0 ) $1 3 7 , 6 2 2 — — — — — — — 1 3 7 9 — Balance at March 31, 1996 Comprehensive income: Net income 1997 Change in foreign currency translation adjustment — Net unrealized gain on investments — Change in minimum pension liability adjustment Total comprehensive income Earned 105,601 ESOP shares Restricted common stock granted, 19,800 shares; net of 3,111 shares canceled Earned portion of restricted stock Common dividends declared $0.27 per share Balance at March 31, 1997 Issued 897,114 common shares Comprehensive income: Net income 1998 Change in foreign currency translation adjustment — Net unrealized gain on investments — Change in minimum pension liability adjustment Total comprehensive income Earned 101,416 ESOP shares Earned portion of restricted stock Common dividends declared $0.28 per share — — — — — — Balance at March 31, 1998 Comprehensive income: Net income 1999 Change in foreign currency translation adjustment — Net unrealized gain on investments — Change in minimum pension liability adjustment Total comprehensive income Earned 96,610 ESOP shares Repurchase of 479,900 common shares by ESOP Restricted common stock granted, 19,500 shares; net of 1,275 shares canceled Earned portion of restricted stock Common dividends declared $0.28 per share — — — — — — — — — — — — 665 289 17 15,154 — — — — — — — — (3,541) — — — — — 1,037 — — — 9 5 , 2 5 4 3,881 6 0 , 9 9 9 — ( 4 , 2 0 1 ) — — — — — — 1,270 20 19,458 — — — — — — — (3,713) — — — — — 998 — — — — — — — — (280) 295 — ( 8 2 1 ) — — — — — — 283 — — 15,154 (1,309) 318 (1,309) 318 (111) (111) — — — — — 14,052 1,702 9 312 (3,541) ( 1 , 2 1 2 ) — 1 5 0 , 1 5 6 3,890 — 19,458 (1,527) 558 (1,527) 558 (447) (447) — — — — 18,042 2,268 303 (3,713) — — — — — 1,108 27,436 — — — — — — — — — — 1,020 — — (7,682) — — — — — — — 780 — — — — (3,725) — — — (759) 288 — — 27,436 (1,399) 714 (1,399) 714 (53) (53) — — — — — — 26,698 2,128 (7,682) 21 288 (3,725) 1 4 6 1 0 0 , 4 2 5 7 6 , 7 4 4 ( 3 , 2 0 3 ) ( 5 3 8 ) ( 2 , 6 2 8 ) 1 7 0 , 9 4 6 Balance at March 31, 1999 $14 6 $10 2 , 3 1 3 $10 0 , 4 5 5 $(9 , 8 6 5) $(1 , 0 0 9) $(3 , 3 6 6) $18 8 , 6 7 4 See accompanying notes. 32 C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S (In thousands) Operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary charge for early debt extinguishment Minority interest Depreciation and amortization Deferred income taxes Other Changes in operating assets and liabilities net of effects from businesses purc h a s e d : Trade accounts receivable and unbilled revenues Inventories Prepaid expenses Other assets Trade accounts payable and excess billings Accrued and non-current liabilities 1999 Year Ended March 31, 1998 1997 $ 27,436 $ 19,458 $ 15,154 — — 27,256 (2,235) 624 37 (865) 1,952 (96) (5,940) 9,324 4,520 — 19,896 55 — (8,224) (5,454) 4,008 2,135 (646) 2,672 3,198 323 11,285 4,816 15 (3,320) (2,177) (1,721) (949) (586) 2,848 Net cash provided by operating activities 57,493 38,420 28,886 Investing activities: Purchase of marketable securities, net Capital expenditures Proceeds from sale of business Purchase of businesses, net of cash acquired Net assets held for sale (1,976) (12,992) 8,801 (19,958) 2,182 (2,517) (11,406) — (175,686) 4,575 (2,098) (9,392) — (203,577) (784) Net cash used in investing activities (23,943) (185,034) (215,851) Financing activities: Proceeds from issuance of common stock, net Net (payments) borrowings under revolving line-of-credit agreements Repayment of debt Proceeds from issuance of long-term debt, net Deferred financing costs incurred Dividends paid Repurchase of stock by ESOP Change in ESOP debt guarantee Net cash (used in) provided by financing activities Effect of exchange rate changes on cash Net change in cash and cash equivalents Cash and cash equivalents at beginning of year — 1,914 — (28,194) (8,179) — (1,272) (3,725) (7,682) 1,020 (48,032) (1,512) (15,994) 22,861 159,101 (198,251) 203,357 (1,313) (3,713) — 998 162,093 (1,525) 13,954 8,907 75,293 (78,528) 206,000 (10,000) (4,390) — (1,596) 186,779 (1,078) (1,264) 10,171 Cash and cash equivalents at end of year $ 6,867 $ 22,861 $ 8,907 Supplementary cash flows data: Interest paid Income taxes paid See accompanying notes. $ 27,595 $ 22,829 $ 26,553 $ 15,040 $ 8,683 $ 14,993 33 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 . D E S C R I P T I O N O F B U S I N E S S A N D B U S I N E S S A C Q U I S I T I O N S Columbus McKinnon Corporation (the Company) is a leading broad-line designer, manufacturer and supplier of sophisticated material handling products and integrated material handling solutions that are widely distributed to industrial, automotive, and consumer markets worldwide. The Company’s material handling products are sold, domestically and intern a t i o n a l l y, principally to third party distributors in commercial and consumer distribution channels. The Company’s integrated material handling solutions businesses primarily deal with end users, both domestically and internationally (primarily Europe) in the automotive and industrial markets. During fiscal 1999, approximately 75% of sales were to customers in the United States. On March 1, 1999, GL International, Inc. (“GL”), was merged with and into the Company through the issuance of 897,114 shares of newly issued Company stock and options to purchase 154,848 shares of Company stock for all issued and outstanding stock and options of GL. GL is a full-service designer and builder of industrial o v e rhead bridge and jib cranes and related components. The merger was accounted for as a pooling of intere s t s and, accordingly, the 1999 and 1998 consolidated financial statements have been restated to include the accounts of GL from the date of GL’s formation, April 1, 1997. The fair market value of the stock and options exchanged was approximately $20.6 million. In connection with the merg e r, the Company incurred $560,000 of merger related costs which were charged to operations during the year ended March 31, 1999. Net sales and net income of the separate companies for the periods preceding the merger were as follows: Combined Net income: In thousands) Net sales: December 27, 1998 $ 510,731 59,860 (8,768) $ 510,865 51,558 (5,455) 9 Months Ended Year Ended March 31, 1998 Columbus McKinnon, as reported GL International, Inc. Intercompany eliminations On January 29, 1999, the Company a c q u i red all of the outstanding stock of Camlok Lifting Clamps Limited (“Camlok”) and the net assets of the Tigrip product line (“Ti g r i p ” ) f rom Schmidt-Krantz & Co. GmbH for $10.6 millio n in cash. The acquisition was accounted for as a p u rchase and was financed thro u g h cash, a revolving credit facility, and a $4 million term note. Camlok m a n u f a c t u res plate clamps, crane weighers and related products and is based in Chester, England, while the Tigrip line of standard and specialized plate clamps is produced in Germ a n y. The consolidated statement of income and the consolidated statement of cash flows for the year ended Marc h 31, 1999 include Camlok and Tigrip activity since their January 29, 1999 acquisition by the Company. Columbus McKinnon, as reported GL International, Inc. Intercompany eliminations $ 16,865 1,736 142 $ 18,901 1,140 (583) $ 18,743 $ 556,968 $ 561,823 $ 19,458 Combined On December 4, 1998, the Company acquired all of the outstanding stock of Societe D’Exploitation des Raccord s Gautier (“Gautier”), a French-based manufacturer of industrial components. The total cost of the acquisition, which was accounted for as a purchase, was approximately $3 million in cash, consisting of $2.4 million financed by proceeds from the Company’s revolving debt facility and the assumption of certain debt. The consolidated statement of income and the consolidated statement of cash flows for the year ended March 31, 1999 include Gautier activity since its December 4, 1998 acquisition by the Company. On August 21, 1998 the Company acquired the net assets of Abell-Howe Crane division (“Abell-Howe”) of Abell-Howe Company, a regional manufacturer of jib, gantry, and bridge cranes. The total cost of the acquisition, which was accounted for as a purchase, was approximately $7 million of cash, which was financed by p roceeds from the Company’s revolving debt facility. The consolidated statement of income and the consolidated statement of cash flows for the year ended March 31, 1999 include Abell-Howe activity since its August 21, 1998 acquisition by the Company. On August 7, 1998 the Company sold its Mechanical Products division, a producer of circuit controls and protection devices, for $11.5 million, consisting of $9.1 million in cash and a $2.4 million note receivable, to Mechanical Products’ senior management team. The selling price approximated the net book value of the division. The consolidated statement of income and the consolidated statement of cash flows for the year ended March 31, 1999 include Mechanical Products activity through its August 7, 1998 sale by the Company. 34 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S On March 31, 1998, the Company acquired all of the outstanding stock of LICO, Inc. (“LICO”), a leading designer, manufacturer and installer of custom conveyor and automated material handling systems primarily for the automotive industry. The total cost of the acquisition, which was accounted for as a purchase, was appro x i m a t e l y $155 million of cash, which was financed by proceeds from the Company’s revolving credit facility and a private placement of senior subordinated notes, both of which also closed effective March 31, 1998. The consolidated statement of income and the consolidated statement of cash flows for the year ended March 31, 1998 do not include any LICO activity. On January 7, 1998, the Company acquired all of the outstanding stock of Univeyor A/S (“Univeyor”), a Denmark- based designer, manufacturer and distributor of automated material handling systems for the industrial market, and has accounted for the acquisition as a purchase. The cost of the acquisition was approximately $15 million of cash plus certain debt, financed by the Company’s revolving debt facility. The consolidated statement of income and the consolidated statement of cash flows for the year ended March 31, 1998 include Univeyor activity since its January 7, 1998 acquisition by the Company. On October 17, 1996, through a tender offer, the Company acquired approximately 72% of the outstanding stock (on a diluted basis) of Spreckels Industries, Inc., now known as Yale Industrial Products, Inc. (“Yale”), a manufacturer of a wide range of industrial products, including hoists, scissor lift tables, mechanical jacks, rotating joints, actuators and circuit protection devices. On January 3, 1997, the Company acquired the re m a i n i n g outstanding shares, effected a merger, and accounted for the acquisition as a purchase. The total cost of the acquisition was approximately $270 million, consisting of $200 million of cash and $70 million of acquire d Yale debt. The consolidated statement of income and the consolidated statement of cash flows for the year ended March 31, 1997 include Yale activity since its October 17, 1996 acquisition by the Company. The minority interest share of Yale’s earnings since acquisition through January 3, 1997 has been appropriately segregated from consolidated net income for the year ended March 31, 1997. Included with the Yale acquired assets were real estate pro p e rties and equipment retained from Ya l e ’s April 19, 1996 sale of two of its subsidiaries in unrelated businesses. Certain assets were sold during fiscal 1998 and 1 9 9 9 and the remaining assets held for sale are expected to be sold in fiscal 2000. They have been re c o rded at their estimated realizable values net of disposal costs, separately reflected on the consolidated balance sheet and amounting to $8,214,000 and $10,396,000 as of March 31, 1999 and 1998, re s p e c t i v e l y. On December 19, 1996, the Company acquired all of the outstanding stock of Lister Bolt & Chain Ltd. and of Lister Chain & Forge, Inc. (together known as “Lister”), a chain and forgings manufacture r, and has accounted for the acquisition as a purchase. The total cost of the acquisition was approximately $7 million of cash, which was financed by the Company’s revolving debt facility. The consolidated statement of income and the consolidated statement of cash flows for the year ended March 31, 1997 include Lister activity since its December 19, 1996 acquisition by the Company. Year Ended March 31, (In thousands, except per share data) Pro forma: The following table presents pro forma summary information, which is not covered by the re p o rt of independent auditors, for the years ended March 31, 1999 and 1998, as if the Abell-Howe, LICO, and Univeyor acquisitions and related borrowings and also the priva te plac ement of senior s u b o rdinated notes and the sale of Mechanical Products, had occurre d as of April 1, 1997 which is the beginning of fiscal 1998. The pro f o rma information is provided for i n f o rmational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future re s u l t s o f o per ations of t he c ombined enterprise: Net sales Income from operations Income before extraordinary charge Net income Earnings per share, basic: Income before extraordinary charge Extraordinary charge Earnings per share, diluted: Income before extraordinary charge Extraordinary charge $ 732,143 84,702 27,355 27,355 $ 735,525 81,963 24,354 19,834 1.71 (0.32) 1.69 (0.32) 1.93 — 1.91 — Net income Net income 1.93 199 9 1998 1.39 1.37 1.91 $ $ $ $ $ $ $ $ 35 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 2 . A C C O U N T I N G P R I N C I P L E S A N D P R A C T I C E S Consolidation These consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries; all significant intercompany accounts and transactions have been eliminated. Foreign Currency Translations The Company translates foreign currency financial statements as described in Financial Accounting Standard s (FAS) No. 52. Under this method, all items of income and expense are translated at average exchange rates for the year. All assets and liabilities are translated at the year-end exchange rate. Gains or losses on translations are re c o rded in accumulated other comprehensive income (loss) in the shareholders’ equity section of the balance sheet. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also aff e c t the reported amounts of revenue and expenses. Actual results could differ from those estimates. Revenue Recognition and Concentration of Credit Risk Sales are recorded when products are shipped to a customer, except as described below. The Company p e rf o rms ongoing credit evaluations of its customers’ financial condition, but generally does not re q u i re collateral to support customer receivables. The credit risk is controlled through credit approvals, limits and monitoring procedures. The Company established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other factors. LICO and Univeyor recognize contract revenues under the percentage of completion method, measured by comparing direct costs incurred to total estimated direct costs. Changes in job performance, job conditions and estimated profitability, including those arising from final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. In the event that a loss is anticipated on an uncompleted contract, a provision for the estimated loss is made at the time it is determined. Billings on contracts may precede or lag revenues earned, and such differences are reported in the balance sheet as current liabilities (excess billings) and current assets (unbilled revenues), respectively. As of March 31, 1999, approximately $26 million ($26 million in 1998) of trade accounts receivable was concentrated in the automotive industry, including retainages amounting to $9,061,000 ($7,870,000 in 1998). The accounts receivable included $22,007,000 ($13,840,000 in 1998) due from General Motors Corporation. This one customer accounted for $96,663,000 or 13% of consolidated net sales and is included within the Solutions - Automotive segment for the year ended March 31, 1999. Concentrations of Labor Approximately 36% of the Company’s employees are represented by twelve separate domestic and Canadian collective bargaining agreements which terminate at various times between September 26, 1999 and April 30, 2003. Approximately 3% of the labor force is covered by collective bargaining agreements that will expire within one year. In addition, the Company hires union production workers for field installation under its material handling systems contracts. Cash and Cash Equivalents The Company considers as cash equivalents all highly liquid investments with an original maturity of three months or less. Inventories Inventories are valued at the lower of cost or market. Costs of approximately 49% of inventories at March 31, 1999 and 1998 have been determined using the LIFO (last-in, first-out) method. Costs of other inventories have been d e t e rmined using the FIFO (first-in, first-out) or average cost method. FIFO cost approximates replacement cost. Property, Plant, and Equipment Property, plant, and equipment are stated at cost and depreciated principally using the straight-line method over their respective estimated useful lives (buildings and building equipment— 15 to 40 years; machinery 36 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S and equipment — 3 to 18 years). When depreciable assets are retired, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operating results. Goodwill It is the Company’s policy to account for goodwill and other intangible assets at the lower of amortized cost or fair value based on discounted cash flows, if indicators of impairment exist. As a result of the Yale, Lister, Univeyor, LICO, Abell-Howe, Gautier, Camlok and Tigrip acquisitions, the Company recorded approximately $200 million, $2 million, $9 million, $123 million, $3 million, $1 million, and $6 million of goodwill, re s p e c t i v e l y, which is being amortized on a straight-line basis over twenty five years. As a result of the sale of Mechanical P roducts, the Company reduced goodwill by approximately $8 million. At March 31, 1999 and 1998 accumulated amortization was $29,864,000 and $14,979,000, respectively. Marketable Securities All of the Company’s investments, which consist of equity securities and corporate and govern m e n t a l obligations, have been classified as available-for-sale securities and are therefore recorded at their fair values with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss) within shareholders’ equity. Estimated fair value is based on published trading values at the balance sheet dates. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The cost of securities sold is based on the specific identification method. Interest and dividend income are included in interest and other income on the consolidated statements of income. The marketable securities are carried as long-term assets since they are retained for the settlement of a portion of the Company’s general liability and products liability insurance claims filed through CM Insurance Company, Inc., a wholly owned captive insurance subsidiary. Fair Value of Financial Instruments The fair value of interest rate swap and cap agreements is the amount that the Company would receive or pay to terminate the agreements, based on quoted market prices and considering current interest rates and remaining maturities. Research and Development Research and development costs as defined in FAS No. 2, for the years ended March 31, 1999, 1998 and 1997 were $1,663,000, $1,497,000 and $1,283,000, respectively. 3 . U N B I L L E D R E V E N U E S A N D E X C E S S B I L L I N G S (In thousands) Costs incurred on March 31, 1999 19 98 The net amounts to the left are included in the consoli- d a t e d balance sheets under the following captions: uncompleted contracts $ 255,706 $ 194,359 38,255 Estimated earnings 54,013 Revenues earned to date Less billings to date 309,719 304,956 232,614 217,633 $ 4,763 $ 14,981 4 . I N V E N T O R I E S Inventories consisted of the following: (In thousands) Unbilled revenues Excess billings March 31, 1999 19 98 $ 9,821 (5,058) $ 19,634 (4,653) $ 4,763 $ 14,981 (In thousands) At cost —FIFO basis: Raw materials Work-in-process Finished goods LIFO cost less than FIFO cost March 31, 1999 1998 $ 54,648 $ 57,103 24,696 37,089 21,663 45,042 121,353 (5,374) 118,888 (3,762) Net inventories $ 115,979 $ 115,126 37 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 . M A R K E T A B L E S E C U R I T I E S Marketable securities are retained for the settlement of a portion of the Company’s general liability and p roducts liability insurance claims filed through CM Insurance Company, Inc. (see Notes 2 and 13). The following is a summary of available-for-sale securities at March 31, 1999: (In thousands) Government securities U. S. corporate securities Total debt securities Equity securities Cost $ 7,668 700 8,368 7,134 $ 15,502 Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value $ 203 31 234 3,710 $ 3,944 $ 1 — 1 90 $ 91 $ 7,870 731 8,601 10,754 $ 19,355 The following is a summary of available-for-sale securities at March 31, 1998: (In thousands) Government securities U. S. corporate securities Total debt securities Equity securities Cost $ 10,180 1,107 11,287 2,847 $ 14,134 Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value $ 285 36 321 2,247 $ 2,568 $ 13 1 14 23 $ 37 $ 10,452 1,142 11,594 5,071 $ 16,665 The amortized cost and estimated fair value of debt and equity securities at March 31, 1999, by contractual maturity, are shown below: (In thousands) Due in one year or less Due after one year through three years Due after three years Equity securities Cost Estimated Fair Value $ 4,688 $ 4,688 100 3,580 8,368 7,134 107 3,806 8,601 10,754 $ 15,502 $ 19,355 Net unrealized gains included in the balance sheet amounted to $3,853,000 and $2,531,000 at Marc h 31, 1999 and 1998, re s p e c t i v e l y. The amounts, net of related income taxes of $1,541,000 and $933,000 at March 31, 1999 and 1998, re s p e c t i v e l y, are reflected as a component of accumulated other com- p rehensive income (loss) within shareholders’ equity. 6 . P R O P E R T Y , P L A N T , A N D E Q U I P M E N T Consolidated property, plant, and equipment of the Company consisted of the following: (In thousands) Land and land improvements Buildings Machinery, equipment, and leasehold improvements Construction in progress Less accumulated depreciation Net property, plant, and equipment March 31, 1999 1998 $ 4,592 31,880 $ 4,980 29,570 92,991 2,589 81,418 3,162 132,052 119,130 42,048 31,468 $ 90,004 $ 87,662 38 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 7 . A C C R U E D L I A B I L I T I E S A N D O T H E R N O N - C U R R E N T L I A B I L I T I E S Consolidated accrued liabilities of the Company included the following: Consolidated other non-current liabilities of the Company included the following: (In thousands) Accrued payroll Accrued pension cost Interest payable Income taxes payable Other accrued liabilities March 31, 1999 19 98 $ 12,233 4,508 10,394 10,133 17,063 $ 17,228 5,195 499 5,546 15,937 $ 54,331 $ 44,405 (In thousands) Accumulated postretirement benefit obligation Accrued general and March 31, 1999 19 98 $ 15,379 $ 17,154 product liability costs Other non-current liabilities 11,416 9,200 11,688 17,616 $ 35,995 $ 46,458 8 . L O N G - T E R M D E B T Consolidated long-term debt payable to banks (except as noted) of the Company consisted of the following: (In thousands) Revolving Credit Facility with availability up to $300 million, due March 31, 2003 with interest payable at varying Eurodollar rates based on LIBOR plus a spread determined by the Company’s leverage ratio, amounting to 112.5 basis points at March 31, 1999 (6.09% and 6.85% at March 31, 1999 and 1998) Revolving credit facilities, term note, subordinated term loan, and mortgage note payable repaid and retired March 1999 Industrial Development Revenue Bonds payable annually at $625,000 through 1999, $620,000 thereafter through 2001, $315,000 in 2002, and $52,000 in 2003 in quarterly sinking fund installments plus interest payable at varying effective rates (3.58% and 3.98% at March 31, 1999 and 1998) Term loan of foreign subsidiary payable in two installments of $1,639,000 and $2,186,000, due on December 30, 2000 and December 30, 2001, respectively; interest payable monthly at 4.255% Employee Stock Ownership Plan term loans payable in quarterly installments of $148,000 through January 2002 and $1,099,000 in April 2002 plus interest payable at a Eurodollar rate based on LIBOR plus a spread determined by the Company’s leverage ratio (6.62% and 7.34% at March 31, 1999 and 1998) Other senior debt Total senior debt 81⁄2% Senior Subordinated Notes due March 31, 2008 with interest payable in semi-annual installments at 8.45% effective rate, recorded net of unamortized discount of $479,000 ($532,000 at March 31, 1998) Total Less current portion March 31, 19 99 1998 $ 212,400 $ 240,000 — 10,265 1,608 2,232 3,825 — 3,173 3,085 3,765 2,847 224,091 259,109 199,521 199,468 423,612 1,926 458,577 2,180 $ 421,686 $ 456,397 On March 31, 1998, the Company entered into a new revolving credit facility (“1998 Revolving Credit Facility”) with a group of financial institutions. Concurre n t l y, the Company issued $200 million of 81⁄2% Senior Subord i n a t e d Notes (“the 81⁄2% Notes”) due March 31, 2008. Proceeds from both the bank refinancing and the note off e r i n g were used to finance the acquisition of LICO, and to repay the outstanding balances and retire the Company’s then existing Term Loan A, Term Loan B and revolving credit facility. The 1998 Revolving Credit Facility is secured by all equipment, inventory, receivables, subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual pro p e rt y. The corresponding credit agreement places cert a i n debt covenant restrictions on the Company including, but not limited to, maximum annual cash dividends of $10 million. Upon refinancing its bank debt in 1998, the Company wrote off unamortized financing costs of $7,532,000 and re c o rded an extraord i n a ry charge of $4,520,000, which is net of $3,012,000 of tax. 39 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 8 . L O N G - T E R M D E B T (continued) To manage its exposure to interest rate fluctuations, the Company has an interest rate swap with a notional amount of $3.5 million from January 2, 1999 through July 2, 2000, based on LIBOR at 5.9025%. In order to comply with its credit agreements, the Company also has a LIBOR-based interest rate cap on $49.5 million of debt through December 16, 1999 at 10%. Net payments or receipts under the swap and cap agreements are recorded as adjustments to interest expense. The carrying amount of the Company’s debt instruments approximates the fair values. The Industrial Development Revenue Bonds are held by institutional investors and are guaranteed by a bank letter of credit (IDRB letter of credit), which is collateralized by the assets also securing the 1998 Revolving Credit Facility. The Employee Stock Ownership Plan term loans (ESOP loans) are guaranteed by the Company and are collateralized by an equivalent number of shares of Company common stock. The ESOP loans are not further collateralized. Provisions of the 81⁄2% Notes include, without limitation, restrictions of liens, indebtedness, asset sales, and dividends and other restricted payments. Prior to April 1, 2003, the 81⁄2% Notes are redeemable at the option of the Company, in whole or in part, at the Make-Whole Price (as defined in the 81⁄2% Notes agreement). On or after April 1, 2003, they are redeemable at prices declining annually to 100% on and after April 1, 2006. In addition, on or prior to April 1, 2001, the Company may redeem up to 35% of the outstanding notes with the proceeds of equity offerings at a redemption price of 108.5%, subject to certain restrictions. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the 81⁄2% Notes may re q u i re the Company to repurchase all or a portion of such holder’s 81⁄2% Notes at a purchase price equal to 101% of the principal amount thereof. The 81⁄2% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements. The principal payments scheduled to be made as of March 31, 1999 on the above debt, for the next five annual periods subsequent thereto, are as follows: (In thousands) 2000 2001 2002 2003 2004 March 31, 1999 $ 1,926 3,213 3,422 213,870 295 In December 1996, the Company tendered to purchase the outstanding Yale Senior Secured Notes at a pre m i u m and redeemed $69,480,000 of the $70,000,000 face value which was outstanding. The Company recorded an extraord i n a ry charge of $5,331,000 ($3,198,000 net of taxes), consisting of redemption pre m i u m s , costs to exercise the tender off e r, and write-off of deferred financing costs related to early re t i rement of debt. The debt extinguishment was funded by the Company’s revolving credit facility. The remaining $520,000 was redeemed during fiscal 1999. As of March 31, 1999, the Company had letters of credit outstanding of $3.6 million, including those issued as security for the IDRBs as referred to above. 40 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 9 . R E T I R E M E N T P L A N S The Company provides defined benefit pension plans to certain employees. Th e follo wi ng p rovides a reconciliation of benefit obligations, plan assets, and funded status of plans: (In thousands) Change in benefit obligation: Benefit obligation at beginning of year Benefit obligation of sold businesses Service cost Interest cost Effect of amendments Actuarial loss Benefits paid March 31, 1999 1998 $ 69,680 (9,590) 3,151 4,489 — 5,866 (2,975) $ 62,093 — 3,244 4,787 (522) 3,476 (3,398) Benefit obligation at end of year $ 70,621 $ 69,680 Change in plan assets: Fair value of plan assets at beginning of year Assets of sold plans Actual return on plan assets Employer contribution Benefits paid 69,203 (10,348) 7,015 3,381 (2,975) 54,844 — 13,706 4,051 (3,398) Fair value of plan assets at end of year $ 66,276 $ 69,203 Funded Status Unrecognized transition obligation Unrecognized actuarial loss (gain) Unrecognized prior service cost Net amount recognized Amounts recognized in the consolidated balance sheets are as follows: (In thousands) Intangible asset Accrued liabilities Deferred tax effect of equity charge Accumulated other comprehensive income Net amount recognized $ (4,345) (85) 1,661 1,610 $ (477) (113) (3,037) 855 $ (1,159) $ (2,772) March 31, 1999 1998 $ 1,172 (4,066) 694 1,041 $ 776 (5,195) 659 988 $ (1,159) $ (2,772) Net periodic pension cost included the fol- lowing components: (In thousands) S e rvice costs –benefits earned during the period Interest cost on projected benefit obligation Expected return on plan assets Net amortization Net periodic pension cost Year Ended March 31, 1998 1999 1997 $ 3,151 4,489 (5,124) 167 $ 3,244 4,787 (6,670) 1,951 $ 2,354 2,744 (2,966) 475 $ 2,683 $ 3,312 $ 2,607 The aggregate accumulated benefit obligation and aggregate fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $9,932,000 and $7,293,000, re s p e c t i v e l y as of March 31, 1999 and $11,311,000 and $9,090,000, respectively as of March 31, 1998. The unrecognized transition obligation is being amortized on a straight-line basis over 20 years. U n recognized gains and losses are amortized on a straight-line basis over the average remaining service period of active participants. 41 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 9 . R E T I R E M E N T P L A N S (continued) The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation of all of the defined benefit plans was 7% and 71⁄2% as of March 31, 1999 and 1998, respectively. Future average compensation increases are assumed to be 4.0% and 4.3% per year as of March 31, 1999 and 1998, re s p e c t i v e l y. The weighted-average expected long-term rate of re t u rn on plan assets used in determining the expected return on plan assets included in net periodic pension cost was 8 7⁄8% for the each of the years ended March 31, 1999, 1998 and 1997. Plan assets consist of equities, corporate and government securities, and fixed income annuity contracts. The Company’s funding policy with respect to the defined benefit pension plans is to contribute annually at least the minimum amount required by the Employee Retirement Income Security Act of 1974 (ERISA). The Company also sponsors defined contribution plans covering substantially all domestic employees. P a rticipants may elect to contribute basic contributions. Effective April 1, 1998, these plans provide for employer contributions based primarily on employee participation. The Company re c o rded a charge for such contributions of approximately $1,410,000 during 1999. 1 0 . E M P L O Y E E S T O C K O W N E R S H I P P L A N ( E S O P ) The AICPA Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans” re q u i re s that compensation expense for ESOP shares be measured based on the fair value of those shares when committed to be released to employees, rather than based on their original cost. Also, dividends on those ESOP shares that have not been allocated or committed to be released to ESOP participants are not reflected as a re d u c t i o n of retained earnings. Rather, since those dividends are used for debt service, a charge to compensation expense is recorded. Furthermore, ESOP shares that have not been allocated or committed to be released are not considered outstanding for purposes of calculating earnings per share. The obligation of the ESOP to repay borrowings incurred previously to purchase shares of the Company’s common stock is guaranteed by the Company; the unpaid balance of such borrowings, therefore, has been reflected in the accompanying consolidated balance sheet as a liability. An amount equivalent to the cost of the collateralized common stock and re p resenting deferred employee benefits has been re c o rded as a deduction from shareholders’ equity. Substantially all of the Company’s domestic non-union employees, excluding LICO, Abell-Howe and GL employees, are participants in the ESOP. Contributions to the plan result from the release of collateralized shares as debt service payments are made. Compensation expense amounting to $2,128,000, $2,268,000 and $1,704,000 in fiscal 1999, 1998 and 1997, respectively, is recorded based on the guarantee release of the ESOP shares at their fair market value. Dividends on allocated ESOP shares are re c o rded as a re d u c t i o n of retained earnings and are applied toward debt service. During fiscal 1999, the ESOP bor rowed $7,682,000 from the Company and purchased 479,900 shares on the open market at an average cost of $16 per share. At March 31, 1999 and 1998, 886,684 and 855,337 of ESOP shares, re s p e c t i v e l y, were allocated or available to be allocated to participants’ accounts. At March 31, 1999 and 1998, 708,382 and 325,092 of ESOP shares were pledged as collateral to guarantee the ESOP term loans. The fair market value of unearned ESOP shares at March 31, 1999 amounted to $14,256,000. 42 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 1 . P O S T R E T I R E M E N T B E N E F I T O B L I G A T I O N The Company sponsors defined benefit postre t i rement health care plans that provide medical and life insurance coverage to Yale domestic retirees and their dependents. Prior to the acquisition of Yale, the Company did not sponsor any postretirement benefit plans. The Company pays the majority of the medical costs for Yale retirees and their spouses who are under age 65. For retirees and dependents of retirees who retired prior to January 1, 1989, and are age 65 or over, the Company contributes 100% toward the American Association of Retired Persons (“AARP”) premium frozen at the 1992 level. For retirees and dependents of retirees who retired after January 1, 1989, the Company contributes $35 per month toward the AARP premium. The life insurance plan is noncontributory. The Company’s postretirement health benefit plans are not funded. In accordance with FAS No. 132 “Employers’ Disclosure s about Pensions and Other P o s t re t i rement Benefits,” the following sets forth a reconcili- ation of benefit obligations and the funded status of the plan: (In thousands) Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Effect of amendments Actuarial loss (gain) Benefits paid Curtailment effect March 31, 1999 1998 $ 16,509 257 1,061 (4,035) 1,713 (1,475) (1,618) $ 17,057 348 1,203 — (645) (1,454) — Benefit obligation at end of year $ 12,412 $ 16,509 Funded Status Unrecognized actuarial loss (gain) Unrecognized prior service gain Net amount recognized in other non-current liabilities $ (12,412) 1,068 (4,035) $ (16,509) (645) — $ (15,379) $ (17,154) Net periodic post- re t i rement benefit cost included the following comp o- nents since the Octo- ber 17, 1996 Ya l e acquisition: (In thousands) Service cost– benefits attributed to service during the period Interest cost Year Ended March 31, 1998 1999 1997 $ 257 1,061 $ 348 1,203 $ 187 609 Net periodic postretirement benefit cost $ 1,318 $ 1,551 $ 796 For measurement purposes, a 6.5% annual rate of increase in the per capita cost of postretirement medical benefits was assumed at the beginning of the period; the rate was assumed to decrease 0.5% per year to 5.5% by 2001. The discount rate used in determining the accumulated postretirement benefit obligation was 7% and 71⁄2% as of March 31, 1999 and 1998, respectively. Assumed medical claims cost t rend rates have an effect on the amounts re p o rted for the health c a re plans. A one-perc e n t a g e point change in assumed health c a re cost trend rates would have the following eff e c t s : (In thousands) Effect on total of service and interest cost components Effect on postretirement obligation One One Percentage Percentage Point Increase Point Decrease $ 86 600 $ (79) ( 541) 43 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 2 . E A R N I N G S P E R S H A R E A N D S T O C K P L A N S Earnings per Share In 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, “Earnings per Share” (FAS No. 128). FAS No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic e a rnings 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 necessary, restated to conform to the FAS No. 128 requirements. The following table sets forth the computation of basic and diluted earnings per share before extraordinary charge for debt extinguishment: (In thousands) Numerator for basic and diluted earnings per share: Income before extraordinary charge Denominators: Weighted-average common stock outstanding— denominator for basic EPS Effect of dilutive employee stock options Adjusted weighted-average common stock outstanding and assumed conversions —denominator for diluted EPS 1999 Year Ended March 31, 1998 1997 $ 27,436 $ 23,978 $18,352 14,137 157 14,221 206 13,210 5 14,294 14,427 13,215 The weighted-average common stock outstanding shown above is net of unallocated ESOP shares (see Note 10). Stock Plans The Company maintains two stock option plans, a Non-Qualified Stock Option Plan (“Non-Qualified Plan”) and an Incentive Stock Option Plan (“Incentive Plan”). Under the Non-Qualified Plan, options may be granted to officers and other key employees of the Company as well as to non-employee directors and advisors. The Company has not granted any options under the Non-Qualified Plan and accord i n g l y, at March 31, 1999, 250,000 shares were reserved for grant under that plan. Options granted under the Incentive Plan become exercisable over a four-year period at the rate of 25% per year commencing one year from the date of grant at an exerc i s e price of not less than 100% of the fair market value of the common stock on the date of grant. Any option granted under this plan may be exercised not earlier than one year and not later than ten years from the date such option is granted. A summary of Incentive Plan option transactions during each of the three fiscal years in the period ended March 31, 1999 is as follows: 1998 1997 19 99 Year Ended March 31, 200,000 31,000 (32,500) — Number of Shares Outstanding at beginning of year Granted Canceled Exercised In conjunction with the M a rch 1, 1999 m e rger of GL Inter- national, Inc. (see Note 1), outstanding GL o ptio ns which w e re originally issued in fiscal years 1999 and 1998 became fully vested and w e re converted into options to acquire 154,848 Company shares at prices of $4.34 to $17.36. Those options expire appro x i m a t e l y t h ree years after the date of their original issuance, ranging from September 30, 1999 through June 5, 2001. Exercisable at end of year Available for grant at end of year Price range of options outstanding 92,500 1,051,500 $15.50 – $29.00 200,000 — — — — 200,000 — — 50,000 1,050,000 $ 15.50 — 1,050,000 $ 15.50 Outstanding at end of year 198,500 200,000 200,000 The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) in accounting for its employee stock options because, as discussed below, the altern a t i v e fair value accounting provided for under FAS No. 123, “Accounting for Stock-Based Compensation,” requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the grant date, no compensation expense is recognized. 44 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Pro forma information regarding net income and earnings per share is required by FAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models re q u i re the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly diff e rent from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The fair value for issued options was estimated at the date of grant using a Black- Scholes option pricing model with the follow- ing weighted-average assumptions and yield- ing the following pro forma results: (In thousands, except for assumptions and earnings per share data) Assumptions: Year Ended March 31, 1998 1999 1997 Risk-free interest rate Dividend yield —Incentive Plan Dividend yield —GL conversions Volatility factor Expected life— Incentive Plan Expected life — GL conversions 5.5% 0.97% 1.33% 0.200 4 years 1 year 5.5% — 1.33% 0.245 — 3 years 5.5% 1.80% — 0.245 4 years — Pro forma results: Net income Earnings per share, basic Earnings per share, diluted $ 26,314 1.86 1.84 $ 18,946 1.33 1.31 $ 15,127 1.15 1.14 The Company maintains a Restricted Stock Plan, under which the Company has reserved 60,700 shares at March 31, 1999. The Company charges unearned compensation, a component of shareholders’ equity, for the market value of shares, as they’re issued. It is then ratably amortized over the restricted period. Grantees who remain continuously employed with the Company become vested in their shares five years after the date of the grant. 1 3 . L O S S C O N T I N G E N C I E S General and Product Liability — $10,392,000 of the accrued general and product liability costs which are included in other non-current liabilities at March 31, 1999 ($9,688,000 at March 31, 1998) are the actuarial present value of estimated reserves based on an amount determined from loss reports and individual cases filed with the Company and an amount, based on past experience, for losses incurred but not reported. The accrual in these consolidated financial statements was determined by applying a discount factor based on interest rates customarily used in the insurance industry, between 6.76% and 8.12%, to the undiscounted re s e rves of $13,897,000 and $12,685,000 at March 31, 1999 and 1998, re s p e c t i v e l y. This liability is funded by investments in marketable securities (see Notes 2 and 5). Prior to its acquisition by the Company, Yale was self-insured for product liability claims up to a maximum of $500,000 per occurrence and maintained product liability insurance with a $100 million cap per occurrence. The Company was advised that a customer alleged that one of Yale’s products was the cause of a fire which occurred in January 1995 at a manufacturing facility, resulting in losses in excess of Yale’s policy limits. A formal complaint was filed seeking damages in excess of $500 million. This claim was settled during fiscal 1999 within the Company’s policy limits. 45 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 4 . I N C O M E T A X E S The following is a reconciliation of the diff e rence between the effective tax rate and the statutory federal tax rate: (In thousands) Computed statutory provision State income taxes net of federal benefit Nondeductible goodwill amortization Foreign taxes greater than statutory provision Other Actual tax provision The provision for income tax expense consisted of the following: (In thousands) Current income tax expense: Federal taxes State taxes Foreign Deferred income tax (benefit) expense: Domestic Foreign 1999 Year Ended March 31, 1998 1997 $ 17,753 1,767 4,540 790 (1,562) $ 23,288 $ 16,363 1,945 2,870 949 649 $ 22,776 $ 12,002 1,700 1,961 301 (347) $ 15,617 1999 Year Ended March 31, 1998 1997 $ 18,775 2,770 3,978 $ 15,800 3,081 3,840 $ 8,399 1,124 1,278 (2,298) 63 (238) 293 4,736 80 $ 23,288 $ 22,776 $ 15,617 The Company applies the liability method of accounting for income taxes as required by FAS Statement No. 109, “Accounting for Income Taxes.” The gross composition of the net current deferred tax asset, included in prepaid expenses within the consolidated balance sheet, is as follows: The gross composition of the net non-current deferre d tax asset is as follows: (In thousands) Inventory Accrued vacation and incentive costs Other Net current deferred tax asset March 31, 1999 19 98 $ (5,366) $ (5,357) 1,596 5,945 1,724 4,463 (In thousands) Insurance reserves Property, plant, and equipment Other Net non-current March 31, 1999 19 98 $ 10,718 $ 11,087 (7,438) 2,347 (8,109) 4,067 $ 2,175 $ 830 deferred tax asset $ 5,627 $ 7,045 Income before income taxes, minority interest and extraordinary charge includes foreign subsidiary income of $9,288,000, $9,097,000, and $3,650,000 for the years ended March 31, 1999, 1998, and 1997 respectively. United States income taxes have not been provided on unremitted earnings of the Company’s foreign subsidiaries as such earnings are considered to be permanently reinvested. 1 5 . R E N T A L E X P E N S E A N D L E A S E C O M M I T M E N T S Rental expense for the years ended March 31, 1999, 1998 and 1997 was $6,672,000, $4,478,000 and $2,805,000, re s p e c t i v e l y. The following amounts re p resent future minimum payment commitments as of March 31, 1999 under non-cancelable operating leases extending beyond one year (in thousands): Year Ended March 31, Real Property Vehicles and Equipment Total $ 1,984 $ 1,940 $ 3,924 1,705 1,538 1,478 1,466 1,476 752 252 118 3,181 2,290 1,730 1,584 2000 2001 2002 2003 2004 46 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 6 . S U M M A R Y F I N A N C I A L I N F O R M A T I O N The summary financial information of the parent, domestic subsidiaries (guarantors) and foreign subsidiaries (nonguarantors) of the 81⁄2% senior subordinated notes follows: As of and for the year ended March 31, 1999: (In thousands) As of March 31, 1999: Current assets: Parent Domestic Subsidiaries Foreign Subsidiaries Elimina- tions Consoli- dated Cash Trade accounts receivable and unbilled re v e n u e s Inventories Other current assets $ 3,109 55,479 47,792 3,168 Total current assets Net property, plant, and equipment Goodwill and other intangibles, net Intercompany balances Other non-current assets Total assets Current liabilities Long-term debt, less current portion Other non-current liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity 109,548 36,649 42,993 205,830 220,453 $ 615,473 $ 40,258 415,096 11,311 466,665 148,808 $ 615,473 For the Year Ended March 31, 1999: Net sales Cost of products sold Gross profit Selling, general and administrative expenses Amortization of intangibles $ 265,284 184,781 80,503 34,395 1,961 36,356 44,147 Income from operations 34,349 Interest and debt expense Interest and other income 1,531 Income before income taxes and extraord i n a ry charg e 11,329 4,521 Income tax expense 6,808 Income before extraordinary charge — E x t r a o rd i n a ry charge for early debt extinguishment 6,808 Net income $ $ 408 66,556 41,707 10,645 119,316 33,058 260,406 (368,479) 162,153 $ 206,454 $ 55,088 — 21,849 76,937 129,517 $ 206,454 $ 368,716 291,446 77,270 35,188 11,349 46,537 30,733 947 249 30,035 14,709 15,326 — $ 15,326 $ 3,350 24,774 27,488 2,561 58,173 20,297 54,328 (66,710) (833) $ 65,255 $ 25,846 6,590 2,835 35,271 29,984 $ 65,255 $ 122,300 87,744 34,556 22,326 2,169 24,495 10,061 627 (215) 9,219 4,006 5,213 — 5,213 $ $ — $ — (1,008) 6,867 146,809 115,979 16,374 (1,008) — — 229,359 (348,622) 286,029 90,004 357,727 — 33,151 $ (120,271) $ 766,911 $ — — (636) (119,635) (636) $ 120,556 421,686 35,995 578,237 188,674 $ (120,271) $ 766,911 $ (20,855) $ 735,445 542,975 192,470 91,909 15,479 107,388 85,082 35,923 1,565 50,724 23,288 27,436 — $ 27,436 (20,996) 141 — — — 141 — — 141 52 89 — 89 $ For the Year Ended March 31, 1999: Operating activities: Cash provided by (used in) operating activities Investing activities: Purchase of marketable securities, net Capital expenditures Proceeds from sale of business Purchase of businesses, net of cash acquired Net assets held for sale Net cash (used in) provided by investing activities Financing activities: Proceeds from issuance of common stock Net (payments) borrowings under revolving line-of-credit agreements Repayment of debt Dividends paid Other Net cash provided by (used in) financing activities Effect of exchange rate changes on cash Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ 36,147 $ 10,776 $ 9,877 $ 693 $ 57,493 (1,976) (8,414) 9,390 (9,597) — (10,597) — (2,809) (589) (1,313) 2,182 (2,529) — (1,769) — (8,861) — (10,630) — — — (187) — (187) (1,976) (12,992) 8,801 (19,958) 2,182 (23,943) — — 1,449 (1,449) — (27,600) (1,216) (3,725) (7,934) (40,475) (1) (14,926) 18,035 3,109 $ (1,340) (8,365) 1,078 — (8,627) — (380) 788 408 $ 746 1,402 (2,070) — 1,527 (1,462) (688) 4,038 3,350 $ $ — — 992 — (457) (49) — — — $ (28,194) (8,179) (3,725) (7,934) (48,032) (1,512) (15,994) 22,861 6,867 47 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 6 . S U M M A R Y F I N A N C I A L I N F O R M A T I O N (continued) Parent Domestic Subsidiaries Foreign Subsidiaries Elimina- tions Consoli- dated As of and for the year ended March 31, 1998: (In thousands) As of March 31, 1998: Current assets: Cash Trade accounts receivable and unbilled re v e n u e s Inventories Other current assets Total current assets Net property, plant, and equipment Goodwill and other intangibles, net Intercompany balances Other non-current assets Total assets Current liabilities Long-term debt, less current portion Other non-current liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity $ 18,035 41,651 47,201 5,050 111,937 32,159 43,404 237,011 214,997 $ 639,508 $ 35,854 444,225 10,576 490,655 148,853 $ 639,508 For the Year Ended March 31, 1998: Net sales Cost of products sold Gross profit Selling, general and administrative expenses Amortization of intangibles $ 269,675 192,684 76,991 36,804 1,892 38,696 38,295 Income from operations 24,125 Interest and debt expense 1,764 Interest and other income Income before income taxes and extraord i n a ry charg e 15,934 7,326 Income tax expense 8,608 Income before extraordinary charge (4,520) E x t r a o rd i n a ry charge for early debt extinguishment 4,088 Net income $ For the Year Ended March 31, 1998: Operating activities: Cash provided by (used in) operating activities $ 40,272 Investing activities: (2,517) Purchase of marketable securities, net (6,518) Capital expenditures (170,277) Purchase of businesses, net of cash acquired Net assets held for sale — Net cash (used in) provided by investing activities (179,312) Financing activities: Proceeds from issuance of stock Net (payments) borrowings under — revolving line-of-credit agreements Repayment of debt Proceeds from issuance of long-term debt, net Dividends paid Other 157,058 (196,353) 196,120 (3,713) (275) $ 788 79,245 44,314 12,919 137,266 35,517 276,210 (400,737) 165,698 $ 213,954 $ 54,748 9,098 31,065 94,911 119,043 $ 213,954 $ 212,269 156,749 55,520 26,122 6,475 32,597 22,923 594 7 22,336 11,529 10,807 — $ 10,807 $ 4,038 24,744 24,712 2,834 56,328 19,986 49,332 (65,997) 494 $ 60,143 $ 25,933 3,074 4,817 33,824 26,319 $ 60,143 $ 101,279 72,688 28,591 17,013 1,930 18,943 9,648 385 169 9,432 4,286 5,146 — 5,146 $ $ (1,369) (1,101) — (2,470) — — 229,723 (351,996) — $ 22,861 144,271 115,126 20,803 303,061 87,662 368,946 — 29,193 $(124,743) $ 788,862 $ (1,474) $ 115,061 456,397 46,458 617,916 — — (1,474) (123,269) 170,946 $(124,743) $ 788,862 (20,452) (948) — — — (948) — — (948) 365 (583) — $ (21,400) $ 561,823 401,669 160,154 79,939 10,297 90,236 69,918 25,104 1,940 46,754 22,776 23,978 (4,520) (583) $ 19,458 $ $ (5,864) $ 3,361 $ 651 $ 38,420 — (3,044) (5,918) 4,575 (4,387) 1,914 2,551 (955) 7,237 — (219) — (1,844) 509 — (1,335) — (508) (943) — — 740 (711) (1,435) (120) 4,158 4,038 $ (2,517) — — (11,406) — (175,686) — 4,575 — (185,034) — 1,914 — 159,101 — (198,251) 203,357 — (3,713) — (315) (561) 162,093 (561) (1,525) (90) 13,954 — — 8,907 — $ 22,861 Net cash provided by (used in) financing activities 152,837 — Effect of exchange rate changes on cash 13,797 Net change in cash and cash equivalents Cash and cash equivalents at beginning of year 4,238 $ 18,035 Cash and cash equivalents at end of year 10,528 — 277 511 788 $ $ 48 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 7 . E F F E C T S O F N E W A C C O U N T I N G P R O N O U N C E M E N T S The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities,” in June of 1998 which is effective for fiscal 2001. Statement No. 133 establishes accounting and reporting standards for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The intended use of the derivative and its designation as either (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (a fair value hedge) (2) a hedge of the exposure to variable cash flows of a forecasted transaction (a cash flow hedge), or (3) a hedge of the foreign currency exposure of a net investment in a foreign operation (a foreign currency hedge), will determine when the gains and losses on the derivatives are reported in earnings and when they are to be reported as a component of other comprehensive income. The impact of compliance with this Statement has not yet been determined by the Company. In March of 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” The Company adopted the provisions of the SOP in its financial statements for the year ended March 31, 1999. The SOP re q u i res the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. The impact of the SOP was not material to the Company. In April of 1998, the AICPA issued SOP 98-5, “Reporting the Costs of Start-Up Activities,” which re q u i res costs related to start-up activities be expensed as incurred. The Company adopted the provisions of the SOP in its financial statements for the year ended March 31, 1999. The adoption of SOP 98-5 had no effect on the Company’s reported earnings. 1 8 . B U S I N E S S S E G M E N T I N F O R M A T I O N In June of 1997, SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” was issued effective for fiscal years ending after December 15, 1998. The Company has adopted the statement for the year ended March 31, 1999. As a result of how the Company manages the business, its reportable segments are strategic business units that offer products with different characteristics. The most defining characteristic is the extent of customized engineering required on a per-order basis. In addition, the segments serve different customer bases through differing methods of distribution. The Company has three reportable segments: material handling products, integrated material handling solutions — industrial, and integrated material handling solutions — automotive. The Company’s material handling products segment sells hoists, chains, attachments, and other material handling p roducts principally to third party distributors in commercial and consumer distribution channels. The material handling solutions segments sell engineered material handling systems such as conveyors, manipulators, and lift tables primarily to end-users in the consumer products manufacturing, warehousing, and general manufacturing industries or the automotive segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment sales are not significant. The Company evaluates performance based on operating earnings of the respective business units prior to the effects of amortization. Segment information as of and for the years ended March 31, 1999, 1998, and 1997, is as follows: (In thousands) Year Ended March 31, 1999: Sales to external customers Operating income before amortization Depreciation and amortization Total assets Capital expenditures Products Solutions – Industrial Solutions – Automotive Eliminations/ Other Total $ 528,974 81,165 18,237 517,774 11,201 $ 58,301 5,592 3,045 68,520 1,468 $ 161,443 14,925 5,652 180,617 321 $ (13,273) (1,121) 322 — 2 $ 735,445 100,561 27,256 766,911 12,992 49 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 8 . B U S I N E S S S E G M E N T I N F O R M A T I O N (continued) (In thousands) Year Ended March 31, 1998: Sales to external customers Operating income before amortization Depreciation and amortization Total assets Capital expenditures Year Ended March 31, 1997: Sales to external customers Operating income before amortization Depreciation and amortization Total assets Capital expenditures Products Solutions – Industrial Solutions – Automotive Eliminations/ Other Total $ 524,949 76,188 17,094 515,772 10,580 $ 318,544 45,169 10,571 485,350 8,851 $ 39,845 3,992 1,957 71,499 712 $ 28,308 3,513 506 43,744 541 $ — — — 183,609 — $ — — — — — $ (2,971) 35 845 17,982 114 $ 12,572 1,569 208 19,151 — $ 561,823 80,215 19,896 788,862 11,406 $ 359,424 50,251 11,285 548,245 9,392 1999 Year Ended March 31, 1998 1997 $ 100,561 15,479 35,923 (1,565) $ 80,215 10,297 25,104 (1,940) $ 50,251 5,197 11,930 (1,168) $ 50,724 $ 46,754 $ 34,292 1999 Year Ended March 31, 1998 1997 $ 613,179 65,000 51,653 5,613 $ 462,120 39,208 55,367 5,128 $ 313,705 14,146 27,951 3,622 $735,445 $ 561,823 $ 359,424 1999 Year Ended March 31, 1998 1997 $ 634,720 100,317 28,265 3,609 $ 662,371 90,036 32,258 4,197 $ 457,501 61,696 26,191 2,857 $ 766,911 $ 788,862 $ 548,245 The following provides a re c o n- ciliation of operating income b e f o re amortization to consoli- dated income before income taxes, minority interest, and extra- ordinary charge: (In thousands) Operating income before amortization Amortization of intangibles Interest and debt expense Interest and other income Income before income taxes, minority interest and extraordinary charge Financial information relating to the Company’s operations by geographic area is as follows: (In thousands) Net sales: United States Europe Canada Other Total (In thousands) Identifiable and total assets: United States Europe Canada Other Total 50 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 9 . S E L E C T E D Q U A R T E R L Y F I N A N C I A L D A T A ( U N A U D I T E D ) In accordance with the pooling of interests method of accounting, the following selected quarterly financial data has been restated to include the accounts of GL from the date of GL’s formation, April 1, 1997. (In thousands, except per share data) Net sales Gross profit Income from operations Income before extraordinary charge Net income Income per share before extraordinary charge Net income per share (In thousands, except per share data) Net sales Gross profit Income from operations Income before extraordinary charge Net income Income per share before extraordinary charge Net income per share June 28,1998 Sept. 27,1998 Dec. 27,1998 March 31,1999 Three Months Ended $ 184,616 47,313 21,223 $ 185,357 47,042 20,578 $ 186,995 47,396 21,402 $ 178,477 50,719 21,879 6,375 6,375 0.44 0.44 5,923 5,923 0.41 0.41 6,445 6,445 0.46 0.46 8,693 8,693 0.62 0.62 June 29,1997 Sept. 28,1997 Dec. 28,1997 March 31,1998 Three Months Ended $ 136,858 38,273 15,663 $ 136,060 39,008 17,312 $ 137,329 38,634 16,112 $ 151,576 44,239 20,831 Year Ended March 31,1999 $ 735,445 192,470 85,082 27,436 27,436 1.92 1.92 Year Ended March 31,1998 $ 561,823 160,154 69,918 4,579 4,579 0.32 0.32 5,850 5,850 0.41 0.41 5,619 5,619 0.39 0.39 7,930 3,410 (a) 0.55 0.24(a) 23,978 19,458 (a) 1.66 1.35 (a) (In thousands, except per share data) June 30,1996 Sept. 29,1996 Dec. 29,1996 March 31,1997 March 31,1997 Three Months Ended Year Ended Net sales Gross profit Income from operations Income before extraordinary charge Net income Income per share before extraordinary charge Net income per share $ 65,735 20,017 8,681 $ 64,426 19,184 8,910 $ 103,393 30,104 11,240 $ 125,870 38,132 16,223 $ 359,424 107,437 45,054 5,032 5,032 0.38 0.38 5,211 5,211 0.39 0.39 3,219 118 (b) 0.24 0.01 (b) 4,890 4,793 (b) 0.37 0.36 (b) 18,352 15,154 (b) 1.39 1.15(b) (a) Includes extraordinary charges for early debt extinguishment amounting to $4,520,000 in the quarter ended March 31, 1998, net of the tax effect. (b) Includes extraordinary charges for early debt extinguishment amounting to $3,101,000 and $97,000 in the quarters ended December 29, 1996 and March 31, 1997, respectively, net of the tax effect. 2 0 . A C C U M U L A T E D O T H E R C O M P R E H E N S I V E I N C O M E ( L O S S ) The components of other com- p rehensive income (loss) are as follows: (In thousands) Net unrealized investment gains — net of tax Minimum pension liability adjustment —net of tax Foreign currency translation adjustment Accumulated other comprehensive loss March 31, 1999 1998 $ 2,312 (1,041) (4,637) $ 1,598 (988) (3,238) $ (3,366) $ (2,628) The net tax liability associated with items included in comprehensive income (loss) was $847,000 and $406,000 for 1999 and 1998, respectively. 51 R E P O R T O F I N D E P E N D E N T A U D I T O R S Board of Directors Columbus McKinnon Corporation We have audited the accompanying consolidated balance sheets of Columbus McKinnon Corporation as of March 31, 1999 and 1998, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 1999. 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. The consolidated financial statements give retroactive effect to the merger of Columbus McKinnon Corporation and GL International, Inc., which has been accounted for as a pooling of interests as described in Note 1 to the consolidated financial statements. We did not audit the balance sheet of GL International, Inc. as of March 31, 1998, or the related statements of income and cash flows for the year then ended, which statements reflect total assets of $27,921,000 as of March 31, 1998, and total revenues of $59,860,000 for the year ended March 31, 1998. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for GL International, Inc. for 1998, is solely based on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards re q u i re that we plan and perf o rm the audit to obtain reasonable assurance about whether the financial statements are f ree 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 pre s e n t a t i o n . We believe that our audits and the re p o rt of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the re p o rt of other auditors, the financial statements re f e rred to above p resent fairly, in all material respects, the consolidated financial position of Columbus McKinnon Corporation at March 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the t h ree years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. Ernst & Young LLP Buffalo, New York May 17, 1999 C O M P A N Y R E S P O N S I B I L I T Y F O R F I N A N C I A L S T A T E M E N T S The accompanying consolidated financial statements of Columbus McKinnon have been pre p a red by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and include amounts based on management’s best estimates and judgments. Financial information elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The Company has established and maintains a system of internal control designed to provide reasonable assurance that assets are safeguarded and that the financial re c o rds reflect the authorized transactions of the Company. The financial statements have been audited by Ernst & Young LLP, independent accountants. As part of their a u d i t of the Company’s 1999 financial statements, Ernst & Young LLP considered the Company’s system of intern a l c o n t rol to the extent they deemed necessary to determine the nature, timing and extent of their audit tests. The Board of Directors pursues its responsibility for the Company’s financial re p o rting through its Audit Committee, which is composed entirely of outside directors. The independent accountants have direct access to the Audit Committee, with and without the presence of management representatives, to discuss the results of their audit work and their comments on the adequacy of internal accounting controls and the quality of financial reporting. Timothy T. Tevens President and Chief Executive Officer Robert L. Montgomery, Jr. Executive Vice President and Chief Financial Officer 52 S H A R E H O L D E R A N D C O R P O R A T E I N F O R M A T I O N N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Company Information on the Internet I n f o rmation of interest to shareholders, potential investors, customers, vendors and employees is available o n-line. For details on CM’s re c e n t acquisitions, company news, financial documents, time-delayed stock quotes, and an opportunity to e-mail senior management, visit CM at: http://www.cmworks.com Shareholder Information As of March 31, 1999, there were 162 share h o l d e r s of record of the Company’s common stock. 1,400 Columbus McKinnon employees own shares through the Company ESOP. Approximately 2,000 additional shareholders hold shares in “street name.” Trading Information The Company’s common stock is traded in the over- the-counter market and quoted on the Nasdaq Stock Market® under the trading symbol, “CMCO”. Analyst Coverage These firms have recently produced research about Columbus McKinnon. Information may be obtained by contacting the following security analysts: Michael Braig, A.G. Edwards & Sons (314) 955-5894 John Inch, Bear Stearns & Co. (212) 272-4054 John Walthausen, C. L. King & Associates (212) 421-3242 Ed LaVarnway, First Albany Corporation (518) 447-8500 Karen A. Ubelhart, Goldman Sachs & Co. (212) 902-6773 Jennifer Cole, First Union Capital Markets Corp. (212) 891-5030 Dividend Policy The Company has continuously paid a cash dividend on its common stock since 1988. The Board of Directors, when justified by the financial condition of the Company, intends to continue its present policy of declaring quarterly dividends. The Company has paid a dividend of $.07 per share since July 1996. However, the amount of future dividends, if any, will always depend on the Company’s earnings and capital re q u i rements, and on such other factors as the Board of Directors may deem relevant. Annual Shareholders Meeting August 16, 1999; 10:00 a.m. Columbus McKinnon Corporation Corporate Headquarters 140 Audubon Parkway Amherst, NY 14228-1197 Transfer Agent Please direct questions about lost certificates, change of address and consolidation of accounts to the Company’s transfer agent and registrar: American Stock Transfer & Trust Company 40 Wall Street, New York, NY 10005 (212) 936-5100 www.amstock.com Conference Call Recordings A recording of the Company’s most recent quarterly e a rnings release conference call is available year- round, toll-free, at 1-800-925-0870. Form 10-K and Other Information In addition to the Company’s Web Site, information may be requested by calling or writing: Lois H. Demler, Corporate Secretary Columbus McKinnon Corporation 140 Audubon Parkway, Amherst, NY 14228-1197 (716) 689-5409 Corporate Headquarters Columbus McKinnon Corporation 140 Audubon Parkway, Amherst, NY 14228-1197 Telephone: (716) 689-5400 Independent Auditors Ernst & Young LLP 50 Fountain Plaza, 14th floor Buffalo, NY 14202-2297 Corporate Counsel for Securities Matters Lippes, Silverstein, Mathias & Wexler, LLP 700 Guaranty Building, Buffalo, NY 14202 General Counsel Phillips, Lytle, Hitchcock, Blaine & Huber, LLP 3400 HSBC Center, Buffalo, NY 14203 The following are trademarks of Columbus McKinnon Corporation registered in the U.S. Patent and Trademark Office: CM, ASI, Big Orange, Bossman, Budgit, Cady, Coffing, Conco, Cyclone, Duff-Norton, Hammerlok, Herc-Alloy, Lift-Tech LTI, Little Mule, Lodestar, Shaw-Box, Tigrip, Yale. The following are trademarks of Columbus McKinnon Corporation: Abell-Howe, Camlock, CM Max, CraneMart, Deeweld, Gaff e y, HSC, L a rco, LICO, Positech, Raccords Gautier, Rotary Union, Univeyor, WECO. EVA is a trademark of Stern Stewart registered in the U.S. Patent and Trademark Office. 53 B O A R D O F D I R E C T O R S Herbert P. Ladds, Jr. was elected Chairman of the Board of Columbus McKinnon Corporation in Janu- ary 1998, and has been a Director of the Company since 1973. He served as Chief Executive Officer of the Company from 1982 until his retirement in July, 1998. He served as President and Chief Executive Officer from 1982 until January 1998. Prior to this, he served as Executive Vice President from 1981 to 1982, and Vice President—Sales and Marketing from 1971 to 1980. At age 66, he is also a Director of Utica Mutual Insurance Company and Eastman Machine Company, in addition to various not-for-profit entities. L. David Black, age 62, has been a Director of the Company since 1995. He has served as Chairman of the Board, President and Chief Executive Officer of JLG Industries, Inc., since 1993. Prior thereto, he served as President of JLG Industries, Inc. He is also a member of Columbus McKinnon’s Audit and Compensation committees. Edward W. Duffy has been a Director of the Company since 1986. He served as Chairman of the Board of the Company from 1986 until his retirement in January 1998. Mr. Duffy is also a retired Chairman of the Board and Chief Executive Officer of Marine Midland Bank and a retired Director of W. R. Grace & Company, Niagara Mohawk Power Corporation, Oneida Limited and Utica Mutual Insurance Company. At age 73, he serves on Columbus McKinnon’s Audit and Compensation committees. Richard H. Fleming was named a Director in 1999. Fleming, age 51, is currently Executive Vice Presi- dent and Chief Financial Officer of USG Corporation. Prior to his appointment as Chief Financial Officer of USG in 1994, Mr. Fleming held several executive positions in finance at USG, including Treasurer, and Assis- tant Treasurer and Director, Corporate Finance. Mr. Fleming joined USG in 1984 following its acquisition of Masonite Corporation, where he was Vice President and Chief Financial Officer. He also serves as President of the Board of Directors of the Child Defense League of America in Washington, D.C. Randolph A. Marks, age 63, has been a Director of the Company since 1986. A private investor, he is a retired Chairman of the Board of American Brass Company and a current Director of Computer Task Group, Inc. He is also a member of Columbus McKinnon’s Audit and Compensation committees. Robert L. Montgomery, Jr. has served as Executive Vice President, Chief Financial Officer and Direc- tor since 1987. Mr. Montgomery, age 61, has been with Columbus McKinnon since 1974. Prior thereto, he was a certified public accountant with Price Waterhouse LLP. He also currently serves on the Kaleida Health System Trustee Council and the Beechwood Continuing Care Board of Directors. Carlos Pascual, age 54, has been a Director of the Company since August 1998. A 30-year veteran of Xerox Corporation, he currently serves as Senior Vice President, Xerox Corporation and President of U.S. Customer Operations for Xerox. Mr. Pascual also serves on the board of the United States Chamber of Com- merce. He is a member of Columbus McKinnon's Audit and Compensation Committees. Timothy T. Tevens, age 43, was named a Director in January 1998, in conjunction with his promotion to President. Having served as Chief Operating Officer since October 1996, Mr. Tevens succeeded Herb Ladds as Chief Executive Officer in July, 1998. He joined the Company in 1991 as Vice President of Information Services. He is a director of the American Supply & Machinery Manufacturers Association. O F F I C E R S Timothy T. Tevens, President and Chief Executive Officer Robert L. Montgomery, Jr., Executive Vice President and Chief Financial Officer Karen L. Howard, Vice President, Controller Ned T. Librock, Vice President, Sales and Marketing Ernst K. H. Marburg, Vice President, Total Quality and Standards Lois H. Demler, Corporate Secretary 54 B O A R D O F D I R E C T O R S Herbert Ladds Robert Montgomery Timothy Tevens Edward Duffy David Black Randolph Marks Carlos Pascual Richard Fleming E X E C U T I V E C O M M I T T E E From left to right: Ned Librock, Bob Montgomery, Karen Howard and Tim Tevens C O R P O R A T E S E C R E T A R Y Lois Demler l53 l54 l64 l63 l5 8l6 5 l56 l5 7 76 l4 5 C M W O R K S A R O U N D T H E G L O B E l46 l43 74 71 67 66 75 l29l30l34 l36l39 l38 73 l37l40 l35 l60 l59 Columbus McKinnon has 76 facilities and w a rehouses located throughout the world. CM products are serviced by strategically located Master Parts Depots, Chain Repair Stations and warehouses. The Company maintains its worldwide headquarters in Amherst, New Yo r k , and conducts its principal manufacturing and distribution operations at the following facilities: l20 l18l19 l11 l49 l47 l48 l50l1 l25l28 l14 70 l13 l12 l9 69 l10 l8 l21l23l22 l24 l4 l3 l2 l15l16 l17 l33 72 l42l41 l31 l32 l26 l27 l7 68 l5 l6 l C M U . S . F A C I L I T I E S 1 Amherst, New York Worldwide Headquart e r s 2 R e f o rm, Alabama Durbin Durco Stampings, A s s e m b l i e s 1 0 Moline, Illinois Washington Equipment Co. O v e rhead Cranes 1 1 G re e n s b u rg, Indiana American Lifts Scissor Lifts *3 F o rrest City, Arkansas *1 2 Cedar Rapids, Iowa Yale Hoists Big Orange Forged Pro d u c t s 4 Little Rock, Arkansas *1 3 L a u rens, Iowa HSC Power & Free Conveyors Positech Manipulators 5 Jacksonville, Florida Washington Equipment Co. O v e rh e a dC r a n e s 6 Sarasota, Florida CM Ti re Shre d d e r 7 Atlanta, Georg i a GL International Bridge and J i bC r a n e s 8 E u reka, Illinois Washington Equipment Co. O v e rhead Cranes 9 F o rest Park, Illinois Abell-Howe Cranes 1 4 Covington, Kentucky GL International Sales Off i c e 1 5 Baton Rouge, Louisiana GL International Sales Off i c e 1 6 B ro u s s a rd, Louisiana GL International Bridge and J i b C r a n e s 1 7 Houma, Louisiana GL International Sales Off i c e 1 8 Brighton, Michigan Sales and Engineering 1 9 Lansing, Michigan Sales and Engineering 2 0 Muskegon, Michigan Budgit and Shaw-Box Hoists 2 1-2 3 Kansas City, Missouri *3 3 Lexington, Te n n e s s e e LICO, Inc. and ASI, Integrated Material Handling Systems 2 4 St. Louis, Missouri Washington Equipment Co. O v e rh e a dC r a n e s 2 5 Tonawanda, New York Cady Lifters, Conco Manipulators, Specialty Forg i n g s *2 6 Charlotte, North Caro l i n a D u ff - N o rton Actuators, R o t a ry Unions, Jacks 2 7 Wa d e s b o ro, North Caro l i n a C o ffing Hoists 2 8 Lisbon, Ohio Chester Specialty Hoists 2 9 C l a re m o re, Oklahoma GL International Bridge and J i bC r a n e s 3 0 Tulsa, Oklahoma GL International Sales Off i c e 31-3 2 Chattanooga, Tennessee F o rgings, Dixie Load Binders, Logging Tools (2 plants) CM Herc-Alloy and Carbon Chain 3 4 B e d f o rd, Te x a s GL International Bridge and J i b Cranes, Main Off i c e 3 5 Corpus Christi, Te x a s GL International Sales Off i c e *3 6 F o rt Wo rth, Te x a s GL International Sales Off i c e *3 7 Houston, Te x a s GL International Bridge and Jib C r a n e s *3 8 L o n g v i e w, Te x a s GL International Sales Off i c e 3 9 Midland, Te x a s GL International Sales Off i c e 4 0 San Antonio, Te x a s GL International Sales Off i c e *4 1 Abingdon, Vi rg i n i a CM Hand and Electric Hoists *4 2 Damascus, Vi rg i n i a CM Hand and Electric Hoists 4 3 Blaine, Wa s h i n g t o n Lister Chain & Forg e l51l52 l62 l55 l6 1 l C M I N T E R N AT I O N A L FA C I L I T I E S n C M W A R E H O U S E L O C A T I O N S l44 4 4 M e l b o u rne, Victoria, Australia ASI of Australia Pty. Ltd. Sales Off i c e *53 A rden, Denmark Univeyor A/S, Integrated Material Handling Systems *4 5 P f a ffstatten, Austria Sales, Distribution **4 6 Richmond, B.C., Canada Lister Bolt & Chain *4 7 Cambridge, Ontario, Canada L i f t - Tech Hoists and Serv i c e *4 8 C o b o u rg, Ontario, Canada CM Hoists and Chain 4 9 Hamilton, Ontario, Canada Automatic Systems Inc. Sales Off i c e 5 0 Stoney Creek, Ontario, Canada L a rco Industrial Serv i c e s *5 1 Hangzhou, China LILA Lifting and Lashing LILA Textile Strapping 5 2 Yiquiao, Zhejiang, China Yale Hangzhou Industrial Pro d u c t s Yale Pallet Tru c k s *5 4 H o b ro, Denmark Univeyor Electronic A/S Material Handling Systems 5 5 C a i ro, Egypt Egyptian American Crane Co. 5 6 R o m e n y - s u r- M a rne, France R a c c o rds Gautier R o t a ry Unions, Swivel Joints *5 7 Vi e rzon, France Manufacturing, Sales, Distribution *5 8 Ve l b e rt, Germ a n y Yale Hoists, Tigrip Plate Clamps 5 9 Mexico City, Mexico Endor Hoists Sales Off i c e 6 0 Santiago Tianguistenco, Mexico Endor Hoists 6 1 Durban, South Africa Sales, Distribution 6 2 Hat Yai, Thailand Sales and Distribution 6 3 C h e s t e r, United Kingdom Camlok Plate Clamps 6 4 L e i c e s t e r, United Kingdom Univeyor Conveyor Systems Ltd. Material Handling Systems *6 5 Te l f o rd, United Kingdom Sales, Distribution *6 6 Ontario, Californ i a 6 7 Woodland, Californ i a *6 8 Atlanta, Georg i a *6 9 Romeoville, Illinois *7 0 Tonawanda, New Yo r k 7 1 Milwaukie, Ore g o n *7 2 Lexington, Te n n e s s e e Fleet Distribution Center *7 3 Houston, Te x a s 7 4 Seattle, Wa s h i n g t o n 7 5 Edmonton, Alberta, Canada 7 6 R o t t e rdam, Netherlands * ISO 9000 certified ** Approved by Lloyds and numerous government agencies Columbus McKinnon Corporation 140 Audubon Parkway Amherst, New York 14228-1197 716-689-5400 http://www.cmworks.com 

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