Columbus McKinnon Annual Report 2006

Plain-text annual report

CMCO Fiscal 2006 Sales +8% Net Income +258% Pro forma Net Income +92% millions $600 500 400 300 200 100 0 millions $250 200 150 100 50 0 millions $400 300 200 100 0 STRONG OPERATING LEVERAGE 2006 FINANCIAL SUMMARY 25.1% 23.7% 23.6% 24.5% 26.6% (In thousands, except per share, percent change, margin and ratio data) Data as of or for the year ended March 31, 2006 2005 % change $480.0 $453.3 $444.6 $556.0 $514.8 FY 02 FY 03 FY 04 FY 05 FY 06 ■ NET SALES GROSS MARGIN GROWING INTERNATIONAL SALES $198.3 $191.3 $140.9 $148.4 $158.6 FY 02 FY 03 FY 04 FY 05 FY 06 CONTINUED DEBT REDUCTION $337.3 $314.4 $282.3 $261.5 $164.2 INCOME STATEMENT DATA Net sales Restructuring charges Amortization of intangibles Income from operations Net income per diluted share Pro forma net income* per diluted share** MARGIN DATA Gross margin Operating income margin OTHER DATA Cash flow from operating activities per share Revenue per employee Capital expenditures Inventory turns Working capital / sales BALANCE SHEET DATA Total assets Total liabilities Total funded debt Total shareholders’ equity Debt / capitalization $556,007 1,609 249 57,869 59,796 3.60 26,684 1.60 $514,752 910 312 40,665 16,710 1.13 13,971 0.84 26.6% 10.4% 24.5% 7.9% $2.92 201 8,430 5.7 17.4% $1.16 188 5,925 5.7 20.2% $566,044 361,623 209,766 204,421 50.6% $480,871 399,104 270,941 81,767 76.8% 8.0 76.8 -20.2 42.3 257.8 218.6 92.1 90.5 151.7 6.9 42.3 17.7 -9.4 -22.6 150.0 FY 02 FY 03 FY 04 FY 05 FY 06 DEBT NET OF CASH * Excludes unusual items ** Excludes unusual items and uses the 16.6 million average diluted shares outstanding in FY 2006 for both periods. TABLE OF CONTENTS Letter to Shareholders Major Products SEC Form 10K Document 1 4 5 Corporate Information/ Board of Directors and Corporate Officers Inside Back Cover COMPANY PROFILE Columbus McKinnon Corporation (NASDAQ: CMCO) is a leading designer, manufacturer and marketer of material handling products, systems and services which lift, secure, position and move material ergonomically, safely, precisely and efficiently. Headquartered in Amherst, New York, Columbus McKinnon’s major products include hoists, cranes, chain and forged attachments. The Company’s products serve a wide variety of commercial and industrial applications that require the safety and quality provided by Columbus McKinnon’s superior product design and engineering know-how. STRATEGY AND FOCUS Our strategy is to leverage our superior material handling design and engineering know- how to provide differentiated products, systems and services to lift, secure, position and move material ergonomically, safely, precisely, and efﬁ ciently. Our focus is on industrial and commercial applications with the highest potential for growing market share in countries that offer the greatest volume and proﬁ t potential. Funded Debt/Capitalization 50.6% -2620 BASIS POINTS Stock Price +98% Dear Fellow Shareholders: Fiscal 2006 was a very rewarding year for Columbus McKinnon and our shareholders. The substantial operating leverage gained from our lean manufacturing and facility rationalization initiatives, combined with growing sales and lower debt produced a signiﬁ cant improvement in our performance and proﬁ tability. Strong market conditions in industrial markets worldwide contributed to consolidated net sales reaching the highest level in the last ﬁ ve years. Our progress over the last year in de-levering the balance sheet and paying down debt was outstanding as our net debt was reduced by over $97 million with $56 million coming from our November 2005 equity offering and $41 million from cash ﬂ ow generated by operations. As a result, we achieved our near-term goal of 50% funded debt to total capitalization on March 31st, compared with 77% a year ago. Subsequent to year-end, $32.1 million of available cash was used to further reduce this key ratio to 46%. Fiscal 2006 net sales were $556.0 million, a $41.2 million or 8.0% increase from $514.8 million in ﬁ scal 2005. Net income for ﬁ scal 2006 was $59.8 million, a $43.1 million improvement from net income of $16.7 million in ﬁ scal 2005. On a per share basis, Columbus McKinnon’s net income for ﬁ scal 2006 was $3.60 per diluted share on 16.6 million average shares outstanding, an improvement of $2.47 per diluted share (219% improvement) from $1.13 per diluted share on 14.8 million average shares outstanding in ﬁ scal 2005. Net income in ﬁ scal 2006 and 2005 included several unusual items with a total net favorable effect of $33.1 million in ﬁ scal 2006 and $2.8 million in ﬁ scal 2005. Excluding unusual items from both years, pro forma net income for ﬁ scal 2006 would have been $26.7 million, a 92.1% improvement from $13.9 million pro forma net income in ﬁ scal 2005. On a per share basis, pro forma net income using the 16.6 million average diluted shares outstanding in ﬁ scal 2006 would have been $1.60 per diluted share in ﬁ scal 2006 and $0.84 per diluted share on a pro forma basis in ﬁ scal 2005, a 90.5% improvement. A reconciliation of the unusual items affecting net income in both years is provided in our ﬁ scal 2006 fourth quarter and full year earnings release which is available on our web site at www.cmworks.com. The most signiﬁ cant unusual item was the reversal of a $38.6 million deferred tax asset valuation allowance in the ﬁ scal 2006 fourth quarter which resulted in a corresponding $38.6 million tax beneﬁ t on the income statement. The Company continues to have signiﬁ cant U.S federal net operating loss carryforwards ($83.1 million at 2006 ﬁ scal year end) to be utilized against future U.S. taxable income. This will beneﬁ t future cash ﬂ ow as income tax expense related to U.S.-generated taxable income will be recorded as a non-cash expense. Higher volumes and a lower cost base again produced signiﬁ cant improvement in virtually every major performance metric for the year. Operating leverage was 42% in ﬁ scal 2006, compared with 15% in ﬁ scal 2005. Our consolidated gross margin for ﬁ scal 2006 increased to 26.6%, up 210 basis points from last year. Similarly, consolidated operating margin improved 250 basis points to 10.4% for the ﬁ scal 2006 year, with gross and operating margins improving in both business segments. Working capital as a percent of revenue improved to 17.4% at 2006 ﬁ scal year-end from 20.2% and 22.0% at year-end ﬁ scal 2005 and 2004, respectively. During the past year, we not only substantially reduced debt through our very successful equity offering and our strong operating cash ﬂ ow, we also completed several additional reﬁ nancing initiatives to reduce more costly and restrictive debt, as well as to extend the maturity of our debt. The combined effect of our ﬁ scal 2006 and subsequent reﬁ nancing activities is expected to produce future annual savings of $8.0 million in cash and pre-tax interest expense. In addition to reducing debt and interest expense, our reﬁ nancing activities improved Columbus McKinnon’s capital structure, lowered our cost of capital and provided the ﬁ nancial ﬂ exibility to execute our strategic growth plans. Our signiﬁ cantly improved operating results and ﬁ nancial position, combined with growing demand from industrial markets we serve, all helped Columbus McKinnon successfully complete the transition from recovery to growth in ﬁ scal 2006. Our primary focus going forward is to accelerate our top line growth while making continued improvements in our proﬁ tability and ﬁ nancial position. Our current organic bookings growth is in the mid-to-high single digits, and a key near-term objective is to step up our growth pace to enhance both earnings and our global market position. While we will again consider acquisitions to support growth now that our ﬁ nancial condition is much stronger, we are likely to make smaller acquisitions that complement existing product lines or enhance our market position in international markets. While doing so, we will continue to be very mindful of maintaining a prudent capital structure. Based on that thinking, we are looking for the bulk of our growth over the next few years to continue to be driven by organic growth. The focus of our organic growth initiatives targets two key strategies: new market development and new products and services. 1 Results 2006 Operating Leverage 42% vs. 15% in 2005 2006 Pro forma EPS $1.60 + 90.5% 2006 Gross Margin 26.6% +210 basis points 2006 Operating Margin 10.4% +250 basis points Working Capital/Sales 17.4% -280 basis points Global markets remain a major focus for Columbus McKinnon. The demand for our types of products is high in developing economies such as Latin America, Eastern Europe and the Far East. We are also looking to expand in higher growth markets like construction and energy around the world. There is a greater opportunity to sell more products in North American markets by identifying market shifts and penetrating the industries that are moving into a growth mode. As we look to accelerate sales growth, we are investing more in sales and marketing activities in all markets to ensure that we cover them effectively. Besides expanding our sales force, we are also adding product and market specialists to support our human resources in the ﬁ eld. On the new product front, developing products that will make us more competitive globally continues to be a major focus. In March 2006, we launched our FEM-rated (Federation of European Manufacturers) 5-10 ton wire rope hoist to the North American cranebuilder channel. It has been very well received with orders to date exceeding our initial forecasts. We believe the features that this unit provides users truly set our FEM product apart from our competition. Marketed under our strong brand names, Yale and Shaw Box, this product differentiates us in the marketplace and reﬂ ects focus on engineering, innovation and quality. Our plan is to expand this product line further with 15-20 ton and 1-3 ton capacities being launched later in the year. The Yale Global King, Columbus McKinnon’s ﬁ rst FEM-rated hoist, is targeted to the global market. Strength 2006 FYE Net Debt $164.2 million -37.2% 2006 FYE Funded Debt $209.8 million -22.6% 2006 #1 U.S. Market Positions Large and diverse customer base Over 20,000 distributors and end user customers With well-established and expanding manufacturing, sales and service operations in major global markets, Columbus McKinnon has a strong platform of international sales. At ﬁ scal 2006 year end, we operated 26 manufacturing facilities in nine countries, 26 sales and service ofﬁ ces in 12 countries and nine warehouse facilities in ﬁ ve countries. China, Latin America and both western and Eastern Europe remain our major focus areas of global presence and expansion. In ﬁ scal 2006, international sales increased to $198.3 million representing 36% of total sales. Since becoming a public company ten years ago, international sales have grown at a 16.9% compound annual growth rate. Lifting and sling chain (59%) Forged attachments (46%) Hoists (57%) growth future for We are also successfully maintaining a strong domestic market presence with number one U.S. market positions in hoists, lifting and sling chain, and forged attachments for this past year. Columbus McKinnon continues to have a large and diverse North American customer base numbering over 20,000 distributors and end user customers. As we continue to grow sales, we remain focused on further improving operating proﬁ tability. A key point we make in communicating Columbus McKinnon’s underlying proﬁ tability potential to investors is the 11% to 12% operating margins achieved when sales were at the $600 million level in ﬁ scal 2000. As we return Columbus McKinnon’s sales closer to that level, we are targeting operating proﬁ t in that range. We are also focused on making further improvements in working capital utilization through better asset management. 2 Strategy Increase domestic organic sales through new products and enhanced market coverage Increase international sales by further expanding global presence and oﬀ ering new products designed for global markets Enhance operating margins and leverage through continued sales growth and cost reduction Continue lean manufacturing and facility rationalizations to further improve working capital and capacity utilization Continue debt reduction to reduce interest expense and enhance strategic and ﬁ nancial ﬂ exibility Support incremental external growth through strategic acquisitions and alliances Operational Excellence in everything we do To support these goals, we launched Operational Excellence in ﬁ scal 2006, a major strategic initiative being led by Chief Operating Ofﬁ cer Derwin Gilbreath. Derwin and his team are identifying the barriers that hinder excellence in execution in all aspects of our business. Given our improved ﬁ nancial strength and performance, we are now in a better position to make greater capital improvements to support better work ﬂ ow in our operations. In many locations, we are investing in equipment that is more oriented toward the production ﬂ ow of lean manufacturing than the batch mode of production. We also plan to invest in our people for greater ﬂ exibility so that we are better able to shift resources to meet customer needs and exceed their expectations. To help Columbus McKinnon Associates achieve their best, we are investing in training and organizational development to support individual growth, identiﬁ cation and development of skill sets and stronger employee engagement. Ultimately, our Associates are the major driver of our success. The 3,100 Associates of the Columbus McKinnon team were instrumental in delivering strong operating performance in ﬁ scal 2006 and we are making the investments to ensure they deliver even better results in the years ahead. Columbus McKinnon is the largest producer of higher grade chain in North America. We also want to thank the members of your Board of Directors, who bring outstanding knowledge and judgment to our strategic planning and corporate governance activities. In particular, we would like to recognize Herbert P. Ladds, Jr. who will now retire as a Director of the Company at our 2006 annual meeting, capping 35 years of outstanding service to Columbus McKinnon. Throughout his three decades of leadership, Herb was a driving force behind Columbus McKinnon’s growth and prosperity. He joined the Company in 1971 as Vice President - Sales & Marketing and became Executive Vice President in 1981 before being named President in 1982. Herb served as Chief Executive Ofﬁ cer from 1986 until his retirement as CEO in July 1998 when he was named Chairman. As Vice President – Sales & Marketing, Herb traveled all over the world visiting plants and customers and became an international ambassador of goodwill for Columbus McKinnon. As Chief Executive Ofﬁ cer from 1986 to 1998, Herb guided us through a dramatic period of growth that secured Columbus McKinnon’s leading position in North America. On behalf of the Board and the entire Columbus McKinnon family, we thank Herb for his many contributions to the Company’s success and wish him continued health and happiness in his retirement. Columbus McKinnon is a major producer and servicer of overhead cranes. As ﬁ scal 2007 begins, the future looks bright for Columbus McKinnon. Bookings are very strong as we enter the new ﬁ scal year and on every major front, we are operating from a position of strength with a sound course for the future. We are making prudent investments in the business and remain focused on executing well. We are steadfastly committed to our successful strategy of further cost and debt reduction, global growth and expanding our market leadership in North America. All of this will be accomplished through our greatest resource, our people, who realize that the best is yet to come. We are very pleased with the signiﬁ cant progress made over the last few years, but know we have yet to reach Columbus McKinnon’s full potential. As we work toward achieving that goal, we are raising the bar and setting our sights even higher for Columbus McKinnon and our shareholders. We look forward to reporting on our continued progress and greatly appreciate your conﬁ dence and support. Timothy T. Tevens President and Chief Executive Officer Ernest R. Verebelyi Chairman of the Board of Directors With over one million units sold since its introduction in 1955, the Lodestar is the world’s leading electric chain hoist. 3 Major Products: 82 Percent of Fiscal 2006 Sales HOISTS Products: Electric chain hoists, electric wire rope hoists, hand-operated hoists, lever tools, hoist trolleys, air balancers and air-powered hoists. Custom-designed, below-the-hook tooling, clamps, pallet trucks and textile strappings. Brands: Yale, CM, Coffing, Shaw-Box, Budgit, Chester, Little Mule, Camlok, Tugit, Tigrip, Cady Distribution and Service: Over 20,000 distributors in commercial and consumer channels for both domestic and international markets. A leading supplier to industrial catalog houses. Service for hoist products is provided through over 350 hoist parts, product, service and repair centers. Columbus McKinnon’s CraneMart program supports over 50 independent crane builders covering 89 markets with best pricing, parts distribution rights, dedicated technical support, shared resources and its TechLink automated crane and hoist inspection service. CHAIN & FORGED ATTACHMENTS Products: Alloy chain (used in overhead lifting, pulling and restraining applications), carbon steel welded-link chain (used for load securement and other non-overhead lifting applications). Rigging accessories, including a complete line of alloy and carbon steel closed- die forged attachments used in virtually all types of chain, synthetic and wire rope rigging applications in a variety of industries. Columbus McKinnon also produces custom application forgings for a number of OEM customers. Brands: CM, Big Orange, Hammerlok, Herc-Alloy, Dixie Industries, Midland Forge, Durbin Durco, AgWorks, ColorLinks Distribution and Service: Industrial distributors, hardware distributors and mass merchandiser outlets. Aftermarket service is provided to product end-users through a network of independent distributors, including 13 chain service centers. INDUSTRIAL CRANES Products: Industrial bridge crane & runway systems up to 100 tons, jibs, patent track cranes, enclosed track light duty workstation cranes, and distribution outlet for most CM products. Services: Columbus McKinnon’s subsidiary, Crane Equipment & Service, Inc. (CES), inspections, provides OSHA-mandated installation, service, repair, preventive maintenance, and replacement parts. CES is one of the largest crane service providers in North America with approximately 70 service technicians in 19 locations. HOIST PRODUCT LINE KEY METRICS Metric Sales FYE 2006 FYE 2005 $258.1 million $227.8 million Percentage of Total Sales U.S. #1 Market Share* 46% 57% 44% 61% Inventories $39.3 million $39.5 million * Powered hoists, manual hoists and trolleys representing 53% and 52% of fiscal 2006 and fiscal 2005 hoist sales, respectively. End-user Markets: General manufacturing, production industries, marine, power generation and distribution, automotive parts manufacturing, entertainment, construction, mining, crane building, logging, oil and gas production, pulp and paper, metals production, steel processing, warehousing and distribution. CHAIN AND FORGED ATTACHMENTS PRODUCT LINE KEY METRICS Metric Sales Percentage of Total Sales U.S. #1 Market Share Chain Product* U.S. #1 Market Share Forged Attachments** Inventories FYE 2006 FYE 2005 $134.3 million $127.3 million 24% 59% 46% 25% 45% 49% $17.7 million $18.5 million * Selected categories comprising 25% and 32% of fiscal 2006 and fiscal 2005 chain sales, respectively. ** Selected categories comprising 55% and 58% of fiscal 2006 and fiscal 2005 forged attachments sales, respectively. End-user Markets: General manufacturing, marine, agricultural, automotive parts manufacturing, entertainment, construction, mining, crane building, transportation, logging, oil and gas, primary metals production, steel processing and consumer. CRANE PRODUCT LINE KEY METRICS Metric Sales FYE 2006 FYE 2005 $62.0 million $62.5 million Percentage of Total Sales 11% 12% Backlog $14.7 million $13.2 million Brands: Abell-Howe, Gaffey, All-Cranes, Larco, WECO, LodeRail Distribution and Service: Direct sales /service groups & reseller channels End-user Markets: energy / oil / gas production & services, heavy equipment manufacturing, mining, primary metals production, steel warehousing & distribution, shipbuilding, construction, military, transportation, aviation, pulp and paper, general manufacturing. MAJOR 2006 CRANE PROJECTS Project: Major Steel Producer – Hot Strip Mill Upgrade – Nanticoke, ON, Canada Products: Two (2) 140/40 metric ton / 125 foot span / cab controlled / Class F-CMMA #70 slab handling cranes with rope operated slab tongs for continuous severe steel mill slab handling service. Each crane weighed 980,000 pounds (490 tons) Project: Major Oil Company – LNG Compressor & Turbine Room Maintenance Cranes – Biokio Island, Equatorial Guinea, Africa Products: One (1) 40 ton double box girder crane with two (2) 40 ton Shaw-Box DMR explosion proof hoists for compressor maintenance One (1) 10 ton single girder crane with two (2) Yale explosion proof hoists for turbine room maintenance Five (5) 5 ton Budgit manual hoists 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended March 31, 2006 Commission file number 0-27618 _________________ COLUMBUS McKINNON CORPORATION (Exact name of Registrant as specified in its charter) New York (State of Incorporation) 16-0547600 (I.R.S. Employer Identification Number) 140 John James Audubon Parkway Amherst, New York 14228-1197 (Address of principal executive offices, including zip code) (716) 689-5400 (Registrant’s telephone number, including area code) _________________ Securities pursuant to section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value (and rights attached thereto) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [ X ] Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act. Large accelerated filer [ ] Accelerated filer [ X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2005 was approximately $315 million, based upon the closing price of the Company’s common shares as quoted on the Nasdaq Stock Market on such date. The number of shares of the Registrant’s common stock outstanding as of May 31, 2006 was 18,708,522 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s proxy statement for its 2006 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Registrant’s fiscal year ended March 31, 2006 are incorporated by reference into Part III of this report. COLUMBUS McKINNON CORPORATION 2006 Annual Report on Form 10-K This annual report contains “forward-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 our actual results to differ materially from the results expressed or implied by such statements, including general economic and business conditions, conditions affecting the industries served by us and our subsidiaries, conditions affecting our customers and suppliers, competitor responses to our products and services, the overall market acceptance of such products and services, the integration of acquisitions and other factors set forth herein under “Management’s Discussion and Analysis of Results of Operations and Financial Condition – Factors Affecting Our Operating Results.” We use words like “will,” “may,” “should,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “future” and other similar expressions to identify forward looking statements. These forward looking statements speak only as of their respective dates and we do not undertake and specifically decline any obligation to publicly release the results of any revisions to these forward-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 changes. Our actual operating results could differ materially from those predicted in these forward-looking statements, and any other events anticipated in the forward-looking statements may not actually occur. Item 1. Business General PART I We are a leading manufacturer and marketer of hoists, cranes, chain, conveyors, material handling systems, lift tables and component parts serving a wide variety of commercial and industrial end-user markets. Our products are used to efficiently and ergonomically move, lift, position or secure objects and loads. We are the domestic market leader in hoists, our principal line of products, which we believe provides us with a strategic advantage in selling our other products. We have achieved this leadership position through strategic acquisitions, our extensive and well-established distribution channels and our commitment to product innovation and quality. We have one of the most comprehensive product offerings in the industry and we believe we have more overhead hoists in use in North America than all of our competitors combined. Our brand names, including CM, Coffing, Duff- Norton, Shaw-Box and Yale, are among the most recognized and well-respected in our marketplace. The Building of Our Business Founded in 1875, we have grown to our current size and leadership position largely as the result of the 14 businesses we acquired since February 1994. These acquisitions have significantly broadened our product lines and services and expanded our geographic, end-user markets and our customer base. Our senior management has substantial experience in the acquisition and integration of businesses, aggressive cost management, efficient manufacturing techniques and global operations, all of which are critical to our long-term growth strategy. We have a proven track record of acquiring complementary businesses and product lines, integrating their activities into our organization, and aggressively managing their cost structures to improve operating efficiencies. The history of our Products and Solutions acquisitions since 1994 is outlined below (purchase price in millions): 1 Safety Regulations and Concerns. Driven by federal and state workplace safety regulations such as the Occupational Safety and Health Act and the Americans with Disabilities Act, and by the general competitive need to reduce costs such as health insurance premiums and workers’ compensation expenses, employers seek safer ways to lift and position loads. Our lifting and positioning products enable these tasks to be performed with reduced risk of personal injury. Consolidation of Suppliers. In an effort to reduce costs and increase productivity, our customers and end-users are increasingly consolidating their suppliers. We believe that our competitive strengths will enable us to benefit from this consolidation and enhance our market share. Our Competitive Strengths Leading Market Positions. We are a leading manufacturer of hoists and alloy and high strength carbon steel chain in North America. We have developed our leading market positions over our 131-year history by emphasizing technological innovation, manufacturing excellence and superior after-sale service. Approximately 74% of our domestic net sales for the year ended March 31, 2006 were from product categories in which we believe we hold the number one market share. We believe that the strength of our established products and brands and our leading market positions provide us with significant competitive advantages, including preferred supplier status with a majority of our largest customers. Our large installed base of products also provides us with a significant competitive advantage in selling our products to existing customers as well as providing repair and replacement parts. The following table summarizes the product categories where we believe we are the market leader: Product Category Powered Hoists (1) Manual Hoists & Trolleys (1) Forged Attachments (1) Lifting and Sling Chains (1) Hoist Parts (2) Mechanical Actuators (3) Tire Shredders (4) Jib Cranes (5) _____________ U.S. Market Share 53% 66% 46% 59% 60% 40% 80% 45% U.S. Market Position #1 #1 #1 #1 #1 #1 #1 #1 Percentage of Domestic Net Sales 27% 14% 10% 6% 9% 5% 2% 1% 74% (1) Market share and market position data are internal estimates derived from survey information collected and provided by our trade associations. (2) Market share and market position data are internal estimates based on our market shares of Powered Hoists and Manual Hoists & Trolleys, which we believe are good proxies for our Hoist Parts market share because we believe most end-users purchase Hoist Parts from the original equipment supplier. (3) Market share and market position data are internal estimates derived by comparison of our net sales to net sales of one of our competitors based on discussions with that competitor, and to estimates of total market sales from a trade association. (4) Market share and market position data are internal estimates derived by comparing the number of our tire shredders in use and their capacity to estimates of the total number of tires shredded published by a trade association. (5) Market share and market position are internal estimates derived from both the number of bids we win as a percentage of the total projects for which we submit bids and from estimates of our competitors’ net sales based on their relative position in distributor catalogues. Comprehensive Product Lines and Strong Brand Name Recognition. We believe we offer the most comprehensive product lines in the markets we serve. We are the only major supplier of material handling equipment offering full lines of hoists, chain and attachments. Our capability as a full-line supplier has allowed us to (i) provide our customers with “one-stop shopping” for material handling equipment, which meets some customers’ desires to reduce the number of their supply relationships in order to lower their costs, (ii) leverage our engineering, research and development and marketing costs over a larger sales base and (iii) achieve purchasing efficiencies on common materials used across our product lines. 3 In addition, our brand names, including Budgit, Chester, CM, Coffing, Duff-Norton, Little Mule, Shaw-Box and Yale, are among the most recognized and respected in the industry. The CM name has been synonymous with overhead hoists since manual hoists were first developed and marketed under the name in the early 1900s. We believe that our strong brand name recognition has created customer loyalty and helps us maintain existing business, as well as capture additional business. No single product comprises more than 1% of our sales, a testament to our broad and diversified product offering. Distribution Channel Diversity and Strength. Our products are sold to over 20,000 general and specialty distributors and OEMs. We enjoy long-standing relationships with, and are a preferred provider to, the majority of our largest distributors and industrial buying groups. Over the past decade, there has been significant consolidation among distributors of material handling equipment. We have benefited from this consolidation and have maintained and enhanced our relationships with our leading distributors, as well as formed new relationships. We believe our extensive North American distribution channels provide a significant competitive advantage and allow us to effectively market new product line extensions and promote cross-selling. Expanding International Markets. We have significantly grown our international sales since becoming a public company in 1996. Our international sales have grown from $34.3 million (representing 16% of total sales) in fiscal 1996 to $198.3 million (representing 36% of our total sales) during the year ended March 31, 2006. This growth has occurred primarily in Europe, South America and Asia-Pacific where we have recently opened additional sales offices. Our international business has provided us, and we believe will continue to provide us, with significant growth opportunities and new markets for our products. Low-Cost Manufacturing with Significant Operating Leverage. We believe we are a low-cost manufacturer and we will continue to consolidate our manufacturing operations and reduce our manufacturing costs through the initiatives summarized below. Our low-cost manufacturing capability continues to positively impact our operating performance as volumes increase. — Rationalization and Consolidation. From fiscal 2002 through fiscal 2004, we closed 10 manufacturing plants and three warehouses, as more fully described in “Our Strategy” below. — Lean Manufacturing. In fiscal 2002, we initiated Lean Manufacturing techniques, facilitating substantial inventory reductions, a significant decline in required manufacturing floor area, a decrease in product lead time and improved productivity and on-time deliveries. — Purchasing Council. We continue to leverage our company-wide purchasing power through our Purchasing Council to reduce our costs. — — Selective Vertical Integration. We manufacture many of the critical parts and components used in the manufacture of our hoists and cranes, resulting in reduced costs. International Expansion. Our continued expansion of our manufacturing facilities in China and Mexico provides us with another cost efficient platform to manufacture and distribute certain of our products. We now operate 26 manufacturing facilities in nine countries, with 26 stand alone sales and service offices in 12 countries, and nine stand alone warehouse facilities in five countries. Strong After-Market Sales and Support. We believe that we retain customers and attract new customers due to our ongoing commitment to customer service and satisfaction. We have a large installed base of hoists and chain that drives our after-market sales for components and repair parts and is a stable source of higher margin business. We maintain strong relationships with our customers and provide prompt aftermarket service to end-users of our products through our authorized network of 13 chain repair stations and over 350 hoist service and repair stations. Long History of Free Cash Flow Generation and Significant Debt Reduction. We have consistently generated positive free cash flow (which we define as net cash provided by operating activities less capital expenditures) by continually reducing our costs, increasing our inventory turnover and reducing the capital intensity of our manufacturing operations. From the beginning of fiscal 2004 through fiscal 2006, we have reduced total debt by $106.5 million, from $316.3 million to $209.8 million, which includes application of $47.6 million of net proceeds from our November 2005 secondary offering. 4 Experienced Management Team with Significant Equity Ownership. Our senior management team provides a depth and continuity of experience in the material handling industry. Our management has experience in aggressive cost management, balance sheet management, efficient manufacturing techniques, acquiring and integrating businesses and global operations, all of which are critical to our long-term growth. Our directors and executive officers, as a group, own an aggregate of approximately 7% of our outstanding common stock. Our Strategy Increase our Domestic Organic Growth. We intend to leverage our strong competitive advantages to increase our domestic market share across all of our product lines by: — — Leveraging Our Strong Competitive Position. Our large diversified customer base, our extensive distribution channels and our close relationship with our distributors provide us with insights into customer preferences and product requirements that allow us to anticipate and address the future needs of end-users. Introducing New and Cross-Branded Products. We continue to expand our business by developing new material handling products and services and expanding the breadth of our product lines to address customer needs. Over the past three years, we have developed over 100 new or cross-branded products, representing approximately $27.5 million in fiscal 2006 revenues. During fiscal 2004, we established a dedicated hoist product development team. The majority of the hoist products under development are guided by the Federation of European Manufacturing, or FEM, standard. We believe these FEM hoist products will facilitate our global sales expansion strategy as well as improve our cost competitiveness against internationally made products imported into the U.S. Recent new product introductions include: global wire rope hoists used in overhead cranes; • • Hand hoists and lever tools manufactured at our Chinese plants; • • • • a variety of new forged lifting attachments; pallet layer picking systems; high-speed, light-weight, mini-load cranes, used in warehouse applications; and Techlink crane and hoist maintenance and inspection software. — Leveraging Our Brand Portfolio to Maximize Market Coverage. Most industrial distributors carry one or two lines of material handling products on a semi-exclusive basis. Unlike many of our competitors, we have developed and acquired multiple well-recognized brands that are viewed by both distributors and end-users as discrete product lines. As a result, we are able to sell our products to multiple distributors in the same geographic area. This strategy maximizes our market coverage and provides the largest number of end-users with access to our products. Continue to Grow in International Markets. Our international sales of $198.3 million comprised 36% of our net sales for the year ended March 31, 2006, as compared to $34.3 million, or 16% of our net sales, in fiscal 1996, the year we became a public company. We sell to distributors in over 50 countries and have our primary international facilities in Canada, Mexico, Germany, the United Kingdom, Denmark, France and China. In addition to new product introductions, we continue to expand our sales and service presence in the major market areas of Europe, Asia-Pacific and South America through our sales offices and warehouse facilities in Europe, Thailand, Brazil, Uruguay and Mexico. We intend to increase our sales by manufacturing and exporting a broader array of high quality, low-cost products and components from our facilities in Mexico and China for distribution in Europe and Asia-Pacific. We have developed and are continuing to expand upon new hoist products in compliance with FEM standards to enhance our global distribution. Further Reduce Our Operating Costs and Increase Manufacturing Productivity. Our objective is to remain a low-cost producer. We continually seek ways to reduce our operating costs and increase our manufacturing productivity including through our on-going expansion of our manufacturing capacity in low-cost regions, including Mexico and China. In furtherance of this objective, we have undertaken the following: 5 Item 2. Properties We maintain our corporate headquarters in Amherst, New York and, as of March 31, 2006, conducted our principal manufacturing at the following facilities: Location United States: Muskegon, MI Charlotte, NC Wadesboro, NC Lexington, TN Cedar Rapids, IA Eureka, IL Damascus, VA Chattanooga, TN Greensburg, IN Lisbon, OH Cleveland, TX Tonawanda, NY Chattanooga, TN Sarasota, FL Products/Operations Hoists Industrial components Hoists Chain Forged attachments Cranes Hoists Forged attachments Scissor lifts Hoists Cranes Light-rail crane systems Forged attachments Tire shredders International: Santiago, Tianguistenco, Mexico Hoists and chain Velbert, Germany Arden, Denmark Hangzhou, China Stoney Creek, Ontario, Canada Hangzhou, China Hangzhou, China Chester, United Kingdom Romeny-sur-Marne, France Arden, Denmark Velbert, Germany Szekesfeher, Hungary Hoists Project design and conveyors Hoists and hand pallet trucks Cranes Metal fabrication, textiles and textile strappings Textile strappings Plate clamps Rotary unions Project construction Hoists Textiles and textile strappings Square Footage Owned or Leased Business Segment 441,225 Owned 243.750 Owned 186,057 Owned 175,700 Owned 100,000 Owned 91,300 Owned 90,338 Owned 77,000 Owned 70,000 Owned 36,600 Owned 35,000 Owned 35,000 Owned 33,000 Owned 24,954 Owned Products Products Products Products Products Products Products Products Solutions Products Products Solutions Products Solutions 85,000 Owned 72,200 Leased 71,500 Owned 50,000 Leased 44,255 Owned 37,000 Leased 30,000 Leased 28,100 Leased 21,550 Owned 19,500 Leased 12,800 Leased 10,000 Leased Products Products Solutions Products Products Products Products Products Products Solutions Products Products In addition, we have a total of 35 sales offices, distribution centers and warehouses. We believe that our properties have been adequately maintained, are in generally good condition and are suitable for our business as presently conducted. We also believe our existing facilities provide sufficient production capacity for our present needs and for our anticipated needs in the foreseeable future. Upon the expiration of our current leases, we believe that either we will be able to secure renewal terms or enter into leases for alternative locations at market terms. Item 3. Legal Proceedings From time to time, we are named a defendant in legal actions arising out of the normal course of business. We are not a party to any pending legal proceeding other than ordinary, routine litigation incidental to our business. We do not believe that any of our pending litigation will have a material impact on our business. We maintain comprehensive general liability insurance against risks arising out of the normal course of business through our wholly-owned insurance subsidiary of which we are the sole policy holder. The limits of this coverage are currently $3.0 million per occurrence ($2.0 million through March 31, 2003) and $6.0 million aggregate ($5.0 million through March 31, 2003) per year. We obtain additional insurance coverage from independent insurers to cover potential losses in excess of these limits. Item 4. Submission of Matters to a Vote of Security Holders None. 17 PART II Item 5. Market for the Company’s Common Stock and Related Security Holder Matters Our common stock is traded on the Nasdaq Stock Market under the symbol ‘‘CMCO.” As of May 31, 2006, there were 488 holders of record of our common stock. We paid quarterly cash dividends on our common stock from 1988 through the second quarter of fiscal 2002. In January 2002, we announced that we were indefinitely suspending the payment of cash dividends on our common stock in order to dedicate our cash resources to the repayment of outstanding indebtedness. Our current credit agreement allows, but limits our ability to pay dividends. We may reconsider or revise this policy from time to time based upon conditions then existing, including, without limitation, our earnings, financial condition, capital requirements, restrictions under credit agreements or other conditions our Board of Directors may deem relevant. The following table sets forth, for the fiscal periods indicated, the high and low sale prices per share for our common stock as reported on the Nasdaq Stock Market. Price Range of Common Stock High Low Year Ended March 31, 2004 First Quarter ......................................................... $ Second Quarter .................................................... Third Quarter ....................................................... Fourth Quarter...................................................... 2.72 $ 4.84 7.80 11.72 Year Ended March 31, 2005 First Quarter ......................................................... $ Second Quarter .................................................... Third Quarter........................................................ 8.62 $ 9.81 9.38 Fourth Quarter...................................................... 14.31 1.30 2.31 4.58 6.35 4.87 6.69 6.80 8.20 Year Ended March 31, 2006 First Quarter ......................................................... $ 13.82 $ Second Quarter .................................................... 25.15 26.00 28.64 Third Quarter........................................................ Fourth Quarter...................................................... 8.35 10.70 18.64 20.86 On May 31, 2006, the closing price of our common stock on the Nasdaq Stock Market was $26.30 per share. 18 We maintain a strong domestic market share with significant leading North American market positions in hoists, lifting and sling chain, and forged attachments. To broaden our product offering in markets where we have a strong competitive position as well as to facilitate penetration into new geographic markets, we have heightened our new product development activities. This includes development of hoist lines in accordance with international standards, to complement our current offering of hoist products designed in accordance with U.S. standards. To further expand our global sales, we are introducing certain of our products that historically have been distributed only in North America and also introducing new products through our existing European distribution network. Furthermore, we are working to build a distribution network in China to capture an anticipated growing demand for material handling products as that economy continues to industrialize. These investments in international markets and new products are part of our focus on our greatest opportunities for growth. International sales increased 3.7% from approximately $191,300 to $198,300 during fiscal 2006 and overall sales increased 8.0% over the same period last year. Management believes that the growth rate of total sales may moderate in future periods due to more difficult comparisons with our fiscal 2006 periods. We monitor such indicators as U.S. Industrial Capacity Utilization, which has been increasing since July 2003. In addition, we continue to monitor the potential impact of global and domestic trends, including rising energy costs, steel price fluctuations, rising interest rates and uncertainty in some end-user markets around the globe. Our Lean Manufacturing efforts are fundamentally changing our manufacturing processes to be more responsive to customer demand and improving on-time delivery and productivity. From 2001 to 2004 under our facility rationalization program, we closed 13 facilities and consolidated several product lines. During fiscal 2006, certain families within our mechanical jack line were eliminated and several smaller sales offices were closed with potential opportunity for further rationalization. We also continue to undergo assessments for possible divestiture of several less-strategic businesses. Our manipulator and specialty marine chain businesses were sold in fiscal 2004 and two others remain as possible divestiture candidates, our conveyor business which comprises a majority of our Solutions segment and a specialty crane business within our Products segment. During fiscal 2006, we completed the sale and partial leaseback of warehouse in Ontario, Canada at a $0.6 million gain as well as the sale of an unused parcel of land in Charlotte, North Carolina. Fiscal 2005 saw the completion of the sale of a Chicago-area property resulting in a $2.7 million gain and the sale and partial leaseback of our corporate headquarters building in Amherst, New York at a $2.2 million gain, of which $1.0 million was recorded in fiscal 2005 and the remainder is being recognized pro-rata over the life of the 10-year leaseback period. Additionally during 2005, we sold a small parcel of land in Virginia. We will continue to sell surplus real estate resulting from our facility rationalization projects and those sales may result in gains or losses. Consistent with most companies, over the past several years we have been facing significantly increased costs for fringe benefits such as health insurance, workers compensation insurance and pension. Combined, those benefits cost us over $35 million in fiscal 2006 and we work diligently to balance cost control with the need to provide competitive employee benefits packages for our associates. Another cost area of focus is steel. We utilize approximately $35 million to $40 million of steel annually in a variety of forms including rod, wire, bar, structural and others. With increases in worldwide demand for steel and fluctuating scrap steel prices, we experienced fluctuations in our costs that we reflected as price increases and surcharges to our customers. We believe we have been successful in instituting surcharges and price increases to pass on these material cost increases. We will continue to monitor our costs and reevaluate our pricing policies. RESULTS OF OPERATIONS Net sales of our Products and Solutions segments, in millions of dollars and with percentage changes for each segment, were as follows: Fiscal Years Ended March 31, 2004 2005 2006 Change 2006 vs. 2005 % Amount Change 2005 vs. 2004 % Amount $ 40.8 $ 41.2 9.0 0.4 0.6 8.0 $ $ 14.9 58.9 11.3 22.4 15.8 70.2 Products segment ................... $ 493.9 62.1 Solutions segment .................. Total net sales ................... $ 556.0 $ 453.1 61.7 $ 514.8 $ 394.2 50.4 $ 444.6 21 Fiscal 2006 saw continued improvement in the industrial sector of North America and Europe which began in fiscal 2005 compared to the downturn in the general North American and European economies and the industrial sectors in particular that had been occurring through fiscal 2004. In addition, sales growth was fostered by the expansion of international selling efforts. Net sales for fiscal 2006 of $556.0 increased by $41.2 million or 8.0% from fiscal 2005, and net sales for fiscal 2005 of $514.8 million increased by $70.2 million, or 15.8%, from fiscal 2004. The Products segment for fiscal 2006 experienced a net sales increase of 9.0% over the prior year. The increase was due to a combination of increased volume on the continued growth of the North American industrial economy as well as price increases ($17.8 million). The Products segment for fiscal 2005 experienced a net sales increase of 14.9% over the prior year. The increase was due to a combination of higher volume as the North American industrial economy recovered as well as price increases ($19.7 million) including surcharges specifically in response to rising steel costs. Fiscal 2005 was impacted by the weakening U.S. dollar relative to other currencies, particularly the euro, and reported Products segment sales were favorably affected by $6.2 million. For fiscal 2006, our Solutions segment net sales were flat as increased volume was offset by the strengthening U.S. dollar relative to the Danish Krone resulting in an unfavorable impact of $0.9 million. For fiscal 2005, our Solutions segment net sales increased 22.4% as a result of increased volume in Europe at our conveyor business. Gross profit of the Products and Solutions segments, in millions of dollars and as a percentage of total segment net sales, was as follows: Fiscal Years Ended March 31, 2005 2006 2004 Amount % Amount % Amount % Products segment ................. $ 138.1 9.5 Solutions segment ................ Total gross profit ............. $ 147.6 28.0 $ 117.1 15.3 8.8 26.5 $ 125.9 25.2 25.8 $ 99.2 14.3 5.6 11.1 24.5 $104.8 23.6 Our gross profit margins were approximately 26.5%, 24.5% and 23.6% in fiscal 2006, 2005 and 2004, respectively. The Products segment for fiscal 2006 and fiscal 2005 continues to see improved gross margins as a result of operational leverage at increased volumes from the prior years and the impact of previous facility rationalization projects and lean manufacturing activities. The Solutions segment’s gross profit margins increased in Fiscal 2006 as a result of a shift in product mix at our European conveyor business to more internally developed product costs from resale products, increased volume at certain facilities, and some rationalization cost savings. The Solutions segment’s gross profit margins increased in Fiscal 2005 as a result of the recovery of European markets which led to increased volume for one division, as well as the divestiture of a poor performing, non-strategic business at the end of fiscal 2004. Selling expenses were $54.3 million, $52.3 million and $48.3 million in fiscal 2006, 2005 and 2004, respectively. As a percentage of net sales, selling expenses were 9.8%, 10.2% and 10.9% in fiscal 2006, 2005 and 2004, respectively. The fiscal 2006 increase includes additional salaries ($1.2 million), increased advertising, marketing, warehousing and travel ($1.3 million), and new market costs ($0.4 million) offset by a decrease in foreign pension costs ($0.4 million) and lower commission expense ($0.8 million). Fiscal 2005 includes a $1.2 million increase resulting from the weakening of the U.S. dollar relative to foreign currencies, particularly the euro, upon translation of foreign operating results into U.S. dollars for reporting purposes. Fiscal 2005 also includes increases related to variable costs associated with the increase sales volume, mainly commissions ($1.3 million), increased foreign pension costs ($0.5 million) and increased investments in international markets ($0.5 million). General and administrative expenses were $33.6 million, $31.7 million and $25.0 million in fiscal 2006, 2005 and 2004, respectively. As a percentage of net sales, general and administrative expenses were 6.1%, 6.2% and 5.6% in fiscal 2006, 2005 and 2004, respectively. The Fiscal 2006 increase includes increases in salaries/personnel including variable compensation ($3.0 million), employee development/professional fees ($0.7 million), offset by lower foreign pension costs ($1.0 million), decreased external Sarbanes-Oxley Section 404 savings ($0.9 million) and currency translation ($0.2 million). Fiscal 2005 increases include variable compensation ($2.3 million), compliance costs associated with Sarbanes-Oxley Section 404 implementation ($1.4 million), increasing foreign pension costs ($1.2 million), translation of foreign currencies into the weaker U.S. dollar for reporting purposes ($0.7 million) and increases in bad debt reserves based on increased accounts receivable levels ($0.5 million). Restructuring charges of $1.6 million, $0.9 million and $1.2 million, or 0.3%, 0.2% and 0.3% of net sales in fiscal 2006, 2005 and 2004, respectively, were primarily attributable to the ongoing organizational rationalizations occurring at the company. The fiscal 2006 charges consist of the cost of removal of certain environmentally hazardous materials ($0.6 million), inventory 22 disposal costs related to the rationalization of certain product families within our mechanical jack lines ($0.4 million), the ongoing maintenance costs of a non-operating facility accrued based on anticipated sale date ($0.3 million) and other facility rationalization projects ($0.3 million). The fiscal 2005 restructuring charges consist of $0.5 million of costs related to facility rationalizations being expensed on an as incurred basis as a result of the project timing being subsequent to the adoption of SFAS No. 144. Fiscal 2005 also included $0.3 million of write-down on the net realizable value of a facility based on changes in market conditions and a reassessment of its net realizable value. During fiscal 2004, we recorded restructuring charges of $1.2 million related to various employee termination benefits and facility costs as a result of our continued closure, merging and reorganization and completion of two open projects from fiscal 2003. The remaining liability of as of March 31, 2006 relates to the accrued costs for the removal of the environmentally hazardous materials ($0.5 million) and the ongoing maintenance costs of a non-operating facility ($0.3 million). Write-off/amortization of intangibles was $0.2 million, $0.3 million and $0.4 million in fiscal 2006, 2005 and 2004, respectively. Interest and debt expense was $24.7 million, $27.6 million and $28.9 million in fiscal 2006, 2005 and 2004, respectively. As a percentage of net sales, interest and debt expense was 4.4%, 5.4% and 6.5% in fiscal 2006, 2005 and 2004, respectively. The fiscal 2006 and 2005 decreases primarily resulted from lower debt levels as we continue to execute our strategy of debt reduction and increasing our financial flexibility. Other (income) and expense, net was $5.0 million, ($5.2) million and ($4.2) million in fiscal 2006, 2005 and 2004, respectively. Fiscal 2006 includes $9.2 million of redemption costs associated with the repurchase of outstanding senior secured and senior subordinated notes, offset by $3.1 million from investment and interest income and $0.8 million of gains from sales of real estate. Fiscal 2005 includes $3.7 million in gains from sales of real estate, $2.1 million from investment and interest income, offset by $0.3 million of additional losses from 2004 business divestitures. The income in fiscal 2004 included $5.7 million from asset sales and $1.9 million from an interest rate swap partially offset by $3.9 million of losses upon business divestitures. Income taxes as a percentage of income before income taxes were not reflective of U.S statutory rates in fiscal 2006, 2005 or 2004. A valuation allowance of $50.5 million existed at March 31, 2005 due to the uncertainly of whether our U.S. federal net operating loss carryforwards (“NOLs”), deferred tax assets and capital loss carryforwards might ultimately be realized. We utilized $14.9 million of the U.S. federal NOLs in fiscal 2006 reducing the valuation allowance by $5.2 million. As a result of our increased operating performance over the past several years, we reevaluated the certainty as to whether our remaining U.S. federal NOLs and other deferred tax assets may ultimately be realized. As a result of the determination that it is more likely than not that nearly all of the remaining deferred tax assets will be realized, $38.6 million of the remaining valuation allowance was reversed as of March 31, 2006. The fiscal 2005 effective tax rate varies due to the benefit received from the utilization of the domestic net operating loss carry-forwards that had fully reserved and jurisdictional mix. Income tax expense primarily results from non-U.S. taxable income and state taxes on U.S. taxable income. The fiscal 2004 effective tax rate varies due to jurisdictional mix and the existence of losses at certain subsidiaries for which no benefit was recorded. LIQUIDITY AND CAPITAL RESOURCES In March 2006, we amended and expanded our revolving credit facility. The Revolving Credit Facility currently provides availability up to a maximum of $75 million with an opportunity for expansion up to $125 million. At March 31, 2006, the unused Revolving Credit Facility totaled $64.8 million, net of outstanding borrowings of $0.0 million and outstanding letters of credit of $10.2 million. Interest on the revolver is payable at varying Eurodollar rates based on LIBOR or prime plus a spread determined by our leverage ratio amounting to 100 or 0 basis points, respectively, at March 31, 2006. The Revolving Credit Facility is secured by all domestic inventory, receivables, equipment, real property, subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual property. In November 2005, we registered an additional 3,350,000 shares of our common stock which were sold at $20.00 per share. The number of shares offered by us was 3,000,000 and 350,000 were offered by a selling shareholder. We did not receive any proceeds from the sale of shares by the selling shareholder. This stock offering increased our weighted average common stock outstanding by 1.8 million for the year ended March 31, 2006. A portion of the proceeds received by us were used to redeem $47.6 million of 10% Senior Secured Notes (10% Notes). The repurchase of the 10% Notes occurred at a premium resulting in a pre-tax loss on early extinguishment of debt of $4.8 million. As a result of the repurchase of the 10% Notes, $1.1 million of pre- tax deferred financing costs were written-off. The net effect of these items, a $5.9 million pre-tax loss in fiscal 2006, is shown as part of other (income) and expense, net. The balance of the proceeds is available for other general corporate purposes to advance our strategy of global growth, including additional debt repayment, investments and acquisitions. 23 In September 2005, we issued $136 million of 8 7/8% Senior Subordinated Notes (8 7/8% Notes) due November 1, 2013. Proceeds from the 8 7/8% Notes and cash on hand were used to repurchase all of the outstanding 8 ½% Senior Subordinated Notes (8 ½% Notes). The repurchase of the 8 ½% Notes occurred at a premium resulting in a pre-tax loss on early extinguishment of debt of $2.3 million. As a result of the repurchase of the 8 ½% Notes, $0.9 million of pre-tax deferred financing costs and $0.1 million of the original issue discount were written-off. The net effect of these items, a $3.3 million pre- tax loss in fiscal 2006, is shown as part of other (income) and expense, net. Provisions of the 8 7/8% Notes include, without limitation, restrictions on indebtedness, asset sales, and dividends and other restricted payments. Until November 1, 2008, we may redeem up to 35% of the outstanding notes at a redemption price of 108.875% with the proceeds of equity offerings, subject to certain restrictions. The 8 7/8% Notes are redeemable at the option of us, in whole or in part, at prices declining annually from the Make-Whole Price (as defined in the 8 7/8% Notes agreement) to 100% on and after November 1, 2011. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the 8 7/8% Notes may require us to repurchase all or a portion of such holder’s 8 7/8% Notes at a purchase price equal to 101% of the principal amount thereof. The 8 7/8% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements. In July 2003, we issued $115.0 million of 10% Senior Secured Notes due August 1, 2010 of which $67.8 million remain outstanding at March 31, 2006. During April and May of 2006, the Company repurchased an additional $32.1 million of the outstanding 10% Senior Secured Notes, resulting in a remaining balance of $35.7 million. The proceeds from the 10% Notes offering were used for the repayment in full of a then outstanding Senior Second Secured Term Loan ($66.8 million), the repurchase of $35.7 million of Senior Subordinated 8½% Notes at a discount ($30.1 million), the repayment of a portion of the outstanding Revolving Credit Facility ($10.0 million), the repayment of a portion of the Term Loan ($3.9 million), the payment of financing costs ($2.8 million) and the payment of accrued interest ($1.4 million). Provisions of the 10% Notes include, without limitation, restrictions on liens, indebtedness, asset sales, and dividends and other restricted payments. The 10% Notes are redeemable at our option, in whole or in part, at prices declining annually from the Make-Whole Price (as defined in the Indenture for the Notes). In the event of a Change of Control (as defined), each holder of the 10% Notes may require us to repurchase all or a portion of such holder’s 10% Notes at a purchase price equal to 101% of the principal amount thereof. The 10% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements. The 10% Notes are also secured, in a second lien position, by all domestic inventory, receivables, equipment, real property, subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual property. The redemption in fiscal 2004 of the 8½% Senior Subordinated Notes occurred at a discount resulting in a $5.6 million pre- tax gain on early extinguishment of debt. As a result of the repayment of the Senior Second Secured Term Loan and a portion of the Term Loan and 8½% Senior Subordinated Notes, $4.9 million of pre-tax deferred financing costs were written-off in fiscal 2004. The net effect of these two items, a $0.7 million pre-tax gain, is shown as part of other (income) and expense, net. The corresponding credit agreement associated with the Revolving Credit Facility places certain debt covenant restrictions on us, including certain financial requirements and a restriction on dividend payments, with which we were in compliance as of March 31, 2006. From time to time, we manage our debt portfolio by using interest rate swaps to achieve an overall desired position of fixed and floating rates. In June 2001, we entered into an interest rate swap agreement to effectively convert $40 million of variable- rate debt to fixed-rate debt, which matured in June 2003. That cash flow hedge was considered effective and the gain or loss on the change in fair value was reported in other comprehensive income, net of tax. In August 2003, we entered into an interest rate swap agreement to convert $93.5 million of fixed-rate debt (10%) to variable-rate debt (LIBOR plus 578.2 basis points) through August 2008 and $57.5 million from August 2008 through August 2010 at the same rate. That interest rate swap was considered an ineffective hedge and therefore the change in fair value was recognized in income as a gain. The swap was terminated in January 2004 and a pre-tax gain of $1.9 million was recognized in fiscal 2004 as other income, net as a result of changes in the fair value of the swap. We believe that our cash on hand, cash flows, and borrowing capacity under our Revolving Credit Facility will be sufficient to fund our ongoing operations and budgeted capital expenditures for at least the next twelve months. This belief is dependent upon a steady economy and successful execution of our current business plan which includes cash generation for debt repayment. The business plan focuses on continued implementation of lean manufacturing, possible facility rationalization projects, divestiture of excess facilities, improving working capital components, including inventory reductions, and new market and new product development. Net cash provided by operating activities was $48.5 million, $17.2 million and $26.4 million in fiscal 2006, 2005 and 2004, respectively. The $31.3 million increase in fiscal 2006 relative to fiscal 2005 was primarily due to stronger operating 24 performance in fiscal 2006 ($19.9 million) and improved working capital components ($11.4 million). The working capital changes come from favorable changes in inventory ($9.3 million), accounts payable and accrued liabilities ($9.9 million), offset by unfavorable changes in prepaids ($3.8 million) and accounts receivables ($4.1 million). The $9.2 million decrease in fiscal 2005 relative to fiscal 2004 was primarily due to stronger operating performance in fiscal 2005 ($4.0 million) offset by changes in working capital components ($13.2 million). The working capital changes come from favorable changes in prepaids/other ($3.3 million), accounts payable and accrued liabilities ($6.7 million), offset by unfavorable changes in and accounts receivables ($8.0 million) and inventory ($15.2 million). Net cash (used) provided by investing activities was ($6.4) million, $3.1 million and $4.3 million in fiscal 2006, 2005 and 2004, respectively. The fiscal 2006 change in cash (used) provided by investing activities is the result of increased capital expenditures and lower proceeds from asset sales. The fiscal 2005 change in cash (used) provided by investing activities is primarily the result of increased capital expenditures. The fiscal 2006, 2005 and 2004 amounts included $2.1 million, $7.1 million and $7.8 million, respectively, from business and property divestitures. Net cash used in financing activities was $6.4 million, $21.9 million and $21.5 million in fiscal 2006, 2005 and 2004, respectively. The decrease for fiscal 2006 was the result of $56.6 million of proceeds from the November 2005 stock offering and $7.0 million from the exercise of employee stock options. The fiscal 2006, 2005 and 2004 amounts included $67.8 million, $22.9 million and $17.7 million of debt repayment, respectively. We also paid $2.8 million and $4.4 million of financing costs in fiscal 2006 and 2004, respectively, to effect the capital transactions previously described. CONTRACTUAL OBLIGATIONS The following table reflects a summary of our contractual obligations in millions of dollars as of March 31, 2006, by period of estimated payments due: Long-term debt obligations (a) Operating lease obligations (b) Purchase obligations (c) ......... Interest obligations (d) ............ Letter of credit obligations...... Other long-term reflected on balance sheet under GAAP (e) Total................................... liabilities the Company’s Total $ 204.0 13.3 -- 119.8 10.2 Fiscal 2007 $ 0.1 3.4 -- 18.8 10.2 Fiscal 2008- Fiscal 2009 $ 0.2 5.6 -- 37.6 -- Fiscal 2010- More Than Five Years Fiscal 2011 $ 136.3 $ 67.4 0.8 3.5 -- -- 31.2 32.2 -- -- 50.7 $ 398.0 0.0 $ 32.5 29.0 $ 72.4 20.0 $ 123.1 1.7 $ 170.0 (a) As described in note 10 to our consolidated financial statements. (b) As described in note 18 to our consolidated financial statements. (c) We have no purchase obligations specifying fixed or minimum quantities to be purchased. We estimate that, at any given point in time, our open purchase orders to be executed in the normal course of business approximate $40 million. (d) Estimated for our Senior Secured Notes due 8/1/10 and Senior Subordinated Notes due 11/1/13. (e) As described in note 9 to our consolidated financial statements. We have no additional off-balance sheet obligations that are not reflected above. CAPITAL EXPENDITURES In addition to keeping our current equipment and plants properly maintained, we are committed to replacing, enhancing and upgrading our property, plant and equipment to support new product development, reduce production costs, increase flexibility to respond effectively to market fluctuations and changes, meet environmental requirements, enhance safety and promote ergonomically correct work stations. Further, our facility rationalization program underway between fiscal 2002-2004 reduced our annual capital expenditure requirements and also provided for transfers of equipment from the rationalized facilities to other operating facilities. Our capital expenditures for fiscal 2006, 2005 and 2004 were $8.4 million, $5.9 million and $3.6 million, respectively. Higher capital expenditures in fiscal 2006 and 2005 were the result of new product development and productivity enhancing equipment along with normal maintenance items. We expect capital expenditure spending in fiscal 2007 to be in the range of $8-$10 million. 25 INFLATION AND OTHER MARKET CONDITIONS Our 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. We do not believe that general inflation has had a material effect on our results of operations over the periods presented primarily due to overall low inflation levels over such periods and our ability to generally pass on rising costs through annual price increases and surcharges. However, employee benefits costs such as health insurance, workers compensation insurance, pensions as well as energy and business insurance have exceeded general inflation levels. In the future, we may be further affected by inflation that we may not be able to pass on as price increases. With changes in worldwide demand for steel and fluctuating scrap steel prices over the past several years, we experienced fluctuations in our costs that we have reflected as price increases and surcharges to our customers. We believe we have been successful in instituting surcharges and price increases to pass on these material cost increases. We will continue to monitor our costs and reevaluate our pricing policies. SEASONALITY AND QUARTERLY RESULTS Our quarterly results may be materially affected by the timing of large customer orders, periods of high vacation and holiday concentrations, restructuring charges and other costs attributable to our facility rationalization program, divestitures, acquisitions and the magnitude of rationalization integration costs. Therefore, our operating results for any particular fiscal quarter are not necessarily indicative of results for any subsequent fiscal quarter or for the full fiscal year. DISCONTINUED OPERATIONS In May 2002, we completed the divestiture of substantially all of the assets of ASI which comprised the principal business unit in our former Solutions - Automotive segment. Proceeds from this sale included cash of $15.9 million and an 8% subordinated note in the principal amount of $6.8 million payable over 10 years. Due to the uncertainty surrounding the financial viability of the new organization, the note has been recorded at the estimated net realizable value of $0. Principal payments received on the note are recorded as income from discontinued operations at the time of receipt. Accordingly, $0.7 million of income from discontinued operations was recorded in fiscal 2006. All interest and principal payments required under the note have been made to date. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We continually evaluate the estimates and their underlying assumptions, which form the basis for making judgments about the carrying value of our assets and liabilities. Actual results inevitably will differ from those estimates. We have identified below the accounting policies involving estimates that are critical to our financial statements. Other accounting policies are more fully described in note 2 of notes to our consolidated financial statements. Pension and Other Postretirement Benefits. The determination of the obligations and expense for pension and postretirement benefits is dependent on our selection of certain assumptions that are used by actuaries in calculating such amounts. Those assumptions are disclosed in Notes 11 and 13, respectively, to our fiscal 2006 consolidated financial statements and include the discount rates, expected long-term rate of return on plan assets and rates of future increases in compensation and healthcare costs. The pension discount rate assumptions of 5¾%, 6%, 6¼% as of March 31, 2006, 2005 and 2004, respectively, are based on long- term bond rates. The decrease in discount rates for fiscal 2006 and 2005 resulted in $3.9 million and $3.0 million increases in the projected benefit obligations as of March 31, 2006 and 2005, respectively. The rate of return on plan assets assumptions of 7½%, 8¼% and 8.4% for the years ended March 31, 2006, 2005 and 2004, respectively, are based on the composition of the asset portfolios (approximately 56% equities and 44% fixed income at March 31, 2006) and their long-term historical returns. The actual assets realized gains of $6.8 and $5.5 million in fiscal 2006 and 2005. Our funded status as of March 31, 2006 and 2005 was negative by $33.9 million and $29.3 million, or 25.3% and 24.3%, respectively. Our pension contributions during fiscal 2006 and 2005 were approximately $7.8 and $9.7 million, respectively. The negative funded status may result in future pension expense increases. Pension expense for the March 31, 2007 fiscal year is expected to approximate $7.8 million, which is up from the fiscal 2006 amount of $7.0 million. The factors outlined above will result in increases in funding requirements over time, unless there is continued significant market appreciation in the asset values. However, pension funding contributions for the March 31, 2007 fiscal year are expected to decrease by approximately $1.8 million compared to fiscal 2006. The compensation increase assumption of 4% as of March 31, 2006, 2005 and 2004 is based on historical trends. 26 The healthcare inflation assumptions of 9¾%, 10½% and 12% for fiscal 2006, 2005 and 2004, respectively are based on anticipated trends. Healthcare costs in the United States have increased substantially over the last several years. If this trend continues, the cost of postretirement healthcare will increase in future years. Insurance Reserves. Our accrued general and product liability reserves as described in Note 15 to our consolidated financial statements involve actuarial techniques including the methods selected to estimate ultimate claims, and assumptions including emergence patterns, payment patterns, initial expected losses and increased limit factors. Other insurance reserves such as workers compensation and group health insurance are based on actual historical and current claim data provided by third party administrators or internally maintained. Inventory and Accounts Receivable Reserves. Slow-moving and obsolete inventory reserves are judgmentally determined based on historical and expected future usage within a reasonable timeframe. We reassess trends and usage on a regular basis and if we identify changes, we revise our estimated allowances. Allowances for doubtful accounts and credit memo reserves are also judgmentally determined based on historical bad debt write-offs and credit memos issued, assessing potentially uncollectible customer accounts and analyzing the accounts receivable agings. Long-Lived Assets. Property, plant and equipment and certain intangibles are depreciated or amortized over their assigned lives. These assets as well as goodwill are also periodically measured for impairment. The assigned lives and the projected cash flows used to test impairment are subjective. If actual lives are shorter than anticipated or if future cash flows are less than anticipated, we could incur a future impairment charge or a loss on disposal relating to these assets. Marketable Securities. On a quarterly basis, we review our marketable securities for declines in market value that may be considered other than temporary. We consider market value declines to be other than temporary if they are declines for a period longer than six months and in excess of 20% of original cost. Deferred Tax Asset Valuation Allowance. As of March 31, 2006, we had $56.7 million of total net deferred tax assets before valuation allowances. As described in Note 17 to the consolidated financial statements, $29.1 million of the assets pertain to U.S. federal net operating loss carryforwards (“NOLs”) and the remainder relate principally to liabilities including employee benefit plans, insurance reserves, accrued vacation and incentive costs and also to asset valuation reserves such as inventory obsolescence reserves and bad debt reserves. The U.S. federal NOLs expire in 2023. We reduced the deferred tax assets by $5.2 million as a result of utilizing U.S. federal NOLs in fiscal 2006. As a result of our increased operating performance over the past several years, we reevaluated the certainty as to whether our remaining NOLs and other deferred tax assets may ultimately be realized. As a result of the determination that it is more likely than not that nearly all of the remaining deferred tax assets will be realized, a significant portion of the remaining valuation allowance was reversed in fiscal 2006. Our ability to realize our deferred tax assets is primarily dependent on generating sufficient future taxable income. If we do not generate sufficient taxable income, we could be required to record a valuation allowance. Revenue Recognition. Sales are recorded when title passes to the customer, which is generally at the time of shipment to the customer, except for long-term construction-type contracts. For long-term construction-type contracts, we 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 (accrued liabilities) and current assets (unbilled revenues), respectively. Customers do not routinely return product. However, sales returns are permitted in specific situations and typically include a restocking charge or the purchase of additional product. We have established an allowance for returns based upon historical trends. EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs,” as an amendment to ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage). This Statement requires that these items be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This Statement becomes effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS No. 151 to have a material impact on our consolidated financial statements. 27 In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) was to be adopted for interim or annual periods beginning after June 15, 2005. On April 14th, 2005, the SEC announced that it would provide for a phased-in implementation process for FASB statement No. 123(R). The SEC is requiring that registrants adopt statement 123(R)’s fair value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after June 15, 2005. We expect to adopt 123(R) in the first quarter of Fiscal 2007. Statement 123(R) permits public companies to adopt its requirements using one of two methods: 1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123(R) for all share-based payments granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. 2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We are still evaluating the method we plan to use when we adopt statement 123(R). As permitted by Statement 123, we currently account for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, recognize no compensation cost for employee stock options. Accordingly, adoption of Statement 123(R)’s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of 123(R) cannot be predicted at this time because it will depend on levels of share based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to our consolidated financial statements. In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 changes the requirements for and reporting of a change in accounting principle. This Statement becomes effective for changes in accounting methods during fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS No. 154 will have a material impact on our consolidated results of operations and financial condition. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. We are exposed to various market risks, including commodity prices for raw materials, foreign currency exchange rates and changes in interest rates. We may enter into financial instrument transactions, which attempt to manage and reduce the impact of such changes. We do not enter into derivatives or other financial instruments for trading or speculative purposes. Our primary commodity risk is related to changes in the price of steel. We control this risk through negotiating purchase contracts on a consolidated basis and by attempting to build changes in raw material costs into the selling prices of our products. We also evaluate our steel cost increases and assess the need for price increases and surcharges to our customers. We have not entered into financial instrument transactions related to raw material costs. In fiscal 2006, 29% of our net sales were from manufacturing plants and sales offices in foreign jurisdictions. We manufacture our products in the United States, Mexico, China, Denmark, the United Kingdom, France and Germany and sell our products and solutions in over 50 countries. Our results of operations could be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets. Our operating results are exposed to fluctuations between the U.S. dollar and the Canadian dollar, European currencies and the Mexican peso. For example, when the U.S. dollar strengthens against the Canadian dollar, the value of our net sales and net income denominated in Canadian dollars decreases when translated into U.S. dollars for inclusion in our consolidated results. We are also exposed to foreign currency fluctuations in relation to 28 purchases denominated in foreign currencies. Our foreign currency risk is mitigated since the majority of our foreign operations’ net sales and the related expense transactions are denominated in the same currency so therefore a significant change in foreign exchange rates would likely have a very minor impact on net income. For example, a 10% decline in the rate of exchange between the euro and the U.S. dollar impacts net income by approximately $0.5 million. In addition, the majority of our export sale transactions are denominated in U.S. dollars. Accordingly, we currently have not invested in derivative instruments, such as foreign exchange contracts, to hedge foreign currency transactions. We control risk related to changes in interest rates by structuring our debt instruments with a combination of fixed and variable interest rates and by periodically entering into financial instrument transactions as appropriate. At March 31, 2006, we do not have any material swap agreements or similar financial instruments in place. At March 31, 2006 and 2005, approximately 97% and 96%, respectively, of our outstanding debt had fixed interest rates. At those dates, we had approximately $6.4 million and $11.4 million, respectively, of outstanding variable rate debt. A 1% fluctuation in interest rates in fiscal 2006 and 2005 would have changed interest expense on that outstanding variable rate debt by approximately $0.1 million for both years. Like many industrial manufacturers, we are involved in asbestos-related litigation. In continually evaluating costs relating to its estimated asbestos-related liability, we review, among other things, the incidence of past and recent claims, the historical case dismissal rate, the mix of the claimed illnesses and occupations of the plaintiffs, its recent and historical resolution of the cases, the number of cases pending against it, the status and results of broad-based settlement discussions, and the number of years such activity might continue. Based on this review, we have estimated its share of liability to defend and resolve probable asbestos-related personal injury claims. This estimate is highly uncertain due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that can affect the range of the liability. We will continue to study the variables in light of additional information in order to identify trends that may become evident and to assess their impact on the range of liability that is probable and estimable. Based on actuarial information, we have estimated our asbestos-related aggregate liability through March 31, 2031 and March 31, 2082 to range between $5.5 million and $19.0 million using actuarial parameters of continued claims for a period of 25 to 76 years. Our estimation of our asbestos-related aggregate liability that is probable and estimable, in accordance with U.S. generally accepted accounting principles, is through March 31, 2031 and ranges from $5.5 million to $6.5 million as of March 31, 2006. The range of probable and estimable liability reflects uncertainty in the number of future claims that will be filed and the cost to resolve those claims, which may be influenced by a number of factors, including the outcome of the ongoing broad-based settlement negotiations, defensive strategies, and the cost to resolve claims outside the broad-based settlement program. Based on the underlying actuarial information, we have reflected $6.3 million as a liability in the consolidated financial statements in accordance with U.S. generally accepted accounting principles. The increase in the recorded liability from the amount of $4.8 million at March 31, 2005 is due to a change in actuarial parameters used to calculate required asbestos liability reserve levels. The recorded liability does not consider the impact of any potential favorable federal legislation such as the “FAIR Act”. Of this amount, management expects to incur asbestos liability payments of approximately $0.5 million over the next 12 months. Because payment of the liability is likely to extend over many years, management believes that the potential additional costs for claims will not have a material after- tax effect on our financial condition or our liquidity, although the net after-tax effect of any future liabilities recorded could be material to earnings in a future period. 29 Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Columbus McKinnon Corporation Audited Consolidated Financial Statements as of March 31, 2006: Report of Independent Registered Public Accounting Firm .............................................................................. Consolidated Balance Sheets.............................................................................................................................. Consolidated Statements of Operations.............................................................................................................. Consolidated Statements of Shareholders’ Equity ............................................................................................. Consolidated Statements of Cash Flows ............................................................................................................ Notes to Consolidated Financial Statements 1. Description of Business ........................................................................................................................ 2. Accounting Principles and Practices..................................................................................................... 3. Discontinued Operations ...................................................................................................................... 4. Unbilled Revenues and Excess Billings ............................................................................................... 5. Inventories ............................................................................................................................................ 6. Marketable Securities ........................................................................................................................... 7. Property, Plant, and Equipment ............................................................................................................ 8. Goodwill and Intangible Assets............................................................................................................ 9. Accrued Liabilities and Other Non-current Liabilities ......................................................................... 10. Debt ...................................................................................................................................................... 11. Retirement Plans ................................................................................................................................... 12. Employee Stock Ownership Plan (ESOP) ............................................................................................ 13. Postretirement Benefit Obligation ........................................................................................................ 14. Earnings per Share and Stock Plans ..................................................................................................... 15. Loss Contingencies ............................................................................................................................... 16. Restructuring Charges .......................................................................................................................... Income Taxes........................................................................................................................................ 17. 18. Rental Expense and Lease Commitments ............................................................................................. 19. Summary Financial Information ........................................................................................................... 20. Business Segment Information ............................................................................................................. 21. Selected Quarterly Financial Data (unaudited)..................................................................................... 22. Accumulated Other Comprehensive Loss ............................................................................................ 23. Effects of New Accounting Pronouncements ....................................................................................... 24. Subsequent Events ................................................................................................................................ F-2 F-3 F-4 F-5 F-6 F-7 F-7 F-11 F-11 F-12 F-12 F-13 F-14 F-15 F-16 F-18 F-20 F-20 F-22 F-24 F-26 F-27 F-29 F-30 F-34 F-36 F-37 F-38 F-39 Schedule II – Valuation and Qualifying Accounts......................................................................................... F-40 F-1 COLUMBUS McKINNON CORPORATION CONSOLIDATED BALANCE SHEETS March 31, 2006 2005 (In thousands, except share data) Current assets: ASSETS Cash and cash equivalents ............................................................................................. $ 45,598 $ 9,479 Trade accounts receivable, less allowance for doubtful accounts ($3,417 and $3,015, respectively) .............................................................................. 95,726 12,061 Unbilled revenues.......................................................................................................... 74,845 Inventories..................................................................................................................... 15,676 Prepaid expenses ........................................................................................................... 243,906 Total current assets................................................................................................................ 55,132 Net property, plant, and equipment ....................................................................................... 184,917 Goodwill, net......................................................................................................................... 2,410 Other intangibles, net ............................................................................................................ 27,596 Marketable securities............................................................................................................. 46,065 Deferred taxes on income...................................................................................................... Other assets ........................................................................................................................... 6,018 Total assets ............................................................................................................................ $ 566,044 88,974 8,848 77,626 14,198 199,125 57,237 185,443 1,842 24,615 6,122 6,487 $ 480,871 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Notes payable to banks.................................................................................................. $ Trade accounts payable ................................................................................................. Accrued liabilities.......................................................................................................... Restructuring reserve..................................................................................................... Current portion of long-term debt ................................................................................. Total current liabilities .......................................................................................................... Senior debt, less current portion............................................................................................ Subordinated debt.................................................................................................................. Other non-current liabilities .................................................................................................. Total liabilities....................................................................................................................... Shareholders’ equity: 5,798 39,311 61,264 793 127 107,293 67,841 136,000 50,489 361,623 $ 4,839 33,688 52,328 144 5,819 96,818 115,735 144,548 42,003 399,104 Voting common stock; 50,000,000 shares authorized; 185 18,575,454 and 14,948,172 shares issued ................................................................. 170,081 Additional paid-in capital .............................................................................................. 51,152 Retained earnings (accumulated deficit) ....................................................................... (3,996) ESOP debt guarantee; 249,821 and 284,695 shares ...................................................... (22) Unearned restricted stock; 2,000 and 1,000 shares ....................................................... (12,979) Accumulated other comprehensive loss ........................................................................ 204,421 Total shareholders’ equity ..................................................................................................... Total liabilities and shareholders’ equity............................................................................... $ 566,044 149 104,078 (8,644) (4,554) (6) (9,256) 81,767 $ 480,871 See accompanying notes. F-3 COLUMBUS McKINNON CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS 2006 Year Ended March 31, 2005 (In thousands, except per share data) 2004 Net sales ............................................................................................... $ Cost of products sold............................................................................ Gross profit........................................................................................... Selling expenses ................................................................................... General and administrative expenses ................................................... Restructuring charges ........................................................................... Amortization of intangibles.................................................................. Income from operations........................................................................ Interest and debt expense ..................................................................... Other (income) and expense, net .......................................................... Income from continuing operations before income tax (benefit) expense .......................................................................... Income tax (benefit) expense ............................................................... Income from continuing operations...................................................... Income from discontinued operations (net of tax)................................ Net income ........................................................................................... $ 556,007 408,385 147,622 54,255 33,640 1,609 249 57,869 24,667 5,048 28,154 (30,946) 59,100 696 59,796 $ $ 514,752 388,844 125,908 52,291 31,730 910 312 40,665 27,620 (5,218) 444,591 339,745 104,846 48,331 25,026 1,239 383 29,867 28,856 (4,191) 18,263 2,196 16,067 643 16,710 5,202 4,009 1,193 - 1,193 $ $ Average basic shares outstanding......................................................... Average diluted shares outstanding...................................................... 16,052 16,628 14,594 14,803 14,553 14,554 Basic income per share: Income from continuing operations.............................................. $ Income from discontinued operations .......................................... Basic income per share................................................................. $ Diluted income per share: Income from continuing operations.............................................. $ Income from discontinued operations .......................................... Diluted income per share.............................................................. $ 3.69 0.04 3.73 3.56 0.04 3.60 $ $ $ $ 1.10 0.04 1.14 1.09 0.04 1.13 $ $ $ $ 0.08 - 0.08 0.08 - 0.08 See accompanying notes. F-4 COLUMBUS McKINNON CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands, except share and per share data) Common Stock ($.01 par value) Addi- tional Paid-in Capital Retained Earnings (Accumulated Deficit) ESOP Debt Guarantee Unearned Restricted Stock Accumulated Other Comprehensive Loss Total Shareholders’ Equity 149 $ 104,412 $ (26,547) $ (5,709) $ (208) $ (19,390) $ 52,707 translation adjustment ................................ — translation adjustment ................................ — Balance at March 31, 2003 ............................ $ Comprehensive income: Net income 2004 ............................................ Change in foreign currency Net unrealized gain on investments, net of tax of $918 ............................................. Net change in unrealized loss on derivatives qualifying as hedges, net of tax of $127.......................... Change in minimum pension liability adjustment, net of tax of $352 ................................................. Total comprehensive income ......................... Earned 37,049 ESOP shares .......................... Earned portion and adjustment of restricted shares.......................................... Balance at March 31, 2004 ............................ $ Comprehensive income: Net income 2005 ............................................ Change in foreign currency Net unrealized loss on investments, net of tax benefit of $70................................... Change in minimum pension liability adjustment, net of tax benefit of $27 ....................................... Total comprehensive income ......................... Earned 35,108 ESOP shares .......................... Stock options exercised, 52,000 shares ......... Earned portion of restricted shares ................ Balance at March 31, 2005 ............................ $ Comprehensive income: Net income 2006 ............................................ Change in foreign currency Net unrealized gain on investments, net of tax of $354 ............................................. Change in minimum pension liability adjustment, net of tax benefit of $1,681 .................................. Total comprehensive income ......................... Common stock issued, 3,000,000 shares....... Stock options exercised, 626,282 shares ....... Tax benefit from exercise of stock options .. Earned 34,874 ESOP shares .......................... Restricted common stock granted, 1,000 shares................................................. Earned portion of restricted shares ................ Balance at March 31, 2006 ............................ $ translation adjustment ................................ — — — — — — 1,193 — — — — — — — — — — 593 — — — — — — — 6,389 1,706 191 528 — 1,193 6,389 1,706 191 528 10,007 200 — (393) — — (105) 149 $ 103,914 $ (25,354) $ — (5,116) $ 169 (39) $ — (10,576) $ 64 62,978 149 $ 104,078 $ — — — — (266) 428 2 — — — — 56,589 7,143 2,154 95 16,710 — — — — — — (8,644) 59,796 $ — — — — — — — — — — — 562 — — (4,554) $ — — — — — — — 558 — — — — — — 33 (6) — — — — — — — — $ — 16,710 2,830 2,830 (131) (131) (1,379) — — — (9,256) $ (1,379) 18,030 296 428 35 81,767 — 59,796 (1,846) (1,846) 658 658 (2,535) — — — — (2,535) 56,073 56,619 7,149 2,154 653 — — — — — — — — — — — — — 30 6 — — — — — 22 — — 185 $ 170,081 $ 51,152 $ — — (3,996) $ (22) 6 (22) $ — — (12,979) — 6 $ 204,421 See accompanying notes. F-5 COLUMBUS McKINNON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Operating activities: Income from continuing operations............................................................... $ Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization............................................................... Deferred income taxes........................................................................... Loss on divestitures ............................................................................... Gain on sale of real estate/investments.................................................. Loss (gain) on early retirement of bonds............................................... Amortization/write-off of deferred financing costs............................... Tax benefit from exercise of stock options ........................................... Other...................................................................................................... Changes in operating assets and liabilities net of effects of business divestitures: Trade accounts receivable and unbilled revenues ........................ Inventories ..................................................................................... Prepaid expenses ........................................................................... Other assets.................................................................................... Trade accounts payable ................................................................. Accrued and non-current liabilities ............................................... Net cash provided by operating activities ..................................................... Investing activities: (Purchase) sale of marketable securities, net................................................. Capital expenditures ...................................................................................... Proceeds from sale of facilities and surplus real estate ................................. Proceeds from sale of property, plant, and equipment .................................. Proceeds from net assets held for sale........................................................... Proceeds from discontinued operations note receivable – revised ................ Net cash (used) provided by investing activities ........................................... Financing activities: Proceeds from issuance of common stock..................................................... Proceeds from exercise of stock options ....................................................... Payments under revolving line-of-credit agreements .................................... Borrowings under revolving line-of-credit agreements................................. Repayment of debt......................................................................................... Proceeds from issuance of long-term debt .................................................... Payment of deferred financing costs ............................................................. Change in ESOP debt guarantee ................................................................... Net cash 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 ...................................................... $ Supplementary cash flows data: 2006 Year ended March 31, 2005 (In thousands) 2004 59,100 $ 16,067 $ 1,193 10,126 6,413 3,875 (5,143) (5,590) 6,613 — 67 1,140 8,351 (1,332) (181) (976) 1,813 26,369 110 (3,619) 4,015 387 3,376 — 4,269 8,824 (36,968) 87 (2,100) 7,083 3,297 2,154 — (11,025) 2,518 (2,026) 207 6,099 11,267 48,517 (888) (8,430) 2,091 — — 857 (6,370) 56,619 7,149 (47,669) 49,030 (205,167) 136,000 9,171 (971) 330 (4,632) 40 1,575 — — (6,896) (6,834) 1,796 10 3,192 4,313 17,161 1,314 (5,925) 6,742 — 375 643 3,149 — 428 (345,664) 344,541 (21,745) — — (332,218) 325,326 (125,764) 115,000 (4,432) 593 (21,495) 15 9,158 1,943 11,101 (2,877) 558 (6,357) 329 36,119 9,479 45,598 $ — (24) 562 (21,902) (30) (1,622) 11,101 9,479 $ Interest paid ........................................................................................... $ Income taxes paid (received), net .......................................................... $ 26,565 5,035 $ $ 28,133 $ 2,029 $ 30,002 (9,683) See accompanying notes. F-6 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (tabular amounts in thousands, except share data) 1. Description of Business Columbus McKinnon Corporation (the Company) is a leading U.S. designer and manufacturer of material handling products, systems and services which efficiently and ergonomically move, lift, position and secure material. Key products include hoists, cranes, chain and forged attachments. The Company’s material handling products are sold, domestically and internationally, principally to third party distributors through diverse distribution channels, and to a lesser extent directly to end-users. The Company’s integrated material handling solutions businesses deal primarily with end users and sales are concentrated, domestically and internationally (primarily Europe), in the consumer products, manufacturing, warehousing and, to a lesser extent, the steel, construction, automotive and other industrial markets. During fiscal 2006, approximately 64% of sales were to customers in the United States. 2. Accounting Principles and Practices Advertising Costs associated with advertising are expensed in the year incurred and are included in selling expense in the statement of operations. Advertising expenses were $3,343,000, $2,521,000, and $2,406,000 in fiscal 2006, 2005, and 2004, respectively. Cash and Cash Equivalents The Company considers as cash equivalents all highly liquid investments with an original maturity of three months or less. Concentrations of Labor Approximately 23% of the Company’s employees are represented by seven separate domestic and Canadian collective bargaining agreements which terminate at various times between August 2006 and May 2009. Approximately 10% of the labor force is covered by collective bargaining agreements that will expire within one year. 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. Derivatives and Financial Instruments Derivative instruments held by the Company that have high correlation with the underlying exposure and are highly effective in offsetting underlying price movements are designated as hedges. Accordingly, gains and losses from changes in derivatives fair values are deferred until the underlying transaction occurs at which point they are then recognized in the statement of operations. When derivatives are not designated as hedges, the gains and losses from changes in fair value are recorded currently in the statement of operations. All derivates are carried at fair value in the balance sheet. The fair values of derivatives are determined by reference to quoted market prices. The Company’s use of derivative instruments has historically been limited to cash flow hedges of certain interest rate risks. The carrying value of the Company’s current assets and current liabilities approximate their fair values based upon the relatively short maturity of those instruments. For the fair value of the Company’s marketable securities and debt instruments, see Notes 6 and 10, respectively. F-7 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Foreign Currency Translations The Company translates foreign currency financial statements as described in Financial Accounting Standards (FAS) No. 52. Under this method, all items of income and expense are translated to U.S. dollars at average exchange rates for the year. All assets and liabilities are translated to U.S. dollars at the year-end exchange rate. Gains or losses on translations are recorded in accumulated other comprehensive loss in the shareholders’ equity section of the balance sheet. The functional currency is the foreign currency in which the foreign subsidiaries conduct their business. Gains and losses from foreign currency transactions are reported in other income and expense, net. There was an approximate $100,000 loss, $200,000 gain and $600,000 loss on transactions with foreign subsidiaries in fiscal 2006, 2005 and fiscal 2004, respectively. Goodwill Goodwill is not amortized but is periodically tested for impairment, in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The fair value of a reporting unit is determined using a discounted cash flow methodology. The Company’s reporting units are determined based upon whether discrete financial information is available and regularly reviewed, whether those units constitute a business, and the extent of economic similarities between those reporting units for purposes of aggregation. As a result of this analysis, the reporting units identified under SFAS No. 142 were at the component level, or one level below the reporting segment level as defined under SFAS No. 131. The Products segment was subdivided into three reporting units and the Solutions segment was subdivided into two reporting units. Identifiable intangible assets acquired in a business combination are amortized over their useful lives unless their useful lives are indefinite, in which case those intangible assets are tested for impairment annually and not amortized until their lives are determined to be finite. See Note 8 for further discussion of goodwill and intangible assets. Inventories Inventories are valued at the lower of cost or market. Cost of approximately 58% of inventories at March 31, 2006 (57% in 2005) has been determined using the LIFO (last-in, first-out) method. Costs of other inventories have been determined using the FIFO (first-in, first-out) or average cost method. FIFO cost approximates replacement cost. Marketable Securities All of the Company’s marketable securities, which consist of equity securities and corporate and governmental 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 loss within shareholders’ equity unless unrealized losses are deemed to be other than temporary. In such instance, the unrealized losses are reported in the statement of operations within other (income) and expense, net. 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 other (income) and expense, net in the consolidated statements of operations. The marketable securities are carried as long-term assets since they are held for the settlement of the Company’s general and products liability insurance claims filed through CM Insurance Company, Inc., a wholly owned captive insurance subsidiary. F-8 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 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. Reclassification/Revisions Certain prior year amounts have been reclassified to conform to the current year presentation. In 2006, the Company has disclosed the investing portions of the cash flows attributable to its discontinued operations within the investing section of the consolidated statements of cash flows, whereas in prior years they were reported as a separate component on the consolidated statements of cash flows. Research and Development Research and development costs as defined in FAS No. 2, for the years ended March 31, 2006, 2005 and 2004 were $1,614,000, $1,289,000 and $1,625,000, respectively and are classified as general and administrative expense in the consolidated statements of operations. Revenue Recognition and Concentration of Credit Risk Sales are recorded when title passes to the customer which is generally at time of shipment to the customer, except for long-term construction contracts as described below. The Company performs ongoing credit evaluations of its customers’ financial condition, but generally does not require collateral to support customer receivables. The credit risk is controlled through credit approvals, limits and monitoring procedures. Accounts receivable are reported at net realizable value and do not accrue interest. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other factors. Accounts receivable are charged against the allowance for doubtful accounts once all collection efforts have been exhausted. The Company does not routinely permit customers to return product. However, sales returns are permitted in specific situations and typically include a restocking charge or the purchase of additional product. The Company has established an allowance for returns based upon historical trends. The Company recognizes 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 (accrued liabilities) and current assets (unbilled revenues), respectively. F-9 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Sale-Leaseback Transactions On January 28, 2005, the Company sold its corporate headquarters property and entered into a leaseback for a portion of the facility under a 10-year lease agreement. Net proceeds to the Company for the sale of the property were approximately $2.7 million and the gain on the transaction was $2.2 million. Of the total gain, $1.0 million was recognized in 2005 under the caption other income, and $1.2 million was deferred and will be recognized as income over the 10-year leaseback period. Additionally, $0.5 million of non-cash value (rent abatement) will be recognized on a straight-line basis as lower operating expenses over the 10-year leaseback period. Shipping and Handling Costs Shipping and handling costs are a component of cost of products sold. Stock-Based Compensation At March 31, 2006, the Company has two stock-based employee compensation plans in effect, which are described more fully in Note 14. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related Interpretations. No stock based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant and the number of options granted was fixed. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition of SFAS No. 123 “Accounting for Stock-Based Compensation”, to stock-based employee compensation: Year Ended March 31, 2006 2005 2004 Net income, as reported ........................................................... $ 59,796 $ 16,710 $ 1,193 Deduct: Total stock based employee compensation expenses determined under fair value based method for all awards, net of related tax effects............................... Net income, pro forma......................................................... (577) $ 59,219 (1,135) $ 15,575 $ (504) 689 Basic income per share: As reported .......................................................................... Pro forma ............................................................................. $ $ 3.73 3.69 $ $ 1.14 1.07 $ $ 0.08 0.05 Diluted income per share: As reported .......................................................................... Pro forma ............................................................................. $ $ 3.60 3.56 $ $ 1.13 1.05 $ $ 0.08 0.05 Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-10 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Warranties The Company offers warranties for certain of the products it sells. The specific terms and conditions of those warranties vary depending upon the product sold and the country in which the Company sold the product. The Company generally provides a basic limited warranty, including parts and labor for any product deemed to be defective for a period of one year. The Company estimates the costs that may be incurred under its basic limited warranty, based largely upon actual warranty repair costs history, and records a liability in the amount of such costs in the month that the product revenue is recognized. The resulting accrual balance is reviewed during the year. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rate of warranty claims, and cost per claim. Changes in the Company’s product warranty accrual are as follows: Balance at beginning of year ...................................................................... Accrual for warranties issued ..................................................................... Warranties settled ....................................................................................... Balance at end of year ................................................................................ March 31, 2006 $ $ 832 4,658 (3,358) 2,132 2005 $ $ 889 2,475 (2,532) 832 3. Discontinued Operations In May 2002, the Company sold substantially all of the assets of Automatic Systems, Inc. (ASI). The ASI business was the principal business unit in the Company’s former Solutions – Automotive segment. The Company received $20,600,000 in cash and an 8% subordinated note in the principal amount of $6,800,000 which is payable at a rate of $214,000 per quarter over eight years beginning August 2004. Due to the uncertainty surrounding the financial viability of the new organization, the note has been recorded at the estimated net realizable value of $0. Principal payments received on the note are recorded as income from discontinued operations at the time of receipt. All interest and principal payments required under the note have been made to date. The gross value of the note as of March 31, 2006 is approximately $5,100,000. 4. Unbilled Revenues and Excess Billings Costs incurred on uncompleted contracts .............................................................. $ Estimated earnings................................................................................................. Revenues earned to date ........................................................................................ Less billings to date ............................................................................................... $ March 31, 2006 2005 52,615 15,361 67,976 56,331 11,645 $ $ 34,154 11,498 45,652 37,133 8,519 The net amounts above are included in the consolidated balance sheets under the following captions: Unbilled revenues.......................................................................................................... $ Accrued liabilities.......................................................................................................... $ March 31, 2006 2005 12,061 (416) 11,645 $ $ 8,848 (329) 8,519 F-11 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 5. Inventories Inventories consisted of the following: At cost—FIFO basis: Raw materials ........................................................................................................ $ Work-in-process .................................................................................................... Finished goods....................................................................................................... LIFO cost less than FIFO cost....................................................................................... Net inventories .............................................................................................................. $ March 31, 2006 2005 41,134 12,199 33,424 86,757 (11,912) 74,845 $ $ 42,283 10,238 35,800 88,321 (10,695) 77,626 6. Marketable Securities Marketable securities are held for the settlement of the Company’s general and products liability insurance claims filed through the Company’s subsidiary, CM Insurance Company, Inc. (see Notes 2 and 15). On a quarterly basis, the Company reviews its marketable securities for declines in market value that may be considered other than temporary. The Company considers market value declines to be other than temporary if they are declines for a period longer than six months and in excess of 20% of original cost. The following is a summary of available-for-sale securities at March 31, 2006: Government securities................................................ Equity securities ......................................................... Gross Unrealized Gains $ $ 150 3,013 3,163 Cost $ 10,859 13,828 $ 24,687 Gross Unrealized Losses $ 25 229 254 $ Estimated Fair Value $ 10,984 16,612 $ 27,596 As of March 31, 2006, in accordance with FAS No. 115, the Company reduced the cost bases of certain equity securities since it was determined that the unrealized losses on those securities were other than temporary in nature. This determination resulted in the recognition of a pre-tax charge to earnings of $78,000 for the year ended March 31, 2006, classified within other (income) and expense, net. The above schedule reflects the reduced cost bases. The aggregate fair value of investments and unrealized losses on available-for-sale securities in an unrealized loss position at March 31, 2006 are as follows: Equity securities in a loss position for less than 12 months Equity securities in a loss position for more than 12 months Aggregate Fair Value $ $ 1,012 1,553 2,565 Unrealized Losses $ $ 75 154 229 The net gain related to sales of marketable securities totaled $1,436,000, $706,000 and $1,861,000 in fiscal 2006, 2005 and 2004, respectively. F-12 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following is a summary of available-for-sale securities at March 31, 2005: Government securities................................................ Equity securities ......................................................... Gross Unrealized Gains Cost $ 7,967 14,751 $ 22,718 $ $ 251 2,076 2,327 Gross Unrealized Losses $ - 430 430 $ Estimated Fair Value $ 8,218 16,397 $ 24,615 As of March 31, 2005, in accordance with FAS No. 115, the Company reduced the cost bases of certain equity securities since it was determined that the unrealized losses on those securities were other than temporary in nature. This determination resulted in the recognition of a pre-tax charge to earnings of $280,000 and $110,000 for the years ended March 31, 2005 and 2004, respectively, classified within other (income) and expense, net. The above schedule reflects the reduced cost bases. The amortized cost and estimated fair value of debt and equity securities at March 31, 2006, by contractual maturity, are shown below: Due in one year or less ................................................................................... Due in one to five years.................................................................................. Due in five to ten years .................................................................................. Equity securities ............................................................................................. Estimated Fair Value Cost $ 5,064 $ 2,008 3,787 10,859 13,828 $ 24,687 $ 5,068 2,015 3,901 10,984 16,612 27,596 Net unrealized gain included in the balance sheet amounted to $2,909,000 at March 31, 2006 and $1,897,000 at March 31, 2005. The amounts, net of related income taxes of $1,018,000 and $664,000 at March 31, 2006 and 2005, respectively, are reflected as a component of accumulated other comprehensive loss within shareholders’ equity. 7. Property, Plant, and Equipment Consolidated property, plant, and equipment of the Company consisted of the following: Land and land improvements ....................................................................................... Buildings ...................................................................................................................... Machinery, equipment, and leasehold improvements .................................................. Construction in progress............................................................................................... Less accumulated depreciation..................................................................................... Net property, plant, and equipment .............................................................................. March 31, 2006 $ 4,564 33,755 102,485 1,736 142,540 87,408 $ 55,132 2005 $ 5,183 33,991 99,147 2,089 140,410 83,173 $ 57,237 Depreciation expense was $8,575,000, $8,859,000, and $9,743,000 for the years ended March 31, 2006, 2005 and 2004, respectively. F-13 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 9. Accrued Liabilities and Other Non-current Liabilities Consolidated accrued liabilities of the Company consisted of the following: March 31, 2006 Accrued payroll ................................................................................................................ $ 18,736 5,987 Accrued pension cost........................................................................................................ 6,199 Interest payable................................................................................................................. 2,959 Accrued workers compensation ....................................................................................... 6,493 Accrued income taxes payable ......................................................................................... 1,620 Accrued postretirement benefit obligation ....................................................................... 2,891 Accrued health insurance ................................................................................................. 4,000 Accrued general and product liability costs ..................................................................... 12,379 Other accrued liabilities.................................................................................................... $ 61,264 2005 $ 15,895 4,325 8,097 2,959 4,237 2,100 2,550 3,500 8,665 $ 52,328 Consolidated other non-current liabilities of the Company consisted of the following: Accumulated postretirement benefit obligation................................................................ $ Accrued general and product liability costs ..................................................................... Accrued pension cost........................................................................................................ Accrued workers compensation ....................................................................................... Other non-current liabilities ............................................................................................. 4,856 16,969 20,285 5,383 2,996 $ 50,489 $ 5,273 12,594 18,637 3,134 2,365 $ 42,003 March 31, 2006 2005 F-15 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 10. Debt Consolidated debt of the Company consisted of the following: Revolving Credit Facility due February 22, 2010 ............................................................ $ Previous Term Loan repaid and retired April 2005.......................................................... 10% Senior Secured Notes due August 1, 2010 with interest payable in semi-annual installments ............................................................................ Other senior debt .............................................................................................................. Total senior debt............................................................................................................... 8 7/8% Senior Subordinated Notes due November 1, 2013 with interest payable in semi-annual installments............................................................................. 8½% Senior Subordinated Notes repaid and retired in October 2005.............................. Total ................................................................................................................................. Less current portion.......................................................................................................... March 31, 2006 2005 $ - - - 5,819 67,384 584 67,968 115,000 735 121,554 136,000 - 203,968 127 $ 203,841 - 144,548 266,102 5,819 $ 260,283 On March 16, 2006, the Company amended and expanded its revolving credit facility. The Revolving Credit Facility provides availability up to a maximum of $75,000,000. Provided there is no default, the Company may on a one-time basis, request an increase in the availability of the Revolving Credit Facility by an amount not exceeding $50,000,000 if all Senior Secured Notes have been repaid in full or will be repaid in full contemporaneously with such increase, or $25,000,000 in the event that any Senior Secured Notes remain outstanding. The unused Revolving Credit Facility totaled $64,800,000, net of outstanding borrowings of $0 and outstanding letters of credit of $10,200,000. Interest on the revolver is payable at varying Eurodollar rates based on LIBOR or prime plus a spread determined by our leverage ratio amounting to 100 or 0 basis points, respectively, at March 31, 2006. The Revolving Credit Facility is secured by all domestic inventory, receivables, equipment, real property, subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual property. On September 2, 2005, the Company issued $136,000,000 of 8 7/8% Senior Subordinated Notes (8 7/8% Notes) due November 1, 2013. Proceeds from the 8 7/8% Notes and cash on hand were used to repurchase all of the outstanding 8 ½% Senior Subordinated Notes (8 ½% Notes). The repurchase of the 8 ½% Notes occurred at a premium resulting in a pre-tax loss on early extinguishment of debt of $2,298,000. As a result of the repurchase of the 8 ½% Notes, $922,000 of pre-tax deferred financing costs and $110,000 of the original issue discount were written-off. The net effect of these items, a $3,330,000 pre-tax loss in fiscal 2006, is shown as part of other (income) and expense, net. On July 22, 2003, the Company issued $115,000,000 of 10% Senior Secured Notes (10% Notes) due August 1, 2010. Proceeds from this offering were used for the repayment of various outstanding debt instruments including the repurchase of $35,700,000 of the 8 ½% Notes at a discount ($30,060,000). The redemption in fiscal 2004 of the 8½% Notes occurred at a discount resulting in a $5,640,000 pre-tax gain on early extinguishment of debt. As a result of the repayment of the various outstanding debt instruments including the 8½% Notes, $4,925,000 of pre-tax deferred financing costs were written-off in fiscal 2004. The net effect of these two items, a $715,000 pre-tax gain, is shown as part of other (income) and expense, net. During fiscal 2006, the Company used a portion of the proceeds from its stock offering (see Note 14) to repurchase $47,616,000 of the outstanding 10% Notes. The repurchase of the 10% Notes occurred at a premium resulting in a pre-tax loss on early extinguishment of debt of $4,786,000. As a result of the repurchase of the 10% Notes, $1,085,000 of pre-tax deferred financing costs was written-off. The net effect of these items, a $5,871,000 pre-tax loss in fiscal 2006, is shown as part of other (income) and expense, net. During April and May of 2006, the Company repurchased an additional $32,128,000 of the outstanding 10% Notes (see Note 24). F-16 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The corresponding credit agreement associated with the Revolving Credit Facility places certain debt covenant restrictions on the Company, including certain financial requirements and a restriction on dividend payments, with which the Company was in compliance as of March 31, 2006. From time to time, the Company manages its debt portfolio by using interest rate swaps to achieve an overall desired position of fixed and floating rates. In June 2001, the Company entered into an interest rate swap agreement to effectively convert $40,000,000 of variable-rate debt to fixed-rate debt, which matured in June 2003. This cash flow hedge was considered effective and the gain or loss on the change in fair value was reported in other comprehensive income, net of tax. In August 2003, the Company entered into an interest rate swap agreement to convert $93,500,000 of fixed- rate debt (10%) to variable-rate debt (LIBOR plus 578.2 basis points) through August 2008 and $57,500,000 from August 2008 through August 2010. This interest rate swap was considered an ineffective hedge and therefore the change in fair value was recognized in income as a gain. The swap was terminated in January 2004 and a pre-tax gain of $1,900,000 was recognized as other income as a result of changes in the fair value of the swap. Provisions of the 8 7/8% Notes include, without limitation, restrictions on indebtedness, asset sales, and dividends and other restricted payments. Until November 1, 2008, the Company may redeem up to 35% of the outstanding notes at a redemption price of 108.875% with the proceeds of equity offerings, subject to certain restrictions. The 8 7/8% Notes are redeemable at the option of the Company, in whole or in part, at prices declining annually from the Make-Whole Price (as defined in the 8 7/8% Notes agreement) to 100% on and after November 1, 2011. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the 8 7/8% Notes may require us to repurchase all or a portion of such holder’s 8 7/8% Notes at a purchase price equal to 101% of the principal amount thereof. The 8 7/8% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements. Provisions of the 10% Notes include, without limitation, restrictions on liens, indebtedness, asset sales, and dividends and other restricted payments. The 10% Notes are redeemable at the option of the Company, in whole or in part, at prices declining annually from the Make-Whole Price (as defined in the 10% Notes agreement) to 100% on and after August 1, 2009. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the 10% Notes may require the Company to repurchase all or a portion of such holder’s 10% Notes at a purchase price equal to 101% of the principal amount thereof. The 10% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements. The 10% Notes are also secured, in a second lien position, by all domestic inventory, receivables, equipment, real property, subsidiary stock (limited to 65% for foreign subsidiaries) and intellectual property. The carrying amount of the Company’s revolving credit facility approximates the fair value based on current market rates. The Company’s Senior Secured Notes and Senior Subordinated Notes have an approximate fair market value of $74,207,000 and $142,800,000, respectively, based on quoted market prices, the total of which is more than their aggregate carrying amount of $203,384,000. The principal payments scheduled to be made as of March 31, 2006 on the above debt, for the next five annual periods subsequent thereto, are as follows (in thousands): 2007 2008 2009 2010 2011 $ 127 117 53 33 67,411 F-17 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 11. Retirement Plans The Company provides defined benefit pension plans to certain employees. The Company uses December 31 as the measurement date for all of its pension plans. The following provides a reconciliation of benefit obligation, plan assets, and funded status of the plans: March 31, 2006 2005 Change in benefit obligation: Benefit obligation at beginning of year ................................................................. $ 120,634 4,004 Service cost............................................................................................................ 7,213 Interest cost............................................................................................................ 7,003 Actuarial loss ......................................................................................................... (4,860) Benefits paid.......................................................................................................... Foreign exchange rate changes.............................................................................. 154 Benefit obligation at end of year ........................................................................... $ 134,148 $ 110,865 4,285 6,718 2,888 (4,410) 288 $ 120,634 Change in plan assets: Fair value of plan assets at beginning of year ....................................................... $ 91,323 5,795 Actual gain on plan assets ..................................................................................... 7,816 Employer contribution........................................................................................... (4,860) Benefits paid.......................................................................................................... Foreign exchange rate changes.............................................................................. 132 Fair value of plan assets at end of year ................................................................. $ 100,206 $ 80,564 5,250 9,673 (4,410) 246 $ 91,323 Funded status ........................................................................................................ $ (33,942) 35,282 Unrecognized actuarial loss................................................................................... 2,148 Unrecognized prior service cost ............................................................................ 3,488 Net amount recognized.......................................................................................... $ $ (29,311) 29,744 1,537 1,970 $ Amounts recognized in the consolidated balance sheets are as follows: Intangible asset ...................................................................................................... $ Accrued liabilities.................................................................................................. Other non-current liabilities .................................................................................. Deferred tax effect of accumulated other comprehensive loss .............................. Accumulated other comprehensive loss ................................................................ Net amount recognized.......................................................................................... $ Net periodic pension cost included the following components: March 31, 2006 2,148 (5,987) (20,284) 11,038 16,573 3,488 2005 1,537 (4,325) (18,637) 8,823 14,572 1,970 $ $ Service costs—benefits earned during the period ................................... $ Interest cost on projected benefit obligation............................................ Expected return on plan assets ................................................................ Net amortization ...................................................................................... Net periodic pension cost ........................................................................ $ 4,004 7,213 (6,753) 2,518 6,982 $ $ 4,285 6,719 (6,666) 4,033 8,371 $ $ 3,921 6,711 (5,404) 1,978 7,206 Year Ended March 31, 2005 2004 2006 The fiscal 2005 pension expense includes a one-time, non-cash charge of $2,037,000 relating to a defined benefit plan at one of our foreign operations. The accumulated benefit obligation for all defined benefit plans was $126,196,000 and $113,486,000 as of March 31, 2006 and 2005, respectively. F-18 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Information for pension plans with a projected benefit obligation in excess of plan assets is as follows: Projected benefit obligation................................................................................... $ 134,148 100,206 Fair value of plan assets ........................................................................................ $ 120,634 91,323 Information for pension plans with an accumulated benefit obligation in excess of plan assets is as follows: March 31, 2006 2005 March 31, 2006 2005 Accumulated benefit obligation............................................................................. $ 126,196 100,206 Fair value of plan assets ........................................................................................ $ 113,486 91,323 Unrecognized gains and losses are amortized on a straight-line basis over the average remaining service period of active participants. The weighted-average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed and also net periodic pension cost for the following year: Discount rate .............................................................. Expected long-term rate of return on plan assets ....... Rate of compensation increase ................................... March 31, 2006 5.75% 7.50 4.00 2005 6.00% 8.25 4.00 2004 6.25% 8.40 4.00 2003 6.75% 8.50 4.00 The expected rate of return on plan asset assumptions are determined considering historical averages and real returns on each asset class. The Company’s retirement plan target and actual asset allocations are as follows: Equity securities ......................................................... Fixed income .............................................................. Total plan assets ......................................................... Target 2007 70% 30 100% March 31, Actual 2006 56% 44 100% 2005 55% 45 100% The Company has an investment objective for domestic pension plans to adequately provide for both the growth and liquidity needed to support all current and future benefit payment obligations. The investment strategy is to invest in a diversified portfolio of assets which are expected to satisfy the aforementioned objective and produce both absolute and risk adjusted returns competitive with a benchmark that is a blend of the S&P 500 and an aggregate bond fund. The shift to the targeted allocation is the result of management’s re-evaluation of its investment allocation. The targeted allocation will be accomplished as some plan assets governed by collective bargaining contracts will be transferred from fixed income into equity securities, as well as reallocation of remaining assets to achieve the desired balance during fiscal 2007. 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). Additional contributions may be made to minimize PBGC premiums. The Company expects to contribute $5,987,000 to its pension plans in fiscal 2007. F-19 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Information about the expected benefit payments for the Company’s defined benefit plans is as follows: 2007 2008 2009 2010 2011 2012-2016 $ 5,079 6,174 5,888 6,487 7,084 46,221 The Company also sponsors defined contribution plans covering substantially all domestic employees. Participants may elect to contribute basic contributions. These plans provide for employer contributions based primarily on employee participation. The Company recorded a charge for such contributions of approximately $1,476,000, $673,000 and $635,000 for the years ended March 31, 2006, 2005 and 2004, respectively. 12. Employee Stock Ownership Plan (ESOP) The AICPA Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans” requires 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 reduction 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 to purchase shares of the Company’s common stock is guaranteed by the Company; the unpaid balance of such borrowings, if any, would be reflected in the consolidated balance sheet as a liability. An amount equivalent to the cost of the collateralized common stock and representing deferred employee benefits has been recorded as a deduction from shareholders’ equity. Substantially all of the Company’s domestic non-union 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 $653,000, $296,000 and $200,000 in fiscal 2006, 2005 and 2004, respectively, is recorded based on the guaranteed release of the ESOP shares at their fair market value. Dividends on allocated ESOP shares, if any, are recorded as a reduction of retained earnings and are applied toward debt service. At March 31, 2006 and 2005, 723,618 and 795,791 of ESOP shares, respectively, were allocated or available to be allocated to participants’ accounts. At March 31, 2006 and 2005, 249,821 and 284,695 of ESOP shares were pledged as collateral to guarantee the ESOP term loans. The fair market value of unearned ESOP shares at March 31, 2006 amounted to $6,728,000. 13. Postretirement Benefit Obligation The Company sponsors defined benefit postretirement health care plans that provide medical and life insurance coverage to certain domestic retirees and their dependents of one of its subsidiaries. Prior to the acquisition of this subsidiary, the Company did not sponsor any postretirement benefit plans. The Company pays the majority of the medical costs for certain 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. F-20 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) On December 8, 2003, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“Medicare Act”). In March 2004, the FASB issued Staff Position No FAS 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003 (“FSP No 106-2”),” which provides accounting guidance on how to account for the effects of the Medicare Act on postretirement plans that provide prescription drug benefits. The Medicare Act also requires certain disclosures regarding the effect of the subsidy provided by the Medicare Act. Additionally, FSP 106-2 provides two transition methods – retroactive to the date of enactment or prospective from the date of adoption. The Company elected to adopt FAS 106-2 and apply the prospective transition method in the second quarter of fiscal 2005. The accumulated post retirement benefit obligation decreased $2,339,000 as of July 4, 2004 and net periodic postretirement benefit cost decreased by $225,000 for fiscal 2005. As a result of delays in filing the required paperwork to receive the prescription drug benefits under the Medicare Act, the benefit obligation has been adjusted at March 31, 2006 to reflect an increase in the liability that will be charged to net periodic postretirement benefit cost over the average remaining service period of the participants. The Company still expects to file the required paperwork at some point in the future to receive the benefit. The impact of the delayed filing was not material to the benefit obligation at March 31, 2006 or net periodic postretirement benefit cost for the year end March 31, 2006. The Company’s postretirement health benefit plans are not funded. In accordance with FAS No. 132 “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” the following sets forth a reconciliation of benefit obligation and the funded status of the plan: March 31, 2006 2005 Change in benefit obligation: Benefit obligation at beginning of year ......................................................... $ 12,927 6 Service cost.................................................................................................... 751 Interest cost.................................................................................................... - Amendment ................................................................................................... Actuarial loss ................................................................................................. 601 (2,064) Benefits paid.................................................................................................. Benefit obligation at end of year ................................................................... $ 12,221 $ 15,984 17 834 (2,339) 460 (2,029) $ 12,927 Funded status ................................................................................................. $ (12,221) 5,745 Unrecognized actuarial loss............................................................................ (6,476) Net amount recognized in accrued and other non-current liabilities.............. $ $ (12,927) 5,554 (7,373) $ Net periodic postretirement benefit cost included the following: Service cost—benefits attributed to service during the period..................... Interest cost................................................................................................... Amortization of prior service gain ............................................................... Amortization of plan net losses .................................................................... Net periodic postretirement benefit cost............................................... Year Ended March 31, 2005 $ 17 834 - 460 $1,311 2006 $ 6 751 - 411 $1,168 2004 $ 11 869 (153) 643 $1,370 For measurement purposes, healthcare costs were assumed to increase 9% in fiscal 2007, grading down over time to 5% in seven years. The discount rate used in determining the accumulated postretirement benefit obligation was 5.75% and 6.00% as of March 31, 2006 and 2005, respectively. F-21 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Information about the expected benefit payments for the Company’s postretirement health benefit plans is as follows: 2007 2008 2009 2010 2011 2012-2016 $ 1,620 1,529 1,441 1,323 1,315 5,250 Assumed medical claims cost trend rates have an effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects: Effect on total of service and interest cost components .................. Effect on postretirement obligation ................................................. $ 40 724 $ (36) (656) One Percentage Point Increase One Percentage Point Decrease 14. Earnings per Share and Stock Plans Earnings per Share The Company calculates earnings per share in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (FAS No. 128). Basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share includes any dilutive effects of stock options. The following table sets forth the computation of basic and diluted earnings per share: Numerator for basic and diluted earnings per share: Income from continuing operations............................................ $ Income from discontinued operations ........................................ Net income ................................................................................ $ 59,100 696 59,796 $ $ 16,067 643 16,710 $ $ 1,193 - 1,193 Year Ended March 31, 2006 2005 2004 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 .................................................. 16,052 576 14,594 209 14,553 1 16,628 14,803 14,554 The weighted-average common stock outstanding shown above is net of unallocated ESOP shares (see Note 12). During fiscal 2006, the Company registered an additional 3,350,000 shares of its common stock which were sold at $20.00 per share. The number of shares offered by the Company was 3,000,000 and 350,000 were offered by a selling shareholder. The Company did not receive any proceeds from the sale of shares by the selling shareholder. This stock offering increased the Company’s weighted average common stock outstanding by 1,134,000 shares for fiscal 2006. A portion of the proceeds received by the Company were used to redeem $47,616,000 principal amount of the Company’s outstanding 10% Senior Secured Notes. The balance of the proceeds is available for other general corporate purposes to advance the Company’s strategy of global growth, additional debt repayment, investments and acquisitions. F-22 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. As of March 31, 2006, no options have been granted to non-employees. Options granted under the Non-Qualified and Incentive Plans become exercisable over a four-year period at the rate of 25% per year commencing one year from the date of grant at an exercise price of not less than 100% of the fair market value of the common stock on the date of grant. Any option granted under the Non-Qualified plan may be exercised not earlier than one year from the date such option is granted. Any option granted under the Incentive Plan may be exercised not earlier than one year and not later than 10 years from the date such option is granted. A summary of option transactions during each of the three fiscal years in the period ended March 31, 2006 is as follows: Balance at March 31, 2003............................................................. Granted...................................................................................... Cancelled................................................................................... Balance at March 31, 2004............................................................. Granted...................................................................................... Exercised ................................................................................... Cancelled................................................................................... Balance at March 31, 2005............................................................. Granted...................................................................................... Exercised ................................................................................... Cancelled................................................................................... Balance at March 31, 2006............................................................. Shares 1,311,750 45,000 (126,900) 1,229,850 741,500 (52,000) (116,550) 1,802,800 45,000 (626,282) (89,400) 1,132,118 A summary of exercisable and available for grant options is as follows: $ $ Weighted-average Exercise Price 14.05 6.92 14.28 13.77 6.41 8.25 13.82 10.89 21.61 11.41 7.76 11.28 $ $ Exercisable at end of year.......................................................................... 605,243 Available for grant at end of year.............................................................. 172,100 Year Ended March 31, 2006 2005 926,050 127,700 2004 851,425 752,650 Exercise prices for options outstanding as of March 31, 2006, ranged from $5.46 to $29.00. The following table provides certain information with respect to stock options outstanding at March 31, 2006: Range of Exercise Prices Up to $10.00....................................... $10.01 to $20.00.................................. $20.01 to $30.00.................................. Stock Options Outstanding 702,000 175,568 254,550 1,132,118 Weighted-average Exercise Price 6.91 $ 14.32 21.25 $ 11.28 Weighted-average Remaining Contractual Life 7.3 4.9 4.1 6.2 The following table provides certain information with respect to stock options exercisable at March 31, 2006: Range of Exercise Prices Up to $10.00............................................................................ $10.01 to $20.00....................................................................... $20.01 to $30.00....................................................................... Stock Options Outstanding 276,375 119,318 209,550 605,243 F-23 $ Weighted-average Exercise Price 8.95 14.51 21.18 14.28 $ COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 19. Summary Financial Information The following information sets forth the condensed consolidating summary financial information of the parent and guarantors, which guarantee the 10% Senior Secured Notes and the 8 7/8% Senior Subordinated Notes, and the nonguarantors. The guarantors are wholly owned and the guarantees are full, unconditional, joint and several. As of and for the year ended March 31, 2006: As of March 31, 2006: Current assets: Cash............................................................................. $ Trade accounts receivable and unbilled revenues ................................................................. Inventories .................................................................. Prepaid expenses......................................................... 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’ Parent Guarantors Non Guarantors Eliminations Consolidated 27,531 $ (1,461) $ 19,528 $ — $ 45,598 60,808 32,708 4,777 125,824 24,651 89,808 92,325 96,548 429,156 48,146 203,384 16,305 267,835 161,321 $ $ 157 18,177 1,446 18,319 11,703 58,036 (93,637) 197,328 191,749 15,368 — 8,676 24,044 167,705 $ $ 46,822 26,325 8,903 101,578 18,778 39,483 (73,697) 25,939 112,081 43,306 457 25,508 69,271 42,810 $ $ — (2,365) 550 (1,815) — — 75,009 (240,136) (166,942) 473 — — 473 (167,415) 107,787 74,845 15,676 243,906 55,132 187,327 — 79,679 566,044 107,293 203,841 50,489 361,623 204,421 $ $ equity ........................................................... $ 429,156 $ 191,749 $ 112,081 $ (166,942) $ 566,044 For the Year Ended March 31, 2006: Net sales ................................................................................ $ Cost of products sold ............................................................ Gross profit ........................................................................... Selling, general and administrative expenses ....................... Restructuring charges ..........................................................… Amortization of intangibles .................................................… Income from operations ........................................................ Interest and debt expense...................................................... Other (income) and expense, net .......................................... (Loss) income from continuing operations before income tax (benefit) expense ........................................... Income tax (benefit) expense................................................ Income from continuous operations ..................................... Income from discontinued operations .................................. Net income ............................................................................ $ 268,570 200,639 67,931 40,811 1,635 179 25,306 19,558 8,055 (2,307) (37,950) 35,643 696 36,339 $ $ 152,181 114,042 38,139 16,003 — 3 22,133 4,876 20 17,237 2,912 14,325 — 14,325 $ $ 163,787 120,842 42,945 31,081 (26) 67 11,823 233 (3,027) 14,617 4,263 10,354 — 10,354 $ $ (28,531) (27,138) (1,393) — — — (1,393) — — (1,393) (171) (1,222) — (1,222) $ $ 556,007 408,385 147,622 87,895 1,609 249 57,869 24,667 5,048 28,154 (30,946) 59,100 696 59,796 F-30 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) For the Year Ended March 31, 2006: Operating activities: Cash provided by operating activities .................................. Investing activities: Purchases of marketable securities, net ................................ Capital expenditures ............................................................. Proceeds from sale of businesses and surplus real estate..... Proceeds from discontinued operations note receivable – revised .............................................................................. Net cash used in investing activities..................................... Financing activities: Proceeds from issuance of common stock............................ Proceeds from exercise of stock options .............................. Net borrowings under revolving line-of-credit agreements ....................................................................... Repayment of debt ................................................................ Proceeds from issuance of long-term debt ........................... Deferred financing costs incurred......................................... 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 ............................. Parent Guarantors Non Guarantors Eliminations Consolidated $ 28,512 $ 8,418 $ 11,587 $ — $ 48,517 — (4,759) — 857 (3,902) 56,619 7,149 240 (204,832) 136,000 (2,877) 9,067 558 1,924 - 26,534 — (800) 468 — (332) — — — — — — (8,854) — (8,854) 4 (764) (888) (2,871) 1,623 — (2,136) — — 1,121 (335) — — (213) — 573 325 10,349 997 27,531 $ $ (697) (1,461) $ 9,179 19,528 $ — — — — — — — — — — — — — — — — — — $ (888) (8,430) 2,091 857 (6,370) 56,619 7,149 1,361 (205,167) 136,000 (2,877) — 558 (6,357) 329 36,119 9,479 45,598 As of and for the year ended March 31, 2005: As of March 31, 2005: Current assets: Cash............................................................................. $ Trade accounts receivable and unbilled revenues ................................................................. Inventories .................................................................. Prepaid expenses......................................................... 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’ 1,019 $ (697) $ 9,157 $ — $ 9,479 57,707 33,651 7,297 99,674 25,107 90,027 98,964 55,396 369,168 47,189 259,520 11,032 317,741 51,427 197 18,919 973 19,392 12,847 57,287 (102,189) 197,864 185,201 14,450 — 8,199 22,649 162,552 $ $ 39,918 26,028 5,928 81,031 19,283 39,971 (70,216) 24,159 94,228 36,653 763 22,772 60,188 34,040 $ $ — (972) — (972) — — 73,441 (240,195) (167,726) (1,474) — — (1,474) (166,252) 97,822 77,626 14,198 199,125 57,237 187,285 — 37,224 480,871 96,818 260,283 42,003 399,104 81,767 $ $ $ $ equity ........................................................... $ 369,168 $ 185,201 $ 94,228 $ (167,726) $ 480,871 F-31 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Parent Guarantors Non Guarantors Eliminations Consolidated For the Year Ended March 31, 2005: Net sales ................................................................................ $ Cost of products sold ............................................................ Gross profit ........................................................................... Selling, general and administrative expenses ....................... Restructuring charges ..........................................................… Amortization of intangibles .................................................… Income from operations ........................................................ Interest and debt expense...................................................... Other income, net.................................................................. (Loss) income from continuing operations before income tax (benefit) expense ........................................... Income tax (benefit) expense................................................ Income from continuous operations ..................................... Income from discontinued operations .................................. Net income ............................................................................ $ 245,166 188,499 56,667 34,290 782 242 21,353 23,916 (1,562) (1,001) (1,424) 423 643 1,066 $ $ 141,324 110,455 30,869 18,957 — 3 11,909 3,378 (2,560) 11,091 1,487 9,604 — 9,604 $ $ 151,741 113,369 38,372 30,774 128 67 7,403 326 (1,096) 8,173 2,133 6,040 — 6,040 $ $ $ (23,479) (23,479) — — — — — — — — — — — — $ 514,752 388,844 125,908 84,021 910 312 40,665 27,620 (5,218) 18,263 2,196 16,067 643 16,710 For the Year Ended March 31, 2005: Operating activities: Cash (used in) provided by operating activities ........................................................................... $ (54,146) $ 64,479 $ 6,828 $ — $ 17,161 Investing activities: Proceeds from marketable securities, net ............................. Capital expenditures ............................................................. Proceeds from sale of businesses and surplus real estate..... Net assets held for sale.......................................................... Proceeds from discontinued operations note receivable – revised .............................................................................. Net cash provided by (used in) investing activities.............. Financing activities: Proceeds from exercise of stock options .............................. Net payments under revolving line-of-credit agreements ....................................................................... Repayment of debt ................................................................ Deferred financing costs incurred......................................... 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 ............................. 705 (3,718) 3,439 — 643 1,069 428 (219) (21,666) (24) 68,168 562 47,249 (134) (5,962) — (610) 3,303 375 — 3,068 — — — — (68,000) — (68,000) 85 (368) 609 (1,597) — — — (988) — (904) (79) — (168) — (1,151) 19 4,708 6,981 1,019 $ $ (329) (697) $ 4,449 9,157 $ — — — — — — — — — — — — — — — — — $ 1,314 (5,925) 6,742 375 643 3,149 428 (1,123) (21,745) (24) — 562 (21,902) (30) (1,622) 11,101 9,479 F-32 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) For the year ended March 31, 2004: Parent Guarantors Non Guarantors Eliminations Consolidated For the Year Ended March 31, 2004: Net sales ................................................................................ $ Cost of products sold ............................................................ Gross profit ........................................................................... Selling, general and administrative expenses ....................... Restructuring charges ..........................................................… Amortization of intangibles .................................................… Income from operations ........................................................ Interest and debt expense...................................................... Other (income) and expense, net .......................................... (Loss) income from continuing operations before 226,631 173,269 53,362 35,046 1,281 245 16,790 28,390 888 $ $ $ 114,987 94,677 20,310 12,854 — 3 7,453 (263) (12,573) 124,116 93,785 30,331 25,457 (42) 135 4,781 729 (1,456) (21,143) (21,986) 843 — — — 843 — 8,950 $ 444,591 339,745 104,846 73,357 1,239 383 29,867 28,856 (4,191) income tax (benefit) expense ........................................... Income tax (benefit) expense................................................ Net (loss) income .................................................................. $ (12,488) (1,306) (11,182) $ 20,289 3,181 17,108 $ 5,508 2,134 3,374 $ (8,107) — (8,107) $ 5,202 4,009 1,193 For the Year Ended March 31, 2004: Operating activities: Cash provided by (used in) operating activities ........................................................................... $ 19,359 $ (2,644) $ 18,623 $ (8,969) $ 26,369 Investing activities: Proceeds from marketable securities, net ............................. Capital expenditures ............................................................. Proceeds from sale of businesses.......................................... Proceeds from sale of property, plant and equipment .......... Net assets held for sale.......................................................... Net cash provided by (used in) investing activities.............. Financing activities: Proceeds from issuance of common stock............................ Net (payments) borrowings under revolving — (2,635) 4,015 — — 1,380 — (9,925) line-of-credit agreements ................................................. (115,147) Repayment of debt ................................................................ Proceeds from issuance of long term debt............................ 115,000 Deferred financing costs incurred......................................... (4,432) 174 Dividends paid ...................................................................... Other...................................................................................... 593 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 ............................................................. Cash and cash equivalents at end of year ............................. (13,737) (78) 6,924 — (700) — 387 3,376 3,063 — — — — — — — — 72 491 110 (284) — — — (174) (19) 3,033 (10,617) — — — — — — — 19 — — — — — (9,124) — (16,727) 21 1,743 8,950 — 8,969 — — 110 (3,619) 4,015 387 3,376 4,269 — (6,892) (125,764) 115,000 (4,432) — 593 (21,495) 15 9,158 57 6,981 $ $ (820) (329) $ 2,706 4,449 $ — — $ 1,943 11,101 F-33 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 20. Business Segment Information As a result of the way 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 two reportable segments: Products and Solutions. The Company’s Products segment sells hoists, industrial cranes, chain, attachments, and other material handling products principally to third party distributors through diverse distribution channels, and to a lesser extent directly to end-users. The Solutions segment sells engineered material handling systems such as conveyors and lift tables primarily to end- users in the consumer products, manufacturing, warehousing, and, to a lesser extent, the steel, construction, automotive, and other industrial markets. 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 the operating earnings of the respective business units. Segment information as of and for the years ended March 31, 2006, 2005 and 2004 is as follows: Year Ended March 31, 2006 Solutions $ 62,111 2,020 1,019 35,444 499 Products $ 493,896 55,849 7,805 530,600 7,931 Total $ 556,007 57,869 8,824 566,044 8,430 Year Ended March 31, 2005 Solutions $ 61,647 $ 514,752 40,665 9,171 480,871 5,925 Products $ 453,105 39,392 8,092 449,284 4,203 1,273 1,079 31,587 1,722 Total Year Ended March 31, 2004 Solutions $ 50,431 (2,459) 1,130 27,294 257 Products $ 394,160 32,326 8,996 446,069 3,362 Total $ 444,591 29,867 10,126 473,363 3,619 Sales to external customers ...................................................................... Income from operations........................................................................... Depreciation and amortization ................................................................. Total assets ............................................................................................... Capital expenditures ................................................................................. Sales to external customers ...................................................................... Income from operations........................................................................... Depreciation and amortization ................................................................. Total assets ............................................................................................... Capital expenditures ................................................................................. Sales to external customers ...................................................................... Income from operations........................................................................... Depreciation and amortization ................................................................. Total assets ............................................................................................... Capital expenditures ................................................................................. F-34 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Financial information relating to the Company’s operations by geographic area is as follows: Year Ended March 31, 2005 2004 2006 Net sales: United States ................................................................................................ $ 394,657 $ 360,917 $ 319,815 86,518 Europe .......................................................................................................... 27,736 Canada.......................................................................................................... Other............................................................................................................. 10,522 Total ............................................................................................................. $ 556,007 $ 514,752 $ 444,591 108,717 28,778 16,340 112,868 30,492 17,990 Total assets: United States ................................................................................................ $ 411,199 $ 341,645 $ 347,488 105,120 Europe .......................................................................................................... 14,628 Canada.......................................................................................................... Other............................................................................................................. 6,127 Total ............................................................................................................. $ 566,044 $ 480,871 $ 473,363 115,241 17,442 6,543 123,694 20,444 10,707 Year Ended March 31, 2005 2004 2006 Year Ended March 31, 2005 2004 2006 Long-lived assets: United States ................................................................................................ $ 184,448 $ 185,518 $ 187,202 53,051 Europe .......................................................................................................... 3,283 Canada.......................................................................................................... Other............................................................................................................. 1,979 Total ............................................................................................................. $ 242,459 $ 244,522 $ 245,515 54,181 2,672 2,151 53,357 1,869 2,785 Sales by major product group are as follows: Year Ended March 31, 2005 2004 2006 Hoists .......................................................................................................... $ 258,082 $ 227,789 $ 197,400 110,681 Chain and forged attachments ...................................................................... 53,276 Industrial cranes ........................................................................................... .......................................................................................................... 83,234 Other Total.................................................................................................. $ 556,007 $ 514,752 $ 444,591 127,300 62,468 97,195 134,301 61,967 101,657 F-35 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 21. Selected Quarterly Financial Data (Unaudited) Below is selected quarterly financial data for fiscal 2006 and 2005: Three Months Ended Net sales ................................................... Gross profit............................................... Income from operations............................ Net income ............................................... July 3, 2005 $ 140,877 36,543 14,622 7,322 $ October 2, 2005 134,712 35,158 13,267 3,263 $ $ March 31, 2006 January 1, 2006 133,322 $ 147,096 40,990 16,866 $ 47,798 34,931 13,114 1,413 $ $ Net income per share – basic................... $ 0.50 $ 0.22 $ 0.09 $ 2.63 Net income per share – diluted................ $ 0.49 $ 0.21 $ 0.08 $ 2.53 Results include pre-tax losses on early extinguishment of debt of $3,341,000, $4,950,000 and $920,000 for the quarters ended October 2, 2005, January 1, 2006 and March 31, 2006 respectively. Net income includes tax benefit due to the reversal of a valuation allowance of $38,571,000 for the quarter ended March 31, 2006. Three Months Ended Net sales ................................................... Gross profit............................................... Income from operations............................ Net income ............................................... July 4, 2004 $ 121,658 31,451 11,156 3,362 $ October 3, 2004 122,711 29,943 9,896 2,594 $ $ March 31, 2005 January 2, 2005 125,913 $ 144,470 34,515 10,157 8,349 29,999 9,456 $ 2,405 $ $ Net income per share – basic................... $ 0.23 $ 0.18 $ 0.16 $ 0.57 Net income per share – diluted................ $ 0.23 $ 0.18 $ 0.16 $ 0.56 Results for the quarter ended March 31, 2005 include a one-time, non-cash charge of $2,037,000 ($1,170,000 net of tax) relating to a defined benefit plan at one of our foreign operations and $3,919,000 of gains from the sale of surplus real estate. F-36 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 22. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows: Net unrealized investment gains – net of tax...................................................... Minimum pension liability adjustment – net of tax............................................ Foreign currency translation adjustment ............................................................ Accumulated other comprehensive loss ............................................................. $ 1,891 (17,107) 2,237 $ (12,979) $ $ 2006 2005 1,233 (14,572) 4,083 (9,256) March 31, The deferred taxes associated with the items included in accumulated other comprehensive loss were $9,486,000 and $8,159,000 for 2006 and 2005, respectively. As a result of the recording of a deferred tax asset valuation allowance in fiscal 2005, the Company recorded as an offsetting entry a $534,000 charge in the minimum pension liability component of other comprehensive income. With the reversal of that valuation allowance in fiscal 2006 (see Note 17), the Company recorded the reversal of the valuation allowance as a reduction of income taxes in the statement of operations. This is in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” even though the valuation allowance was initially established by a charge against comprehensive income. This amount will remain indefinitely as a component of minimum pension liability adjustment. The activity by year related to investments, including reclassification adjustments for activity included in earnings is as follows (all items shown net of tax): Year Ended March 31, 2005 2004 2006 Net unrealized investment gains (losses) at beginning of year ............ $ Unrealized holdings gains arising during the period........................ Reclassification adjustments for (gains) included in earnings ...................................................................... Net change in unrealized gains (losses) on investments ...................... Net unrealized investment gains at end of year.................................... $ 1,233 $ 1,591 1,364 $ 328 (342) 2,916 (933) 658 1,891 $ (459) (131) 1,233 $ (1,210) 1,706 1,364 F-37 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 23. Effects of New Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs,” as an amendment to ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage). This Statement requires that these items be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This Statement becomes effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of SFAS No. 151 to have a material impact on the Company’s consolidated financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) was to be adopted for interim or annual periods beginning after June 15, 2005. On April 14th, 2005, the SEC announced that it would provide for a phased-in implementation process for FASB statement No. 123(R). The SEC is requiring that registrants adopt statement 123(R)’s fair value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after June 15, 2005. We expect to adopt 123(R) in the first quarter of Fiscal 2007. Statement 123(R) permits public companies to adopt its requirements using one of two methods: 1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123(R) for all share-based payments granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. 2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company is still evaluating the method it plans to use when it adopts statement 123(R). As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, recognizes no compensation cost for employee stock options. Accordingly, adoption of Statement 123(R)’s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of 123(R) cannot be predicted at this time because it will depend on levels of share based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to the Company’s consolidated financial statements. In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 changes the requirements for and reporting of a change in accounting principle. This Statement becomes effective for changes in accounting methods during fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS No. 154 will have a material impact on the Company’s consolidated results of operations and financial condition. F-38 COLUMBUS McKINNON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 24. Subsequent Events During April and May of 2006, the Company repurchased $32,128,000 of the outstanding 10% Senior Secured Notes. The repurchase of the 10% Notes occurred at a premium resulting in a pre-tax loss on early extinguishment of debt of $3,194,000. As a result of the repurchase of the 10% Notes, approximately $671,000 of pre-tax deferred financing costs was written-off. The net effect of these items, a $3,865,000 pre-tax loss will be shown as part of other (income) and expense, net for the first quarter of fiscal 2007. F-39 COLUMBUS McKINNON CORPORATION SCHEDULE II—Valuation and qualifying accounts March 31, 2006, 2005 and 2004 Dollars in thousands Description Year ended March 31, 2006: Deducted from asset accounts: Allowance for doubtful accounts Slow-moving and obsolete inventory Deferred tax asset valuation allowance Total Reserves on balance sheet: Additions Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts Balance at End of Period Deductions $ 3,015 6,413 50,538 $ 1,628 2,617 (38,571) $ — — — $ 59,966 $(34,326) $ — $ 1,226 1,395 5,666 $ 8,287 (1) $ 3,417 7,635 (2) 6,301 $ 17,353 Accrued general and product liability costs $ 16,094 $ 7,920 $ — $ 3,045 (3) $ 20,969 Year ended March 31, 2005: Deducted from asset accounts: Allowance for doubtful accounts Slow-moving and obsolete inventory Deferred tax asset valuation allowance Total Reserves on balance sheet: $ 2,811 5,878 55,456 $ 2,191 1,182 1,175 $ — — — $ 64,145 $ 4,548 $ — $ 1,987 647 6,093 $ 8,727 (1) $ 3,015 6,413 (2) 50,538 $ 59,966 Accrued general and product liability costs $ 15,930 $ 5,780 $ — $ 5,616 (3) $ 16,094 Year ended March 31, 2004: Deducted from asset accounts: Allowance for doubtful accounts Slow-moving and obsolete inventory Deferred tax asset valuation allowance Total Reserves on balance sheet: $ 2,743 5,699 $ 1,761 2,333 55,456 $ — (126) — (4) $ 1,693 2,028 — — $ 8,442 $ 59,550 $ (126) $ 3,721 (1) $ 2,811 5,878 (2) 55,456 $ 64,145 Accrued general and product liability costs $ 14,439 $ 5,398 $ — $ 3,907 (3) $ 15,930 ________ (1) Uncollectible accounts written off, net of recoveries (2) Obsolete inventory disposals (3) Insurance claims and expenses paid (4) Reserves at date of disposal of subsidiary F-40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. Item 9A. Controls and Procedures Management’s Evaluation of Disclosure Controls and Procedures As of March 31, 2006, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of March 31, 2006. There were no changes in our internal controls or in other factors during our fourth quarter ended March 31, 2006. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2006 based on the framework in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of March 31, 2006. Management's assessment of the effectiveness of our internal control over financial reporting as of March 31, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein. Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Columbus McKinnon Corporation We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Columbus McKinnon Corporation and subsidiaries maintained effective internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Columbus McKinnon Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 30 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment the Columbus McKinnon Corporation maintained effective internal control over financial reporting as of March 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Columbus McKinnon Corporation maintained, in all material respects, effective internal control over financial reporting as of March 31, 2006, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Columbus McKinnon Corporation and subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2006 of Columbus McKinnon Corporation and subsidiaries, and our report dated June 1, 2006 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP June 1, 2006 Buffalo, New York Item 9B. Other Information None. Item 10. Directors and Executive Officers of the Registrant PART III The information regarding Directors and Executive Officers of the Registrant will be included in a Proxy Statement to be filed with the Commission prior to July 29, 2006 and upon the filing of such Proxy Statement, is incorporated by reference herein. The charters of our Audit Committee, Compensation Committee, Nomination/Succession Committee and Governance Committee are available on our website at www.cmworks.com and are available to any shareholder upon request to the Corporate Secretary. The information on the Company's website is not incorporated by reference into this Annual Report on Form 10-K. We have adopted a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer and principal accounting officer, as well as our directors. Our code of ethics, the Columbus McKinnon Corporation Legal Compliance & Business Ethics Manual, is available on our website at www.cmworks.com. We intend to disclose any amendment to, or waiver from, the code of ethics that applies to our principal executive officer, principal financial officer or principal accounting officer otherwise required to be disclosed under Item 10 of Form 8-K by posting such amendment or waiver, as applicable, on our website. Item 11. Executive Compensation The information regarding Executive Compensation will be included in a Proxy Statement to be filed with the Commission prior to July 29, 2006 and upon the filing of such Proxy Statement, is incorporated by reference herein. Item 12. Security Ownership of Certain Beneficial Owners and Management The information regarding Security Ownership of Certain Beneficial Owners and Management will be included in a Proxy Statement to be filed with the Commission prior to July 29, 2006 and upon the filing of such Proxy Statement, is incorporated by reference herein. 31 4.13 Indenture among Columbus McKinnon Corporation, Audubon Europe S.a.r.l., Crane Equipment & Service, Inc., Yale Industrial Products, Inc.. and U.S. Bank National Association., as trustee, dated as of September 2, 2005 (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement No. 33-129142 on Form S-3 dated October 19, 2005). 4.14 Registration Rights Agreement among Columbus McKinnon Corporation, Audubon Europe S.a.r.l., Crane Equipment & Service, Inc., Yale Industrial Products, Inc., and Credit Suisse First Boston LLC, acting on behalf of itself and as Representative of the Initial Purchasers, dated as of September 2, 2005 (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement No. 33-129142 on Form S-3 dated October 19, 2005). 10.1 Agreement by and among Columbus McKinnon Corporation Employee Stock Ownership Trust, Columbus McKinnon Corporation and Marine Midland Bank, dated November 2, 1995 (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement No. 33-80687 on Form S-1 dated December 21, 1995). #10.2 Columbus McKinnon Corporation Employee Stock Ownership Plan Restatement Effective April 1, 1989 (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement No. 33-80687 on Form S-1 dated December 21, 1995). #10.3 Amendment No. 1 to the Columbus McKinnon Corporation Employee Stock Ownership Plan as Amended and Restated as of April 1, 1989, dated March 2, 1995 (incorporated by reference to Exhibit 10.24 to the Company’s Registration Statement No. 33-80687 on Form S-1 dated December 21, 1995). #10.4 Amendment No. 2 to the Columbus McKinnon Corporation Employee Stock Ownership Plan, dated October 17, 1995 (incorporated by reference to Exhibit 10.38 to the Company’s Annual Report on Form 10- K for the fiscal year ended March 31, 1997). #10.5 Amendment No. 3 to the Columbus McKinnon Corporation Employee Stock Ownership Plan, dated March 27, 1996 (incorporated by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1997). #10.6 Amendment No. 4 of the Columbus McKinnon Corporation Employee Stock Ownership Plan as Amended and Restated as of April 1, 1989, dated September 30, 1996 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996). #10.7 Amendment No. 5 to the Columbus McKinnon Corporation Employee Stock Ownership Plan as Amended and Restated as of April 1, 1989, dated August 28, 1997 (incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1998). #10.8 Amendment No. 6 to the Columbus McKinnon Corporation Employee Stock Ownership Plan as Amended and Restated as of April 1, 1989, dated June 24, 1998 (incorporated by reference to Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1998). #10.9 Amendment No. 7 to the Columbus McKinnon Corporation Employee Stock Ownership Plan as Amended and Restated as of April 1, 1989, dated April 30, 2000 (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2000). #10.10 Amendment No. 8 to the Columbus McKinnon Corporation Employee Stock Ownership Plan as Amended and Restated as of April 1, 1989, dated March 26, 2002 (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2002). #10.11 Amendment No. 9 to the Columbus McKinnon Corporation Employee Stock Ownership Plan as Amended and Restated as of April 1, 1989, dated March 27, 2003 (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2003). 34 #10.12 Amendment No. 10 to the Columbus McKinnon Corporation Employee Stock Ownership Plan as Amended and Restated as of April 1, 1989, dated February 28, 2004 (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004). #10.13 Amendment No. 11 to the Columbus McKinnon Corporation Employee Stock Ownership Plan as Amended and Restated as of April 1, 1989, dated December 19, 2003 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2003). #10.14 Amendment No. 12 to the Columbus McKinnon Corporation Employee Stock Ownership Plan as Amended and Restated as of April 1, 1989, dated March 17, 2005 (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005). #10.15 Columbus McKinnon Corporation Personal Retirement Account Plan Trust Agreement, dated April 1, 1987 (incorporated by reference to Exhibit 10.25 to the Company’s Registration Statement No. 33-80687 on Form S-1 dated December 21, 1995). #10.16 Amendment No. 1 to the Columbus McKinnon Corporation Employee Stock Ownership Trust Agreement (formerly known as the Columbus McKinnon Corporation Personal Retirement Account Plan Trust Agreement) effective November 1, 1988 (incorporated by reference to Exhibit 10.26 to the Company’s Registration Statement No. 33-80687 on Form S-1 dated December 21, 1995). #10.17 Amendment and Restatement of Columbus McKinnon Corporation 1995 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1999). #10.18 Second Amendment to the Columbus McKinnon Corporation 1995 Incentive Stock Option Plan, as amended and restated (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2002). #10.19 Columbus McKinnon Corporation Restricted Stock Plan, as amended and restated (incorporated by reference to Exhibit 10.28 to the Company’s Registration Statement No. 33-80687 on Form S-1 dated December 21, 1995). #10.20 Second Amendment to the Columbus McKinnon Corporation Restricted Stock Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2002). #10.21 Amendment and Restatement of Columbus McKinnon Corporation Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1999). #10.22 Columbus McKinnon Corporation Thrift [401(k)] Plan 1989 Restatement Effective January 1, 1998 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1998). #10.23 Amendment No. 1 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Thrift [401(k)] Plan, dated December 10, 1998 (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1999). #10.24 Amendment No. 2 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Thrift [401 (k)] Plan, dated June 1, 2000 (incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2000). #10.25 Amendment No. 3 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Thrift [401 (k)] Plan, dated March 26, 2002 (incorporated by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2002). 35 #10.26 Amendment No. 4 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Thrift [401(k)] Plan, dated May 10, 2002 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2002). #10.27 Amendment No. 5 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Thrift [401(k)] Plan, dated December 20, 2002 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2002). #10.28 Amendment No. 6 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Thrift [401(k)] Plan, dated May 22, 2003 (incorporated by reference to Exhibit 10.46 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2003). #10.29 Amendment No. 7 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Thrift [401(k)] Plan, dated April 14, 2004 (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004). #10.30 Amendment No. 8 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Thrift [401(k)] Plan, dated December 19, 2003 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2003). #10.31 Amendment No. 9 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Thrift [401(k)] Plan, dated March 16, 2004 (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004). #10.32 Amendment No. 10 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Thrift [401(k)] Plan, dated July 12, 2004 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 4, 2004). #10.33 Amendment No. 11 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Thrift [401(k)] Plan, dated March 31, 2005 (incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005). *#10.34 Amendment No. 12 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Thrift [401(k)] Plan, dated December 27, 2005. #10.35 Columbus McKinnon Corporation Thrift 401(k) Plan Trust Agreement Restatement Effective August 9, 1994 (incorporated by reference to Exhibit 10.32 to the Company’s Registration Statement No. 33-80687 on Form S-1 dated December 21, 1995). #10.36 Columbus McKinnon Corporation Monthly Retirement Benefit Plan Restatement Effective April 1, 1998 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1998). #10.37 Amendment No. 1 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Monthly Retirement Benefit Plan, dated December 10, 1998 (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1999). #10.38 Amendment No. 2 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Monthly Retirement Benefit Plan, dated May 26, 1999 (incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1999). #10.39 Amendment No. 3 to the 1998 Plan Restatement of the Columbus McKinnon Corporation Monthly Retirement Benefit Plan, dated March 26, 2002 (incorporated by reference to Exhibit 10.44 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2002). 36 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES Date: June 7, 2006 COLUMBUS McKINNON CORPORATION By: /S/ TIMOTHY T. TEVENS Timothy T. Tevens President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title /S/ TIMOTHY T. TEVENS ____________________________________ Timothy T. Tevens President, Chief Executive Officer and Director (Principal Executive Officer) /S/ KAREN L. HOWARD ____________________________________ Karen L. Howard Vice President – Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Date June 7, 2006 June 7, 2006 /S/ ERNEST R. VEREBELYI ____________________________________ Ernest R. Verebelyi Chairman of the Board of Directors June 7, 2006 /S/ CARLOS PASCUAL ____________________________________ Carlos Pascual /S/ RICHARD H. FLEMING ____________________________________ Richard H. Fleming Director Director /S/ HERBERT P. LADDS, JR. ____________________________________ Director Herbert P. Ladds, Jr. /S/ WALLACE W. CREEK ____________________________________ Wallace W. Creek /S/ LINDA A. GOODSPEED ____________________________________ Linda A. Goodspeed /S/ STEPHEN RABINOWITZ ____________________________________ Stephen Rabinowitz Director Director Director 39 June 7, 2006 June 7, 2006 June 7, 2006 June 7, 2006 June 7, 2006 June 7, 2006 COLUMBUS McKINNON CORPORATION SUBSIDIARIES (as of March 31, 2006) Exhibit 21.1 CM Insurance Company, Inc. (US-NY) Columbus McKinnon de Mexico, S.A. de C.V. (Mexico) Columbus McKinnon de Uruguay, S.A. (Uruguay) Columbus McKinnon do Brazil Ltda. (Brazil) Crane Equipment & Service, Inc. (US-OK) Larco Industrial Services, Ltd. (Canada) Société d’Exploitation des Raccords Gautier (France) Univeyor A/S (Denmark) Ejendomsselskabet Lupinvej 11 (Denmark) Univeyor AB (Sweden) Univeyor Conveying Systems Ltd. (England) Yale Industrial Products, Inc. (US-DE) Egyptian-American Crane Co. (40% Joint Venture) (Egypt) Spreckels Water Company, Inc. (US-DE) Spreckels Consolidated Industries, Inc. (US-CA) Audubon Europe S.a.r.l. (Luxembourg) Columbus McKinnon Limited (Canada) Yale Industrial Products Ltd. (England) Yale Industrial Products GmbH (Germany) Asia Hoist Co., Ltd. (Hong Kong) Camlok Lifting Clamps Ltd. (England) Hangzhou LILA Lifting and Lashing Co. Ltd. (China) Yale Levage (France) Yale Elevación Ibérica S.L. (Spain) Yale Hangzhou Industrial Products Ltd. (China) Yale Industrial Products Asia (Thailand) Co. Ltd. Yale Industrial Products B.V. (The Netherlands) Yale Industrial Products GmbH (Austria) Yale Industrial Products Pty. Ltd. (South Africa) Yale Lifting & Mining Products (Pty.) Ltd. (25% Financial Interest) (South Africa) Yale Industrial Products Kft. (Hungary) 40 Consent of Independent Registered Public Accounting Firm Exhibit 23.1 We consent to the incorporation by reference in the following Registration Statements: (1) Registration Statement (Form S-8 No. 333-3212) pertaining to the Columbus McKinnon Corporation 1995 Incentive Stock Option Plan, the Columbus McKinnon Corporation Non-Qualified Stock Option Plan, the Columbus McKinnon Corporation Restricted Stock Plan and the Columbus McKinnon Corporation Employee Stock Ownership Plan Restatement Effective April 1, 1989 of Columbus McKinnon Corporation, (2) Registration Statement (Form S-8 No. 333-81719) pertaining to the Options assumed by Columbus McKinnon Corporation originally granted under the GL International, Inc. 1997 Stock Option Plan and the Larco Industrial Services Ltd. 1997 Stock Option Plan, of our reports dated June 1, 2006, with respect to the consolidated financial statements and schedule of Columbus McKinnon Corporation, Columbus McKinnon Corporation management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Columbus McKinnon Corporation, included in the Annual Report (Form 10-K) for the year ended March 31, 2006. /s/ Ernst & Young LLP June 7, 2006 Buffalo, New York 41 CERTIFICATION Exhibit 31.1 I, Timothy T. Tevens, Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Columbus McKinnon Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanged Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c. disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): d. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and e. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: June 7, 2006 /S/ TIMOTHY T. TEVENS Timothy T. Tevens Chief Executive Officer 42 CERTIFICATION Exhibit 31.2 I, Karen L. Howard, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Columbus McKinnon Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanged Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c. disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): d. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and e. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: June 7, 2006 /S/ KAREN L. HOWARD Karen L. Howard Chief Financial Officer 43 CERTIFICATION Exhibit 32.1 Each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Columbus McKinnon Corporation (the "Company") on Form 10-K for the year ended March 31, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and result of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Dated: June 7, 2006 /S/ TIMOTHY T. TEVENS__ Timothy T. Tevens Chief Executive Officer /S/ KAREN L. HOWARD__ Karen L. Howard Chief Financial Officer 44 Corporate Information Independent Auditors Ernst & Young LLP 50 Fountain Plaza, 14th floor Buffalo, NY 14202-2297 The following are trademarks of Columbus McKinnon Corporation registered in the U.S. Patent and Trademark Office: CM, Big Orange, Budgit, Cady, Coffing, ColorLinks, Hammerlok, Herc-Alloy, Little Mule, Lodestar, Shaw-Box, Tigrip, Tugit, Yale The following are trademarks of Columbus McKinnon Corporation: Abell-Howe, AgWorks, Camlok, CraneMart, Gaffey, Global King, LARCO, TechLink, WECO Forward-looking Information The Columbus McKinnon annual report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements concerning future revenue and earnings, involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to differ materially from 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 and other factors disclosed in the Company’s periodic reports filed with the Securities and Exchange Commission. The Company assumes no obligation to update the forward-looking information contained in this report. Common Stock Columbus McKinnon’s common stock is traded on NASDAQ under the symbol CMCO. As of May 31, 2006, there were 488 shareholders of record of the Company’s common stock. Approximately 3,300 additional shareholders held shares in “street name.” According to the March 31, 2006 SEC filings, approximately 110 institutional investors own 75.7% of Columbus McKinnon’s outstanding common shares. Annual Meeting of Shareholders July 31, 2006; 10:00 am Eastern Time Ramada Hotel and Conference Center 2402 North Forest Road Amherst, NY 14226 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 59 Maiden Lane, Plaza Level New York, NY 10038 (800) 937-5449 (718) 921-8200 www.amstock.com Investor Relations Karen L. Howard Vice President – Finance, Treasurer and Chief Financial Officer Phone: (716) 689-5550 E-mail: karen.howard@cmworks.com Investor information is available on the Company’s web site: www.cmworks.com Corporate Headquarters Columbus McKinnon Corporation 140 John James Audubon Parkway Amherst, NY 14228-1197 Telephone: (716) 689-5400 Board of Directors/Corporate Oﬃ cers Board of Directors Ernest R. Verebelyi was elected Chairman of Columbus McKinnon’s Board of Directors in August 2005 and has served as a Director of the Company since January 2003. He is a member of the Audit Committee. Mr. Verebelyi retired from Terex Corporation, a global diversified equipment manufacturer, in October 2002 where he held the position of Group President. Prior to joining Terex in 1998, he held executive, general management and operating positions at General Signal Corporation, Emerson, Hussmann Corporation and General Electric. Mr. Verebelyi also serves as a director of CH Energy Group, Inc. Wallace W. Creek was appointed a Director of the Company in January 2003. He is Chairman of the Corporate Governance and Nomination Committee and also serves on the Audit Committee. From December 2002 through June 2004, Mr. Creek served as Senior Vice President of Finance for Collins & Aikman, a leading manufacturer of automotive interior components. Prior to that, Mr. Creek served as Controller of the General Motors Corporation from 1992 to 2002 and held several executive positions in finance at General Motors over a 43-year career. Mr. Creek is also a director of CF Industries Holdings, Inc. Timothy T. Tevens was elected President and a Director of the Company in January 1998 and assumed the duties of Chief Executive Officer in July 1998. From May 1991 to January 1998 he served as Vice President - Information Services and was also elected Chief Operating Officer of the Company in October 1996. From 1980 to 1991, Mr. Tevens was employed by Ernst & Young LLP in various management consulting capacities. Herbert P. Ladds, Jr. has served as a Director of the Company since 1973 and was Chairman of the Board of Directors from January 1998 to August 2005. Mr. Ladds serves on the Compensation and Succession Committee and on the Corporate Governance and Nomination Committee. He will retire as a Director of the Company at the July 2006 Annual Meeting of Shareholders. Mr. Ladds served as Chief Executive Officer of the Company from 1986 until his retirement in July 1998. Mr. Ladds was President of the Company from 1982 until January 1998, and Executive Vice President from 1981 to 1982 and Vice President - Sales & Marketing from 1971 to 1980. Mr. Ladds is also a director of Utica Mutual Insurance Company and Utica Life Insurance Company. Carlos Pascual has been a Director of the Company since 1998. He is Chairman of the Compensation and Succession Committee and is also a member of the Corporate Governance and Nomination Committee. Mr. Pascual currently serves as Chairman of the Board of Directors of Xerox de Espana S.A. (Spain). From January 2000 through December 2003, Mr. Pascual was Executive Vice President and President of Developing Markets Operations for Xerox. From January 1999 to January 2000, Mr. Pascual served as Deputy Executive Officer of Xerox’s Industry Solutions Operations. From August 1995 to January 1999, Mr. Pascual served as President of Xerox Corporation’s United States Customer Operations. Prior thereto, he has served in various capacities with Xerox Corporation. Richard H. Fleming was appointed a Director of the Company in March 1999. He is the Chairman of the Audit Committee and is also a member of the Compensation and Succession Committee. In February 1999, Mr. Fleming was appointed Executive Vice President and Chief Financial Officer of USG Corporation. Prior thereto, Mr. Fleming served USG Corporation in various executive financial capacities, including Senior Vice President and Chief Financial Officer from January 1995 to February 1999 and Vice President and Chief Financial Officer from January 1994 to January 1995. Mr. Fleming also serves as a member of the Board of Directors for several not-for-profit entities including UCAN, the Child Welfare League of America, and Chicago United. Linda A. Goodspeed became a Director of the Company in October 2004. She serves on the Audit Committee and the Corporate Governance and Nomination Committee. In 2001, she joined Lennox International, Inc., a global supplier of climate control solutions, and currently serves as Executive Vice President and Chief Technology Officer of that company. Prior to that, Ms. Goodspeed served as President and Chief Operating Officer of PartMiner, Inc., a global supplier of electronic components. She has also held management positions in product management and development, research and development and design engineering at General Electric Appliances, Nissan North America, Inc. and the Ford Motor Company. Ms. Goodspeed also serves as a director of American Electric Power Co., Inc. and is a member of the Development Board of the University of Texas at Dallas. Stephen Rabinowitz became a Director of the Company in October 2004. He serves on the Audit Committee and the Compensation and Succession Committee. He retired in 2001 from his position as Chairman and Chief Executive Officer of General Cable Corporation, a leading manufacturer of electrical, communications and utility cable. Prior to joining General Cable as President and Chief Executive Officer in 1994, he served as President and CEO of AlliedSignal Braking Systems, and before that as President and CEO of General Electric’s Electrical Distribution and Control business. He also held management positions in manufacturing operations and technology at the General Electric Company and the Ford Motor Company. Mr. Rabinowitz is also a Director of Energy Conversion Devices, Inc. and JLG Industries, Inc. Corporate Officers Timothy T. Tevens, President and Chief Executive Officer Derwin R. Gilbreath, Vice President and Chief Operating Officer Timothy R. Harvey, General Counsel and Corporate Secretary Karen L. Howard, Vice President – Finance, Treasurer and Chief Financial Officer Joseph J. Owen, Vice President and Hoist Group Leader Richard A. Steinberg, Vice President – Human Resources ® Columbus McKinnon Corporation 140 John James Audubon Parkway Amherst, New York 14228-1197 716-689-5400 http://www.cmworks.com

Continue reading text version or see original annual report in PDF format above