James F. Shepard Chairman and Chief Executive Officer Dear Shareholders, Customers, and Employees: In 1998, after four years of continuous record revenues and profits, Finning International Inc. received a resounding message. The slowdown in Asia and decline in commodity prices was having a significant impact on most of our markets, especially in the United Kingdom and British Columbia. While the Company’s geographic diver- sification allowed us to achieve increased revenue, our unsatisfactory profitability showed that we needed to redefine the way we do business. We needed to examine how we allocated capital within the Company in areas such as inventory, rentals, real estate and technology. We had to harness advances in information technology, transportation and communications to build on our competitive advantage in each of the markets we serve. By combining our “best solutions” practices with this new way of thinking, we had an opportunity to rebuild our Company from the ground up – based on flexibility and speed – to compete in the next millennium. So we have embarked on a process of rebuilding the Company. Decisions are now being made that are changing the shape of our oper- ations. From a reduced cost base, our dealer network is now focusing not only on the traditional business segment but is also pursuing new emerging segments of the industry. To better serve our traditional customers who own and operate their equipment, we have committed to raising our customer support service levels. We will achieve this through improved logistics and the application of information technology. By taking advantage of our global connections and our Dealer Business System (DBS) that links us from the factory floor to the branch shop, Finning will improve service and delivery with a high-tech, high-touch approach. Finning International Inc. 555 Great Northern Way, Vancouver, B.C., Canada, V5T 1E2 F I N N I N G I N T E R N A T I O N A L I N C . 2 James F. Shepard Chairman and Chief Executive Officer In addition, we will enhance our “best solutions” approach for customers who currently own and operate equipment, but whose core competency lies elsewhere. This will allow Finning to ensure optimal performance of Caterpillar equipment for these customers by applying our Company’s knowledge of equipment operation and maintenance. The depth of human talent at Finning boasts an expertise in equipment solutions that has few peers. We are focused on intimately understanding our customers’ businesses and on providing the best solutions to lower unit operating costs – be it the production or transportation of ore, timber, grain, oil, gravel or goods. Our Company is undergoing a renewal that combines the vitality of “start-up” thinking with the culture of proven profitability performance. We will combine the best people, the best equipment and the best tech- nologies to sustain our competitive advantage in the marketplace. Underpinning this “start-up” approach is a population of thousands of Caterpillar machines throughout our territories that will require parts and service support for years to come. The growth opportunities that will be afforded by Caterpillar’s imaginative product expansion will open new markets in the future. Augmenting this growing market oppor- tunity is the strong capital base we have as a publicly traded company, and a record of growth and uninterrupted profitability. In 1998, our Company achieved substantial successes despite diffi- cult market conditions in our territories. In Western Canada, we generated a significant increase in market share based on the growing line-up of quality equipment from Caterpillar. In Chile, we completed an organiza- tional restructuring that has brought new, high-calibre talent into the operation. And in the U.K., we completed the merger of H. Leverton Limited into Finning (UK) Ltd., forming a national Caterpillar dealership in Britain. In addition, we installed the most recent version of DBS, a dealer-designed information system that is Year 2000 compliant, through- out all our operations. F I N N I N G I N T E R N A T I O N A L I N C . 4 James F. Shepard Chairman and Chief Executive Officer As we move forward, there will be exciting opportunities for employees to grasp new ideas and implement them for the benefit of our customers. At Finning, we want our employees to grow through self- renewal and to be part of a learning organization that allows them to realize their potential. I am pleased to welcome Doug Whitehead to the Company. Mr. Whitehead brings a proven record of senior management achieved through an outstanding career in retail marketing and forestry. His appointment as President and Chief Operating Officer adds more depth to the strong management team of Finning International Inc. Additionally, the Board appointed Andrew Simon of London, England as a Director, effective January 1999, and Ricardo Bacarreza of Santiago, Chile as a Director, effective February 1999. These Board appointments are a reflection of the substantial growth of our operations outside Canada. The Board thanks Rolf Hougen of Whitehorse, Yukon for his excellent service as a Director of the Company for the past 19 years. I would like to thank Bill Merrell and Dave Edwards, both of whom retired after making unique and outstanding contributions to Finning over the course of their careers. On behalf of the Board of Directors, I wish to thank our employees for their committed effort in what has been a very challenging year. Looking to the future, I see our Company taking advantage of the unrealized opportunities that will come with the next millennium. With vision, courage and commitment, Finning will continue to deliver prof- itability and growth for its shareholders. Sincerely, J a m e s F. S h e p a r d C H A I R M A N A N D C H I E F E X E C U T I V E O F F I C E R F I N N I N G I N T E R N A T I O N A L I N C . 6 C O R P O R A T E P R O F I L E Finning International Inc. is one of Caterpillar’s largest dealers world- wide, serving markets in Western Canada, the U.K. and Chile. Our busi- ness is to consistently provide the best solutions to people who move, harvest or transform goods and mate- rials so they can meet the needs of their customers. We are rebuilding our organization so it has the vitality, flexibility and speed to compete in the next millen- nium. We’re focused on becoming a leading solutions provider through unmatched excellence in customer support services. Finning’s employees and manage- ment are committed to making both our customers and our Company suc- cessful. And to delivering improved returns to our shareholders from a more efficient operating base. At Finning, we’ve created a climate in which our people have the compe- tence and freedom to deliver the best solutions to our customers. We can only do this successfully if we listen closely to the needs of our customers, drawing on our years of product and industry knowledge. Once we have an intimate under- standing of a customer’s problem, the Finning team can deliver solutions that will increase productivity and lower operating costs – key goals of our customers. We support and ser- vice the best equipment in its class, namely Caterpillar. F I N N I N G I N T E R N A T I O N A L I N C . 8 [1] WE LISTEN In becoming a leading solutions provider to industry, we must excel at customer service throughout our business. We work closely with our large and small customers to ensure the opti- mal performance of their equipment on the worksite – whether it’s for part-time operation or 24 hours a day, 365 days a year. With more than 36,000 Caterpillar machines currently operating in our three dealer territories, we have exten- sive knowledge in the maintenance and repair of Cat equipment. The Finning team is there to serve – wherever our customers may be. F I N N I N G I N T E R N A T I O N A L I N C . 1 0 [2] WE SUPPORT With a growing, innovative Caterpillar product line, it’s essential that our people receive the training and edu- cation needed to provide the best solutions for our customers. Educating our workforce is a con- stant process at Finning and one that occurs daily – in the shop, in the class- room and on the job. Given the size and strength of the Company, training can be focused by industry and by product application. Having developed expertise in spe- cific areas, we’re eager to share that knowledge base with our customers. We want all of our employees to be part of a learning organization – one that uses information technology to improve customer service, product knowledge and communication. F I N N I N G I N T E R N A T I O N A L I N C . 1 2 [3] WE TRAIN To maintain our competitiveness in technology, Finning is investing in the latest computer hardware and soft- ware, diagnostic equipment, mobile trucks and information systems. By taking advantage of our global connections and Dealer Business System (DBS), we’re linked from the factory floor to the branch shop and can connect with other Cat dealers around the world. This allows us to improve our service and delivery with a high-tech, high-touch approach. We also see information technology as a means by which to share more information with our customers, faster and more conveniently – enabling us to be more responsive to their needs. F I N N I N G I N T E R N A T I O N A L I N C . 1 4 [4] WE UPGRADE More of our customers are focusing on their own core competencies and seeking equipment solutions exter- nally that can improve their produc- tivity. This has created a business opportunity for Finning, where cus- tomers are now asking us to do the work for them. And with our expert knowledge of operating and maintaining Caterpillar equipment, we can serve this emerg- ing market profitably while assuming some of the risk of doing this work. We’re also pursuing new channels of distribution, using e-commerce to redistribute used equipment and used parts to sophisticated buyers world- wide. As the adoption of the internet increases rapidly into the next millen- nium, we’ll be prepared to meet the changing demands of our customers. F I N N I N G I N T E R N A T I O N A L I N C . 1 6 [5] WE PURSUE NEW MARKETS F I N N I N G ( C A N A D A ) [A DIVISION OF FINNING INTERNATIONAL INC.] Servicing Western Canada with dealer territories in British Columbia, Alberta, Yukon and the Northwest Territories F I N N I N G ( U K ) LT D . [100% – OWNED SUBSIDIARY OF FINNING INTERNATIONAL INC.] Servicing Britain with dealer territories in England, Scotland and Wales F I N N I N G C H I L E S . A . [100% – OWNED SUBSIDIARY OF FINNING INTERNATIONAL INC.] Servicing the northern, central and southern regions of Chile U N I V E R S A L M A C H I N E R Y S E R V I C E S [A DIVISION OF FINNING INTERNATIONAL INC.] Selling used equipment and used parts internationally F I N N I N G I N T E R N A T I O N A L I N C . F I N N I N G I N T E R N A T I O N A L I N C . 1 8 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S R E V I E W O F O P E R A T I O N S Lower Asian demand for forest products H I G H L I G H T S Consolidated revenue increased resulted in significantly lower activity levels 11% to $2.6 billion in 1998 compared with in the forest industry in British Columbia; and $2.3 billion the previous year. In both Canada Depressed copper prices caused a slow- and Chile, revenue was flat on a year-over-year down in mine expansions and new mining basis. In the United Kingdom, revenue was up projects in Chile. 40% to $793 million, reflecting an additional In response to these conditions, Finning nine months contribution from H. Leverton launched a major restructuring program in Limited in 1998. Revenue in Universal Machin- 1998 to reduce its cost base throughout its ery Services (UMS) was also up during the operations. The program included closing year, increasing 50% to $152 million. five branches and downsizing five other Total equipment revenue, which includes locations in British Columbia as well as new and used equipment sales and rentals, implementing an early retirement program increased 15% to $1.8 billion in 1998. Cus- for employees in Finning (Canada). In the tomer service revenue increased 5% to $783 U.K., one branch and one depot were closed million. The Company’s net income was in 1998 as the dealership continued its $3.2 million compared with $103.7 million efforts to resize the scale of its national the previous year. Excluding non-recurring dealership. In addition, the Company com- charges of $15.5 million in 1998 and non- pleted several major steps towards its reor- recurring gains of $13.2 million in the prior ganization, including: (1) the integration of year, net income declined to $18.6 million H. Leverton into its Finning (UK) Ltd. opera- from $90.5 million in 1997. tion; (2) the relocation of Finning (Canada)’s While Finning International Inc. achieved head office to Edmonton; and (3) the reor- record revenue in 1998, the Company faced ganization of management in all three of its difficult market conditions in many of its dealer operations. dealer territories. These conditions can be summarized as follows: A slowdown in the U.K. economy and a strong British pound had a negative effect on both new and used domestic equipment in that market; R E V E N U E B Y A C T I V I T Y ( $ M I L L I O N S ) New equipment Used equipment Equipment rental Customer support services Finance and other $ 1,187 442 134 783 39 1 9 9 8 46% $ 17% 5% 30% 2% 1,115 309 104 744 55 1 9 9 7 48% 13% 5% 32% 2% $ 2,585 100% $ 2,327 100% G R O W T H 6% 43% 28% 5% (29)% 11% 1 9 REVENUE BY GEOGRAPHIC SEGMENT (%) United Kingdom 31 Alberta/Northwest Territories 27 19 Chile 17 British Columbia/Yukon 6 International CONSOLIDATED REVENUE (BY ACTIVITY) (%) New equipment Customer service Used equipment Equipment rental Finance 46 30 17 5 2 R E V E N U E Total revenue was $2.6 billion com- C U S T O M E R S U P P O R T S E R V I C E S Total parts and pared with $2.3 billion last year, an increase customer service revenue was $783 million, of 11%. All activity levels increased, except a 5% increase compared with the prior year. finance revenue which declined 29% due to Revenue increased in all dealer territories the sale of the U.K. finance portfolio to with the exception of Canada, where rev- Caterpillar Financial Services (UK) Limited enue declined by 7% from prior year levels in November of 1997. Of the 11% increase in due to lower parts and service sales in B.C. total revenue, 6% was related to the apprecia- The improvement in the U.K. reflected the tion of the British pound and the U.S. dollar additional contribution from H. Leverton, relative to the Canadian dollar. Price increas- while the increase in Chile was due to higher es on new equipment and customer support parts revenue from an increased population services, both averaging 2% across opera- of Caterpillar equipment. Parts revenue in tions, increased revenue by 1%. The balance UMS grew 67% to $11 million in 1998. of the increase in total revenue was attribut- able to increased activity due to the acquisi- tion of H. Leverton in 1997. F I N A N C E R E V E N U E Finance revenue declined to $39.1 million in 1998, a decrease of 29% compared with the prior year. This decrease E Q U I P M E N T R E V E N U E Equipment revenue was due to the sale of the U.K. finance port- totalled $1.8 billion compared with $1.5 bil- folio in November 1997, resulting in a reduc- lion in the prior year, an increase of 15%. tion in finance revenue of $14 million in Sales of new equipment were up 6% to $1.2 1998. Finance revenue in Finning (Canada) billion in 1998 as weaker sales in both Cana- remained flat from the prior year. Finning da and Chile were offset by higher sales in the and Caterpillar Finance have arrangements U.K. The increase in the U.K. was entirely a in place to provide customers with competi- result of the acquisition of H. Leverton, pur- tive financial services in each of Finning’s chased by Finning (UK) on October 1, 1997. dealer territories. Used equipment sales increased 43% to Total finance assets declined 19% to $418 $442 million as all operations focused on million at the end of 1998. A 1% increase in reducing aged used equipment inventories at leased equipment was offset by a 51% reduc- lower than normal margins. Rental revenue tion in instalment notes receivable. The decline increased 28% to $134 million as total rental in finance assets was due to the sale of a fleet assets grew 20% during the year. portion of the Canadian finance portfolio to Rental revenue was higher in all operations Caterpillar Financial Services Ltd. during with the exception of Chile which experi- the year. Finning (Canada) and Caterpillar enced a marginal decline in rental activity. Financial Services Ltd. are parties to a joint marketing agreement in which personnel from both Finning (Canada) and Caterpillar Finance market a common array of financial services to customers in the Canadian dealer territory, including leasing, rental-purchase financing, conditional sales, and equity financing. F I N N I N G I N T E R N A T I O N A L I N C . 2 0 C O N S O L I D A T E D R E V E N U E / N E T I N C O M E / E A R N I N G S P E R S H A R E ( $ T H O U S A N D S ) Revenue Net income Non-recurring items Adjusted net income 1 9 9 8 1 9 9 7 $ 2,585,421 $ 2,327,064 $ $ 3,185 15,461 18,646 $ $ 0.04 0.19 $ 103,695 (13,190) 0.23 $ 90,505 $ $ 1.32 (0.17) 1.15 N E T I N C O M E Net income was $3.2 million com- in 1997. Net income in 1998 included $0.9 pared with $103.7 million in 1997. Excluding million in severance costs provided for in the non-recurring charges of $15.5 million in 1998 third quarter. and non-recurring gains of $13.2 million in Selling, general and administrative 1997, net income in 1998 declined to $18.6 expenses increased to $498 million, 27% high- million from $90.5 million in the prior year. er than 1997. Excluding the non-recurring Earnings per share were lower at $0.04 items noted above that were included in compared with $1.32 for 1997. Non-recurring selling, general and administrative expenses, charges in 1998 were $0.19 per share, while costs increased $70.7 million or 17% from non-recurring gains in the previous year the prior year. The majority of the cost were $0.17 per share. Adjusting for these non- increase was in the U.K. and reflected the recurring items, earnings per share were full effect of the integration of Finning (UK) $0.23 in 1998 compared with $1.15 in 1997. and H. Leverton. Net income also included $27.1 million Finance costs and interest on other after-tax charges on aged inventories in indebtedness increased to $75.2 million, up Finning’s four operating units: $13.6 million 12% from the prior year. The majority of the in the first quarter ($0.17 per share) and increase was in Canadian operations, due to $13.5 million in the fourth quarter ($0.17 higher average inventory levels and interest per share). rates compared with 1997 levels. Canadian operations contributed $34.7 For 1999, the Company is expecting mar- million to consolidated net income, a decrease ket conditions to be even tougher than in of 44% from 1997. Excluding a non-recurring 1998 as many commodity prices are hitting charge of $8.2 million in 1998 and a non- 10 to 15 year lows and the U.K. economy is recurring gain of $10.0 million in 1997, net unlikely to turn around quickly during the income in Finning (Canada) was $42.9 mil- next year. Finning expects activity levels in lion, down 17% from the prior year. The U.K. Western Canada to decline in 1999, primarily operations had a loss of $32.2 million com- as the result of a slowdown in the Alberta pared with income of $20.1 million last year. economy. In Chile, without large deliveries of Excluding a non-recurring charge of $6.4 equipment to new projects or mine expan- million in 1998 and a non-recurring gain of sions, it is anticipated activity levels in that $3.2 million in 1997, the net loss in Finning market will be down year-over-year. Despite (UK) was $25.8 million compared with net these conditions, the Company’s cost reduc- income of $16.9 million in the prior year. Net tion and asset management programs are income from Chilean operations was $3.4 expected to improve its returns in 1999. million in 1998 compared with $19.5 million 2 1 C A N A D I A N O P E R A T I O N S F I N A N C I A L R E V I E W H I G H L I G H T S In Finning (Canada), 1998 was a R E V E N U E B Y P R O V I N C E Revenue in British year of consolidation. After achieving record Columbia and Yukon declined by 17% in 1998, levels for both revenue and units sold in down in all categories except used equip- 1997, overall revenues in 1998 declined by ment sales, which were up 28%. The decline 1%. New equipment unit deliveries declined in revenue was directly attributable to the by 12% as the company noted a significant depressed forest and mining industries in shift in the mix and size of units from small- British Columbia. Revenue in Alberta and the er forestry and oilfield units to larger min- Northwest Territories, however, increased ing and construction units. by 13% due to large unit deliveries to com- During 1998, Finning (Canada) implement- panies operating in the oil sands and to the ed significant changes in its Western Cana- Ekati diamond mine in the Northwest Terri- dian operations. Senior management and tories. New equipment sales and equipment head office staff were relocated to Edmonton rentals were up significantly while used from the Company’s location on Great North- equipment sales declined slightly. Customer ern Way in Vancouver. In British Columbia, service revenues were up moderately as the reduced activity levels in the forest and overall increase in oil sands and diamond mining industries led to the closure of five mining were partially offset by lower oil and Finning branches and the downsizing of five gas drilling activity. others in the fourth quarter of 1998. During the year, however, Finning (Canada) opened a new branch facility in Surrey, B.C. and expanded its Parts Distribution Centre in Edmonton. At December 31, 1998, the Finning (Canada) operation had 30 branches and 10 depots, and the number of employees was 2,494 compared with 2,496 at the end of 1997. Further employment reductions are expected in the first quarter of 1999 following a process of early retirements and severances. C A N A D A R E V E N U E / N E T I N C O M E / E A R N I N G S P E R S H A R E ( $ T H O U S A N D S ) Revenue Net income Non-recurring items Adjusted net income 1 9 9 8 1 9 9 7 $ 1,136,917 $ 1,146,406 $ $ 34,747 8,191 42,938 $ $ 0.44 0.10 0.54 $ $ 61,668 (10,007) 51,661 $ $ 0.78 (0.13) 0.65 F I N N I N G I N T E R N A T I O N A L I N C . 2 2 CANADIAN EQUIPMENT DELIVERIES BY MARKET (CONVERTED TO SALES DOLLARS) (%) Mining Power systems Construction Petroleum Forestry Other 30 15 14 14 14 13 CANADIAN REVENUE (BY ACTIVITY) (%) New equipment Customer service Used equipment Equipment rental Finance 44 33 14 6 3 E Q U I P M E N T R E V E N U E Equipment revenue was C U S T O M E R S U P P O R T S E R V I C E S Parts and cus- $724 million in 1998, an increase of 3% over tomer service revenue decreased by 7% to prior year levels. New equipment revenues $376 million. Parts revenue decreased by 5% remained flat at 1997 levels while unit deliv- during the year to $311 million as increased eries declined by 12%, most notably in the overall activity in Alberta was more than forestry and petroleum sectors. New equip- offset by lower parts sales in B.C. Customer ment includes an average price increase of service revenue decreased 17% to $65 mil- 2% for the year, thus revenue declined in real lion, with service activity levels increasing in terms. Used equipment sales in the domestic Alberta and declining in B.C. Increased activ- market increased 11% to $161 million, due in ity in oil sands mining, pipeline construction part to a controlled sale of aged machines. and diamond mining in the Northwest Terri- With the exception of the petroleum industry, tories will provide Finning (Canada) with the demand for used equipment remained steady opportunity to increase its parts and cus- throughout the year. tomer service support in these sectors. Equipment rental revenue was up 13%, The significant fluctuations and overall due mainly to a 42% increase in the number of devaluation of the Canadian dollar relative units available for rent. Other contributing to its U.S. counterpart raised the selling factors were the opening of a new rental fleet price of Caterpillar equipment and parts in in Grande Prairie and higher valued units in 1998. The foreign exchange movement in the fleet. Utilization of the rental fleet 1998 increased equipment and parts revenue returned to normal volumes from the unusu- by 5% from the prior year. ally high levels experienced in 1997. The year- over-year decline in the utilization rate was due primarily to lower petroleum activity. The Company expects increased demand for its rental fleet in 1999 due to the significant planned pipeline expansions in Alberta and northern B.C. F I N A N C E R E V E N U E Finance revenue remained flat in 1998 as revenues from large fleet leases and higher interest rates were offset by the sale of a portion of the finance port- folio. In June 1998 Finning sold a portfolio of notes and rental purchase contracts to Caterpillar Financial Services Ltd. for gross proceeds of $130 million. Total finance assets declined 18% from the prior year, representing a 50% decline in the note port- folio and a 2% decline in the lease portfolio. 2 3 C A T T R A C K - T Y P E T R A C T O R N E T I N C O M E Net income from Canadian opera- Interest expense increased by 20% from tions in 1998 was $34.7 million compared the prior year as a result of higher average with $61.7 million in 1997. Included in net inventory levels and higher borrowing costs income for 1998 was a net non-recurring during 1998. At the end of 1998, total debt charge of $8.2 million (a $9.6 million charge increased by 5% from the prior year’s level for restructuring, severance and relocation and inventory increased by 19%, the latter costs offset by a $1.4 million gain on the sale primarily a reflection of the larger rental of property). Included in net income for 1997 equipment fleet in Canada. was a non-recurring gain of $10.0 million related to insurance proceeds and the sale of property. Excluding these non-recurring items, net income was $42.9 million com- pared with $51.7 million last year, a decline of 17%. Net income also included a $3.4 million after-tax operating charge on aged inventory provided for in the first quarter of 1998. Overall gross profit margins, excluding finance revenue, were down by 0.7% as a greater proportion of Finning (Canada)’s rev- enue shifted from higher margin customer service to equipment sales. New equipment margins declined by 0.3% from 1997 levels, reflecting the increased volume of higher- dollar, lower-margin mining unit sales. Used equipment margins were lower by 2% as older equipment was auctioned off near the end of the year. Margins for customer support services were maintained at 1997 levels. Selling, general and administrative expens- es, excluding the non-recurring items noted above, increased by 2% for the year. The restructuring actions taken by Finning (Canada) in 1998 are expected to reduce its operating costs for 1999 in anticipation of lower activity levels in Western Canada. I N D U S T R Y R E V I E W M I N I N G In 1998, deliveries of new mining units by Finning (Canada) increased by 11% and the value of those units rose 35% com- pared with the prior year. The value of these deliveries to the mining industry accounted for 30% of total new equipment deliveries, making it the largest end market for Finning (Canada). A large package of tractors, trucks, and shovels was delivered to BHP Diamond’s Ekati mine in the Northwest Territories in 1998. Finning (Canada) continued to make inroads into the coal mining industry, selling eleven 240-ton trucks to coal mining prop- erties in B.C. and Alberta. In 1998, the major producer groups operating in the Athabasca oil sands announced that significant capital investments would be made over the next decade. In the fourth quarter, Syncrude approved the expansion of its oil sands oper- ation to its Aurora Mine property, located north of its Mildred Lake upgrading complex. In addition, Suncor Energy is proceeding with approvals for its expansion across the Athabasca River to its Steepbank property, which is part of its Millennium expansion project. Both Shell and Mobil are undertaking feasibility plans for start-up operations near the Syncrude and Suncor properties. With the producers utilizing truck and shovel method- ology for the mining of this resource, the Athabasca oil sands continue to provide substantial expansion opportunities for Finning (Canada). F I N N I N G I N T E R N A T I O N A L I N C . 2 4 C O N S T R U C T I O N Deliveries of new construction F O R E S T R Y The forest industry in British units by Finning (Canada) increased by 3% Columbia faced a significant slowdown in for the year while the value of those units was 1998 as prices declined, the demand for up 17% compared with 1997. Residential lumber in Asian markets weakened and a construction and highway construction and number of plants closed temporarily during paving in Alberta were the primary drivers the year. While unit sales and revenues were for revenue growth. Governmental demand down, Finning (Canada) achieved an increase remained constant throughout the year in market share due to higher sales of feller before declining sharply in the fourth quarter. bunchers, delimber processors and skidders. P E T R O L E U M Finning (Canada)’s petroleum activ- ity is focused on the oil and gas industry as well as pipeline construction. Drilling activity Deliveries of new forestry machines declined by 24% for the year and the value of those units was down 23% compared with 1997. in Western Canada was down by approxi- P O W E R S Y S T E M S Revenue declined by 5% in mately 40% in 1998 as oil prices continued 1998 due to the sale of a large power pack- to decline throughout the year. age to the Ekati diamond mine in late 1997. However, the construction of oil and gas Excluding this transaction in the prior year, pipelines provided opportunities in 1998 as revenues were up 10% in 1998, reflecting pipeline contractors faced increasing fleet increased demand for natural gas compressor requirements. Enbridge’s new Athabasca packages. heavy oil pipeline and its Terrace expansion began construction in 1998. As well, both the Maritimes and Northeast Pipeline project and the Alliance natural gas pipeline received the necessary U.S. and Canadian regulatory approvals in 1998 and substantial construc- tion activity is planned for 1999. New units delivered to the petroleum sector by Finning (Canada) decreased by 25% in 1998 and the value of those units declined by 22% compared with 1997. Most of the decline occurred in the second half of the year with deliveries down more than 60% from 1997 levels. 2 5 C A T L A N D F I L L C O M P A C T O R U N I T E D K I N G D O M O P E R A T I O N S F I N A N C I A L R E V I E W H I G H L I G H T S In 1998, Finning (UK) completed R E V E N U E Total revenue for Finning (UK) the steps necessary to integrate the opera- increased 40% to $793 million in 1998. These tions of H. Leverton, acquired October 1, results included 12 months contribution from 1997. Finning (UK) is now the sole Caterpillar the former H. Leverton operation, compared dealer for all of England, Scotland and Wales. with only three months contribution from The integration of the two operations H. Leverton in 1997. The 1998 results were required a two-stage downsizing to form an also affected by an 8.4% appreciation of the efficient national dealership: one stage British pound against the Canadian dollar, occurred in the first quarter of 1998 and the contributing $47 million or 21% of the total next in the fourth quarter of the year. As a revenue increase. result, both the Wigan branch and the Birm- ingham depot were closed during the year and three more depots are planned for closure in 1999. A number of operations and func- tions were relocated in 1998 and approxi- mately 10% of the employee workforce was terminated. At the end of 1998, Finning (UK) had 14 branches and 12 depots, and had 1,348 employees compared with 1,720 at the end of 1997. Finning (UK) was faced with a difficult operating environment in 1998 that was exacerbated by the strength of the British pound relative to other major currencies. The high value of the British currency resulted in an influx of imported new and nearly new equipment into the U.K. market that adversely affected the sale of new and used domestic equipment. The strength of the British pound also prevented the sale of used equipment overseas. In addition, inter- est rates in the U.K. remained relatively high in the first half of 1998 while economic activity slowed considerably in all regions. E Q U I P M E N T R E V E N U E Equipment revenue was $598 million in 1998, up 50% over the prior year. The increase in equipment revenue was the result of increased new equipment sales which grew 35% to $432 million following the consolidation of the two dealerships. Total unit deliveries of new equipment also increased 27% for the same reasons. Exclud- ing any increases attributable to the acqui- sition of H. Leverton, in real terms revenue and unit deliveries decreased. The decline reflected fierce competition in the market- place, particularly from Japanese, Korean and Swedish manufacturers. Low levels of infrastructure spending by the government adversely affected quarrying, and coal min- ing was affected by uncertainty through the government’s review of energy policy. Slow activity levels due to delays and postpone- ments in motorway and rail expansions U N I T E D K I N G D O M R E V E N U E / N E T I N C O M E / E A R N I N G S P E R S H A R E ( $ T H O U S A N D S ) Revenue Net income (loss) Non-recurring items 1 9 9 8 1 9 9 7 $ 793,020 $ 566,376 $ (32,211) $ 6,408 (0.41) $ 0.08 20,110 (3,183) $ $ 0.26 (0.04) 0.22 Adjusted net income (loss) $ (25,803) $ (0.33) $ 16,927 F I N N I N G I N T E R N A T I O N A L I N C . 2 6 U.K. EQUIPMENT DELIVERIES BY MARKET (CONVERTED TO SALES DOLLARS) (%) Plant hire Power systems Construction Materials handling Quarrying Mining Other 21 19 13 13 12 9 13 U.K. REVENUE (BY ACTIVITY) (%) New equipment Customer service Used equipment Equipment rental 54 25 15 6 resulted in lower demand from the plant hire N E T I N C O M E Finning (UK) reported a loss of industry. Major gas projects have remained $32.2 million in 1998 compared with a on hold pending the government’s Non-Fossil $20.1 million profit in 1997. Excluding a Fuel Obligation announcements that were non-recurring charge for the expected sale of made in October 1998. BCP Plant Hire, an equipment rental business Used equipment revenue was $120 mil- included in the acquisition of H. Leverton, the lion, an increase of 115% from the prior year operating loss in 1998 was $25.8 million. In following the consolidation of the two deal- addition, net income included an after-tax erships. This revenue included a $15 million operating charge of $17.1 million in the year package negotiated in the first quarter of to recognize anticipated losses on used equip- 1998 for 151 machines and refinancing ment due to the continued strength of the packages of $13 million and $10 million in British pound and depressed local markets. the second and fourth quarters, respectively. Overall gross profit margins, excluding Unit deliveries of used equipment improved finance revenue, declined by 6% from the by 33%. Excluding any increases attributable prior year. New equipment margins declined to the acquisition of H. Leverton and the by 3% in 1998 as a result of strong competi- aforementioned special deals, in real terms tion from domestic and imported products. both the domestic and international markets Used equipment margins were significantly have slowed significantly. lower due to the excess supply of used con- Equipment rental revenue increased by struction equipment in the marketplace. over 100% including the contribution from H. This, combined with a strong British pound, Leverton, with a number of machines being prevented its sale overseas. Customer sup- utilized on the M74 motorway construction in port services margins were maintained at Scotland. Assets in the rental fleet increased 1997 levels. to $44 million, up 17% from the prior year. Selling, general and administrative C U S T O M E R S U P P O R T S E R V I C E S Parts and cus- tomer service revenue increased 29% to $195 million in 1998. The increase related to the additional contribution of H. Leverton for 12 months of operations, which in real terms means customer service revenue declined. Genuine Caterpillar parts were sourced by some U.K. customers from overseas loca- tions in 1998 and service revenue has been adversely affected by competition from low-cost companies in Britain. expenses, excluding the non-recurring items, increased 60% from the prior year. Activity levels did not increase sufficiently to support the increased cost structure of the merged operation. Action was taken in 1998 to reduce the cost base in the U.K. operation as noted earlier. Additional cost savings are expected in 1999 following the closure of additional depots, further restructuring of the organization and an ongoing review of costs. 2 7 C A T A R T I C U L A T E D D U M P T R U C K Interest expense for Finning (UK) declined In 1998, a number of infrastructure jobs by 20% during the year. Total debt levels were completed while the number of new declined by 29% year-over-year. This decline projects declined. The first contracts on the was principally due to a focused asset man- delayed Channel Tunnel Rail Link (CTRL) were agement program in Finning (UK), reducing awarded and preparatory work will com- inventory and receivable levels by 11% year- mence in the first quarter of 1999. The CTRL over-year. In addition, the Company increased will link London with the Channel Tunnel by its equity in the U.K. by £25 million in 1998, high-speed train. the proceeds of which were used to reduce The acquisition of Verachtert by Cater- local borrowings in the U.K. pillar further expands the range of attach- I N D U S T R Y R E V I E W C O N S T R U C T I O N A N D P L A N T H I R E Government approval and spending on infrastructure projects continued to be constrained under ments Finning (UK) offers. Verachtert designs and manufactures a wide range of attach- ments for use on hydraulic excavators and wheel loaders. the Labour government in 1998. There was a Q U A R R Y I N G Volumes were stable in the delay in approval for the Birmingham North- aggregates industry at approximately 200 ern Relief Road, which is now anticipated to million tonnes and are forecast to remain at commence no earlier than 2001. the same level in 1999. The major companies In the U.K., there was an overall market within the industry continued to consolidate. decline of 10% (in British pounds) in the sale of The government’s policy is focused on road equipment to the plant hire and construction maintenance rather than road building and industries. The reduction was less dramatic in many of the traditional quarrying companies demand for machines under 100-horsepower. have moved into road reclamation and sur- The high value of the British pound reduced facing through acquisition of specialist the competitiveness of used equipment being businesses. The consolidation of the industry sold into overseas markets. The economic saw the adoption of centralized equipment crisis in Asia, coupled with the strong British purchasing and national customer service pound, resulted in a high level of cheap agreements. In 1998, Finning (UK)’s new imports, particularly hydraulic excavators. equipment sales to this industry declined 3% European manufacturers, particularly the (in British pounds), however, unit deliveries U.K.-based manufacturers forced to sell in improved 11%. Britain rather than in their export markets, responded with lower pricing. The market was, as a consequence, very price sensitive. F I N N I N G I N T E R N A T I O N A L I N C . 2 8 W A S T E This industry has shown growth in P O W E R S Y S T E M S Power systems unit deliveries 1998. Consolidation has taken place and were down by 3%, however, sales were up three major players are emerging. An increase almost 40% (in British pounds). Sales to Indus- in landfill tax has encouraged recycling, and trial/OEM users were down as the export of equipment sales to the sector have increased. compressors and crushing equipment slowed Segmentation of this market between land- due to the strength of the pound. The plea- fill and transfer stations has shown transfer sure craft sector of the industry remained stations as the emerging market following the buoyant and unit deliveries increased 10% focus on recycling and environmental issues. over the previous year. Commercial marine This has been encouraged by the increase in activity has slowed because of the increase landfill tax. in the number of vessels being built overseas O P E N C A S T C O A L In 1998, Finning (UK)’s new for British owner/operators. equipment sales to the opencast coal indus- M A T E R I A L S H A N D L I N G The Finning (UK) market try declined 31% (in British pounds) with share for new equipment is broadly in line unit deliveries also declining by 13%. A gov- with 1997. The marketplace is relatively static ernment review of energy policy in 1998 with the majority of deals being for between resulted in an official moratorium on all gas- five and 10 trucks with some major fleet fired power stations in the planning or pre- deals (primarily the replacement of existing construction stage. The review confirmed contracts). The casual rental fleet has grown that coal as an energy source still has an by 10%, reflecting customers’ requirements important role to play in the generation of to retain full flexibility in the management the country’s electricity. Deep mine coal of their fleet. Approximately two-thirds of production still continues to decline while unit deliveries are on contract rental agree- open pit coal mines maintained output levels ments, generally for a period of between of approximately 15 million tonnes. The four and five years. government did announce a 10-point plan which continues to have an impact on plan- ning approvals of new opencast projects in England with somewhat less restrictive con- straints in Scotland and Wales. Scottish open pit mining continued to provide new equip- ment opportunities, including large rigid dump truck fleets. Other open pit contractors continue to purchase equipment in replace- ment programs. 2 9 C A T W H E E L L O A D E R C H I L E A N O P E R A T I O N S H I G H L I G H T S The Chilean economy was active in the first half of 1998 but slowed in the latter part of the year. Lower copper prices, which fell below US$0.70 per pound in the fourth quarter of 1998, have resulted in a curtailment of new mine expansions and new projects. In addition, the construction industry slowed as the increase in Chilean interest rates in the third quarter caused a marked reduction in smaller industrial pro- jects and residential construction in the fourth quarter. Finning Chile’s new equip- ment unit deliveries declined by 3% from the prior year, reflecting this slowdown. In the third quarter of 1998, the company terminated 110 employees, reducing the total workforce by 8% at that time. Throughout this reorganization, however, the company has continued to hire talented, experienced people to improve the delivery of services to its customers. The total number of employees at the end of the year was 1,354 compared with 1,329 at June 30, 1998. F I N A N C I A L R E V I E W R E V E N U E Total revenue was $504 million compared with $514 million last year, a decrease of 2%. An increase in customer sup- port services revenue was offset by a decline in equipment revenue. The 1998 results were also affected by a 7.1% appreciation of the U.S. dollar against the Canadian dollar that contributed $37 million in increased revenue. C H I L E R E V E N U E / N E T I N C O M E / E A R N I N G S P E R S H A R E E Q U I P M E N T R E V E N U E Equipment revenue was $301 million in 1998, a decrease of 9% from the prior year. New equipment sales were down 12% to $254 million, primarily due to lower sales to the mining industry. The Chilean mining industry was affected by low global commodity prices for both copper and gold. Used equipment sales were up 52% to $25 million, reflecting the Company’s focus on reducing aged inventories. Equipment rental revenue declined 8% to $23 million. Due to the economic downturn, several equipment owners that have idle machines are competing in the rental fleet market. These and other new competitors have put pressure on sales in this sector. In 1998, Finning Chile’s rental fleet served pri- marily larger projects, such as the natural gas pipeline projects in northern Chile as well as small equipment rental requirements in the Santiago area. C U S T O M E R S U P P O R T S E R V I C E S Parts and cus- tomer service revenue increased to $201 million, up 11% from 1997. Due to the large number of machines delivered to the mining industry over the past five years, there has been an increasing demand for customer support services. There were over 300 large Caterpillar trucks operating in Chile at the end of 1998. Service revenue was also affected in part by adjustments taken on maturing maintenance and repair contracts. ( $ T H O U S A N D S ) Revenue Net income Non-recurring items Adjusted net income F I N N I N G I N T E R N A T I O N A L I N C . 1 9 9 8 $ 503,505 $ 514,068 $ $ 3,424 862 4,286 $ $ 0.04 0.01 0.05 $ $ 19,535 — 19,535 $ $ 1 9 9 7 0.25 — 0.25 3 0 CHILEAN EQUIPMENT DELIVERIES BY MARKET (CONVERTED TO SALES DOLLARS) (%) Mining Construction Kenworth Power systems Forestry 62 20 10 6 2 CHILEAN REVENUE (BY ACTIVITY) (%) New equipment 50 Customer support services 40 5 Used equipment 5 Equipment rental N E T I N C O M E Net income decreased to $3.4 In 1998, the U.S. dollar strengthened million compared with $19.5 million in 1997. against the Chilean peso by 7.6% from the The decline in net income was principally prior year. The majority of Finning Chile’s rev- due to lower equipment sales, lower gross enue is U.S. dollar-based while its costs are margins and further provisions taken on in pesos. Therefore, the change resulted in service maintenance contracts. Net income decreased local costs in relation to Finning also included a non-recurring charge of $0.9 Chile’s U.S. dollar-based revenues. This is million in severance costs provided for in opposite the trend experienced in the past the third quarter of 1998. In addition, net three years which saw the Chilean peso income included a $3.3 million operating strengthening against the U.S. dollar. The charge on aged inventory provided for in Chilean inflation rate declined to 4.5% in the first quarter of 1998. 1998 compared with 6.1% in 1997. Overall gross profit margins, excluding finance revenue, were down by 1%. New equipment margins declined by 0.2% from 1997 levels. Used equipment margins were significantly lower, reflecting sales of aged equipment during the year. Parts margins were up by 6% and customer service margins were down in the year due to losses on service maintenance contracts, reflecting higher than anticipated maintenance costs. Selling, general and administrative expenses increased 5% over the prior year’s level but were up marginally as a percent- age of revenue. Interest expense was up 15% from the prior year due to higher interest rates and average borrowing levels during 1998. However, at the end of the year, total debt declined 13% from the prior year, a reflection of a 14% decline in inventory levels year-over-year. I N D U S T R Y R E V I E W M I N I N G The development of new copper and gold mining projects in Chile slowed down in 1998 due to a decline in both the global base and precious metal prices. However, pro- duction from existing copper mines in Chile increased 8% from the prior year. Deliveries of new mining units by Finning Chile decreased 28% and revenue decreased 15% over the prior year. The value of mining deliveries accounted for 62% of total new equipment deliveries in Finning Chile in 1998, the same level as 1997. Large earthmoving packages sold to leading mining companies in Chile included the delivery of 38 pieces of equip- ment for $25 million to the Los Pelambres mine project and the delivery of seven off- highway trucks and three pieces of mining support equipment for $23 million to Radomiro Tomic. 3 1 C A T W H E E L T R A C T O R S C R A P E R C O N S T R U C T I O N In 1998, construction of infra- P O W E R S Y S T E M S In 1998, power systems rev- structure, highway and residential housing enue declined by 38% from the prior year. Unit projects slowed during the year. An increase deliveries, however, improved 135% com- in Chilean interest rates in the third quarter pared with 1997, a reflection of the smaller resulted in a reduction in smaller industrial units sold in 1998. The marine engine market projects and residential construction in the was dramatically lower due to unfavourable fourth quarter. Consequently, unit deliveries fishing conditions brought on by the El Niño to the construction industry declined in the current, and commercial fishing restrictions third quarter and decreased more signifi- imposed by government authorities. In 1999, cantly in the fourth quarter. For the year, the ships being constructed in Chilean ship- deliveries of new construction units by yards for the export markets should increase Finning Chile decreased 16% and total rev- demand for marine engines. Also, Finning enue decreased 18% over the prior year. How- Chile is reintroducing the Olympia line of ever, large concession infrastructure projects Caterpillar generators in 1999. New market under construction – such as the north and strategies are being developed for indus- south expansions of the Pan American high- tries located in Santiago, a market that was way and large pipeline projects – are proceed- not previously served by Finning Chile. ing. In addition, the Chilean government is continuing its strategy to privatize and mod- ernize seaports, airports, irrigation and hydro- electric dams in Chile. F O R E S T R Y Activity in the forest industry declined due to low international pulp prices, which were down approximately 20% in 1998 (US$403 per ton in the second K E N W O R T H Kenworth truck sales decreased by half of 1998 compared with US$506 per ton 9% to $25 million in 1998 while the number in the second half of 1997). New equipment of units delivered almost matched that of sales to this industry decreased 14% from 1997. Given the general slowdown in the 1997 levels, representing only 2% of total Chilean economy, the Class 7 and 8 truck new equipment sales in 1998. population in the country declined by 18% in 1998. The trend is expected to continue into 1999 as an additional 10% reduction in demand is expected. Finning’s ability to pen- etrate new segments in the construction and retail distribution markets was successful in 1998 due to sales of T-300 trucks to both Coca-Cola and the Ejército de Chile (Chilean Army). Despite current market conditions, Finning Chile and Kenworth are bidding on several large truck orders in 1999 for cus- tomers in the food distribution industry. F I N N I N G I N T E R N A T I O N A L I N C . 3 2 I N T E R N A T I O N A L O P E R A T I O N S The profit generated by UMS was more H I G H L I G H T S International operations is com- than offset by the expenses associated with prised of Universal Machinery Services (UMS), the corporate head office and showed a loss a division of Finning International Inc., and of $2.8 million in 1998 compared with net the expenses associated with the corporate income of $2.4 million in the prior year. Net head office of Finning International Inc. income in 1998 included a $3.2 million UMS was established in 1992 and focuses after-tax operating charge on aged inventory on the growing international used equip- provided for in the first quarter of 1998. ment business. UMS has sales operations in The majority of UMS’ sales in 1998 were Western Canada, the United Kingdom and to customers in the United States, Europe, the southeastern United States. Through Mexico and South America. UMS continues these locations, UMS covers the interna- to lead the used equipment business in sales tional used equipment market. This division of large crawler tractors, wheel loaders and sells both used equipment and used parts, off-highway trucks. Large construction and primarily Caterpillar, around the world. mining packages were sourced from South- F I N A N C I A L R E V I E W UMS revenue for 1998 totalled $152 million, an increase of 50% compared with $101 mil- lion the prior year. Equipment revenue was $140 million, an increase of 48% over 1997. In the U.K., sales increased by $27 million, pri- marily as a result of the acquisition of H. Lev- erton in late 1997. In the U.S., UMS sold a large fleet of pipelayers in June 1998 that were previously held in joint venture with a U.S.-based Caterpillar dealer. Total unit deliv- eries in 1998 improved 83% from last year, partly due to the H. Leverton acquisition and the pipelayer fleet sale. Parts revenue con- tinued to increase to $11 million, a 67% increase year-over-year, reflecting additional resources and internet trading of used parts. east Asia in 1998. In particular, there was an increase in the supply of low-hour used con- struction equipment from Southeast Asia into the global marketplace as that region of the world suffered a rapid slowdown in activity in 1998. UMS added two more Caterpillar dealers to its agency and dealer arrangements during 1998. Currently, 50% of UMS inventory is held jointly with other dealers through these commercial marketing agreements. Although a flat market trend is forecast for 1999, higher revenue and profitability is expected from UMS as the operation expands its sales force in 1999. I N T E R N A T I O N A L R E V E N U E / N E T I N C O M E / E A R N I N G S P E R S H A R E ( $ T H O U S A N D S ) Revenue Net income (loss) Non-recurring items Adjusted net income (loss) 1 9 9 8 $ 151,979 $ 101,214 $ $ (2,775) $ — (0.03) $ — 2,382 — (2,775) $ (0.03) $ 2,382 $ $ 1 9 9 7 0.03 — 0.03 3 3 C A T G R A P P L E S K I D D E R L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S Cash used in investing activities totalled Finning management assesses liquidity in $34 million, representing net capital expen- terms of its ability to generate sufficient ditures of $34 million compared with $36 cash flow to fund its operations. Net cash million in 1997. flow is affected by: (1) operating activities, In Canada, total capital expenditures were including the level of accounts receivable, $29 million. The new branch facility in Surrey, inventories, accounts payable and financing B.C., the Edmonton head office building provided to customers; (2) investing activi- renovations and the Edmonton parts distri- ties, including acquisitions of complementary bution centre expansion accounted for over businesses, capital expenditure and dividend 50% of 1998 capital expenditures, with the levels; and (3) external financing, including balance being spent on vehicles, shop tools bank credit lines, commercial paper and other and equipment. The gross expenditures were capital market activities, providing both short offset by proceeds on disposal of $7.8 million, and long-term financing. which represents the sale of two major prop- Cash flow from operations, before erties in Langley and Vancouver, as the Com- changes in operating assets and liabilities, pany continues to manage its property usage. was $226 million in 1998 compared with In the U.K., total capital expenditures were $317 million in 1997. The decrease from 1997 $6.8 million and included the acquisition of was primarily a result of weaker earnings in the Glasgow branch premises, replacing the all operations. property sold in 1996. During 1998, there Cash generated from operating activities was a restriction on capital expenditures due was positive $71 million compared with neg- to the adverse trading conditions. The gross ative $47 million in 1997. Cash flow from expenditures were offset by proceeds on operations was offset by increased invento- disposal of $1.3 million related to the sale of ries to meet delivery and customer rental fixed assets from the Company’s Polish oper- requirements, a lower level of accounts ations, which were sold in February of 1998. payable and income taxes payable, and cash used to expand lease and rental-purchase financing activities in Finning (Canada). F I N N I N G I N T E R N A T I O N A L I N C . 3 4 In Chile, total capital expenditures were Canadian Bond Rating Service (CBRS) and $8.1 million and included the acquisition of Dominion Bond Rating Service (DBRS) both land for the future component rebuild centre rate the Company’s term debt A (low); the in Antofagasta scheduled for construction in Company’s commercial paper is rated A-1 1999. Offsetting the expenditures were pro- and R-1 (low), respectively. The term debt ceeds on disposal of $1.7 million as Finning ratings were reaffirmed in the past year Chile sold its vehicle fleet in late 1998 and with the filing of a shelf prospectus for a will begin leasing vehicles in 1999. $300 million Medium Term Note Program in After providing for these changes in cash 1998. The short-term ratings were also reaf- flow, short-term debt decreased by $9 million firmed in 1998 with the increase of Finning’s in 1998 to $609 million. commercial paper program from $150 million Finning accesses the term debt and short- to $300 million in August 1998. On February term debt markets to meet its liquidity 15, 1999, DBRS placed its rating of Finning and financing needs. At December 31, 1998, “under review” with negative implications. consolidated term debt was $523 million Finning also has committed and uncom- compared with $521 million at the end of mitted bank facilities available to meet liquid- 1997, which included both fixed and float- ity requirements. Management believes that ing rate debt. Total fixed-rate term debt at the sources of funds available to Finning are December 31, 1998 was comprised of: a adequate to meet the operating requirements £25.0 million loan ($64 million) at 7.675%, of the Company. maturing on May 8, 2002; Series A Senior Debentures of $75 million at 8.35%, matur- ing on March 22, 2004; and Series B Senior Debentures of $75 million at 6.6%, maturing on December 8, 2006. Term debt, which pro- vides funding stability, accounted for 46.2% of total debt outstanding at the end of 1998 compared with 45.8% at the end of 1997. 3 5 C A T O F F - H I G H W A Y T R U C K B A L A N C E S H E E T L E V E R A G E equity. Finning applies a conservative debt Finning’s balance sheet is comprised of three to equity ratio of 7:1 to its finance operation major components, namely its operating, and 5:1 to its rental operation. Total debt finance and rental activities. Each of these and shareholder’s equity is allocated to the major business segments has a different operating, finance and rental activities. risk profile. Accordingly, Finning applies a Deferred income taxes are allocated based different capital structure and leverage to on the assets and liabilities assigned to the each business segment. operating, finance and rental activities. The finance assets and rental assets are The following table provides Finning’s supported by a combination of debt and capital structure on a segregated basis. ( $ T H O U S A N D S ) 1 9 9 8 Assets O P E R AT I O N S R E N TA L F I N A N C E C O N S O L I D AT E D $ 1,543,948 $ 268,033 $ 417,620 $ 2,229,601 L I A B I L I T I E S & S H A R E H O L D E R S ’ E Q U I T Y Short-term debt and term debt Deferred income taxes Other liabilities Shareholders’ equity $ 563,579 (12,168) 409,003 $ 212,781 12,696 — $ 355,775 11,020 — $ 1,132,135 11,548 409,003 960,414 583,534 225,477 42,556 366,795 50,825 1,552,686 676,915 $ 1,543,948 $ 268,033 $ 417,620 $ 2,229,601 Debt to equity ratio 0.97:1 5.0:1 7.0:1 1.67:1 1 9 9 7 Assets L I A B I L I T I E S & S H A R E H O L D E R S ’ E Q U I T Y Short-term debt and term debt Deferred income taxes Other liabilities Shareholders’ equity $ 1,613,775 $ 222,848 $ 515,254 $ 2,351,877 $ 530,114 3,670 489,875 $ 175,842 11,838 — $ 433,265 20,094 — $ 1,139,221 35,602 489,875 1,023,659 590,116 187,680 35,168 453,359 61,895 1,664,698 687,179 $ 1,613,775 $ 222,848 $ 515,254 $ 2,351,877 Debt to equity ratio 0.90:1 5.0:1 7.0:1 1.66:1 F I N N I N G I N T E R N A T I O N A L I N C . 3 6 CASH 126÷317=0.397 FLOW FROM OPERATIONS ($ MILLIONS) 98 97 96 95 226 317 245 210 GROSS CAPITAL EXPENDITURES ($ MILLIONS) 126÷317=0.397 98 97 96 95 44 47 43 26 O P E R A T I N G A C T I V I T I E S Finning has a policy of arranging its Finning’s debt to equity ratio for its operat- financing so that the fixed rate financing ing activities (excluding finance and rental offered to its customers is matched by fixed activities) increased to 0.97:1 from 0.90:1. rate borrowings. As well, the portfolio is The increase in the debt to equity ratio was matched on currency and term. Finning enters primarily due to an increase in short-term into swap agreements, which fix the effective debt related to higher inventory levels and to interest rate and currency of the borrowing. a lower level of equity. Finning’s objective is This is an effective and flexible method of to maintain a leverage ratio for its operating matching fixed rate terms provided to cus- activities below 1:1. tomers with fixed rate debt obligations. Finning manages its leverage through At December 31, 1998, Finning had inter- balance sheet management rather than est rate swap agreements which fixed the equity issuance. The debt to equity ratio of semi-annual interest rate on $73 million operations is managed through receivables compared with $89 million of borrowings at collection, inventory turnover and strong the end of 1997, at a weighted average rate earnings and efficiencies throughout the of 5.60% compared with 6.06% at the end of Company. F I N A N C E A C T I V I T I E S At December 31, 1998 the portfolio of finance assets totalled $418 million compared with $515 million at December 31, 1997. During 1998, Finning (Canada) sold $122 million of its finance assets to Caterpillar Finance as 1997. There were swap agreements outstand- ing at December 31, 1998 for $44 million, down from $51 million at the end of 1997. These agreements extend beyond one year for varying periods up to January 2002, at an average interest rate of 5.47% compared with 5.92% at the end of 1997. part of the strategy to manage leverage R E N T A L A C T I V I T I E S through balance sheet management. At December 31, 1998, Finning had rental Finning (Canada) was the only operation assets of $268 million compared with $223 with significant financing activity in 1998. million at the end of 1997. The rental busi- Finning (Canada) offers fixed and floating rate ness provides customers with the freedom to financing to its customers. At December 31, utilize reliable equipment on a “needs-only 1998, approximately 29% of the finance basis” to maximize return without the risks portfolio was at fixed rates compared with inherent in longer-term capital investment. approximately 27% at the end of 1997. The majority of the increase in rental assets during the year was in Finning (Canada) which increased its new Caterpillar, materials han- dling and power systems fleets. 3 7 C A T H Y D R A U L I C E X C A V A T O R S H A R E C A P I T A L with a single counterparty, and by dealing The Company’s share capital is comprised of only with Canadian and international institu- both preferred and common shares. The pre- tions with high credit ratings. ferred shares outstanding at December 31, 1998 amounted to $1.0 million compared with $1.2 million at the end of 1997 and are convertible into common shares at a conver- sion rate of $6.3675 per common share. During 1998, a total of 310,656 common shares were issued on the exercise of stock options and 26,611 common shares were issued on the conversion of 16,950 preferred shares. The number of stock options out- standing at December 31, 1998 totalled 5,141,673 at exercise prices from $5.49 to $17.00. Finning has an employee common share purchase plan for its Canadian employees. Under the terms of this plan, eligible employ- ees may purchase common shares of the Company in the open market at market value. Finning pays a portion of the purchase price to a maximum of 2% of employee earnings. The plan may be cancelled by Finning at any time. At December 31, 1998, 59% of employees were participating in this plan compared with 63% at the end of 1997. F I N A N C I A L D E R I V A T I V E S F I N A N C I A L R I S K S A N D U N C E R T A I N T I E S Finning’s financial performance is subject to two direct sources of currency exchange risk. The first source of currency exchange risk relates to fluctuations in the purchase price of inventory. Canada and Chile source the majority of their product from the United States and, as a consequence, exchange rate movements affect the transaction price for most equipment and parts. Finning is gener- ally able to manage this risk through adjust- ments in the pricing of its product sales. The second source of exchange risk relates to the fact that Finning’s U.K. and Chilean operations are recorded in the Com- pany’s financial statements in Canadian dol- lars, while those operations conduct business primarily in British pounds in the U.K., and Chilean pesos and U.S. dollars in Chile. Changes in the British pound, Chilean peso and U.S. dollar to Canadian dollar exchange rate directly affect the financial performance in Canadian dollars of Finning’s U.K. and Chilean operations. Finning’s sales are also indirectly affected Finning uses various financial instruments by fluctuations in commodity prices and such as interest rate swaps as hedges against exchange rates. In Canada, commodity price actual assets or liabilities. For example, movements in the forestry, metals and Finning hedges the finance portfolio with petroleum sectors can have an impact on funding of similar rates and terms. Derivative customers’ demands for equipment and financial instruments are always associated customer service. In Chile, significant fluc- with a related risk position. Finning contin- tuations in the price of copper and gold can ually evaluates and manages risks associated have similar effects. In the U.K., lower with financial derivatives. This includes prices for thermal coal may reduce equip- counterparty credit exposure. Finning man- ment demand in that sector. In addition, the ages its credit exposure by ensuring there is strength of the British pound relative to other no substantial concentration of credit risk currencies may result in lower activity levels in the used equipment market. F I N N I N G I N T E R N A T I O N A L I N C . 3 8 Y E A R 2 0 0 0 I S S U E Finning’s core systems and its informa- The “Year 2000 Issue” is a general term used tion systems strategy are closely linked with to refer to certain business implications of those of Caterpillar, which is taking the the arrival of the new millennium. In simple actions necessary to ensure its products terms, these implications arise largely and services will continue to operate on and because it has been normal practice for after January 1, 2000. Caterpillar’s deadline computer hardware and software to use to have all products and services ready for only two digits rather than four to record the year 2000 is March 31, 1999. Finning has the year in date fields. On January 1, 2000, undertaken a program to address the Year when the year is designated as “00”, many 2000 Issue beyond its information technology computer systems could either fail com- department. The program involves all key pletely or create erroneous data as a result service providers. of misinterpretation of the year. In 1998, Finning engaged Arthur Andersen Finning has been planning for the year LLP to conduct a full review of the year 2000 2000 since the mid-to-late eighties when it project status. The project’s scope covered changed all its databases and converted its Canada, the U.K. and Chile. The review began mainframe systems in Canada and the U.K. to in February 1998 and was completed by allow for the year 2000. The core systems in all mid-year. Finning has already acted on the three dealerships have now been replaced by recommendations of this review. A simulation Caterpillar’s Dealer Business System version test of the year 2000 was performed on the 2.0, which is year 2000 compliant. Third party AS/400-based systems in 1998. The test was software components of our core systems, successful and Finning intends to test all sys- such as the payroll and general ledger pack- tems again before the end of 1999. A special ages, are all year 2000 compliant. All future year 2000 committee has been assigned the software developed in-house and acquired responsibility of assessing contingency needs externally will be year 2000 compliant. in the first half of 1999. Contingency prepa- Finning is constantly verifying that informa- rations resulting from the committee’s rec- tion technology hardware purchased, such as ommendations will occur in the second half network servers, is year 2000 compliant. of 1999. The information systems department has The financial impact of making further acquired specific software that scans all system changes is not expected to be material applications running on PC’s in use at to Finning’s financial position or results of Finning in order to verify the year 2000 com- operations. pliance of the software. Finning has also entered into a PC leasing agreement that will see all older, potentially non-compliant hard- ware replaced well before the end of the year. 3 9 C A T B A C K H O E L O A D E R M A N A G E M E N T ’ S R E P O R T T O T H E S H A R E H O L D E R S The Consolidated Financial Statements of the Company have been prepared by management in accordance with generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgements of all information available up to January 29, 1999. The Company maintains an accounting system and related controls to provide management with reasonable assurance that transactions are executed and recorded in accordance with its authorizations, that assets are properly safeguarded and accounted for, and that financial records are reliable for preparation of financial statements. The Company’s independent auditors, appointed by the shareholders, express an opinion as to whether management’s financial statements present fairly the Company’s financial position, operating results and cash flow in accordance with generally accepted accounting principles. The Audit Committee of the Board of Directors, consisting solely of outside directors, meets regularly during the year with financial officers of the Company and the external auditors to review internal accounting controls, risk management, audit results, quarterly financial results and accounting principles and practices. In addition, the Audit Committee reports its findings to the Board of Directors which reviews and approves the Consolidated Financial Statements contained in this Annual Report. The financial statements have, in management’s opinion, been properly prepared within reason- able limits of materiality and within the framework of the accounting policies summarized in Note 1 of the Notes to Consolidated Financial Statements. Financial information elsewhere in this Annual Report is consistent with that in the financial statements. R . T. M a h l e r E X E C U T I V E V I C E P R E S I D E N T A N D C H I E F F I N A N C I A L O F F I C E R J A N U A R Y 2 9 , 1 9 9 9 , VA N C O U V E R , B C , C A N A D A A U D I T O R S ’ R E P O R T To the Shareholders of Finning International Inc.: We have audited the consolidated balance sheets of Finning International Inc. (a Canadian corpo- ration) as at December 31, 1998 and 1997 and the consolidated statements of income and retained earnings and cash flow for the years then ended. These Consolidated Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those stan- dards require that we plan and perform an audit to obtain reasonable assurance whether the Consoli- dated Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Consolidated Financial Statement presentation. In our opinion, these Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company as at December 31, 1998 and 1997 and the results of its operations and changes in its financial position for the years then ended in accordance with generally accepted accounting principles. A r t h u r A n d e r s e n L L P C H A R T E R E D A C C O U N TA N T S J A N U A R Y 2 9 , 1 9 9 9 , VA N C O U V E R , B C , C A N A D A F I N N I N G I N T E R N A T I O N A L I N C . 4 0 C O N S O L I D A T E D B A L A N C E S H E E T S (NOTE 1) A S AT D E C E M B E R 3 1 ( $ T H O U S A N D S ) 1 9 9 8 1 9 9 7 A S S E T S Accounts receivable I N V E N T O R I E S On-hand equipment Rental equipment (NOTE 2) Parts and supplies F I N A N C E A S S E T S Instalment notes receivable (NOTES 3 AND 9) Equipment leased to customers (NOTE 4) Land, buildings and equipment (NOTE 5) Goodwill (NOTE 6) L I A B I L I T I E S A N D S H A R E H O L D E R S ' E Q U I T Y Short-term debt (NOTES 7 AND 9) Accounts payable and accruals Income taxes payable Term debt (NOTES 8 AND 9) Deferred income taxes Total liabilities S H A R E H O L D E R S ' E Q U I T Y Share capital (NOTE 10) Retained earnings Cumulative currency translation adjustments (NOTE 11) Total shareholders' equity Approved by the Directors: $ 400,208 $ 478,588 554,704 268,033 276,407 553,179 222,848 283,734 1,099,144 1,059,761 99,930 317,690 417,620 236,066 76,563 201,721 313,533 515,254 219,507 78,767 $ 2,229,601 $ 2,351,877 $ 608,974 421,326 (12,323) 523,161 11,548 $ 618,018 460,099 29,776 521,203 35,602 1,552,686 1,664,698 208,579 458,366 9,970 205,591 471,116 10,472 676,915 687,179 $ 2,229,601 $ 2,351,877 J . F. S h e p a r d D I R E C T O R W. R . W y m a n D I R E C T O R The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 1 C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E A N D R E T A I N E D E A R N I N G S F O R T H E Y E A R S E N D E D D E C E M B E R 3 1 ( $ T H O U S A N D S E X C E P T P E R S H A R E A M O U N T S ) 1 9 9 8 1 9 9 7 R E V E N U E New equipment Used equipment Equipment rental Customer support services Finance and other Total revenue Cost of sales Gross profit Selling, general and administrative Earnings before interest and taxes Finance cost and interest on other indebtedness (NOTES 7 AND 8) Income before provision for income taxes Provision for income taxes (NOTE 13) Net income Dividends on preferred shares Earnings attributable to common shares Retained earnings, beginning of year Dividends on common shares Retained earnings, end of year E A R N I N G S P E R S H A R E (NOTE 14) Basic Fully diluted Average number of common shares outstanding (NOTE 14) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. $ 1,186,744 442,473 133,667 783,445 39,092 $ 1,115,203 309,014 104,347 743,749 54,751 2,585,421 2,004,358 2,327,064 1,718,229 581,063 498,334 82,729 75,179 7,550 4,365 3,185 67 3,118 471,116 474,234 15,868 608,835 392,210 216,625 67,274 149,351 45,656 103,695 50 103,645 383,232 486,877 15,761 $ 458,366 $ 471,116 0.04 $ 0.04 $ 79,328,826 1.32 $ 1.27 $ 78,809,441 F I N N I N G I N T E R N A T I O N A L I N C . 4 2 C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W F O R T H E Y E A R S E N D E D D E C E M B E R 3 1 ( $ T H O U S A N D S ) 1 9 9 8 1 9 9 7 O P E R A T I N G A C T I V I T I E S Net income Add (deduct) items not affecting cash: Depreciation Amortization of goodwill Deferred income taxes Equipment/parts provisions Restructuring charges Warranty reserves Other items C H A N G E S I N O P E R A T I N G A S S E T S A N D L I A B I L I T I E S Accounts receivable Inventories: On-hand equipment Rental equipment Parts and supplies Finance assets: Instalment notes receivable Equipment leased to customers, net of disposals Accounts payable and accruals Income taxes payable Cash provided by (used for) operating activities I N V E S T I N G A C T I V I T I E S Acquisition of subsidiary companies (NOTE 15) Add: short-term debt assumed, net of cash acquired Cash invested in land, buildings and equipment, net of disposals Cash used for investing activities F I N A N C I N G A C T I V I T I E S Proceeds from increase in term debt Payments on term debt Conversion and redemption of preferred shares Issue of common shares on conversion of preferred shares and exercise of stock options Dividends paid Currency translation adjustments Cash provided by (used for) financing activities Decrease (increase) in short-term debt Short-term debt at beginning of year Short-term debt at end of year C A S H P A I D D U R I N G T H E Y E A R F O R Interest The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 3 $ 3,185 $ 103,695 189,627 2,204 (13,163) 33,756 13,436 (3,615) 738 197,533 1,586 (7,357) 14,838 — 9,911 (3,475) 226,168 316,731 86,469 (107,564) (5,659) (113,039) 194 (114,137) (142,716) (84,756) 101,348 (95,349) (74,567) (54,277) 58,751 (104,240) 109,982 21,390 71,288 (46,559) — — (33,868) (51,481) (85,726) (35,615) (33,868) (172,822) 58,172 (68,158) (170) 3,158 (15,935) (5,443) (28,376) 9,044 618,018 47,010 (1,415) (315) 4,335 (15,811) (12,479) 21,325 (198,056) 419,962 $ 608,974 $ 618,018 $ 70,027 $ 58,933 N O T E S T O T H E C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S D E C E M B E R 3 1 , 1 9 9 8 A N D 1 9 9 7 ( $ T H O U S A N D S , E X C E P T T H E N U M B E R O F S H A R E S A N D P E R S H A R E A M O U N T S ) [1] S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S These Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in Canada which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. The significant accounting policies used in these Consolidated Financial Statements are as follows: P R I N C I P L E S O F C O N S O L I D A T I O N The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. Principal operating subsidiaries include Finning (UK) Ltd. and Finning Chile S.A. C U R R E N C Y T R A N S L A T I O N Transactions undertaken in foreign currencies are translated into Canadian dollars at approximate exchange rates prevailing at the time the transactions occurred. Account balances denominated in foreign currencies are translated into Canadian dollars as follows: (1) Monetary assets and liabilities at exchange rates in effect at the balance sheet dates; non-monetary items at historical exchange rates; (2) Exchange gains and losses are included in income except where monetary liabilities are considered to be hedges, in which case they are deferred and accounted for in conjunction with the hedged asset. Financial statements of self-sustaining foreign operations are translated into Canadian dollars as follows: (1) Assets and liabilities using the exchange rates in effect at the balance sheet dates; (2) Revenue and expense items at approximate exchange rates prevailing at the time the transactions occurred; (3) Unrealized translation gains and losses are deferred and included as a separate compo- nent of shareholders’ equity. These cumulative currency translation adjustments are recognized in income when there has been a reduction in the net investment in the self-sustaining foreign operation; (4) The Company has hedged its operations in its foreign subsidiaries by borrowing funds in foreign currency. Exchange gains or losses are accounted for in the cumulative currency translation adjustments. F I N N I N G I N T E R N A T I O N A L I N C . 4 4 I N V E N T O R I E S Inventories are stated at the lower of cost and net realizable value. Cost is determined on a specific item, actual cost basis for both on-hand and rental equipment. For parts and supplies, approximately 59% is recorded on a first-in, first-out basis and the remainder on an average cost basis. Rental equipment inventories are depreciated to the estimated residual value of each unit based on usage. E Q U I P M E N T L E A S E D T O C U S T O M E R S Depreciation of equipment leased to customers is provided in the accounts in equal monthly amounts over the terms of the individual leases after recognizing the estimated residual value of each unit at the end of each lease. L A N D , B U I L D I N G S A N D E Q U I P M E N T Land, buildings and equipment are recorded at cost, net of accumulated depreciation. Buildings and equipment are depreciated over their estimated useful lives on a declining balance basis using the following annual rates: Buildings General equipment Automotive equipment 5% 20% – 30% 30% R E V E N U E R E C O G N I T I O N Revenue from sales of products and services is recognized at the time of shipment of products to, and performance of services for customers. Equipment lease and rental revenue is recognized over the term of the lease or rental. Finance income is recognized as earned. P E N S I O N C O S T S The Company and its subsidiaries have defined benefit and defined contribution pension plans. For defined benefit pension plans, the cost of pension benefits is based on reports prepared by independent actuaries every two years in the U.K. and three years in Canada, using management’s best estimate assumptions and a projected benefit method prorated on services. Adjustments arising from plan amendments, changes in assumptions and experience gains or losses are amortized on a straight line basis over the expected average remaining service life of the employee groups covered by the plans. For defined contribution plans, the cost of pension benefits is a fixed percentage of member earnings for the year. G O O D W I L L Goodwill acquired on the acquisition of subsidiaries is amortized to income on a straight line basis over 40 years. Goodwill is evaluated annually and is written down when the undiscounted future earnings of the related business is less than its carrying amount. I N C O M E T A X E S The Company follows the deferral method of applying the tax allocation basis of accounting for income taxes. P R I O R Y E A R C O M P A R A T I V E S Certain prior year amounts have been reclassified to conform with the 1998 presentation. 4 5 [2] R E N T A L E Q U I P M E N T Rental equipment Less accumulated depreciation 1 9 9 8 1 9 9 7 $ 387,723 (119,690) $ 337,016 (114,168) $ 268,033 $ 222,848 Depreciation of rental equipment for the year ended December 31, 1998 was $70,659 (1997: $60,750). I N S T A L M E N T N O T E S R E C E I V A B L E [3] Instalment notes receivable are recorded net of unearned finance charges and include $47,505 due after one year (1997: $87,031). [4] E Q U I P M E N T L E A S E D T O C U S T O M E R S Cost Less accumulated depreciation 1 9 9 8 1 9 9 7 $ 442,620 (124,930) $ 434,045 (120,512) $ 317,690 $ 313,533 Depreciation of equipment leased to customers for the year ended December 31, 1998 was $91,177 (1997: $113,338). [5] L A N D , B U I L D I N G S A N D E Q U I P M E N T Land Buildings and equipment Less accumulated depreciation 1 9 9 8 1 9 9 7 $ 54,090 $ 51,124 368,266 (186,290) 337,106 (168,723) 181,976 168,383 $ 236,066 $ 219,507 Depreciation of buildings and equipment for the year ended December 31, 1998 was $27,791 (1997: $23,445). [6] G O O D W I L L Purchased goodwill P U R C H A S E D D U R I N G T H E Y E A R : H. Leverton Limited Interior Lift Truck Accumulated amortization 1 9 9 8 1 9 9 7 $ 88,619 $ 54,628 — — — 88,619 (12,056) 33,428 563 33,991 88,619 (9,852) $ 76,563 $ 78,767 F I N N I N G I N T E R N A T I O N A L I N C . 4 6 [7] S H O R T - T E R M D E B T Loans Commercial paper and bankers’ acceptances 1 9 9 8 1 9 9 7 $ 214,008 394,966 $ 278,389 339,629 $ 608,974 $ 618,018 The Company has entered into interest rate swap agreements which fix the semi-annual interest rate on $73,213 (1997: $89,070) of debt at a weighted average interest rate of 5.60% (1997: 6.06%). Agreements for $44,360 (1997: $50,463) extend beyond one year for varying periods up to January 2002 at an average interest rate of 5.47% (1997: 5.92%). [8] T E R M D E B T Fixed rate loan at 7.675%, maturing May 8, 2002, of £25,000 (unsecured) $ Floating rate loan bearing a semi-annual interest rate of 7.63% at December 31, 1998 (1997: 8.52%), maturing June 22, 2000, of £25,000 (unsecured) Floating rate loan bearing a quarterly interest rate of 7.305% 1 9 9 8 1 9 9 7 63,620 $ 58,680 63,620 58,680 at December 31, 1998, maturing May 25, 2003, of £15,000 (unsecured) 38,172 — Series A Senior Debentures at 8.35% with interest payable semi-annually, maturing March 22, 2004 (unsecured) 75,000 75,000 Series B Senior Debentures at 6.60% with interest payable semi-annually, maturing December 8, 2006 (unsecured) Term bank loans bearing interest at floating rates which at December 31, 1998 averaged 5.48% (1997: 4.65%). These loans are repayable May 31, 2001 and December 31, 2002 (unsecured) Other loans denominated in U.S. dollars and Chilean pesos, maturing between 1999 and 2004 (unsecured) Term loans due within one year 75,000 75,000 134,649 179,859 73,100 73,984 $ 523,161 $ 521,203 $ 1,071 $ 6,362 Interest expense in 1998, on indebtedness incurred for a period greater than one year, was $38,795 (1997: $28,845). Estimated principal repayments for the next five years are: 1999 2000 2001 2002 2003 1,071 113,185 71,476 142,331 41,883 $ 4 7 [9] F I N A N C I A L I N S T R U M E N T S The following table reflects the carrying value and estimated fair value of the Company’s financial instruments: F I N A N C I A L I N S T R U M E N T S : Notes receivable $ 99,930 $ 99,983 $ 201,721 $ 202,958 Short-term debt and term debt $ 1,132,135 $ 1,142,856 $ 1,139,221 $ 1,153,390 BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE 1 9 9 8 1 9 9 7 O F F B A L A N C E S H E E T H E D G E S : Interest rate swaps Forward exchange contracts NOTIONAL VALUE MARKET VALUE NOTIONAL VALUE MARKET VALUE 1 9 9 8 1 9 9 7 $ $ 73,213 22,655 $ $ 73,770 22,527 $ $ 89,070 20,767 $ $ 90,269 20,435 Financial instruments that subject the Company to credit risk are notes receivable, short-term and term debt, and hedges such as interest rate swaps and forward exchange contracts. At the balance sheet dates there were no significant concentrations of credit risk from exposure to single debtors. The Company’s hedges are contracted with high quality financial institutions as counter- parties and, as a result, concentration of risk exposure is limited. [10] S H A R E C A P I T A L A U T H O R I Z E D Unlimited Unlimited Preferred shares without par value of which 4,400,000 are designated as Cumulative Redeemable Convertible Preferred shares Common shares I S S U E D A N D O U T S T A N D I N G 99,600 79,427,879 Preferred shares, Series E (1997: 116,550) Common shares (1997: 79,090,612) 1 9 9 8 1 9 9 7 $ 996 207,583 $ 1,166 204,425 $ 208,579 $ 205,591 C H A N G E S D U R I N G 1 9 9 7 At the Company’s annual meeting in April 1997, the shareholders approved the subdivision of the Company’s common shares on a two-for-one basis. C O M M O N S H A R E S A shareholders’ rights plan is in place which is intended to provide all holders of common shares with the opportunity to receive full and fair value for all of their shares in the event a third party attempts to acquire a significant interest in the Company. The Company’s dealership agreements with subsidiaries of Caterpillar Inc. are fundamental to its business and any change in control must be approved by Caterpillar. The plan provides that one share purchase right has been issued for each common share and will trade with the common shares until such time as any person or group, other than a permitted bidder, bids to acquire or acquires 20% or more of the Company’s common shares. The rights will then separate and will ultimately entitle each holder of common shares (other than the bidder) to purchase common shares of the Company at a 50% discount to the then market price. The rights may also be triggered by a third party proposal for merger, amalgamation or a similar transaction. The rights will expire on September 13, 1999 unless redeemed earlier by the Board of Directors. F I N N I N G I N T E R N A T I O N A L I N C . 4 8 The plan will not be triggered if a bid meets certain criteria (a permitted bidder). These criteria include that: (1) the offer is made for all outstanding voting shares of the Company; (2) more than 50% of the voting shares have been tendered by independent shareholders pursuant to the Takeover Bid (voting shares tendered may be withdrawn until taken up and paid for); and (3) the Takeover Bid expires not less than 75 days after the date of the bid circular. A summary of the changes in common shares are as follows: Balance, beginning of year Conversion of 16,950 Series E (1997: 31,450) preferred shares Exercise of stock options 1 9 9 8 1 9 9 7 S H A R E S A M O U N T S H A R E S A M O U N T 79,090,612 $ 204,425 78,546,950 $ 200,090 26,611 310,656 170 2,988 49,370 494,292 315 4,020 Balance, end of year 79,427,879 $ 207,583 79,090,612 $ 204,425 During 1997, the Company acquired 82,828 common shares in the open market for cash consideration of $1,325 that were subsequently cancelled. The Company reissued 82,828 common shares valued at $1,325 for the acquisition of the Interior Lift Truck group of companies (Note 15). P R E F E R R E D S H A R E S S E R I E S E P R E F E R R E D S H A R E S These preferred shares were issued under terms of an employee and director share purchase plan and are redeemable by the Company at its option or retractable at the option of the holder at the issue price. The cumulative preferential cash dividends on the preferred shares are payable quarterly based on the prime interest rate of a specified Canadian chartered bank. The applicable rate for the preferred shares, and price at which the preferred shares are convertible into common shares, is as follows: Series E D I V I D E N D R AT E A S A % O F T H E P R I M E I N T E R E S T R AT E C O N V E R S I O N P R I C E 80% of prime $ 6.3675 In 1999, the conversion rights of the preferred shares will expire. S T O C K O P T I O N S The Company has several stock option plans for employees and directors, the details of which are as follows: 1 9 9 8 Options outstanding, beginning of year Issued Exercised Options outstanding, end of year S H A R E S O P T I O N P R I C E 4,124,890 1,327,439 (310,656) 5,141,673 $ 5.49 to $15.17 $17.00 $ 6.63 to $15.17 $ 5.49 to $17.00 A total of 2,943,211 options were exercisable at December 31, 1998 with the remaining options outstanding exercisable at various times to February 2, 2008. 4 9 [11] C U M U L A T I V E C U R R E N C Y T R A N S L A T I O N A D J U S T M E N T S Balance, beginning of year Gain realized during the year Translation adjustments for the year Balance, end of year 1 9 9 8 1 9 9 7 $ $ 10,472 (2,701) 2,199 11,277 (1,888) 1,083 $ 9,970 $ 10,472 Translation gains or losses on the consolidation of foreign subsidiaries financial statements are accumulated in this account. Translation adjustments arise as a result of fluctuations in foreign currency exchange rates. At December 31, 1998, 1997 and 1996, the Canadian dollar exchange rates against the British pound were 2.5448, 2.3472 and 2.3454, respectively, and the Chilean peso exchange rates against the Canadian dollar were 308, 299 and 310, respectively. During 1998, a dividend of £10,000 (1997: £10,000) was paid from Finning Holdings Limited (U.K.) to the Company which generated a foreign exchange gain of $2,701 (1997: $1,888). [12] P E N S I O N P L A N S The Company’s obligations for pension benefits, under its defined benefit plans at December 31, 1998, were estimated by the plans’ actuaries to be $329,299 (1997: $299,875). Pension plan assets at December 31, 1998, on an adjusted market value basis, were $369,118 (1997: $335,919). [13] P R O V I S I O N F O R I N C O M E T A X E S Current Deferred Provision for income taxes The Company’s provision for income taxes is determined as follows: Combined federal and provincial income tax rates Provision for income taxes based on the combined federal and provincial rates Increase (decrease) in provision for income taxes resulting from: Lower effective rates on the losses (earnings) of foreign subsidiaries Benefit of unrecognized tax loss carryforward of foreign subsidiary Amortization of goodwill and increase in assigned asset value Large corporation tax Income not subject to tax Other items 1 9 9 8 1 9 9 7 $ $ 17,528 (13,163) 4,365 $ $ 53,013 (7,357) 45,656 1 9 9 8 1 9 9 7 43.73% 43.59% $ 3,302 $ 65,102 3,321 (514) 760 1,530 (1,421) (2,613) (12,210) (2,930) 755 1,108 (3,237) (2,932) Provision for income taxes $ 4,365 $ 45,656 The Company’s subsidiary, Finning Chile S.A., has a tax loss carryforward of $103,000 (1997: $111,000), denominated in local currency, available to offset future taxable income. This loss was acquired on acquisition of the company in August 1993. These losses are indexed to Chile’s inflation rate which was 4.5% in 1998 and have no expiry date. F I N N I N G I N T E R N A T I O N A L I N C . 5 0 [14] E A R N I N G S P E R S H A R E Earnings per share has been calculated using the weighted average number of common shares outstanding during each year. Fully diluted earnings per share has been calculated on the assumption that all the outstanding preferred shares were converted and all outstanding stock options were exercised at the beginning of the year. [15] A C Q U I S I T I O N S During 1997, the Company made the following acquisitions: ( 1 ) Effective October 1, 1997, the Company acquired 100% of the outstanding share capital of H. Leverton Limited, the Caterpillar dealer for the north, east and southeast regions of England. The purchase makes the Company the sole dealer for Caterpillar equipment in Britain. The purchase price was comprised of cash consideration of $26,807 (£12,029) in respect of common shares, the assumption of short-term debt of $86,292 (£38,722), and $22,555 (£10,120) in planned restructuring and acquisition costs. ( 2 ) Effective May 12, 1997, the Company acquired 100% of the outstanding share capital of Interior Lift Truck Services Inc., Interior Lift Truck Services (Vernon) Inc. and Interior Lift Truck Services (Penticton) Inc. The Interior Lift Truck group sells, rents and services materials handling and high- reach equipment, primarily in the Interior of British Columbia. Total consideration was $2,119, comprised of 82,828 shares of the Company valued at $1,325 and cash consideration and acquisition costs totalling $794. The acquisitions have been accounted for using the purchase method and, accordingly, the purchase price was allocated to the assets and liabilities based on their estimated fair values as of the acquisition date. The excess of the purchase price over the fair value of the net assets acquired has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. The results of operations related to the acquisitions have been included in these Consolidated Financial Statements from the effective date of acquisition. 5 1 [15] A C Q U I S I T I O N S ( C O N T I N U E D ) Net assets acquired at assigned values: Accounts receivable Inventories Other assets Land, buildings and equipment Short-term debt Accounts and income taxes payable and accruals Deferred income taxes Term debt Net assets acquired at estimated fair value Goodwill H . L E V E RT O N L I M I T E D I N T E R I O R L I F T T R U C K $ $ 68,907 80,641 865 18,648 169,061 478 1,399 9 337 2,223 $ T O TA L 69,385 82,040 874 18,985 171,284 (86,292) (299) (86,591) (65,685) (1,150) — (153,127) 15,934 33,428 (312) (2) (54) (667) 1,556 563 (65,997) (1,152) (54) (153,794) 17,490 33,991 Consideration $ 49,362 $ 2,119 $ 51,481 [16] E C O N O M I C R E L A T I O N S H I P S The Company distributes and services heavy equipment and related products. The Company has dealership agreements with numerous equipment manufacturers, of which the most significant are with subsidiaries of Caterpillar Inc. Distribution and servicing of Caterpillar products account for the major portion of the Company’s operations. Finning has a strong relationship with Caterpillar that has been ongoing since 1933. [17] S E G M E N T E D I N F O R M A T I O N The Company and its subsidiaries have operated primarily in one industry during the year, that being the selling, servicing and financing of heavy equipment and related products. Operating units serve the following geographic areas: (1) Canadian operations: British Columbia, Alberta, the western part of the Northwest Territories and Yukon; (2) U.K. operations: England, Scot- land, Wales and the Channel Islands; (3) Chilean operations: throughout the country; and (4) Inter- national operations: this segment represents the sale of used equipment and used parts worldwide and the expenses associated with the corporate head office. F I N N I N G I N T E R N A T I O N A L I N C . 5 2 The reportable geographic segments are: S E G M E N T C A N A D A U . K . C H I L E I N T E R N AT I O N A L S E G M E N T E L I M I N AT I O N S C O N S O L I D AT E D 1 9 9 8 Revenue from external sources Earnings (loss) before interest and taxes Finance costs and interest on other indebtedness Provision for (recovery of) income taxes $ 1,136,917 $ 794,356 $ 503,505 $ 151,979 $ (1,336) $ 2,585,421 85,434 (30,429) 25,415 2,309 — 82,729 35,194 12,613 21,991 5,381 15,493 (10,831) — (297) — — 75,179 4,365 Net income (loss) $ 34,747 $ (32,211) $ 3,424 $ (2,775) $ — $ 3,185 Identifiable assets Capital expenditures Depreciation and amortization of capital assets and goodwill 1 9 9 7 Revenue from external sources Earnings before interest and taxes Finance costs and interest on other indebtedness Provision for income taxes Net income Identifiable assets Capital expenditures Depreciation and amortization of capital assets and goodwill 5 3 $ 1,303,092 $ 464,770 $ 354,029 $ 378,661 $ (270,951) $ 2,229,601 $ 29,332 $ 6,778 $ 8,066 $ — $ — $ 44,176 $ 147,548 $ 19,471 $ 23,315 $ 1,497 $ — $ 191,831 $ 1,146,406 $ 567,365 $ 514,068 $ 102,942 $ (3,717) $ 2,327,064 124,035 47,049 38,695 6,846 — 216,625 29,317 15,771 19,160 3,026 33,050 11,168 — 1,438 — — 67,274 45,656 $ 61,668 $ 20,110 $ 19,535 $ 2,382 $ — $ 103,695 $ 1,337,637 $ 510,100 $ 386,621 $ 322,844 $ (205,325) $ 2,351,877 $ 15,250 $ 9,135 $ 22,763 $ — $ — $ 47,148 $ 153,186 $ 25,257 $ 19,578 $ 1,098 $ — $ 199,119 [18] Y E A R 2 0 0 0 I S S U E The “Year 2000 Issue” is a general term used to refer to certain business implications of the arrival of the new millennium. In simple terms, these implications arise largely because it has been normal practice for computer hardware and software to use only two digits rather than four to record the year in date fields. On January 1, 2000, when the year is designated as “00”, many com- puter systems could either fail completely or create erroneous data as a result of misinterpretation of the year. Finning has been planning for the year 2000 since the mid-to-late eighties. The core systems in all three dealerships have now been replaced by Caterpillar’s Dealer Business System version 2.0, which is year 2000 compliant. All future software developed in-house and acquired externally will be year 2000 compliant. A simulation test of the year 2000 was performed on the Company’s systems in 1998. The test was successful and Finning intends to re-test all systems before the end of 1999. While it is not possible to test every aspect of the Year 2000 Issue affecting the Company, such as supplier systems, the Company does not expect this issue to be material to Finning’s financial position or results of operations. F I N N I N G I N T E R N A T I O N A L I N C . 5 4 T W O Y E A R S U M M A R Y B Y Q U A R T E R F I S C A L P E R I O D 1 9 9 8 1st quarter 2nd quarter 3rd quarter 4th quarter 1 9 9 7 1st quarter 2nd quarter 3rd quarter 4th quarter R E V E N U E ( $ T H O U S A N D S ) N E T I N C O M E)1 ( $ T H O U S A N D S ) B A S I C ( $ ) F U L LY D I L U T E D ( $ ) D I V I D E N D ( $ ) C L O S I N G S T O C K P R I C E ( $ ) E A R N I N G S P E R C O M M O N S H A R E 689,156 748,680 582,267 565,318 (7,843) 20,229 3,659 (12,860) 2,585,421 3,185 504,355 561,229 554,609 706,871 22,502 23,013 32,701 25,479 2,327,604 103,695 (0.10) 0.25 0.05 (0.16) 0.04 0.29 0.29 0.42 0.32 1.32 (0.10) 0.25 0.05 (0.16) 0.04 0.28 0.27 0.40 0.31 1.27 0.05 0.05 0.05 0.05 0.20 0.05 0.05 0.05 0.05 0.20 15.75 13.40 11.80 10.95 15.33 16.30 19.15 18.00 1 In 1997, $13.2 million in non-recurring gains were realized during the year. In 1998, $15.5 million in non-recurring charges were taken during the year. S E G M E N T E D I N F O R M A T I O N T W E LV E M O N T H S E N D E D D E C E M B E R 3 1 ( $ T H O U S A N D S ) 1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 5 R E V E N U E Canadian operations U.K. operations Chilean operations International operations Consolidated N E T I N C O M E Canadian operations U.K. operations Chilean operations International operations Consolidated $ 1,136,917 793,020 503,505 151,979 $ 1,146,406 565,376 514,068 101,214 $ 926,653 437,949 408,616 101,491 $ 923,275 416,034 350,650 62,032 $ 2,585,421 $ 2,327,064 $ 1,874,709 $ 1,751,991 $ $ 34,747 (32,211) 3,424 (2,775) 61,668 20,110 19,535 2,382 $ $ 40,776 26,308 17,746 3,354 42,509 20,800 12,849 1,335 $ 3,185 $ 103,695 $ 88,184 $ 77,493 5 5 T E N Y E A R F I N A N C I A L S U M M A R Y Y E A R S E N D E D D E C E M B E R 3 1 ( $ T H O U S A N D S E X C E P T P E R S H A R E D ATA ) 1 9 9 8 1 9 9 7 1 9 9 6 R E V E N U E Revenue from Canadian operations Revenue from U.K. operations Revenue from Chilean operations Revenue from International operations I N C O M E B E F O R E P R O V I S I O N F O R I N C O M E T A X E S As a percent of revenue N E T I N C O M E As a percent of revenue E A R N I N G S P E R C O M M O N S H A R E Basic Fully diluted D I V I D E N D S Total common share Per common share C O M M O N S H A R E S O U T S T A N D I N G ( T H O U S A N D S ) R E V E N U E P E R E M P L O Y E E N E T I N C O M E P E R E M P L O Y E E R E T U R N O N A V E R A G E S H A R E H O L D E R S ’ E Q U I T Y G R O S S C A P I T A L E X P E N D I T U R E S C A S H F L O W Cash flow per share R A T I O S Asset turnover ratio Debt to equity Liabilities to equity Debt to equity (excluding finance operation)1 B O O K V A L U E P E R C O M M O N S H A R E C O M M O N S H A R E P R I C E High Low N U M B E R O F E M P L O Y E E S Canada U.K. Chile International Total $ 1,136,917 793,020 503,505 151,979 $ 1,146,406 565,376 514,068 101,214 $ 926,653 437,949 408,616 101,491 $ 2,585,421 $ 2,327,064 $ 1,874,709 $ $ $ $ 7,550 0.3% 3,185 0.1% $ 149,351 6.4% $ 103,695 4.5% $ 128,503 6.9% 88,184 4.7% $ 0.04 0.04 $ $ 1.32 1.27 $ $ 1.13 1.09 $ $ 15,868 0.20 79,426 $ 492,367 606 $ 0.5% $ $ 15,761 0.20 79,091 $ 475,570 22,119 $ 16.2% $ $ 15,600 0.20 78,547 $ 441,940 20,788 $ 16.0% 44,176 $ $ 226,168 2.85 $ 47,148 $ $ 316,731 4.00 $ 43,132 $ $ 244,909 3.12 $ $ $ $ 1.13 1.67:1 2.29:1 0.97:1 0.99 1.66:1 2.37:1 0.90:1 1.04 1.50:1 1.97:1 0.59:1 8.52 $ 8.69 $ 7.59 18.50 10.25 $ $ 20.50 14.43 $ $ 14.58 9.75 2,494 1,348 1,354 55 5,251 2,496 1,720 1,228 50 5,494 2,269 925 1,008 40 4,242 Financial data has been restated to incorporate common share subdivisions occurring during the ten year period and to reflect a retroactive change in accounting for revenue recognition for exchange components implemented in 1992. 1 Assumes a debt to equity ratio of 7:1 in the finance operation and 5:1 in the rental operation. The debt to equity ratio has been restated to reflect a retroactive change in presenting customer rental-purchase contracts as finance assets implemented in 1996. F I N N I N G I N T E R N A T I O N A L I N C . 5 6 1 9 9 5 1 9 9 4 1 9 9 3 1 9 9 2 1 9 9 1 1 9 9 0 1 9 8 9 $ 923,275 416,034 350,650 62,032 $ 838,680 338,499 241,221 39,138 $ 675,490 258,235 74,464 34,768 $ 553,316 251,909 — 27,512 $ 583,542 267,828 — — $ 727,321 319,727 — — $ 542,083 335,371 — — $1,751,991 $1,457,538 $1,042,957 $ 832,737 $ 851,370 $1,047,048 $ 877,454 $ 119,392 6.8% 77,493 4.4% $ $ $ 1.00 0.98 $ $ $ $ 95,488 6.6% 61,421 4.2% 0.80 0.78 $ $ $ $ 35,895 3.4% 22,271 2.1% 0.30 0.30 $ $ $ $ 1,728 0.2% 2,878 0.3% 0.03 0.03 $ $ $ $ 3,139 0.4% 4,612 0.5% 0.05 0.05 $ $ $ $ 43,889 4.2% 30,283 2.9% 0.44 0.43 $ $ $ $ 67,885 7.7% 42,197 4.8% 0.70 0.68 $ $ 15,451 0.20 77,442 $ 428,674 18,961 $ 16.2% $ $ 9,985 0.13 77,026 $ 374,978 15,802 $ 14.8% $ $ 6,592 0.09 76,266 $ 283,875 6,062 $ 6.5% $ $ 5,042 0.08 67,370 $ 281,425 973 $ 0.9% $ $ 6,844 0.10 67,056 $ 260,757 1,413 $ 1.4% $ $ 15,286 0.23 66,640 $ 289,480 8,372 $ 9.8% $ $ 11,826 0.20 66,196 $ 240,267 11,554 $ 17.1% 25,812 $ $ 209,827 2.71 $ 16,641 $ $ 176,764 2.30 $ 13,752 $ $ 116,371 1.53 $ $ $ $ 7,025 94,546 1.40 11,643 $ $ 102,180 1.52 $ 26,116 $ $ 114,467 1.72 $ 24,516 $ $ 112,542 1.70 $ 1.09 1.55:1 2.11:1 0.61:1 1.06 1.35:1 1.99:1 0.43:1 0.95 1.23:1 1.80:1 0.39:1 0.86 1.59:1 2.03:1 0.66:1 0.92 1.46:1 1.95:1 0.56:1 1.07 1.63:1 2.09:1 0.87:1 1.19 1.41:1 1.98:1 0.71:1 6.55 $ 5.83 $ 5.00 $ 4.58 $ 4.79 $ 4.79 $ 4.50 11.63 8.63 $ $ 12.06 9.19 $ $ 10.88 5.88 $ $ 7.25 5.25 $ $ 7.82 5.88 $ $ 8.50 5.13 $ $ 7.88 5.00 2,228 884 941 34 4,087 2,124 873 861 29 3,887 2,025 863 759 27 3,674 2,004 930 — 25 2,959 2,142 1,123 — — 3,265 2,531 1,086 — — 3,617 2,563 1,089 — — 3,652 $ $ $ 5 7 F I N A N C I A L P E R F O R M A N C E EARNINGS PER SHARE ( $ ) ( 1 2 2 ÷ 1 . 2 7 = 9 6 . 0 6 ) 98 97 96 95 0.04 1.27 1.09 0.98 Earnings per share on a fully diluted basis is calculated by dividing net income by the weighted average number of common shares outstanding during the year (assuming that all outstanding preferred shares were converted and all outstanding stock options were exercised at the beginning of the year). CASH FLOW PER SHARE ($) (122÷4=30.5) 98 97 96 95 2.85 4.00 3.12 2.71 Cash flow per share is calculated by dividing cash generated from operations (excluding changes in operating assets and liabilities) by the total number of shares outstanding at the end of the year. In 1998, cash flow per share decreased by 29% compared with the previous year. DIVIDENDS PER SHARE ($) (122÷.2=610) 98 97 96 95 0.20 0.20 0.20 0.20 In setting the dividend payment per common share, the Board of Directors considers the Company’s recent and projected earnings and capital investment requirements and its total return to share- holders. In 1998, the common dividend was maintained at $0.20 per share for a total annual payout of $16 million. RETURN ON SHAREHOLDERS‘ EQUITY ($) (122÷16.2=7.53) 98 97 96 95 0.5 16.2 16.0 16.2 The return on shareholders‘ equity is calculated by dividing net income by the average share- holders’ equity during the year (including share capital, retained earnings and cumulative currency translation adjustments). TOTAL SHAREHOLDER RETURNS ($) FINNING TSE 300 INDEX (54÷99=.545) $100 93 $166 $125 98 The graph above compares the yearly percentage change in the Company’s cumulative total return on its common shares (annual stock price change plus dividends) with the cumulative total return of the TSE 300 index. Based on $100 invested in 1993, Finning’s cumulative total return over the five-year period was $125 compared with $166 for the TSE 300 index. F I N N I N G I N T E R N A T I O N A L I N C . 5 8 S H A R E H O L D E R I N F O R M A T I O N S T O C K E X C H A N G E S C O R P O R A T E I N F O R M A T I O N The common shares of Finning International Inc. The Company’s head office is located at 555 are listed on both the Toronto and Montreal Great Northern Way, Vancouver, BC, Canada, stock exchanges. (Symbol: FTT) A U D I T O R S Arthur Andersen LLP Chartered Accountants, Vancouver, BC, Canada S O L I C I T O R S Ladner Downs V5T 1E2. The Company prepares an Annual Information Form (AIF) which is filed with the securities commissions or similar bodies in all of the provinces of Canada. Copies of the AIF and Annual and Quarterly Reports are available to shareholders and other interested parties on request or can be accessed directly from Barristers and Solicitors, Vancouver, BC, Canada Finning’s home page on the Internet at: R E G I S T R A R A N D T R A N S F E R A G E N T Montreal Trust Company of Canada http://www.finning.ca. I N V E S T O R R E L A T I O N S 510 Burrard Street Vancouver, BC V6C 3B9 Tel (604) 661-9400 A N N U A L M E E T I N G The Annual Meeting of the shareholders will be held at 11:00 a.m., April 23, 1999 at The King Edward Hotel in Toronto, Ontario, Canada. Inquiries relating to shares or dividends should be directed to the Company’s Registrar and Trans- fer Agent. Inquiries relating to the Company’s operating activities and financial information should be addressed to: David Climie Director, Investor and Corporate Relations Tel (604) 331-4885, Fax (604) 331-4899 E-mail dclimie@finning.ca S T O C K P E R F O R M A N C E ( $ ) 144÷18.5=5.838 This graph indicates the high and low closing stock prices for each month in 1998. The black lines indicate the closing price at the end of each month. 1998 MONTHLY STOCK PRICE ($) 0 5 . 8 1 5 7 . 4 1 5 2 . 8 1 0 0 . 6 1 0 5 . 8 1 0 7 . 5 1 0 8 . 5 1 5 1 . 4 1 5 3 . 5 1 5 7 . 4 1 5 9 . 4 1 5 9 . 2 1 5 7 . 4 1 0 1 . 3 1 5 2 . 4 1 0 0 . 2 1 5 2 . 3 1 0 4 . 1 1 5 2 . 2 1 0 5 . 1 1 5 2 . 3 1 0 5 . 1 1 J F M A M J J A S O N 0 0 . 2 1 5 2 . 0 1 D 5 9 D I R E C T O R S , O F F I C E R S A N D C O M M I T T E E S B O A R D O F D I R E C T O R S O F F I C E R S A U D I T C O M M I T T E E J . F. S h e p a r d C H A I R M A N A N D C H I E F E X E C U T I V E O F F I C E R F I N N I N G I N T E R N AT I O N A L I N C . C . A . C e d e r b e r g P R E S I D E N T A N D C H I E F E X E C U T I V E O F F I C E R F I N N I N G C H I L E S . A . D . F. E d w a r d s E X E C U T I V E V I C E P R E S I D E N T S T R AT E G I C D E V E L O P M E N T F I N N I N G I N T E R N AT I O N A L I N C . A . R . G u g l i e l m i n C O R P O R AT E T R E A S U R E R F I N N I N G I N T E R N AT I O N A L I N C . H . M . H o E X E C U T I V E V I C E P R E S I D E N T H U M A N R E S O U R C E S F I N N I N G I N T E R N AT I O N A L I N C . N . B . L l o y d M A N A G I N G D I R E C T O R F I N N I N G ( U K ) LT D . R . T. M a h l e r E X E C U T I V E V I C E P R E S I D E N T A N D C H I E F F I N A N C I A L O F F I C E R F I N N I N G I N T E R N AT I O N A L I N C . I . M . R e i d P R E S I D E N T A N D C H I E F O P E R AT I N G O F F I C E R F I N N I N G ( C A N A D A ) J . T. S t r u t h e r s C O R P O R AT E S E C R E TA R Y F I N N I N G I N T E R N AT I O N A L I N C . D . W. G . W h i t e h e a d P R E S I D E N T A N D C H I E F O P E R AT I N G O F F I C E R F I N N I N G I N T E R N AT I O N A L I N C . M . N . A n d e r s o n P R E S I D E N T A N D E R S O N & A S S O C I AT E S VA N C O U V E R , B C R . B a c a r r e z a P R E S I D E N T P R O I N V E S T S . A . S A N T I A G O , C H I L E J . F. D i n n i n g E X E C U T I V E V I C E P R E S I D E N T E N E R G Y M A R K E T I N G T R A N S A LTA E N E R G Y C O R P. C A L G A R Y, A L B E R TA R . B . H o u g e n P R E S I D E N T H O U G E N ’ S G R O U P O F C O M PA N I E S W H I T E H O R S E , Y U K O N T. S . H o w d e n C O M PA N Y D I R E C T O R M A R L O W , E N G L A N D M . M . K o e r n e r P R E S I D E N T C A N A D A O V E R S E A S I N V E S T M E N T S L I M I T E D T O R O N T O , O N TA R I O N . B . L l o y d M A N A G I N G D I R E C T O R F I N N I N G ( U K ) LT D . B E D N A L L , E N G L A N D D . S . O ’ S u l l i v a n P R E S I D E N T O ’ S U L L I VA N R E S O U R C E S LT D . E D M O N T O N , A L B E R TA C . A . P i n e t t e P R E S I D E N T A N D C H I E F O P E R AT I N G O F F I C E R L I G N U M L I M I T E D VA N C O U V E R , B C J . F. S h e p a r d C H A I R M A N A N D C H I E F E X E C U T I V E O F F I C E R F I N N I N G I N T E R N AT I O N A L I N C . VA N C O U V E R , B C A . H . S i m o n C O M PA N Y D I R E C T O R L O N D O N , E N G L A N D W. R . W y m a n C H A I R M A N S U N C O R E N E R G Y I N C . W E S T VA N C O U V E R , B C M . M . K o e r n e r C H A I R M A N J . F. D i n n i n g R . B . H o u g e n T. S . H o w d e n C . A . P i n e t t e W. R . W y m a n E N V I R O N M E N T A L , H E A L T H A N D S A F E T Y C O M M I T T E E D . S . O ’ S u l l i v a n C H A I R M A N T. S . H o w d e n C . A . P i n e t t e J . F. S h e p a r d P E N S I O N C O M M I T T E E H . M . H o C H A I R M A N A . R . G u g l i e l m i n R . T. M a h l e r G O V E R N A N C E C O M M I T T E E C . A . P i n e t t e C H A I R M A N M . N . A n d e r s o n M . M . K o e r n e r D . S . O ’ S u l l i v a n H U M A N R E S O U R C E S A N D C O M P E N S A T I O N C O M M I T T E E M . N . A n d e r s o n C H A I R M A N D . S . O ’ S u l l i v a n J . F. S h e p a r d W. R . W y m a n F I N N I N G I N T E R N A T I O N A L I N C . 6 0 G N I T N I R P D L A N O D C A M H : G N I T N I R P Y T N U O B A L S E M A J : Y H P A R G O T O H P N O S A M A T A M A S : N G I S E D t r o p e R l a u n n A 8 9 9 1 . c n I l a n o i t a n r e t n I g n i n n i F s s e r g o r p n i k r o w e c n e t e p m o c e h t e v a h e l p o e p r u O t s e b e h t r e v i l e d o t m o d e e r f d n a . s r e m o t s u c r u o o t s n o i t u l o s n e t s i l e w , s e i r o t i r r e t r u o n i g n i t a r e p o s e n i h c a m . e c i v r e s t r o p p u s r e m o t s u c t a l e c x e e w r a l l i p r e t a C 0 0 0 , 6 3 n a h t e r o m h t i W t r o p p u s e w e h t n i – y l i a d s r u c c o t a h t e n o d n a s s e c o r p . b o j e h t n o d n a m o o r s s a l c e h t n i , p o h s t n a t s n o c a s i e c r o f k r o w r u o g n i n i a r T n i a r t e w e r o m e r a h s o t s u s w o l l a y g o l o n h c e t n o i t a m r o f n I . e v i s n o p s e r e r o m e b o t d n a , y l t n e i n e v n o c e r o m d n a r e t s a f , s r e m o t s u c r u o h t i w n o i t a m r o f n i e d a r g p u e w l a t o t g n i r e f f o y b s t e k r a m w e n g n i u s r u p e r a e W o t g n i k e e s s r e m o t s u c r o f s n o i t u l o s t n e m p i u q e . s t n e m e r i u q e r e r o c - n o n r i e h t e c r u o s t u o s t e k r a m w e n e u s r u p e w s r e m o t s u c r u o h t o b g n i k a m o t d e t t i m m o c e r a e w , . c n I l a n o i t a n r e t n I g n i n n i F t A . l u f s s e c c u s y n a p m o C r u o d n a