-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VNCqujMz9rDSNtlra93vZjtX/gs1V8gI/5OqglZQOzmL3Ld+r6Bz4qduHzqp6tM3 wxHG78fsJu6r8Wja9tDBmQ== 0001015402-99-000315.txt : 19990412 0001015402-99-000315.hdr.sgml : 19990412 ACCESSION NUMBER: 0001015402-99-000315 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990409 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRADALL INDUSTRIES INC CENTRAL INDEX KEY: 0001017136 STANDARD INDUSTRIAL CLASSIFICATION: 3531 IRS NUMBER: 363381606 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12049 FILM NUMBER: 99585173 BUSINESS ADDRESS: STREET 1: 406 MILL AVE SW CITY: NEW PHILADELPHIA STATE: OH ZIP: 44663 BUSINESS PHONE: 3303392211 MAIL ADDRESS: STREET 1: 406 MILL AVE SW CITY: NEW PHILADELPHIA STATE: OH ZIP: 44663 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO _________ Commission File No. 001-12049 GRADALL INDUSTRIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-3381606 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 406 MILL AVENUE S.W., NEW PHILADELPHIA, OHIO 44663 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (330) 339-2211 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 26, 1999 was $90,684,360. The number of shares outstanding of registrant's common stock, par value .001 per share, as of February 26, 1999 was 9,515,460. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1998, are incorporated by reference into Part II of this Form 10-K. Portions of the registrant's Proxy Statement to be filed pursuant to Regulation 14A with respect to the 1999 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. The Exhibit index appears on sequential page 28. PART I ------ Item 1. BUSINESS THE COMPANY Gradall Industries, Inc. (the "Company") was incorporated in Delaware in 1985. The Company's principal offices are located at 406 Mill Avenue S.W., New Philadelphia, Ohio 44663, and its telephone number is (330) 339-2211. Unless the context otherwise requires, the "Company" or "Gradall" refers to Gradall Industries, Inc. and its wholly-owned subsidiaries, The Gradall Company and The Gradall Orrville Company. Gradall is a leading manufacturer of hydraulic excavators and rough-terrain variable reach material handlers as well as related service parts. The Company's products are marketed under the widely respected Gradall tradename and are distinguished by their telescopic boom technology, versatility, productivity and reliability. Gradall's telescopic booms, which are manufactured from high-strength specialty steel, are unique both in their shape and engineering design, which provide added strength with minimal weight, and, in the case of excavators, their ability to rotate a full 360 degrees. Gradall products serve niche markets within the construction equipment industry and typically command premium prices. In 1998, total sales were $182.6 million, comprised of $54.6 million in sales of excavators, $110.2 million in sales of material handlers and $17.9 million in sales of service parts. Excavator shipments were down $2.8 million or 4.9% in 1998 compared to 1997. The abundance of low price crawler excavators entering the U.S. from Asia contributed to reduced crawler excavator sales. Material handler sales were up $26.2 million or 31.2% in 1998 compared to 1997. The introduction of the new D-series family of material handlers plus strong market demand were key factors for higher material handler sales. Service parts sales in 1998 were up $0.6 million from 1997. Since January 1994, the Company has introduced 12 new products which accounted for in excess of 85% of Gradall's unit sales in 1998. Gradall excavators are typically used by general contractors and government agencies for ditching, sloping, finish grading, general maintenance and infrastructure projects. The Company's excavators are sold through approximately 46 independent distributors at approximately 168 locations throughout North America. The introduction and ongoing development of the Company's XL Series excavators featuring the unique Gradall rotating, telescopic booms with high-pressure hydraulics have allowed the Company to continue to dominate its traditional niche market of wheeled, telescopic boom excavators and to begin to compete in the larger market of conventional crawler excavators, a market historically dominated by knuckle-boom technology. Gradall rough-terrain variable reach material handlers are typically used by residential, non-residential and institutional building contractors for lifting, transporting and placing a wide variety of materials at their point of use or storage. The Company's material handlers are sold through approximately 40 independent distributors at approximately 169 locations throughout North America. In addition, Gradall material handlers are available at national rental companies at over 490 locations. The Company continues to introduce new material handlers with Gradall's unique 90 rear-pivot steering, hydrostatic drive and low profile design which provide an exceptional combination of maneuverability, versatility and stability. This new product development has allowed the Company to remain competitive in the rapidly growing rough-terrain variable reach material handler market. -2- Gradall's strategy is to design and produce high quality hydraulic excavators and material handlers for niche markets while simultaneously reducing manufacturing costs and increasing production efficiencies. Gradall's ability to design and customize each of its product lines to fit the specifications of its customers augments the uniqueness of the Company's products. In 1995, the Company commenced a multi-year program designed to expand plant capacity and reduce production costs by increasing labor efficiency and equipment productivity and improving quality. The Company invested $4.2 million in 1995, $2.2 million in 1996, $5.3 million in 1997, and $13.3 million in 1998. During 1999 the Company plans to invest approximately $10.5 million for additional capital improvements under this program. Management believes that these strategies have enabled the Company to increase substantially its profitability in recent years. In addition, during 1998 the Board of Directors approved in principle a multi-year capacity expansion program (the "Capacity Expansion Program") which is intended to increase manufacturing capacity in excess of 50% over the next three to five years. The Capacity Expansion Program will require a $30 to $50 million investment over this time frame. As part of the Capacity Expansion Program, in October 1998 the Company purchased a 330,000 sq. ft. facility at Orrville, Ohio to manufacture material handlers and relieve overcrowding at the New Philadelphia plant. The Company expects operations to begin at the Orrville facility in April 1999. The acquisition of the Orrville facility and the purchase of robot welders, machining centers and lasers which total approximately $8.3 million are the investments in this program through December 31, 1998. The Company may alter or revise the Capacity Expansion Program based upon changes in market demand and/or economic conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". THE INDUSTRY Gradall competes principally in the construction equipment industry. In 1997, the latest year for which U.S. industry figures have been published, new orders for construction, mining and material handling equipment exceeded $47 billion. The Company estimates that industry orders for hydraulic excavators and material handlers exceeded $3 billion, in 1997. The construction equipment industry is highly competitive and global in scope. The U.S. construction equipment industry consists of about 700 manufacturers. The demand for construction equipment is largely driven by general economic conditions. -3- Since the beginning of 1994, the construction equipment industry has grown due to improved general economic conditions, increased public funding for infrastructure projects and increased demand for rental equipment. The U.S. Department of Commerce has estimated that more than half of the country's major highways and one-third of the bridges are in need of some repair. Gradall management believes that the need for such repairs will continue to benefit the demand for the Company's products to the extent that funding for such repairs is available. In addition, construction machinery rentals have increased due to the need for specific, high-cost equipment for short durations, strong construction market demand for equipment with broad applications and the lack of an investment tax credit for purchasers. In particular, the market for material handlers, which typically are rented by distributors or other rental companies before being sold in the retail market, has notably increased over the past several years consistent with the trend towards rental of construction equipment. Another important element of the current demand for construction machinery is the replacement of older machines with new and more versatile ones. The Company believes that the present popularity of machines with multiple functions, faster work cycles, ease of transport and special attachments, such as Gradall products, will continue in the future. Excavators. The total market for hydraulic excavators in North America grew from approximately 14,500 units in 1994 to over 23,500 units in 1998. The market growth is due to improved general economic conditions and expanding applications of hydraulic excavators. Excavators were traditionally used for earth moving and below-ground applications such as trenching, road construction, site development, mining and irrigation. The use of excavators has expanded to include many above-ground applications such as demolition, bridge work, hazardous waste clean-up, scrap handling and forestry work as well as applications at industrial sites such as mines and steel mills. The excavator market may be divided into two product categories consisting of track-mounted "crawler" excavators (which is further divided into several size classes) and wheel-mounted "wheeled" excavators, which in recent years have constituted approximately 97% and 3% of the total market for excavators, respectively. The conventional crawler excavator market has been traditionally dominated by knuckle-boom technology. The Company manufactures telescopic boom crawler excavators in three size classes, 12-14 tons, 19-21 tons and 24-28 tons, which in 1998 accounted for approximately 8%, 18% and 8% of the total excavator market, respectively, for a total of approximately 34%. The remainder of the crawler excavator market is represented by size classes not currently manufactured by the Company. Based upon industry data, the Company estimates that its market share of the crawler excavator market that it competes in is approximately 1%. Gradall is a leading manufacturer of wheeled telescopic boom excavators. Based on industry data, the Company estimates that during 1998 its market share of wheeled excavators exceeded 40% and that its market share of highway speed, telescopic boom excavators is 85-90%. Material handlers. The market for rough-terrain variable reach material handlers has experienced dynamic growth in recent years due to new applications, increased rental demand and displacement of straight-mast forklifts and small rough-terrain cranes. The retail market for material handers has grown from approximately 3,500 units in 1994 to more than 11,000 units in 1998. Material handlers are typically used for lifting, transporting and placing a wide variety of materials such as bricks, blocks, lumber, drywall, structural steel and roofing materials at their point of use or storage. The increased use of new attachments such as buckets, augers, winches, truss booms, side shifting/fork positioning carriages and swing carriages has contributed to the development of new applications of material handlers. -4- The rough-terrain variable reach material handler market is divided into several size classes. The Company manufactures and markets material handlers in three sizes, 6-7,000 lbs., 8-9,000 lbs. and 10,000 lbs. and over, which in the aggregate represent over 92% of the total market for material handlers. Based on industry data, the Company estimates that its market share of rough-terrain variable reach material handlers in which it competes is approximately 16%. GROWTH STRATEGY The Company's growth strategy is to design and produce high quality hydraulic excavators and material handlers for niche markets while simultaneously reducing manufacturing costs and increasing production capacity. Since 1994, the Company has introduced 12 new products, and its sales increased from $88.8 million in 1994 to $182.6 million in 1998 and operating income increased from $6.1 million in 1994 to $24.0 million in 1998. The key components of the Company's strategy are: Develop unique products. The Company remains committed to devoting significant resources toward engineering and producing unique excavators and material handlers. With the development of its XL Series excavators, the Company introduced new products to the conventional crawler excavator market. The XL Series excavators are exceptional because they combine the versatility of the Gradall rotating, telescopic boom with the productivity of high-pressure hydraulics. Shipments of the XL 2200, the latest XL Series model, which competes in the 12-14 ton size class, commenced in May 1997, and has been well received by distributors and customers. In mid-1997 the Company introduced the XL model, XL2210, which is operated with a remote control device, making it popular for steel and aluminum metal mill maintenance work as well as hazardous waste cleanup and other potentially dangerous jobs. Gradall entered the non-highway speed wheeled excavator market with the introduction of the XL2300 at the BAUMA trade show in Munich, Germany in April 1998. Gradall introduced in July 1997 a new D Series material handler in the 10,000 lbs. and over size class which is one of the largest material handlers in the industry. In January 1998, the Company introduced seven new D Series models, completing the D Series family. The eight new D Series models provide state of the industry operator protection, new instrumentation, wider seating and excellent visibility in all directions. The machines are designed for easy operation, shortening the operator training process and encouraging faster, more efficient work with advantages like no-shift transmissions. The Company's product development engineers are currently designing additional new excavators and material handlers which Gradall plans to market in the near future. Target niche markets. The Company is working to continue its leading position in its traditional niche market of highway speed, telescopic boom excavators and to gain a strong position in several niche markets in the rough terrain and conventional crawler market. Prior to 1993, the Company focused on the wheeled excavator market which represents approximately 3% of the total excavator market. Although this niche market accounts for a small portion of the overall excavator market, it is an increasing market that generates consistent profit margins. With the introduction of the XL Series excavators in 1993, the Company began to compete in several size classes of the conventional crawler excavator market which in the aggregate currently represent approximately 34% of the excavator market. Gradall believes that it is well-positioned to take advantage of the niches in the crawler excavator market which demand premium full-featured products. In the material handler market, the Company focuses on the segment which demands a reliable, premium product that offers a high level of versatility and maneuverability. The Company believes it is well-positioned to compete in this dynamically growing market. -5- Improve manufacturing processes. An important element of Gradall's growth strategy is to expand profit margins through improved manufacturing processes. In 1995, the Company commenced a multi-year program designed to expand plant capacity and reduce production costs by increasing labor efficiency and equipment productivity and improving quality. The Company invested $4.2 million in 1995, $2.2 million in 1996, $5.3 million in 1997, and $13.3 million in 1998. During 1999 the Company plans to invest approximately $10.5 million for additional capital improvements under this program. Thus far, capital improvements have included robotic welding systems, laser cutting machines, paint systems and direct computer-controlled equipment designed for cellular production. Planned expenditures will include additional robotic welding systems, laser cutting machines, and an additional machining center. Management believes that these strategies have enabled the Company to increase substantially its profitability in recent years. In addition, during 1998 the Board of Directors approved in principle a multi-year capacity expansion program (the "Capacity Expansion Program") which is intended to increase manufacturing capacity in excess of 50% over the next three to five years. The Capacity Expansion Program will require a $30 to $50 million investment over this time frame As part of the Capacity Expansion Program, in October 1998 the Company purchased a 330,000 sq. ft. facility at Orrville, Ohio to manufacture material handlers and relieve overcrowding at the New Philadelphia plant. The Company expects operations to begin at the Orrville facility in April 1999. The acquisition of the Orrville facility and the purchase of robot welders, machining centers and lasers which total approximately $8.3 million are the investments in this program through December 31, 1998. The Company may alter or revise the Capacity Expansion Program based upon changes in market demand and/or economic conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". Gradall has also adopted programs designed to reward its employees for improvements in overall productivity and profitability. In addition, the Company has implemented aggressive quality programs in the areas of statistical process control and quality assurance. Gradall believes its recent and planned investments in automation and technology, material control, productivity incentives and quality programs should improve its manufacturing processes and benefit profit margins in the future. Emphasize quality. Gradall has adopted a "continuous improvement" strategy for every facet of its operation. The Company has carried the continuous improvement concept beyond the scope of the traditional quality definition to include product development and employee training and development. This strategy has led to significant reductions in the Company's total cost of quality (defined as warranty, rework and scrap expenses), which declined from 2.2% of sales in 1994 to 1.2% in 1998. The Company has implemented statistical process controls, a monitored product quality review program and a formal supplier quality assurance program. -6- Increase distributor support. The Company believes that its distribution network is among the strongest in the industry and a core strength for its future growth. The Company plans to further enhance its distribution network by continuing to produce unique new products, provide marketing and sales support through its regional sales managers, and provide technical and service support through its district service managers. Expand service parts business. Management has focused on expanding the Company's service parts business to increase revenues and profits by taking advantage of the growth in the working population of Gradall excavators and material handlers. As a part of this focus, the Company offers the Gradall On Line Distributor ("GOLD") computer system which links the Company and its distributors to facilitate communications regarding orders, availability and other information involving Gradall service parts. In 1998 the Company invested significant resources toward the development of a digital database on CD-ROM for all technical publications including operator, service, parts and maintenance manuals. The system named Gradall Plus will be introduced to the distribution network during the first quarter of 1999. Service parts sales and marketing activities are supported by eight district product support managers who are dispersed geographically throughout the U.S. Pursue joint venture, international business opportunities and strategic alliances. Although substantially all of the Company's business has been focused in North American, the Company believes its increased product development efforts should enable the Company to take advantage of international opportunities, including emerging markets in Russia, Latin America, Turkey, China and the Pacific Rim. The Company obtained its ISO 9001 certification in January 1999, which will assist the international marketing of its products. The Company believes there is opportunity to participate in the current trend of consolidation in the construction equipment industry. -7- PRODUCTS AND MARKETS The Company engineers, manufactures and markets premium hydraulic excavators and material handlers which incorporate Gradall's unique design features. In addition, the Company manufactures and markets service parts for its excavators and material handlers. Since January 1994, the Company has introduced 12 new products which accounted for more than 85% of total unit sales in 1998.
REVENUE BY PRODUCT CATEGORY YEAR ENDED DECEMBER 31, 1994(1) 1995(1) 1996 1997 1998(2) -------- -------- ------ ------ -------- (DOLLARS IN MILLIONS) Excavators. . . . . . $ 45.2 $ 49.2 $ 55.1 $ 57.4 $ 54.6 Material handlers . . 30.7 53.6 70.4 84.0 110.2 Service parts . . . . 12.9 15.6 15.4 17.3 17.9 -------- -------- ------ ------ -------- Total . . . . . . . . $ 88.8 $ 118.4 $140.9 $158.7 $ 182.6 ======== ======== ====== ====== ======== _______________ (1) Material handlers and service parts include revenues from a product line which was discontinued in 1995. (2) The sum in this column may not equal the indicated total due to rounding.
Excavators All Gradall excavators are distinguished by their rotating telescopic boom technology, versatility, productivity and reliability. Gradall excavators are typically used for ditching, sloping, finished grading and general maintenance which often require precise boom and bucket movements which conventional knuckle-boom excavators cannot provide. Gradall excavators are also used at various construction sites with restricted overhead clearance areas or other operating requirements where it would be difficult for conventional knuckle-boom excavators to operate. Gradall's highway speed excavators are particularly useful to customers who require their equipment to be at multiple locations within short periods of time. Gradall excavators compete in the wheeled excavator category and three size classes in the crawler excavator category. A brief description of Gradall excavator models is as follows: G3WD Series E. This model is a single-engine highway speed excavator purchased primarily by state and local government agencies. The mobility and versatility of this product are its primary market strengths since it enables the user to do the work of three machines - an excavator, grader and wheeled loader. The Company's ability to customize this product to meet the specifications required by government agency bid contracts gives it a particular competitive advantage. XL Series. The Company formally introduced the XL Series in March 1993 to enhance its competitive position in the larger market segment of conventional crawler excavators. The XL Series products compete in the 12-14 ton, 19-21 ton and 24-28 ton size classes which in the aggregate constitute approximately 34% of the total excavator market. The XL Series products combine the versatility of the Gradall telescopic boom technology with the performance of high-pressure hydraulics. The XL Series products have more than twice the productivity and efficiency of the Gradall models they replaced. -8- XL2000 Series. Shipments of the new crawler model XL2200 commenced in May 1997, and it competes in the 12-14 ton class which represents approximately 8% of the total excavator market. This model is designed to meet the needs of residential and general contractors. In August 1997 the Company commenced shipments of a remote controlled crawler model XL2210, which is a special industrial version for use in mines and steel mills. During 1998 the Company introduced a rough-terrain wheeled version of the XL2000 series. XL4000 Series. This model competes in the 19-21 ton class which represents approximately 18% of the total excavator market. The XL4000 Series is available in both wheeled and crawler versions. This model is widely used by municipalities and general contractors. XL5000 Series. This model competes in the 24-28 ton class traditionally dominated by conventional crawler knuckle-boom excavators. This class accounts for approximately 8% of the total excavator market. The XL5000 Series is the largest high-pressure hydraulic excavator manufactured by the Company and is available in both wheeled and crawler versions. It is well accepted among infrastructure and highway contractors. In addition to the above-mentioned models which are primarily used in construction applications, the Company offers excavators in both wheeled and crawler versions which are used in industrial applications such as mines and steel mills, respectively. Certain specialized Gradall crawler models are the accepted standard in the steel industry for cleaning furnaces and ladles and for other steel mill applications. Gradall excavators have also been specially designed for mine scaling applications at limestone and salt mines. The primary features of Gradall excavators are: Telescopic boom. The rotating, telescopic boom is well known for its versatility and strength. The unique design is excellent for production work such as trenching and earth moving as well as precision work including finished grading and clean-up. Wheeled carriers. The Company's highway speed, wheeled carriers are designed and manufactured by Gradall to meet the needs for a reliable and durable carrier. They are offered in two, four or six-wheel drive configurations. Remote control, single cab operation. All Gradall highway speed wheeled excavators are designed with two cabs-one for the operation of the carrier and the other for the operation of the excavator. They are engineered so that one operator can control the carrier by remote control from the excavator cab. This allows for greater versatility and adds significantly to the productivity of the machine. -9- Crawler undercarriages. Gradall crawler undercarriages are specifically designed and manufactured by the Company to provide the speed, increased productivity and stability requirements of XL Series excavators. Options/attachments. In addition to a variety of standard features, Gradall also offers specialized options as requested by customers including air conditioning, work lights, vandal covers and special end of the boom auxiliary hydraulics. In 1996 Gradall introduced the "telestick" boom attachment which extends the reach of the XL4000 and XL5000 Series excavators approximately 50% to 45'5" and 50'9", respectively. Material Handlers All Gradall material handlers are renowned for their maneuverability, versatility and dependability. Gradall material handlers are typically used for lifting, transporting and placing a variety of materials such as bricks, blocks, lumber, drywall, structural steel and roofing materials at their point of use or storage. The Company manufactures five basic models of material handlers in three size classes. A brief description of Gradall material handler models is as follows: 522/524D. The 522/524D was introduced in January 1998 and competes in the 6-7,000 lbs. class which represents approximately 47% of the total material handler market. It is available in both two-section and three-section booms which provide a maximum lift height of 24' and 32', respectively. This model is very cost efficient and is ideally suited for less demanding applications. 534D-6. The 534D-6 was introduced in January 1998 and is the most popular Gradall material handler. It also competes in the 6-7,000 lbs. class and has two maximum lift heights, a standard 36' or an optional 42'. This model has been very well accepted by mason and roofing contractors and by the rental industry. 534D-9. The 534D-9 was introduced in January 1998 and competes in the 8-9,000 lbs. class which represents approximately 33% of the market and has a maximum lift height of 40'. This model has a strong appeal to framing and general contractors. 534D-10. The 534D-10 was introduced in January, 1998, and competes in the 10,000 lbs. and over class which represents approximately 12% of the market. It has a maximum lift height of 40' and is ideally suited for operations requiring heavy lifting. This model has stabilizers as standard equipment to increase its overall capacity at full reach. 544D. The 544D was introduced in July 1997 and also competes in the 10,000 lbs. and over class. It is one of the industry's largest material handlers and has a maximum lift height of 55'. This model permits working on buildings as high as six stories and also includes stabilizers as standard equipment. -10- The primary features of Gradall material handlers are: 90 degree rear-pivot steering. This is the key feature of a Gradall material handler which provides excellent maneuverability by allowing the machines to turn within a tight radius. The design keeps the forks and the load inside the turning radius while providing the ability to maneuver the vehicle in tight areas. Strong and versatile boom. Gradall material handlers feature one of the industry's strongest booms. The Gradall boom is capable of handling a variety of attachments which leads to a high degree of versatility. In addition, Gradall has a proprietary design to facilitate changing the attachments called QuickSwitch. Low profile. A significant advantage of the Gradall material handler is its low overall height. The vehicle can move under doorways as low as eight feet while providing excellent ground clearance. Hydrostatic drive. Hydrostatic drive provides the benefits of easier, no-shift operations, inching capability, quick accelerations and a smooth, even ride. Stability. Gradall material handlers operate with the industry's longest wheelbase and shortest overall length which increase their capacity and stability. The mid-mounted engine within the frame provides uniform weight distribution and improved visibility. Service Parts In addition to engineering, manufacturing and marketing hydraulic excavators and material handlers, the Company produces and sells related service parts. This is an important source of revenue and profitability for the Company. Since the Company's products are kept operational for years with parts and service support, each Gradall product that enters the market provides the Company with a potential long-term revenue source. Sales of service parts typically generate high gross margins and historically have been less sensitive to industry cycles. In order to increase sales of service parts in a very competitive market, the Company focuses on parts availability, marketing and sales activities. As an element of this focus, the Company offers the Gradall On Line Distributor ("GOLD") computer system which links the Company and its distributors to facilitate communications regarding orders, availability and other information involving Gradall service parts. The Company emphasizes the importance of stocking and marketing service parts and has developed a delivery system to provide quick shipment of emergency and unit down parts. The Company provides same day shipment on unit down orders and promotes distributor incentives for stock orders. In 1998 the Company invested significant resources toward the development of a digital database on CD-ROM for all technical publications including operator, service, parts and maintenance manuals. The system named Gradall Plus will be introduced to the distribution network during the first quarter of 1999. -11- Specialized Machines Gradall has the ability to modify its products to suit the specific needs of its customers. This ability to produce specialized machines is a part of Gradall's overall strategy to serve specialty, higher margin markets within the construction equipment industry. Approximately 35% of all Gradall excavators are modified from standard models to meet customer requirements with add-on and/or special attachments. Gradall is able to design and produce specialized machines while meeting the delivery schedule of its customers. Some of the specialized machines developed by the Company are now being marketed as standard models; for example, special excavators created for mine scaling, steel mills and other special industrial applications have become Gradall standard models. MARKETING & DISTRIBUTION The Company primarily markets and distributes its products through a network of independent distributors and rental companies who, in turn, sell or rent the products to end-users. The Company also sells directly through its own marketing staff to certain major accounts as well as to customers located outside the United States. The Company has agreements with its distributors under which the distributors purchase products from the Company at agreed-upon prices for resale within the distributor's territory. Although the Company's distributors are not required to purchase any minimum number of products, they are required to maintain agreed-upon inventory levels. Either party may terminate the distributor agreement upon the occurrence of certain events, including bankruptcy or breach, or in the event either party is dissatisfied with the other party's performance, upon thirty days notice after a sixty day dispute resolution procedure. In addition to the Company's products, distributors typically sell construction equipment manufactured by third parties, including competitors of the Company. Gradall excavators are primarily used by general contractors and government agencies. Gradall material handlers are customarily used by residential, non-residential and institutional building contractors. Since these are distinct user bases, the Company markets excavators and material handlers and their related service parts through two separate distribution networks. The Company's excavator distribution network is comprised of approximately 46 independent distributors at approximately 168 locations in North America. The Company's material handler distribution network is composed of approximately 40 independent distributors at approxi-mately 169 locations. In addition, Gradall material handlers are available at national rental companies at over 490 locations. Hertz Equipment Rental Corporation, a national rental company, purchased material handlers which accounted for more than 10% of the Company's total sales in 1998. No other distributor or rental company accounted for more that 10% of the Company's total sales in 1998. The Company believes that its ongoing distributor support and training programs help enhance the competitiveness and increase the strength of its distribution network. The Company supports the sales, service and rental activities of its distributors with product advertising, sales literature, product training and major trade show participation. The independent distribution network is serviced by the Company's five regional sales managers for excavators and six regional sales managers and three national account managers for material handlers. Each regional sales manager is also responsible for developing new distributors within his region. -12- The Company provides its distributors with product financing through agreements with third party financing companies. Such financings include a Wholesale Floor Plan for distributors and a Retail Finance Plan for end-users, each with reduced interest rates subsidized by the Company, and a Rental Plan for distributors. The Company provides parts and service support for its products through the field product support organization consisting of eight product support district managers located throughout the United States. The primary responsibility of the district managers is to provide service training and technical support to the distribution network. Additionally, they are responsible for after-market parts sales and act as liaisons among customers, distributors, and the Company on all product support related matters. This group is supported by an internal product support team that provides service training, technical publications, and parts marketing initiatives. MANUFACTURING The Company fabricates, welds, machines and assembles the chassis, telescopic booms, attachments and many component parts for its excavators and material handlers. The goals of the Company's manufacturing operation are quality, efficiency, productivity, cost control and on-time delivery. The Company strives to increase its manufacturing capacity, productivity and quality through automation and technology, material control, productivity incentives for employees and quality programs. Automation and technology. In 1995, the Company commenced a multi-year program designed to expand plant capacity and reduce production costs by increasing labor efficiency and equipment productivity and improving quality. The Company invested $4.2 million in 1995, $2.2 million in 1996, $5.3 million in 1997, and $13.3 million in 1998. During 1999 the Company plans to invest approximately $10.5 million for additional capital improvements under this program. Thus far, capital improvements have included robotic welding systems, laser cutting machines, paint systems and direct computer-controlled equipment designed for cellular production. Planned expenditures will include additional robotic welding systems, laser cutting machines, and an additional machining center. Management believes that these strategies have enabled the Company to increase substantially its profitability in recent years. In addition, during 1998 the Board of Directors approved in principle the Capacity Expansion Program which is intended to increase manufacturing capacity in excess of 50% over the next three to five years. The Capacity Expansion Program will require a $30 to $50 million investment over this time frame. As part of the Capacity Expansion Program, in October 1998 the Company purchased a 330,000 sq. ft. facility at Orrville, Ohio to manufacture material handlers and relieve overcrowding at the New Philadelphia plant. The Company expects operations to begin at the Orrville facility in April 1999. The acquisition of the Orrville facility and the purchase of robot welders, machining centers and lasers which total approximately $8.3 million are the investments in this program through December 31, 1998. The Company may alter or revise the Capacity Expansion Program based upon changes in market demand and/or economic conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". Gradall believes that the recently completed capital improvements, which have reduced production costs, expanded plant capacity and improved quality, and planned capital improvements, should benefit profit margins in the future. -13- Material control. The Company has instituted and continues to institute material control improvements. These improvements include just-in-time inventory management, the relocation of certain inventory to the shop floor to support cell manufacturing, set-up reduction programs and the reduction and control of obsolete and surplus inventory. Productivity incentives. The Company operates a productivity sharing plan for its unionized, hourly employees called Gainsharing. Gainsharing is a group incentive program that is calculated from a Company-wide measure of productivity. The productivity of the plant is measured against a base period. Each employee receives a Gainshare bonus based upon the percentage increase in productivity. The Company has an active labor management cooperative committee which is supported by employee positive action teams. These teams implement changes in the manufacturing processes which improve quality and productivity, which in turn support the Gainsharing program. Quality programs. The Company has implemented comprehensive quality programs, including the following: Statistical process control. The Company maintains control charts in machining, welding and assembly as well as a pre-shipment quality audit program on finished machines. The Company plans to continue expanding the use of statistical process control charts. Quality feedback/warranty reduction. Gradall reviews critical quality issues on an ongoing basis and initiates corrective actions. A computerized warranty system captures early warning reports from field service managers as well as details of warranty claims which provide additional input to the quality feedback program. Supplier quality assurance. The Company monitors supplier quality through a computer system which records and tracks reports on defective material allowing the Company to execute corrective action measures. Gradall's commitment to automation and technology, material control, productivity incentives for employees and quality programs have improved the capacity, productivity and quality of the Company's manufacturing operations. From 1994 to 1998, the Company increased its unit production by 157% with only a 31% increase in its workforce. The Company's total cost of quality (defined as warranty, rework and scrap expenses) declined from 2.2% in 1994 to 1.2% of sales in 1998. -14- ENGINEERING AND DESIGN Gradall believes that its engineering and design capabilities are among the Company's major strengths. The engineering and design functions are closely integrated with the Company's manufacturing and marketing activities. This allows the Company to integrate new production technology with specific needs of customers, resulting in expanded market opportunities and increased profitability for the Company. In 1998, approximately 35% of Gradall excavators were modified from standard models to meet customer requirements with add-on and/or special attachments. The Company's manufacturing engineers are involved in both product design and implementation of capital improvements in order to maximize manufacturing processes and efficiencies. In addition, the implementation of "concurrent engineering," in which personnel from engineering, manufacturing, materials procurement and marketing are simultaneously engaged in new product development programs, has led to faster new product development time, reduced costs and improved quality. Gradall has made significant investments in its engineering systems, which currently includes a computer-aided design (CAD) system with finite element analysis (FEA) and three-dimensional solids design capabilities. This system has greatly expanded Gradall's design capabilities and has significantly reduced the time required for engineering and design functions. COMPETITION The markets in which the Company operates are highly competitive. The Company faces competition in each of its product lines from a number of different manufacturers, some of which have greater financial and other resources than the Company. The principal competitive factors affecting the markets for the Company's products include performance, functionality, price, brand recognition, customer service and support, and product availability. The excavator market may be divided into two product categories - track-mounted "crawler" excavators (which is further divided into several size classes) and wheel-mounted "wheeled" excavators. In recent years, crawler excavators have constituted approximately 97% of the total market for excavators and wheeled excavators have accounted for 3%. The conventional crawler excavator market has been traditionally dominated by knuckle-boom technology. The leading producers of conventional crawler excavators are Caterpillar Inc., Deere & Co., Hitachi Corporation and Komatsu, Ltd. The Company manufactures telescopic boom crawler excavators in three size classes, 12-14 tons, 19-21 tons and 24-28 tons, which in 1998 accounted for approximately 8%, 18% and 8% of the total excavator market, respectively, for a total of approximately 34% of the total excavator market. Gradall's XL Series excavators are designed to appeal to niche markets in these size classes which require the versatility of the Gradall telescopic boom technology with the performance of high-pressure hydraulics. The remainder of the crawler excavator market is represented by size classes not currently manufactured by the Company. Based upon industry data, the Company estimates that its market share of the crawler excavator market that it competes in is approximately 1%. -15- Gradall is a leading manufacturer of wheeled telescopic boom excavators. Based on industry data, the Company estimates that its market share of all wheeled excavators exceeded 40% and that its market share of highway speed, telescopic boom excavators is 85-90%. The Company has only one competitor in the highway speed, telescopic boom excavator market. The rough-terrain variable reach material handler market is divided into several size classes. The Company manufactures material handlers in three size classes, 6-7,000 lbs., 8-9,000 lbs. and 10,000 lbs. and over, which in the aggregate represent over 92% of the total market for material handlers. Based on industry data, the Company estimates that its market share of all material handlers in which it competes is approximately 16%. Other than Gradall, the principal producers of variable reach material handlers are Caterpillar, Inc., Gehl, JCB International Co., Ltd., and Omniquip International BACKLOG As of December 31, 1998, the Company's backlog of orders aggregated approximately $13.6 million compared to approximately $11.3 million at December 31, 1997 and approximately $14.8 million at December 31, 1996. The increase in backlog of orders at December 31, 1998 was due primarily to orders for the new excavator model XL2300 which were not in the prior year backlog. Substantially all backlog orders at December 31, 1998 are expected to be shipped by April 30, 1999. EMPLOYEES As of December 31, 1998, Gradall employed 711 people, 469 hourly and 242 salaried. The Company's 469 hourly employees are represented by the International Association of Machinists and Aerospace Workers (IAM) and are currently working under a three-year contract which will expire on April 16, 2000. The Company's current contract with the IAM was approved after a three-week work stoppage which occurred when the union failed to ratify a proposed new three-year contract. During the three-week work stoppage the Company was able to continue production and shipment, although at a reduced level. There can be no assurance that the Company will be able to negotiate satisfactory contracts with the union in the future or that the Company's union employees will not participate in any work stoppage which could have a material adverse effect on the operations of the Company. SEASONAL TRENDS Generally, the Company's sales are not subject to significant seasonal variations; however, its sales and earnings tend to be somewhat lower in January and February due to adverse weather conditions in the Northern climates. ENVIRONMENTAL REGULATION The Company is subject to various federal, state and local environmental laws and regulations, including those governing discharges into the air and water, as well as the handling and disposal of solid and hazardous wastes. Pursuant to these laws and regulations, the Company may be required from time to time to remediate environmental contamination associated with releases of hazardous substances. The Company has made and will continue to make capital and other expenditures to comply with such environmental laws and regulations. Such expenditures are not presently material and the Company currently anticipates that such expenditures will not be material in the future. -16- Item 2. PROPERTIES The Company currently operates from a single facility, which it owns. The facility is located in New Philadelphia, Ohio and contains 429,320 square feet on a 66 acre site and accommodates the Company's corporate offices, manufacturing operations and warehouse. In October 1998 the Company acquired a second facility located in Orrville, Ohio which contains 330,000 square feet on a 59 acre site. This facility will accommodate offices, manufacturing operations and warehouse. The Company expects operations to begin at the Orrville facility in April 1999. Item 3. LEGAL PROCEEDINGS Due to the nature of its products, the Company may be subject to significant claims for product liability. The Company is a party to various lawsuits seeking damages for alleged product liability arising from the use of its products. The Company currently maintains product liability insurance with an annual aggregate limit of $11 million subject to a self-insurance retention in the amount of $175,000 per claim. There can be no assurance that the proceeds available under the Company's insurance policy would be adequate to cover potential product liability claims. A successful claim against the Company in excess of the Company's insurance coverage, or multiple successful claims against the Company within the self insurance retention amount, could have a material adverse effect on the financial results of the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT Executive officers of the Company as of February 26, 1999 were as follows:
Name Age Position - - ------------------ --- ----------------------------------------------------- Barry L. Phillips 57 President - CEO David S. Williams 58 Vice President , Marketing and Sales Joseph H. Keller 52 Vice President, Engineering and Secretary James C. Cahill 46 Vice President, Manufacturing Bruce A. Jonker 56 Vice President, Chief Financial Officer and Treasurer
-17- Mr. Phillips has served as President and Chief Executive Officer of the Company since 1995 and has served as President of The Gradall Company since 1985. Prior to 1985, Mr. Phillips spent 26 years with International Harvester and was the plant manager of its Farmall Plant in Rock Island, Illinois. Mr. Williams has served as Vice President, Marketing and Sales of the Company since 1995 and has served as Vice President, Marketing and Sales of The Gradall Company since 1986. Prior to that, Mr. Williams served as President of Claas of America and held various management positions at International Harvester, including General Sales Manager. Mr. Keller joined The Gradall Company in 1981 and has served as its Vice President, Engineering and Secretary since 1987. Mr. Keller has served as Vice President, Engineering and Secretary of the Company since 1995. Mr. Cahill joined The Gradall Company in 1982 and has served as its Vice President, Manufacturing since 1990. Mr. Cahill has served as Vice President, Manufacturing of the Company since 1995. Mr. Jonker joined The Gradall Company in 1973 and has served as its Vice President and Chief Financial Officer since July 1994 and its Treasurer since November 1995. Mr. Jonker has served as Vice President, Finance and Administration and Treasurer of the Company since November 1995 and as Vice President, Chief Financial Officer and Treasurer of the Company since April 1996. -18- PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS TRADING INFORMATION The Company's Common Stock has been traded on The Nasdaq National Market under the symbol "GRDL". The following table sets forth the high and low sales prices for the Common Stock of the Company for the periods indicated as reported by the Nasdaq National Market:
Sale Price ----------------- High Low ------- -------- 1997 - - --------------------- First Quarter $16 1/4 $ 12 Second Quarter 16 1/4 12 Third Quarter 17 3/8 14 3/4 Fourth Quarter 16 7/8 15 1998 - - --------------------- First Quarter 18 3/8 15 3/8 Second Quarter 17 7/8 13 1/16 Third Quarter 16 7/8 12 5/8 Fourth Quarter 16 13 3/32 1999 - - --------------------- First Quarter through February 26, 1999 15 12 1/4
RECORD HOLDERS The approximate number of record holders of the Company's equity securities at February 26, 1999 was as follows: Title of Class Number of Record Holders ---------------- ------------------------ Common Stock 135 -19- DIVIDENDS The Company currently intends to retain its future earnings to finance growth and development of its business and therefore does not anticipate paying cash dividends on the Common Stock for the foreseeable future. Any future determinations to pay dividends will be at the discretion of the Board of Directors and will be dependent on the Company's financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant. Item 6. SELECTED CONSOLIDATED FINANCIAL DATA The information required by this item is incorporated by reference to the "Selected Consolidated Financial Data" on pages 16 and 17 of the 1998 Annual Report to Shareholders. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 36 through 45 of the 1998 Annual Report to Shareholders. This report including the Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated by reference herein, contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's Annual Report to Shareholders, any Report on Form 10-K, Form 10-Q, Form 8-K or any other written or oral statements made by or on behalf of the Company may include forward looking statements. Forward looking statements represent the Company's expectations or beliefs concerning future events. Any forward looking statements made by or on behalf of the Company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Undue reliance should not be placed on any forward looking statements made by or on behalf of the Company as such statements speak only as of the date made. The Company undertakes no obligation to publicly update or revise any forward looking statement, whether as a result of new information, the occurrence of future events or otherwise. -20- Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any market risk sensitive instruments at December 31, 1998. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to pages 18 through 35 of the 1998 Annual Report to Shareholders. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -21- PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to the directors of the Company is incorporated by reference to the Company's proxy statement to be filed for its 1999 Annual Meeting of Stockholders. Item 11. EXECUTIVE COMPENSATION Information with respect to executive compensation is incorporated herein by reference to the Company's proxy statement to be filed for its 1999 Annual Meeting of Stockholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the Company's proxy statement to be filed for its 1999 Annual Meeting of Stockholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and related transactions is incorporated by reference to the Company's proxy statement to be filed for its 1999 Annual Meeting of Stockholders. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: 1. Financial Statements The following consolidated financial statements of the Company and its subsidiaries and the Report of the Independent Accountants included in the 1998 Annual Report to Shareholders on pages 18 through 35 are incorporated by reference in Part II, Item 8. Report of Independent Accountants Consolidated Balance Sheets - December 31, 1998 and December 31, 1997 Consolidated Statements of Income for the three years ended December 31, 1998 Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 1998 Consolidated Statements of Cash Flows for the three years ended December 31, 1998 Notes to Consolidated Financial Statements (including unaudited quarterly financial information) -22- 2. Financial Statement Schedules The following financial statement schedules of the Company and its subsidiaries and the report of independent auditors thereon are filed as part of this Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements of the Company and its subsidiaries included in the 1998 Annual Report to Shareholders. Schedule Page No. -------- -------- Independent Auditors Report 26 Schedule II - Valuation and Qualifying Accounts 27 All other schedules have been omitted because they are not applicable or not required or because the required information is included in the consolidated financial statements or the notes thereto. 3. Exhibits The exhibits in the accompanying Exhibit Index are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the last quarter of the year covered by this report. -23- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GRADALL INDUSTRIES, INC. March 26, 1999 By:/s/ Barry L. Phillips - - ---------------- ---------------------- Date Name: Barry L. Phillips Title: President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - - --------------------------- ---------------------------------------- -------------- /s/ Barry L. Phillips President (Principal Executive Officer - - --------------------------- Barry L. Phillips and Director) March 26, 1999 -------------- /s/ Bruce A. Jonker Vice President, Chief Financial Officer - - --------------------------- Bruce A. Jonker and Treasurer (Principal Financial Officer and Principal Accounting Officer) March 26, 1999 -------------- /s/ Sangwoo Ahn Chairman of the Board and Director - - --------------------------- Sangwoo Ahn March 26, 1999 -------------- /s/ Ernest Green Director - - --------------------------- Ernest Green March 26, 1999 -------------- /s/ Perry J. Lewis Director - - --------------------------- Perry J. Lewis March 26, 1999 -------------- -24- /s/ John A. Morgan Director - - --------------------------- John A. Morgan March 26, 1999 -------------- /s/ William C. Ughetta, Jr. Director - - --------------------------- William C. Ughetta, Jr. March 26, 1999 -------------- /s/ David S. Williams Director - - --------------------------- David S. Williams March 26, 1999 -------------- /s/ Jack Rutherford Director - - --------------------------- Jack Rutherford March 26, 1999 --------------
-25- REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Stockholders of Gradall Industries, Inc.: Our report on the consolidated financial statements of Gradall Industries, Inc., has been incorporated by reference in this Annual Report on Form 10-K from page 35 of the 1998 Annual Report to Stockholders of Gradall Industries, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 23 of this Form 10-K Annual Report. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Cleveland, Ohio February 23, 1999 -26-
GRADALL INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS) Additions ---------------------- Balance at Charged to Charged Balance at Beginning Costs and to Other End of Description of Period Expenses Accounts Deductions Period - - ------------------------------------- ----------- ----------- --------- ----------- ----------- LIFO inventory reserve: Year ended December 31, 1996 . . . . $ 5,161 $ 269 $ 5,430 Year ended December 31, 1997 . . . . 5,430 140 5,570 Year ended December 31, 1998 . . . . 5,570 518 6,088 Allowance for doubtful accounts: Year ended December 31, 1996 . . . . 62 17 16 (a) 4 (b) 15 (c) 76 Year ended December 31, 1997 . . . . 76 3 4 (a) 11 (b) 16 (c) 56 Year ended December 31, 1998 . . . . 56 91 42 (a) 96 (b) 24 (c) 69 Allowance for inventory obsolescence: Year ended December 31, 1996 . . . . 856 751 735 (d) 872 Year ended December 31, 1997 . . . . 872 347 407 (d) 812 Year ended December 31, 1998 . . . . 812 154 279 (d) 687 (a) Late fees assessed and fully reserved. (b) Doubtful accounts written off. (c) Revenue recognized from late fees collected. (d) Write off of obsolete inventories.
-27-
EXHIBIT INDEX Exhibit No. Description ------- ---------------------------------------------------------------------- 3.01 Amended and Restated Certificate of Incorporation of the Registrant - incorporated by reference to Exhibit 3.01 to the Company's Registration Statement on Form S-1 (No. 333-06777) 3.02 Amended and Restated Bylaws of the Registrant - incorporated by reference to Exhibit 3.02 to the Company's Registration Statement on Form S-1 (No. 333-06777) 4.01 Rights Agreement dated as of May 29, 1998 between the Company and Chase Mellon Shareholder Services, LLC, as Rights Agent - incorporated by reference to Exhibit 1 of the Company's Registration Statement on Form 8-A dated June 4, 1998 10.01 Recapitalization Agreement dated as of September 15, 1995 among ICM Industries, Inc., MLGA Fund II, L.P., Jack D. Rutherford and David T. Shelby (excluding exhibits and schedules) - incorporated by reference to Exhibit 10.01 to the Company's Registration Statement on Form S-1 (No. 333-06777) 10.02 Amendment to Recapitalization Agreement dated as of October 12, 1995 - incorporated by reference to Exhibit 10.02 to the Company's Registration Statement on Form S-1 (No. 333-06777) 10.03 Amended and Restated Shareholders Agreement dated as of August 20, 1996 - incorporated by reference to Exhibit 10.03 to the Company's Registration Statement on Form S-1 (No. 333-06777) ** 10.04 Amended and Restated Employment Agreement dated January 1, 1998 between The Gradall Company and Barry L. Phillips - incorporated by reference to Exhibit 10.04 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 -28- ** 10.05 Amended and Restated Employment Agreement dated January 1, 1998 between The Gradall Company and David S. Williams - incorporated by reference to Exhibit 10.05 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 ** 10.06 Deferred Compensation Agreement dated July 19, 1989 between The Gradall Company and Barry L. Phillips - incorporated by reference to Exhibit 10.06 to the Company's Registration Statement on Form S-1 (No. 333-06777) ** 10.07 Amended and Restated Deferred Compensation Agreement dated August 30, 1995 between The Gradall Company and David S. Williams - incorporated by reference to Exhibit 10.07 to the Company's Registration Statement on Form S-1 (No. 333-06777) ** 10.08 Split-Dollar Life Insurance Agreement dated as of August 30, 1995 between The Gradall Company and Barry L. Phillips - incorpo rated by reference to Exhibit 10.08 to the Company's Registration Statement on Form S-1 (No. 333-06777) ** 10.09 Gradall Industries, Inc. 1995 Stock Option Plan - incorporated by reference to Exhibit 10.09 to the Company's Registration Statement on Form S-1 (No. 333-06777) ** 10.10 Amended and Restated Employment Agreement dated as of January 1, 1998 between The Gradall Company and Bruce A. Jonker ** 10.11 Employment Agreement dated as of November 1, 1995 between The Gradall Company and Joseph H. Keller, Jr. - incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 (No. 333-06777) ** 10.12 Employment Agreement dated as of November 1, 1995 between The Gradall Company and James C. Cahill - incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (No. 333-06777) ** 10.13 The Gradall Company Amended and Restated Supplemental Executive Retirement Plan - incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (No. 333-06777) -29- ** 10.14 The Gradall Company Benefit Restoration Plan - incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 (No. 333-06777) 10.15 Amended and Restated Loan and Security Agreement dated as of December 20, 1996, among The Gradall Company, Gradall Industries, Inc. and Heller Financial, Inc., as agent and lender, The CIT Group/Business Credit, Inc. and Bank One Columbus, N.A., as lenders (excluding exhibits and schedules) - incorporated by reference to Exhibit 10.15 in the Company's annual report on Form 10-K filed for the year ended December 31, 1996 10.16 Supply Agreement between The Gradall Company and Iowa Industrial Hydraulics, Inc., dated January 1, 1995 (excluding exhibits) - incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 (No. 333-06777) ** 10.17 Gradall Industries, Inc., 1998 Stock Option Plan incorporated by reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K filed for the year ended December 31, 1997 * 13.01 Annual Report to Shareholders for the year ended December 31, 1997 (only to the extent expressly incorporated herein by reference) 21.01 Subsidiaries of the Registrant - incorporated by reference to Exhibit 21.01 to the Company's Registration Statement on Form S-1 (No. 333-06777) * 23.01 Consent of PricewaterhouseCoopers LLP regarding S-8 registrations * 27.01 Financial Data Schedule _______________ * Filed herewith ** Management contract or compensatory plan or arrangement identified pursuant to Item 14(c) of this Form 10-K.
-30- EX-13.01 2 1998 Annual Report / Gradall Industries, Inc. -1- attitude For over 50 years, Gradall's continual growth can be traced to a unique attitude. A quest to be different and better, leading to the first Gradall machine, created in 1946 to build roads during the post-war labor shortage. The attitude is apparent in the dedication and work ethic of our 700-plus employees, committed to a new high standard in machine design, manufacture and support. Our allied businesses - independent distributors and suppliers - also share our progressive attitude, aligning themselves and their own businesses' futures with Gradall's goal orientation. Plus, it's an attitude shared by our customers - - - contractors and government officials - people who recognize the Gradall difference and actually invest in our unique blend of designed-in productivity, versatility and reliability. Throughout this annual report, you will see evidence of the Gradall attitude, a unique posture which sets an appropriate stage for our impressive corporate performance. -2- Consolidated Financial Highlights (dollars in millions, except share amounts) Gradall Industries, Inc.
For the Years Ended ---------------------- 1998 1997 1996 ------ ------ ------ Net sales . . . . . . . . . . . . . . . . . . $182.6 $158.7 $140.9 Operating income. . . . . . . . . . . . . . . 24.0 20.6 17.9 Income before extraordinary item. . . . . . . 14.4 12.0 8.3 Extraordinary loss on extinguishment of debt, net of tax benefit. - - 1.0 Net income. . . . . . . . . . . . . . . . . . 14.4 12.0 7.3 Earnings per share(1) . . . . . . . . . . . . $ 1.54 $ 1.33 $ 1.07 Working capital . . . . . . . . . . . . . . . 27.8 26.5 14.9 Funded debt . . . . . . . . . . . . . . . . . 7.6 10.37 .9 Shareholders' equity. . . . . . . . . . . . . 42.4 21.29 .1 (1) Earnings per share data is presented on a diluted basis for 1998 and 1997 and on a pro forma basis for 1996. See Note 12 to the Consolidated Financial Statements included herein.
[Net Sales, Operating Income and Income before extraordinary item graphs]
Table of Contents - - -------------------------------------------------------------------------------- Consolidated Financial Highlights . . . . . . . 3 Letter to Stockholders. . . . . . . . . . . . . 4 Gradall Material Handlers . . . . . . . . . . . 8 Gradall Excavators. . . . . . . . . . . . . . . 10 Parts and Distribution. . . . . . . . . . . . . 12 Suppliers . . . . . . . . . . . . . . . . . . . 14 Selected Consolidated Financial Data. . . . . . 16 Consolidated Balance Sheets . . . . . . . . . . 18 Consolidated Statements of Income . . . . . . . 19 Consolidated Statements of Changes in Stockholders' Equity . . . . . . . . . . . 20 Consolidated Statements of Cash Flows . . . . . 21 Notes to Consolidated Financial Statements. . . 22 Report of Independent Accountants . . . . . . . 35 Report of Management. . . . . . . . . . . . . . 35 Management's Discussion and Analysis of Financial Condition and Results of Operations 36 Accounting Pronouncements . . . . . . . . . . . 43 Cautionary Statement. . . . . . . . . . . . . . 44 The Company's Stock . . . . . . . . . . . . . . 45 General Information . . . . . . . . . . . . . . 46 Gradall Replicas. . . . . . . . . . . . . . . . 47
-3- -4- to our stockholders Gradall Industries, Inc. continued its strong growth trend in 1998, achieving a fifth consecutive record year in sales and profitability. Punctuating our sales and profitability achievements, I am pleased to announce that Gradall has received ISO 9001 certification. We see this as recognition of the long-time reputation of our company and our employees for excellent quality, and a signal to both our government and private contractor markets that our reputation will continue. Additional recognition has come in the form of 1998 Ernst & Young Entrepreneur of the Year awards, presented to Gradall and myself in recognition of industrial leadership, citizenship and overall growth performance. I am proud to say these achievements reflect an attitude that permeates our company and positions us for success. We are prepared to take advantage of the market demand for versatile, productive, high-value construction machines. We are focused on profiting from our ongoing commitment to continually introduce new, more productive products. We are clearly motivated to continue to make strategic capital investments to build volume and efficiency into our manufacturing capacity. As a direct result, it is my pleasure to report that Gradall Industries, Inc. posted a record $182.6 million in net sales in 1998, an increase of 15.1 percent over 1997. Net income for 1998 was $14.4 million, up 19.7 percent. Diluted earnings per share reached $1.54, up 15.8 percent. Benefitting from favorable interest rates, supportive construction market conditions in the U.S. and an excellent share of the booming rental market, our material handler sales hit a record $110.2 million, up 31.2 percent over 1997. to our stockholders continued on pages 6-7 -5- to our stockholders continued Fueling material handler sales was the introduction of our new D Series models, replacing all of our C Series machines. Featuring a new, protective operator cab, the D Series machines enhance the market preference for Gradall's trademark advantages such as unique maneuverability, ease of operation and their reputation for superior strength and reliability. Hydraulic excavator sales reached $54.6 million, continuing to benefit from the overall market demand for smaller versatile machines that can do many different kinds of work. In this market, acceptance of our two new models in the 27,000-pound class effectively paved the way for our newest model, the XL 2300 non-highway speed wheeled excavator, which topped the best new product list published by Construction Equipment, the leading industry trade magazine. Unit and net sales of larger XL Series excavators continue to benefit from the Transportation Equity Act (TEA-21), funding highway and bridge work starting in late 1998. Distinguished by their telescoping boom design and powered by high-pressure hydraulics, Gradall excavators are gaining acceptance in high productivity work formerly dominated by conventional excavators. At the same time, our excavators enjoy a clear preference in the market for machines that can perform delicate finishing and grading functions. Sales of service parts reached $17.9 million in 1998, up 3.5 percent from 1997. This growth can be attributed to our strong distribution network and the promotion of new product support programs, including Gradall Plus CD-ROM reference materials and the Gradall On-Line Distributor (GOLD) order entry systems. -6- Overall sales were also sparked by an ongoing commitment to worldwide sales. The addition of a sales office and greater distribution in Central and South America accompanied an expanded global marketing initiative reaching into Europe, the Middle East, Russia and the Pacific Rim. Prompted by continuing increases in unit sales, Gradall executed a $13 million capital investment plan in 1998 which included the purchase of a second manufacturing facility. Without any long-term debt, and assisted by the proceeds from an additional public offering in June 1998, Gradall purchased a modern 330,000-square-foot manufacturing facility in Orrville, Ohio. $7 million of the $13 million total was invested in new equipment for the 450,000-square-foot New Philadelphia plant, which continues to serve as corporate headquarters. New equipment in the plant includes lasers, robots, machining centers, seam welders and paint systems, designed to control costs and improve production efficiency. At the end of 1998, both product lines continued to be produced at the New Philadelphia plant. However, local tax abatements and overwhelming encouragement from the Orrville community support Gradall's initial efforts to equip and operate the Orrville facility as an entity dedicated primarily to the manufacture of Gradall material handlers. Such a move greatly expands our overall capacity, supporting our active program to explore options in product acquisition and contract manufacturing. Barry L. Phillips, President -7- In his 22 years as a masonry contractor, Dennis Knowlton says the Gradall material handler's unique steering system, allowing the big machine to literally turn on a dime, has actually increased his profitability. "With our Gradalls, we save a ton of time moving scaffolding or squaring up to unload tubs of mud," said Knowlton, owner of Knowlton Construction Equipment in Clifford, Pa. "The steering capabilities are tremendous." Knowlton and other contractors who own or rent Gradall material handlers also know the wide variety of jobs they have to do can match up nicely with the designed-in versatility of Gradall machines. Equipped with a range of attachments, Gradalls can be found moving brick, block and mortar; placing trusses and bundles of lumber; even backfilling and cleaning up at the end of the project. The unique design of the machines also makes them "operator friendly," said Knowlton. A hydrostatic drivetrain provides convenient, no-shift operation, and the new operator cabs are protective without obstructing the view of the jobsite. "We own four Gradalls right now, and we often rent more," said Knowlton. "We rely heavily on these machines, and we've always gotten excellent support from the company and our distributor." -8- material handlers Material handlers have always been popular rental machines. Tremendous growth in the rental industry, combined with highly favorable market conditions, increases sales potential for the material handler line. Gradall Material Handlers are typically used to move a variety of construction materials around jobsites and industrial facilities. Masonry, framing and general contractors prefer Gradalls for their collection of unique advantages, including 90 rear-pivot steering. This allows operators to place lumber, brick, block and other materials faster, easier and with greater precision. Gradall's telescopic booms are among the strongest in the industry, providing greater lift capacity and longer reach. 1998 sales benefitted dramatically from favorable market conditions, including low interest rates and a strong economy. The highly successful introduction of a new D Series family of machines also helped to increase 1998 material handler sales. Gradall's primary focus for its material handler sales continues to be in the North American market. In addition to its traditional distributor network, Gradall is a preferred product of national rental companies, which are a growing source of new machines for many of the nation's contractors. -9- "My new XL 2200 excavator has definitely made a major contribution to my bottom line," says Howard Beezer, owner of Delta Equipment Rentals, Inc. in Washington, D.C. "Its low operating profile makes it perfect for interior demolition jobs and work on other tight jobsites." The XL 2000 series machines mark Gradall's entrance into the 27,000-pound excavator class, offering Gradall users traditional Gradall versatility and productivity in a machine suited for smaller jobs. "Delta owns ten Gradall excavators. We use them for cleaning sediment ponds, demolition work, trenching, ditching, finishing and just about anything else you can think of. It's their productivity, versatility and the ability to handle finesse work that's always been a strong point for Gradall." His operators also like the fact that the new XL series hydraulics offer twice as much power and use half as much fuel as the old Gradalls used to. "We've owned Gradalls forever, and I don't see that changing anytime soon. In fact, I can't wait to see their next class of machines hit the street." -10- excavators Gradall excavator sales began to benefit from the release of new government money -TEA-21- earmarked for road and bridge repair and construction. Along with a series of new product innovations, this transportation bill sets the stage for steadily increasing excavator sales. Gradall hydraulic excavators are distinguished by their telescoping, rotating booms. The boom's arm-like motion increases the machine's versatility, maximizing the potential of the machine to use a wide range of attachments. As it has for many years, Gradall continues to dominate the niche market for highway-speed, wheeled excavators. More recently, the introduction of the XL Series high-pressure hydraulics, combined with a durable crawler undercarriage, has allowed Gradall to successfully compete in the conventional excavator market segment. The most recent addition to the XL excavator line, the XL 2300, was introduced in Munich, Germany, at the 1998 Bauma exhibit, the world's largest construction trade show. Gradall's XL 2300, the first excavator of its kind, combines the versatility of the famous Gradall boom with a wheeled undercarriage for greater maneuverability around jobsites, opening new market opportunities. The XL 2300 is the third model in Gradall's line of 27,000-pound excavators, designed to satisfy industry demand to buy or rent mid-size machines. Current product development includes a line of 34,000-pound excavators for municipalities and contractors. Increased demand is expected for specialized machines used in mining and metal mill work. Growth is anticipated in international markets, including Russia, Latin America, Turkey, China and the Pacific Rim. -11- "Some of our Gradalls are more than 10 years old," says Brent Kearns, fleet manager for Vegas General Construction, "and they're still going strong." Product support, which is provided by Bat Rentals in Las Vegas, helps keep Vegas General's material handlers running by minimizing downtime and extending the life of each machine. Vegas General has owned more than 20 Gradall machines. "The Gradall is the only machine that can maneuver in the tight spaces we work in. Authorized Gradall Parts are the only parts we trust to keep our Gradall material handlers performing at their best" says Kearns. "Over the years, we've built almost 8,000 homes, and thanks to the reliability of Gradall Parts, our Gradalls have never let us down." -12- parts & distribution Gradall excavators and material handlers have a strong, reputable name. Our highly respected global distribution network for sales, parts and service demonstrates the dedication we have to serving our customers. Gradall maintains a strong distribution network that provides effective and efficient parts and service support. This network is made up of leading equipment distributors located throughout North America and worldwide. Gradall's distributors are chosen for their financial strength and their commitment to promoting and selling Gradall products, as well as their ability to provide critical after-sale service and parts. They are supported by Gradall's qualified staff of sales and product support regional managers. These managers work hand-in-hand with distributors, ensuring fast, efficient support and helping to maintain a high level of customer satisfaction. Now, as a result of continuing development of new markets, Gradall has distributors in Russia, South America, China, the Middle East and the Pacific Rim. Gradall's On-Line Distributor (GOLD) System allows distributors to access parts availability information and order parts with their computers. In 1998, the GOLD System was expanded to offer broader availability of aftermarket products. In 1999, Gradall will introduce the new Gradall Plus system, an electronic database containing over 50 years of Gradall equipment product support detail by model. This includes parts, service, operation and safety information. The database will be available on CD-ROM and will make valuable Gradall product support information easier than ever to access. -13- "Gradall is the kind of company I want to be aligned with," says Chuck Stockwell, account manager for Parker Hannifin, Fluid Connectors Group. "Their strong emphasis on continuous improvement and product development is part of what makes them successful. They have the attitude we look for in a strategic partner. They see and appreciate the added value we can bring to the table." The four-year-old strategic partnership between Gradall and Parker Hannifin allows Parker representatives to work closely with Gradall during various stages of product design and manufacturing. This helps ensure that Gradall utilizes the potential of Parker's hoses and fittings in the most effective manner, enabling Gradall to promise their customers that there will be no leaks in the hydraulic system. It's all part of the Parker Hannifin Certified Leak-Free program. "It's a mutually beneficial situation," says Stockwell. "By eliminating what sometimes becomes an adversarial relationship between customer and supplier, both Gradall and Parker Hannifin contribute to each other's growth." -14- suppliers Gradall has formed strategic partnerships with many suppliers. Companies like Rexroth Mobile Hydraulics, Bethlehem Steel and Meritor Axles work closely with Gradall to ensure that the components going into our machines are the highest possible quality. Gradall's suppliers often do more than simply provide products for use by Gradall. They get involved in the design stage, helping to optimize manufacturing processes, and they provide post-sale support for their products. They offer the highest quality components available for use in our products and enable us to reduce total costs through techniques such as just-in-time shipping. Part of the Gradall attitude is the concept that working hand-in-hand with business partners creates an environment where both companies will benefit. Gradall's strategic relationships with companies like Parker Fluid Connectors, Meritor Axles, Bethlehem Steel and Rexroth Mobile Hydraulics help ensure that Gradall products are continually improving and that the best manufacturing processes are in use. That's why we've made a commitment to work closely with our core suppliers, growing and improving with them and ensuring the future success of Gradall as well as our suppliers. -15- Selected Consolidated Financial Data (dollars in thousands, except share amounts) Gradall Industries, Inc. The following table sets forth selected consolidated financial data for the Company for the five years ended December 31, 1998 that have been taken or derived from the historical financial statements of the Company and are qualified in their entirety by reference to such financial statements and notes included therein. See "Consolidated Financial Statements."
For the Years Ended December 31, --------------------------------------------------------- 1994 1995 1996 1997 1998 -------- ----------- ---------- ---------- ---------- Income Statement Data: - - ------------------------------------------------------------------------------------------------- Net sales . . . . . . . . . . . . . . $88,820 $ 118,438 $ 140,909 $ 158,659 $ 182,607 Cost of sales . . . . . . . . . . . . 71,280 92,637 108,098 120,663 140,456 -------- ----------- ---------- ---------- ---------- Gross profit. . . . . . . . . . . . . 17,540 25,801 32,811 37,996 42,151 Research and development and product engineering costs. . . . 2,123 2,504 3,081 3,644 4,039 Selling, general and administrative expenses . . . . . . . . . . . . 9,346 10,503 11,815 13,712 14,149 -------- ----------- ---------- ---------- ---------- Operating income. . . . . . . . . . . 6,071 12,794 17,915 20,640 23,963 Amortization of FAS 106 (1). . . . . . (3,626) Interest expense . . . . . . . . . . . 1,146 1,642 3,108 696 380 Other, net. . . . . . . . . . . . . . 234 865 1,018 257 31 -------- ----------- ---------- ---------- ---------- Income before provision for taxes and extraordinary item . . . . . . . 8,317 10,287 13,789 19,687 23,552 Income tax provision . . . . . . . . . 3,152 3,680 5,503 7,696 9,198 -------- ----------- ---------- ---------- ---------- Income before extraordinary item . . . 5,165 6,607 8,286 11,991 14,354 Extraordinary item (2) . . . . . . . . 973 -------- ----------- ---------- ---------- ---------- Net income (3). . . . . . . . . . . . $ 5,165 $ 6,607 $ 7,313 $ 11,991 $ 14,354 ======== =========== ========== ========== ========== Earnings per share (4) Basic: Before extraordinary item. . . . $ 1.17 $ 1.19 $ 1.34 $ 1.56 After extraordinary item . . . . 1.17 1.05 1.34 1.56 Weighted average shares outstanding. . 5,637,244 6,956,507 8,939,605 9,230,768 Diluted: Before extraordinary item. . . . $ 1.17 $ 1.18 $ 1.33 $ 1.54 After extraordinary item . . . . 1.17 1.04 1.33 1.54 Weighted average shares outstanding. . . . . . . . . . . 5,637,244 7,003,200 9,013,760 9,316,466 Pro forma (5) Net income per share . . . . . . $ 0.77 $ 1.07 Weighted average shares outstanding. . . . . . . . . . . 8,939,294 8,939,294 Balance Sheet Data: - - ------------------------------------------------------------------------------------------------- Working capital. . . . . . . . . . . . $ 2,472 $ 10,735 $ 14,907 $ 26,509 $ 27,842 Total assets . . . . . . . . . . . . . 41,099 52,024 58,226 76,735 98,987 Total debt . . . . . . . . . . . . . . 11,234 37,922 7,910 10,312 7,631 Stockholders' (deficit) equity . . . . (2,158) (23,119) 9,076 21,219 42,375 -16- Selected Consolidated Financial Data (continued) Gradall Industries, Inc. (1) -The FAS 106 gain resulted from the reduction in the postretirement health care benefits liability reflecting a change in actuarial assumptions related to the projected growth in medical costs. (2) -An extraordinary item of $1.0 million, net of taxes, related to early extinguishment of senior and subordinated debt which was incurred in September 1996 to write off unamortized deferred financing costs and the discount on subordinated debt which was paid off with the proceeds from the initial public offering on September 3, 1996. (3) -Net income (loss) per share data have been omitted for year 1994 as such amount is not comparable due to a recapitalization which occurred in October, 1995 (the "1995 Recapitalization"). (4) -Presented based on actual earnings and average shares outstanding in the periods indicated after giving effect to the 5,540-for-1 stock split and the conversion of outstanding Warrants. (5) -Presented as if the 1995 Recapitalization, the issuance of shares of Common Stock pursuant to the initial public offering and the application of the net proceeds thereof to reduction in debt, all had occurred effective January 1, 1995. Pro forma net income per share data does not include the extraordinary item. (6) -Excludes former wholly owned subsidiaries of the Company which were spun off to certain shareholders in connection with the 1995 Recapitalization.
-17- Consolidated Balance Sheets (dollars in thousands, except share amounts) Gradall Industries, Inc.
December 31, Assets 1998 1997 - - ------------------------------------------------------------------------- Current assets: Cash . . . . . . . . . . . . . . . . . . . . . . . $ 2,457 $ 1,605 Accounts receivable trade, net of allowance for doubtful accounts of $69 and $56 . . . . . . . . 26,983 25,290 Inventories. . . . . . . . . . . . . . . . . . . . 32,872 25,564 Prepaid expenses and deferred charges. . . . . . . 2,510 1,645 Deferred income taxes. . . . . . . . . . . . . . . 985 742 -------- --------- Total current assets. . . . . . . . . . . . . 65,807 54,846 Deferred income taxes. . . . . . . . . . . . . . . . 5,985 5,402 Property, plant and equipment, net . . . . . . . . . 25,838 15,108 Other assets: Deferred financing costs, net of accumulated amortization of $698 and $404. . . . 152 446 Other. . . . . . . . . . . . . . . . . . . . . . . 1,205 933 -------- --------- Total other assets. . . . . . . . . . . . . . 1,357 1,379 -------- --------- Total assets. . . . . . . . . . . . . . . . . $98,987 $ 76,735 ======== ========= Liabilities and Stockholders' Equity Current liabilities: Current portion of capital lease obligation. . . . $ 307 $ 297 Current portion of long-term debt. . . . . . . . . 6,919 Accounts payable - trade . . . . . . . . . . . . . 16,288 17,113 Accrued other expenses: Profit sharing . . . . . . . . . . . . . . . . . 1,404 1,327 Floor plan interest. . . . . . . . . . . . . . . 1,341 1,444 Warranty . . . . . . . . . . . . . . . . . . . . 1,853 1,075 Deferred revenue . . . . . . . . . . . . . . . . 2,286 Income taxes . . . . . . . . . . . . . . . . . . 2,208 1,115 Other. . . . . . . . . . . . . . . . . . . . . . 5,359 5,966 -------- --------- Total current liabilities . . . . . . . . . . 37,965 28,337 -------- --------- Long-term obligations: Capital lease obligation . . . . . . . . . . . . . 405 412 Long-term debt . . . . . . . . . . . . . . . . . . 9,603 Accrued post-retirement benefit cost . . . . . . . 16,554 15,719 Other long-term liabilities. . . . . . . . . . . . 1,688 1,445 -------- --------- Total long-term obligations . . . . . . . . . 18,647 27,179 -------- --------- Total liabilities . . . . . . . . . . . . . . 56,612 55,516 -------- --------- Stockholders' equity: Serial preferred shares, par value $.001 per share 2,000,000 shares authorized, none issued and outstanding Common stock, $.001 par value; 18,000,000 shares authorized; 9,508,231 and 8,940,194 issued and outstanding in 1998 and 1997, respectively . . . 10 9 Additional paid-in capital . . . . . . . . . . . . 45,805 38,894 Accumulated deficit. . . . . . . . . . . . . . . . (2,733) (17,087) Accumulated other comprehensive loss . . . . . . . (707) (597) -------- --------- Total stockholders' equity. . . . . . . . . . 42,375 21,219 -------- --------- Total liabilities and stockholders' equity. . $98,987 $ 76,735 ======== =========
The accompanying notes are an integral part of these consolidated financial statements. -18- Consolidated Statements of Income (dollars in thousands, except share amounts) Gradall Industries, Inc.
For the Years Ended December 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- Net sales. . . . . . . . . . . . . . . . . . . . . $ 182,607 $ 158,659 $ 140,909 Cost of sales. . . . . . . . . . . . . . . . . . . 140,456 120,663 108,098 ---------- ---------- ---------- Gross profit. . . . . . . . . . . 42,151 37,996 32,811 Research and development and product engineering costs . . . . . . . . . . . . . . 4,039 3,644 3,081 Selling general and administrative expenses. . . . 14,149 13,712 11,815 ---------- ---------- ---------- Operating income. . . . . . . . . 23,963 20,640 17,915 Other expense: Interest expense. . . . . . . . . . . . . . 380 696 3,108 Other. . . . . . . . . . . . . . . . . . . . 31 257 1,018 ---------- ---------- ---------- Net other expense . . . . . . . . 411 953 4,126 ---------- ---------- ---------- Income before income taxes and extraordinary item. . . 23,552 19,687 13,789 Income tax provision . . . . . . . . . . . . . . . 9,198 7,696 5,503 ---------- ---------- ---------- Income before extraordinary item . . . . . . . . . 14,354 11,991 8,286 ---------- ---------- ---------- Extraordinary item, loss from early extinguishment of debt, net of tax benefit of $622. . . . . 973 ---------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . . . . $ 14,354 $ 11,991 $ 7,313 ========== ========== ========== Basic: Weighted average shares outstanding. . . . . . . . 9,230,768 8,939,605 6,956,507 Earnings per share: Before extraordinary item . . . . . . . . . . $ 1.56 $ 1.34 $ 1.19 After extraordinary item. . . . . . . . . . . $ 1.56 $ 1.34 $ 1.05 Diluted: Weighted average shares outstanding. . . . . . . . 9,316,466 9,013,760 7,003,200 Earnings per share: Before extraordinary item . . . . . . . . . . $ 1.54 $ 1.33 $ 1.18 After extraordinary item. . . . . . . . . . . $ 1.54 $ 1.33 $ 1.04
The accompanying notes are an integral part of these consolidated financial statements. -19- Consolidated Statements of Changes in Stockholders' Equity (dollars in thousands) Gradall Industries, Inc.
Accumulated Additional Other Com- Additional Paid-In prehensive Preferred Common Paid-In Capital- Accumulated Income Stock Stock Capital Warrants Deficit (Loss)(1) Total ----------- ------- ------------ ------------ ------------- ------------- --------- Balance December 31, 1995. . . $ 2,000 $ 6 $ 11,994 $ 1,000 $ (37 ,391) $ (728) $(23,119) Issuance of 2,950,000 shares of common stock . . 3 24,913 24,916 Redemption of 140 preferred shares . . . (2,000) 2,000 Redemption of 449,294 common stock warrants. . . (1,000) 1,000 Net income . . . . . . . . . 7,313 7,313 Minimum pension liability adjustment . . . . . . . . (34) (34) --------- Total comprehensive income 7,279 ----------- ------- ------------ ------------ ------------- ------------- --------- Balance December 31, 1996 9 38,907 (29,078) (762) 9,076 Additional expense resulting from the initial public offering (19) (19) Stock options exercised 6 6 Net income 11, 991 11,991 Minimum pension liability adjustment 165 165 --------- Total comprehensive income 12,156 ----------- ------- ------------ ------------ ------------- ------------- --------- Balance December 31, 1997 9 38,894 (17,087) (597) 21, 219 Issuance of 562,500 shares of common stock 1 6,876 6,877 Stock options exercised 35 35 Net income 14,354 14,354 Minimum pension liability adjustment (110) (110) --------- Total comprehensive income 14,244 ----------- ------- ------------ ------------ ------------- ------------- --------- Balance December 31, 1998. . . $ - $ 10 $ 45,805 $ - $ (2,733) $ (707) $ 42,375 ----------- ------- ------------ ------------ ------------- ------------- --------- (1) All items included in accumulated other comprehensive income (loss) are shown net of income taxes. The tax effect for the minimum pension liability adjustment was $70, $(93) and $17 for 1998, 1997, and 1996 respectively.
The accompanying notes are an integral part of these consolidated financial statements. -20- Consolidated Statements of Cash Flows (dollars in thousands) Gradall Industries, Inc.
For the Years Ended December 31, ------------------------------- 1998 1997 1996 --------- -------- --------- Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,354 $11,991 $ 7,313 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item, before tax benefit . . . . . . . . . . 1,595 Change in pension liability adjustment . . . . . . . . . . (110) 165 (34) Post-retirement benefit transition obligation. . . . . . . 835 1, 115 780 Depreciation . . . . . . . . . . . . . . . . . . . . . . . 2,420 1,721 1,391 Amortization . . . . . . . . . . . . . . . . . . . . . . . 294 157 344 Deferred income taxes. . . . . . . . . . . . . . . . . . . (826) 264 106 Equity loss on investment. . . . . . . . . . . . . . . . . 44 Gain on sale of property, plant and equipment. . . . . . . (98) (1) (111) Increase in accounts receivable. . . . . . . . . . . . . . (1,693) (8,444) (4,710) Increase in inventories. . . . . . . . . . . . . . . . . . (7,308) (4,238) (2,816) Increase in prepaid expenses . . . . . . . . . . . . . . . (865) (1,150) (51) Increase in other assets . . . . . . . . . . . . . . . . . (272) (135) (152) Increase in accounts payable and accrued expenses. . . . . 4,147 2,204 3,941 Increase (decrease) in accrued other long-term liabilities 243 (239) 28 --------- -------- --------- Net cash provided by operating activities . . . . . . . 11,121 3,410 7,668 --------- -------- --------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment. . . . . . . . . 223 12 104 Purchase of property, plant and equipment. . . . . . . . . . . . . . (13,275) (5,305) (2,300) --------- -------- --------- Net cash used in investing activities . . . . . . . . . (13,052) (5,293) (2,196) --------- -------- --------- Cash flows from financing activities: Net proceeds from initial public offering. . . . . . . . . . . . . . 26,916 Payment of term debt . . . . . . . . . . . . . . . . . . . . . . . . (10,000) Payment of subordinated debt . . . . . . . . . . . . . . . . . . . . (10,000) Issuance of 900 common shares. . . . . . . . . . . . . . . . . . . . 6 Issuance of 5,540 common shares. . . . . . . . . . . . . . . . . . . 35 Redemption of preferred stock. . . . . . . . . . . . . . . . . . . . (2,000) Net proceeds from follow on public offering. . . . . . . . . . . . . 6,877 Proceeds (repayments) on capital leases. . . . . . . . . . . . . . . 3 90 (172) Net advances (repayments) on revolving line of credit. . . . . . . . (2,684) 2,312 (10,808) Proceeds from (payments of) bank overdraft . . . . . . . . . . . . . (1,448) 884 (730) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19) --------- -------- --------- Net cash provided by (used in) financing activities . . 2,783 3,273 (6,794) --------- -------- --------- Net increase (decrease) in cash . . . . . . . . . . . . 852 1,390 (1,322) Cash, beginning of year. . . . . . . . . . . . . . . . . . . . . . . . 1,605 215 1,537 --------- -------- --------- Cash, end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,457 $ 1,605 $ 215 ========= ======== ========= Supplemental disclosure: Cash paid for: Income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 8,931 $ 7,650 $ 2,875 ========= ======== ========= Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 409 $ 604 $ 3,572 ========= ======== ========= Other: Amounts financed through capital leases. . . . . . . . . . $ 290 $ 287 ========= ========
The accompanying notes are an integral part of these consolidated financial statements. -21- Notes to Consolidated Financial Statements (dollars in thousands) Gradall Industries, Inc. 1. Nature of Business and Basis of Presentation: Gradall Industries, Inc. (the "Company"), Incorporated in Delaware, formerly ICM Industries Inc. (ICM), is a holding company. The consolidated financial statements include the Company and its wholly owned subsidiaries, The Gradall Company, The Gradall Orrville Company and Gradall Investment Company. The Gradall Investment Company was dissolved in 1996. The Gradall Company manufactures and sells excavating and material handling equipment and related parts to public and private sector customers throughout the world through independent distribution organization. On September 3, 1996, the Company completed an initial public offering in which 2,950,000 shares of common stock were issued for a total sum of $29.5 million. Expenses incurred in connection with the issue approximated $2.6 million. The net proceeds of the offering were used as follows:
Repay outstanding term debt . . . $ 9,550 Repay subordinate debt. . . . . . 10,000 Redeem preferred stock. . . . . . 2,000 Reduce revolving credit liability 5,379
In connection with the offering, the Company increased the number of its authorized shares of common stock from 2,200 to 18,000,000 and effected a 5,540-to-1 stock split. All applicable share and per share data have been retroactively adjusted for the stock split. On June 29, 1998, the Company completed a public offering in which 562,500 shares of common stock were issued by the Company for a total sum of $7.3 million. Expenses incurred in connection with the issue approximated $0.5 million including $0.1 million related to selling shareholders. The net proceeds of the offering were used to repay the revolving credit facility. On October 13, 1998, a new company, The Gradall Orrville Company, was formed as a wholly owned subsidiary of Gradall Industries, Inc., to purchase a new production plant at Orrville, Ohio. The new facility, formerly the Volvo Truck Assembly plant, contains 330,000 square feet and will provide additional production space for the material handler product. 2. Summary of Significant Accounting Policies: Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes. Actual results may differ from those estimates. Source of Supply of Labor: Virtually all of the Company's hourly employees are represented by the International Association of Machinists and Aerospace Workers under a three-year contract which expires April 16, 2000. -22- Notes to Consolidated Financial Statements (continued) (dollars in thousands) Gradall Industries, Inc. 2. Summary of Significant Accounting Policies, Continued: Revenue Recognition: The Company's revenue recognition policy is to recognize revenue when products are shipped. In 1998, the Company entered into a twelve-month lease agreement for certain inventories which includes a guarantee by the Company at the end of the lease agreement. Revenues equal to the amount of the guarantee are deferred. Product Financing: The Company provides its distributors with product financing through agreements with third party financing companies. Such financings include a Wholesale Floor Plan for distributors and a Retail Finance Plan for end-users, each with reduced interest rates subsidized by the Company, and a Rental Plan for distributors. Product Warranty Costs: In general, the Company provides warranty on equipment for a period of up to twelve months or for a specified period of use after sale or rental by the distributor. Reserves for estimated warranty costs are established at the time of sale. Inventories: Inventories are stated at cost not in excess of market value using the last-in, first-out (LIFO) method of inventory costing. Inventory cost includes materials, direct labor, manufacturing overhead, and outside service costs. Market value is determined by comparison with recent purchases or realizable value. Property, Plant and Equipment: Expenditures for property, plant and equipment and for renewals and betterments which extend the originally estimated economic lives of assets are capitalized at cost. Expenditures for maintenance and repairs are charged to expense. Items which are sold, retired, or otherwise disposed of are removed from the asset and accumulated depreciation accounts and any gains or losses are reflected in income. The Company's depreciation and amortization methods are as follows: Description Useful Life Method - - -------------------------------------------------------------------------------- Machinery and equipment 3-10 years Straight-line Buildings and improvements 10-24 years Straight-line Furniture and fixtures 3-10 years Straight-line Patents: The cost of patents is being amortized on a straight-line basis over the remaining legal life of the patents. Deferred Financing Costs: Costs incurred to obtain financing have been capitalized and are being amortized over the life of the respective financing arrangements. Income Taxes: The Company follows the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income taxes arise from reporting certain items of income and expense for tax purposes in a different period than for financial reporting purposes. Fair Value of Financial Instruments: The Company's financial instruments consist principally of cash, accounts receivable, accounts payable and accrued liabilities in which the fair value of these financial instruments approximates the carrying value. The Company's revolving line of credit provides for periodic changes in interest rates which approximate current rates and therefore, the fair value of the debt approximates carrying value. -23- Notes to Consolidated Financial Statements (continued) (dollars in thousands) Gradall Industries, Inc. 2. Summary of Significant Accounting Policies, Continued: Research and Development Costs: Expenditures relating to the development of new products and processes, including significant improvements to existing products, are expensed as incurred. Research and development expenses were $2,552, $1,722 and $1,641 in 1998, 1997 and 1996, respectively. In addition, the Company incurred other engineering expenses relating to new product development (that do not meet the accounting definition of "Research and Development") in the amount of $1,487, $1,922 and $1,440 in 1998, 1997 and 1996, respectively. Stock Based Compensation: The Company accounts for stock based compensation awards pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations which prescribe the use of the intrinsic value based method. No compensation cost has been recognized for its fixed stock option plans. However, the Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," See Note 10 for additional information. Earnings Per Common Share: In the fourth quarter of 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which specifies the computation, presentation, and disclosure requirements of earnings per common share. Basic earnings per share are based on the weighted average number of common shares outstanding during the period. Diluted earnings per common share are based on the weighted average number of common shares outstanding during the period plus, if dilutive, the incremental number of common shares issuable on a pro forma basis upon the exercise of employee stock options, assuming the proceeds are used to repurchase outstanding shares at the average market price during the year. All prior periods have been restated to conform to the provisions of this statement. A reconciliation of the Basic and Diluted per share computations are provided below:
1998 1997 1996 --------- --------- --------- Common Shares Weighted average common shares outstanding Basic . . . . . . . . . . . . . . . . . . 9,230,768 8,939,605 6,956,507 Additional common shares issuable for stock options. . . . . . 85,698 74,155 46,693 --------- --------- --------- Common shares - Diluted. . . . . . . . . . 9,316,466 9,013,760 7,003,200 ========= ========= =========
Comprehensive Income: Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." was adopted during the first quarter of 1998. The standard established guidelines for the reporting and display of comprehensive income (loss) and its components in financial statements. Comprehensive income includes net income and adjustments to the minimum pension liability. The Company has changed the format of its Consolidated Statement of Changes in Stockholders' Equity to present comprehensive income and its components. Segment Information: Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," was adopted in the fourth quarter of 1998 and supersedes Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise." The new standard established guidelines for reporting information on operating segments in interim and annual financial statements. The adoption of the standard did not affect the Company's financial position, results of operations or cash flows (see Note 14). -24- Notes to Consolidated Financial Statements (continued) (dollars in thousands) Gradall Industries, Inc. 2. Summary of Significant Accounting Policies, Continued: Future Accounting Requirements: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income. The new rules will be effective the first quarter of 2000. The Company is in the process of determining the impact of this new standard and, based on current market conditions, anticipates that it will not have a material impact on the Company's financial statements when effective. Reclassifications: Certain prior years' balances have been reclassified to conform to the current year's presentation. 3. Inventories:
Inventories are comprised of: 1998 1997 -------- ------- Raw materials . . . . . . . . $ 1,401 $ 921 Work in process . . . . . . . 24,501 24,739 Finished goods. . . . . . . . 13,058 5,474 -------- ------- 38,960 31,134 Less LIFO reserve . . . . . . 6,088 5,570 -------- ------- Total inventory . . . . . . . $ 32,872 $25,564 ======== =======
4. Property, Plant and Equipment: The major classes of property, plant and equipment are summarized as follows:
1998 1997 ------- ------- Land. . . . . . . . . . . . . . . $ 963 $ 513 Machinery and equipment . . . . . 23,998 16,910 Buildings and improvements. . . . 11,087 5,587 Furniture and fixtures. . . . . . 3,212 2,277 Construction in progress. . . . . 2,584 4,109 ------- ------- 41,844 29,396 Less accumulated depreciation . . 16,006 14,288 ------- ------- Net property, plant and equipment $25,838 $15,108 ======= =======
5. Financing:
Long-term debt includes: 1998 1997 ------- ------ Revolving credit . . . . $6,919 $9,603 Less current maturities. 6,919 0 ------- ------ $ 0 $9,603
At December 31, 1998, the Company maintained a loan and security agreement with Heller Financial, Inc. which provided for up to $25 million in revolving loan commitments. Amounts borrowed under the borrowing base, as defined, could be repaid and reborrowed at any time prior to August 31, 1999, the termination date. Amounts outstanding under this agreement were reclassified to current portion of long-term debt at December 31, 1998. -25- Notes to Consolidated Financial Statements (continued) (dollars in thousands) Gradall Industries, Inc. 5. Financing, Continued: The revolving line of credit bears interest at either LIBOR plus 1% or prime minus .50%. At December 31, 1998, the prime rate was 7.75%. There were no borrowings under the LIBOR option at year end. The average annual interest rate in effect for the revolving line of credit was 7.25%. At December 31, 1997, the prime rate was 8.5%, LIBOR was 5.97%, and the average annual interest rate in effect for the revolving line of credit was 7.86%. The Company also pays an unused line fee of 0.25 percent per annum. The terms of the financing agreement contain, among other provisions, restrictions on the level of capital expenditures and various financial ratios, as defined. The financing agreements are collateralized by substantially all the assets of the Company. On January 27, 1999 the Company's Loan and Security Agreement with Heller Financial, Inc. was paid in full and terminated. A new revolving line of credit for $17 million was established with KeyBank National Association (the "Lender") with an unsecured demand promissory note. The note bears interest at either LIBOR plus .80% or prime minus 1.40%. The note renews annually and terminates at the earlier of the Lender's demand or the Company's decision to terminate by written or oral communication to the Lender. 6. Lease Obligations The Company leases certain machinery and equipment under capital leases expiring between 1999 and 2001. The assets and liabilities under capital leases are recorded at the original purchase cost. The assets are depreciated over their estimated productive lives. Depreciation of assets under capital leases is included in depreciation expense. In addition, the Company leases certain equipment under operating leases. A number of these leases have renewal options. The following is a summary of property held under capital leases:
1998 1997 ------ ------ Machinery and equipment . . . $1,020 $1,020 Information systems . . . . . 571 287 ------ ------ Total capital leases. . . . . 1,591 1,307 Less accumulated depreciation 572 364 ------ ------ $1,019 $ 943 ====== ======
-26- Notes to Consolidated Financial Statements (continued) (dollars in thousands) Gradall Industries, Inc. 6. Lease Obligations, Continued: The following is a summary of future minimum payments under capitalized and operating leases that have remaining noncancelable lease terms in excess of one year at December 31, 1998:
Operating Capital Operating Year ending December 31, Leases Leases -------- ---------- 1999 . . . . . . . . . . . . . . . . . $ 356 $ 160 2000 . . . . . . . . . . . . . . . . . 370 86 2001 . . . . . . . . . . . . . . . . . 60 32 -------- ---------- Total minimum lease payments . . . . . 786 $ 278 ========== Interest . . . . . . . . . . . . . . . 74 -------- Liability under capital lease payments 712 Current portion. . . . . . . . . . . . 307 -------- Long-term capitalized lease obligation $ 405 ========
Rental expense for operating leases amounted to $394, $409 and $397 for the years ended December 31, 1998, 1997, and 1996 respectively. 7. Employee Benefit Plans: Pension and Postretirement Benefit Plans: Substantially all employees are covered by pension plans which provide for monthly pension payments to eligible former employees who have retired. Prior to March 24, 1997 the Company sponsored two plans, one for members of the collective bargaining unit and one for salaried and other eligible employees. Benefits paid under the collective bargaining unit plan are based on a benefit multiplier times years of credited service, reduced by benefits under a prior plan. Such prior plan benefits are guaranteed under the terms of group annuity contracts. Benefits paid under the salary plan are based on the greater of a benefit multiplier times years of credited service or a percentage of pre-retirement earnings. Pension costs are funded as actuarially determined and to the extent cash contributions are deductible for federal income tax purposes. The collective bargaining unit plan uses the entry age normal actuarial cost method to determine annual contributions to the plan. The salary plan uses the unit credit actuarial cost method to determine contributions. Effective March 24, 1997 the Company adopted the IAM National Pension Plan to replace the existing collective bargaining unit plan for future service benefits. The collective bargaining unit plan benefits were frozen and the Company continues to fund the plan for past service benefits. The expense related to funding the IAM National Pension Plan for years ending December 31, 1998 and 1997 was $371 and $254 respectively. Postretirement Benefits: The Company provides eligible retired employees with health care and life insurance benefits. These benefits are provided on a non-contributory basis for life insurance and contributory basis for medical coverage. Currently, the Company does not pre-fund these benefits. Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pension," contains a provision which requires the recognition of a liability (including unfunded accrued pension costs) that is at least equal to the unfunded accumulated benefit obligation (the excess of the accumulated benefit obligation over the fair value of plan assets). Recognition of an additional minimum liability is required if an unfunded accumulated benefit exists and the liability already recognized as unfunded accrued pension cost is less than the unfunded accumulated benefit obligation. The additional minimum liability of $1,160 and $980 at December 31, 1998 and 1997, respectively, has been included in other long-term liabilities and has been reported net of income tax effect within stockholders' equity. -27- Notes to Consolidated Financial Statements (continued) (dollars in thousands) Gradall Industries, Inc. 7. Employee Benefit Plans, Continued: The following table sets forth the both plan's funded status and amounts recognized in the Company's consolidated financial statements.
Pension Benefits Postretirement Benefits -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Change in Benefit Obligation Projected benefit obligation (PBO)/Accumulated postretirement benefit obligation (APBO), beginning of year . . . . $ 12,637 $ 10,990 $ 18,874 $ 16,515 Service cost. . . . . . . . . . 487 505 678 583 Interest cost . . . . . . . . . 889 819 1,166 1,232 Plan amendments . . . . . . . . (509) Plan curtailments . . . . . . . 17 Actuarial (gain) loss . . . . . 375 946 (1,355) 1,279 Benefits paid . . . . . . . . . (649) (640) (1,056) (735) --------- --------- --------- --------- PBO/APBO, end of year . . . . . . $ 13,739 $ 12,637 $ 17,798 $ 18,874 ========= ========= ========= ========= Change in plan assets Fair value of plan assets, beginning of year . . . . . . . $ 11,197 $ 9,081 Actuarial return on plan assets 837 1,838 Employer contributions. . . . . 930 918 $ 1,056 $ 735 Benefits paid . . . . . . . . . (649) (640) (1,056) (735) --------- --------- --------- --------- Fair value of plan assets, end of year . . . . . . . . . . 12,315 11,197 ========= ========= ========= ========= Funded status . . . . . . . . . . (1,424) (1,440) (17,798) (18,874) Prior service costs . . . . . . . 98 108 (509) Cumulative net (gain) or loss . . 1,691 1,227 1,753 3,155 --------- --------- --------- --------- (Accrued) prepaid pension/ postretirement cost . . . . . . $ 365 $ (105) $(16,554) $(15,719) ========= ========= ========= ========= Amounts recognized in the statement of financial position consist of: Prepaid benefit cost. . . . . . $ 365 $ (105) Accrued benefit liability . . . $(16,554) $(15,719) Intangible asset Accumulated other comprehensive income. . . . . (1,160) (980) --------- --------- --------- --------- Net amount recognized . . . . . . $ (795) $ (1,085) $(16,554) $(15,719) ========= ========= ========= =========
Pension Benefits Postretirement Benefits ------------------------------- ------------------------------- 1998 1997 1996 1998 1997 1996 --------- --------- --------- --------- --------- --------- Weighted average assumptions as of December 31 Discount rate . . . . . . . . . . 7.0% 7.0% 7.5% 7.0% 7.0% 7.5% Long-term rate of return on assets. . . . . . . . 8.5% 8.5% 8.5% N/A N/A N/A Rate of compensation increase . . 4.5% 4.5% 4.5% Medical trend rates . . . . . . . 5% to 8% 5% to 8% 5% to 8%
-28- Notes to Consolidated Financial Statements (continued) (dollars in thousands) Gradall Industries, Inc. 7. Employee Benefit Plans, Continued: For measurement purposes, an 8 percent annual rate increase in the per capita cost of covered health care benefits was assumed for 1998. The rate was assumed to decrease gradually to 5 percent by 2011 and remain at that level hereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percent point change in assumed health care cost trend rates would have the following effects:
Effect on total of service and interest cost components $ 346 $ (270) Effect on postretirement benefit obligation . . . . . . $2,876 $(2,060)
Pension Benefits Postretirement Benefits ---------------------- ----------------------- 1998 1997 1996 1998 1997 1996 ------ ------ ------ ------- ------ ------ Components of net periodic pension/postretirement cost Service cost. . . . . . . . . $ 487 $ 505 $ 693 $ 679 $ 584 $ 539 Interest cost . . . . . . . . 889 819 739 1,166 1,232 1,143 Expected return on assets . . (954) (775) (658) Amortization of unrecognized Prior service costs . . . . 10 10 13 (18) 34 17 (Gain) / Loss . . . . . . . 28 44 59 Cumulative net (gain) loss. . 17 ------ ------ ------ ------- ------ ------ Net periodic pension/postretirement cost $ 460 $ 620 $ 846 $1,827 $1,850 $1,699 ====== ====== ====== ======= ====== ======
Savings and Investment Plan: Substantially all employees are eligible to participate in a savings and investment plan. The Company sponsors two plans, one for members of the collective bargaining unit and one for salaried and other eligible employees. The plans provide for contributions by employees, through salary reductions, and for a matching contribution by the Company based on a rate determined for each plan year by the Board of Directors of the Company. The plans also provide for a discretionary contribution by the Company. No Company contributions were made to the plan in 1998, 1997 or 1996. Deferred Compensation Program: The Company has a deferred compensation program under which certain employees may elect to postpone receipt of a portion of their earnings. The amounts so deferred are deposited in a trust account, but remain assets of the Company. The trustees of the program are officers and a key employee of the Company. Profit Sharing Plan: The Company maintains a profit sharing plan covering union and salaried employees. The amount of the profit sharing bonus is determined by the Company's return on sales and is calculated based upon the wages of eligible employees. Company contributions for 1998, 1997 and 1996 were $1,404, $1,327 and $794 respectively. -29- Notes to Consolidated Financial Statements (continued) (dollars in thousands) Gradall Industries, Inc. 8. Income Taxes: The provision for income taxes for the years ended December 31, 1998, 1997 and 1996 consisted of the following:
1998 1997 1996 ------- ------ ------ Federal. . . . . . . . . . . $8,576 $6,327 $3,433 State. . . . . . . . . . . . 1,448 1,105 642 Deferred . . . . . . . . . . (826) 264 806 ------- ------ ------ 9,198 7,696 4,881 ------- ------ ------ Tax effect of extraordinary item (shown separately). . 622 ------- ------ ------ $9,198 $7,696 $5,503 ======= ====== ======
The Company's effective tax rate differed from the federal statutory rate as follows:
1998 1997 1996 ----- ----- ----- Federal statutory rate. . . . . 35.0% 35.0% 35.0% Effect of state and local taxes 4.0% 3.7% 3.6% Change in tax liability . . . . - - - Other . . . . . . . . . . . . . 0.1% 0.4% 1.4% ----- ----- ----- 39.1% 39.1% 40.0% ===== ===== =====
The components of the net deferred tax benefits (liabilities) as of December 31, 1998 and 1997 were as follows:
1998 1997 -------- -------- Current: Inventories . . . . . . . . . . . $ (659) $ (705) Accrued expenses. . . . . . . . . 1,644 1,628 Other . . . . . . . . . . . . . . (181) $ 985 $ 742 Long-term: Basis of property and equipment . $(1,862) $(1,618) Postretirement benefits liability 6,761 6,420 Accrued expenses. . . . . . . . . 1,086 600 -------- -------- $ 5,985 $ 5,402 ======== ========
The sources of timing differences and the related deferred tax effects were as follows:
1998 1997 1996 -------- ------ ------ Accrued expenses. . . . . . . . . $(647)6 $ 340 $ 970 Postretirement benefits liability (341) (456) (318) Depreciation. . . . . . . . . . . 244 225 212 Inventories . . . . . . . . . . . (46) (57) (52) Other . . . . . . . . . . . . . . (26) 212 (6) -------- ------ ------ $ (816) $ 264 $ 806 ======== ====== ======
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. -30- Notes to Consolidated Financial Statements (continued) (dollars in thousands) Gradall Industries, Inc. 9. Preferred Stock: The Company is authorized to issue shares of Series A preferred stock in which each share has one vote with a fixed aggregate of 12% of the total vote. The holders of this preferred stock will vote together with the holders of the Company's common stock on all matters submitted to the Company's stockholders. Holders may require the Company to redeem preferred shares proportionately to any reduction in shares held by MLGA Fund II, L.P. At December 31, 1998 and 1997 no Series A preferred stock was outstanding. The Board of Directors is authorized, subject to any limitations prescribed by law, to issue preferred stock in one or more classes or series and to fix the designations, voting powers, preferences, rights, qualifications, limitations or restrictions of any such class or series, including dividend rights, dividend rates, redemption prices and terms, conversion rights and liquidation preferences of each class or series of preferred stock, without any further vote or action by the stockholders of the Company. 10. Stock Options: On October 13, 1995, the stockholders approved a qualified incentive stock option program under which 315,226 shares of the Company's common stock are reserved for grants to key employees (The "1995 Stock Option Plan"). The option price is to be determined by the Board, but may not be less than 100% of the fair market value of the Company's common stock at the time of the grant and options must be exercised within ten years from the date of grant. The options vest and become exercisable in three annual installments commencing on the first anniversary of the date of the grant. On June 3, 1997, the stockholders approved an amendment to the 1995 Stock Option Plan increasing the number of shares of the Company's common stock reserved for grants under the program to 515,226. On May 20, 1998, the stockholders approved a qualified incentive stock option plan under which 300,000 shares of the Company's common stock are reserved for grants to key employees. The plan includes provisions for pricing and vesting which are the same as the above plan. The stockholders also approved an employee stock purchase plan under which 300,000 shares of the Company's common stock may be sold at a 15% market price reduction. Common shares sold through the plan are being purchased in the open market. The following summarizes the changes in the number of Common Shares under option:
(Options in thousands) 1998 1997 1996 ------------- ------------- ------------ Options outstanding at beginning of year. 514 278 132 Options granted during the year . . . . . 237 151 Options exercised during the year . . . . (5) (1) Options canceled during the year. . . . . (5) Options outstanding at end of year. . . . 509 514 278 ------------- ------------- ------------ Option price range per share. . . . . . . $2.71-$13.75 $2.71-$13.75 $2.71-$6.32 ============= ============= ============
The Company's current option plans, which provide for a total of 815 options (6 of which have been exercised), have 300 options remaining for future grants at December 31, 1998. -31- Notes to Consolidated Financial Statements (continued) (dollars in thousands) Gradall Industries, Inc. 10. Stock Options, Continued: The ranges of exercise prices and the remaining contractual life of options as of December 31, 1998 were:
Range of exercise prices: $2.71 $6.32 $12-13.75 ----- ----- --------- Options outstanding in thousands: Outstanding as of December 31, 1998. . . . . . . . . . . . . . . . . . 132 140 237 Weighted-average remaining contractual life (in years) 6.78 7.30 8.45 Weighted-average exercise price. . . . . . . . . . . . $2.71 $6.32 $ 13.47 Options exerciseable in thousands: Outstanding as of December 31, 1998. . . . . . . . . . 132 53 79 Weighted-average remaining contractual life (in years) . . . . . . . . . . . . 6.78 7.30 8.45 Weighted-average exercise price. . . . . . . . . . . . $2.71 $6.32 $ 13.47
On August 15, 1996, an unqualified stock option for 10,000 shares of common stock was granted to a director at the exercise price of $2.71. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." This statement defines a fair value based method of accounting for an employee stock option or similar equity instrument. The statement does, however, allow an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued To Employees." In 1996, the Company adopted provisions of SFAS No. 123 by providing disclosures of the pro forma effect on net income and earnings per share that would result if the fair value compensation element were to be recognized as expense. The following table shows the pro forma earnings and earnings per share for 1998, 1997 and 1996 along with significant assumptions used in determining the fair value of the compensation amounts.
1998 1997 1996 ----------- ----------- --------- Pro forma amounts: Net income . . . . . . . . . $ 14,019 $ 11,777 $ 7,242 Earnings per share (basic) . $ 1.52 $ 1.32 $ 1.04 Earnings per share (diluted) $ 1.51 $ 1.31 $ 1.03 Assumptions: Dividend yield . . . . . . . 0 0 0 Expected volatility. . . . . 36.75% 36.75% 34.46% Risk free interest rate. . . 6.20-6.73% 6.20-6.73% 6.30% Expected lives . . . . . . . 4 years 4 years 4 years
During fiscal years 1997 and 1996 the weighted average grant-date fair value of options granted was $5.08 and $2.31 per share, respectively. No options were granted in 1998. 11. Contingencies: The Company is involved in certain claims and litigation related to its operations. Based upon the facts known at this time, management is of the opinion that the ultimate outcome of all such claims and litigation will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. -32- Notes to Consolidated Financial Statements (continued) (dollars in thousands) Gradall Industries, Inc. 12. Pro Forma Information: Net income and net income per share are presented below as if the 1995 Recapitalization, the issuance of shares of common stock pursuant to the initial public offering and the application of the net proceeds thereof to the reduction in debt, all had occurred as of January 1, 1995.
1996 ----------- Net income as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,313 Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 973 Reduction in interest expense using an average interest rate of 8.2% including the elimination of amortization of deferred financing costs. . . . . . . . . . . . . 2,013 Increase in income taxes related to the pro forma adjustments. . . . . . . . . . . (763) ----------- Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,536 =========== Average shares outstanding as if the initial public offering had occurred on January 1, 1995 . . . . . . . . . . . . . . . . . . . . 8,939,294 Pro forma net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.07
13. Extraordinary Item: The early repayment of the term debt and subordinated debt with the proceeds of the initial public offering resulted in the write-off of $723 of deferred financing costs and unamortized discount on the subordinated debt of $872 which have been accounted for as an extraordinary charge resulting from early extinguishment of debt net of applicable income taxes of $622. Total income before taxes after consideration of these extraordinary expenses amounted to $12,194 for the year ended December 31, 1996. 14. Segment Reporting: During the fourth quarter of 1998, the Company adopted Statement of Financial Accounting Standard No. 131, "Disclosure about Segments of an Enterprise and Related Information." Management has determined that the Company operates in a single industry segment, construction equipment. The Company's operations involve manufacturing specialized construction equipment and parts. While the Company's chief operating decision maker monitors the revenue streams of the different products, operations are managed and financial performance is measured in the construction equipment segment. Products and Services: The Company groups its products and services into the following categories: 1. Material Handlers-Machines typically used to move a variety of construction materials around jobsites and industrial facilities. 2. Excavators-Machines used for ditching, sloping, finish grading, general maintenance and infrastructure projects. 3. Parts & Distribution-Parts and service support for Gradall machines. -33- Notes to Consolidated Financial Statements (continued) (dollars in thousands) Gradall Industries, Inc. 14. Segment Reporting, Continued: The revenues generated by these products and services at December 31 were:
($in thousands) 1998 1997 1996 -------- -------- -------- Material Handlers . . $110,161 $ 84,004 $ 70,409 Excavators. . . . . . 54,580 57,361 55,096 Parts & Distribution. 17,866 17,294 15,404 -------- -------- -------- $182,607 $158,659 $140,909 ======== ======== ========
Foreign and Domestic Sales: The Company sells equipment and parts to countries outside of the United States. There were no foreign countries with sales greater than 10% of total revenue. The domestic and foreign revenues generated at December 31 by domestic and foreign were:
($in thousands) 1998 1997 1996 -------- -------- -------- United States. . . . $176,796 $153,444 $138,330 All other countries. 5,811 5,215 2,579 -------- -------- -------- $182,607 $158,659 $140,909 ======== ======== ========
Major Customers: For the years ended December 31, 1998 and 1996, one customer accounted for 10% or more of the Company's total revenue. No customers have accounted for 10% or more of the Company's total revenue for the year ended December 31, 1997. At December 31, 1998, the customer accounted for 13%, and at December 31, 1996, the customer accounted for 11% of the Company's total revenue. 15. Selected Summary Quarterly Data (Unaudited):
QUARTERS ENDED(2) 1997 1998 ------------------------------------------ ------------------------------------------ Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, --------- --------- --------- --------- --------- --------- --------- --------- Net Sales. . . . . . . $ 35,910 $ 38,356 $ 40,310 $ 44,083 $ 41,541 $ 49,789 $ 44,138 $ 47,139 Gross Profit . . . . . 8,618 9,267 9,814 10,297 9,551 11,143 9,980 11,477 Operating Income . . . 4,674 4,735 5,310 5,921 5,234 6,018 5,779 6,932 Income Before Income Taxes . . . . 4,363 4,231 5,250 5,843 5,011 5,878 5,926 6,737 Net Income . . . . . . 2,657 2,577 3,199 3,558 3,054 3,582 3,612 4,106 Earnings Per Share (1) Basic. . . . . . . . . $ .30 $ .29 $ .36 $ .40 $ .34 $ .40 $ .38 .43 Dilutive . . . . . . . $ .30 $ .29 $ .35 $ .39 $ .34 $ .40 $ .38 .43 (1) Based on average shares outstanding during the quarter. (2) The sum of each year's quarterly data may not equal the total year results due to rounding.
-34- Report of Independent Accountants Report of Management Gradall Industries, Inc. To the Board of Directors and Stockholders of Gradall Industries, Inc. In our opinion, the accompanying consolidated balance sheets and related consolidated statements of income, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Gradall Industries, Inc. and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers Cleveland, Ohio February 23, 1999 To the Board of Directors and Stockholders of Gradall Industries, Inc. The Company maintains accounting and related internal control systems which are intended to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and to produce records necessary for the preparation of financial information. There are limits inherent in all systems of internal control, and the cost of the systems should not exceed the expected benefits. Through recommendations from its independent accountants, the Company periodically reviews these systems and controls and compliance therewith. The Audit Committee of the Board of Directors, comprised entirely of nonemployee directors, meets with management and the independent accountants to review the results of their work and to satisfy itself that their responsibilities are being properly discharged. The independent accountants have full and free access to the Audit Committee and may have discussions regarding appropriate matters, with and without the presence of management. The primary responsibility for integrity of financial information rests with management. Certain valuations contained herein result, of necessity, from estimates and judgments of management; actual results could differ from these estimates. The accompanying consolidated financial statements, notes thereto and other related information were prepared in conformity with generally accepted accounting principles applied on a consistent basis. /s/ Barry L. Phillips /s/ Bruce A. Jonker Barry L. Phillips Bruce A. Jonker President and Chief Vice President, Chief Financial Executive Officer Officer and Treasurer -35- Management's Discussion and Analysis of Financial Condition and Results of Operations Gradall Industries, Inc. The following discussion of results of operations and financial condition is based upon and should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto, the Selected Consolidated Financial Data and other financial data appearing elsewhere herein. General Gradall Industries operates in two markets of the construction equipment segment. The majority of the Company's revenues, 63.4%, are generated by material handler machines and related parts that are sold in the rough-terrain variable-reach material handler market which has grown in excess of 30% per year for the last five years. New applications, increased rental demands and displacement of straight-mast forklifts and small rough-terrain cranes along with strong construction and a supportive economy are the major contributors to the rapid market growth. The Company has in excess of 16% market share in North America for the three size classes that it competes in. Ninety percent of Gradall material handlers are first used in rental fleets. The product is sold to national rental companies and independent distributors for rent and sale to end-users. Sales for material handler machines were $110.2 million in 1998, a 31.2% increase over 1997 sales and a four-year compound annual growth of 39.9%. A new D series family of machines was introduced in early 1998 to provide improved ergonomics, safety and serviceability. The remaining 36.6% of the Company's sales are generated from excavator machines and related parts. Excavators are produced with wheeled and crawler undercarriages which compete in separate markets. Gradall is the market leader in North America in the wheeled excavator market with a market share of over 40%. In the highway-speed niche market, Gradall has a market share in North America of over 90%. Since 1994 the wheeled excavator market has a modest compound annual growth of 4.3% and the crawler market has grown at a 13.1% compound annual growth. The passage of the Federal highway bill (TEA-21) is expected to increase construction equipment demand and contribute to increased market growth over the next three or four years. International sales and the rental market are areas of focus for sales growth in 1999. Excavator machine sales were $54.6 million in 1998, down 4.8% from 1997 volume. The four-year compound annual growth for excavator sales is 4.8%. The significant sales growth of material handlers in recent years has created a need to increase production capacity. The board of directors has approved a capacity expansion program, which will require a $30 to $50 million investment over the next three to five years. An important step in this plan was the purchase of an additional 330,000-sq. ft. facility in October 1998. Formerly the Volvo Truck Assembly plant, the facility is located in Orrville, Ohio, and will be used to produce material handler products. Start-up of this plant is scheduled for the second quarter 1999 upon the receipt of newly purchased machinery and equipment. -36- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Gradall Industries, Inc. Results of Operations The following table sets forth, for the periods indicated, items in the Company's income statements as a percentage of net sales for the periods indicated(1):
For the Years Ended December 31, ---------------------- 1996 1997 1998 ------ ------ ------ Net Sales: Excavators. . . . . . . . . . . . . 39.1% 36.2% 29.9% Material handlers . . . . . . . . . 50.0 52.9 60.3 Service parts . . . . . . . . . . . 10.9 10.9 9.8 ------ ------ ------ Total net sales . . . . . . . . . . . 100.0% 100.0% 100.0% Cost of sales . . . . . . . . . . . . 76.7 76.1 76.9 ------ ------ ------ Gross profit. . . . . . . . . . . . 23.3 23.9 23.1 Research and development and product engineering costs . . . . . . . . . 2.2 2.3 2.2 Selling general and administrative expenses. . . . . . 8.4 8.6 7.7 ------ ------ ------ Operating income. . . . . . . . . . . 12.7 13.0 13.1 Other expense: Interest expense. . . . . . . . . . 2.2 0.4 0.2 Other, net. . . . . . . . . . . . . 0.7 0.2 ------ ------ ------ Income before income taxes and extraordinary item 9.8 12.4 12.9 Income tax provision. . . . . . . . . 3.9 4.9 5.0 ------ ------ ------ Income before extraordinary item. . . . . . . . . 5.9% 7.6% 7.9% ====== ====== ====== (1) The sum in any column may not equal the indicated total due to rounding.
Results of Operations Fiscal 1998 Compared to Fiscal 1997 Net Sales. Net sales were $182.6 million for fiscal 1998, an increase of $23.9 million or 15.1% compared to $158.7 million for fiscal 1997. The increase in net sales was attributable to a material increase in the unit volume of material handlers. Excavator unit sales were slightly lower and service parts showed a small increase in fiscal 1998 over fiscal 1997. The introduction of the new D series family of material handlers plus strong market demand were the key factors for higher material handler sales. The abundance of low price crawler excavators entering the U.S. from Asia contributed to reduced crawler excavator sales. Service parts sales increased for material handler parts as a result of the increased population of field units. Net sales of material handlers were $110.2 million for fiscal 1998, an increase of $26.2 million or 31.2% compared to $84.0 million in 1997. Net sales of excavators were $54.6 million for fiscal 1998, a decrease of $2.8 million or 4.9% compared to $57.4 million for fiscal 1997. Net sales of service parts were $17.9 million for fiscal 1998, an increase of $0.6 million or 3.5% compared to $17.3 million in fiscal 1997. Although the Company expects net sales to increase in the future, it anticipates that the rate of growth, especially with respect to sales of material handlers, will not continue at the rate of growth experienced in 1998. -37- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Gradall Industries, Inc. Gross Profit. Gross profit was $42.2 million for fiscal 1998, an increase of $4.2 million or 10.9% compared to $38.0 million for fiscal 1997. Gross profit as a percentage of net sales decreases to 23.1% for fiscal 1998 from 24.0% for fiscal 1997, primarily due to increased volume production inefficiencies related to schedule changes, parts shortages, high overtime and outsourcing. The newly acquired Orrville facility should reduce overtime and outsourcing requirements following start up in mid-1999. Research and Development and Product Engineering Costs. Research and development and product engineering cost was $4.0 million for fiscal 1998, an increase of $0.4 million or 10.8% compared to $3.6 million for fiscal 1997. The increase is due to the addition of engineering personnel to support new product development. Selling, General and Administrative. Selling, general and administrative expense was $14.1 million for fiscal 1998, an increase of $0.4 million or 3.2% compared to $13.7 million for 1997. This increase is attributable to the addition of marketing field sales and service representatives, greater overseas and domestic travel and increased advertising spending for international trade publications. Interest Expense. Interest expense was $0.4 million for fiscal 1998, a decrease of $0.3 million or 45.4% compared to $0.7 million for fiscal 1997. This reduction is the result of the application of the net proceeds of the Company's public offering of common stock on June 29, 1998, to reduce indebtedness. Income Tax Provisions. Income tax expense was $9.2 million for fiscal 1998, an increase of $1.5 million or 19.5% compared to $7.7 million for fiscal 1997, and representing an effective tax rate of 39.1% in 1998 and 1997. Net Income. Net income was $14.4 million for fiscal 1998, an increase of $2.4 million or 19.7% compared to $12.0 million for fiscal 1997. This increase results from the higher level of sales in fiscal 1998 generating increased operating margins and reduced debt from the 1998 public offering lowering interest expense. Diluted Earnings Per Share After Extraordinary Item. Earnings per share after extraordinary item were $1.54 for fiscal 1998, an increase of $0.21 or 15.8% from $1.33 for fiscal 1997, resulting from increased net sales and net income. Results of Operations Fiscal 1997 Compared to Fiscal 1996 Net sales. Net sales were $158.7 million for fiscal 1997, an increase of $17.8 million or 12.6% compared to $140.9 million for fiscal 1996. The increase in net sales was attributed to a material increase in unit volume of material handlers and excavators and a moderate increase in sales volume of service parts. The introduction of the new excavator models XL 2200 and XL 2210 in 1997 assisted in the excavator unit increase. Price increases affecting all three product lines had a modest favorable impact. Net sales of excavators were $57.4 million for fiscal 1997, an increase of $2.3 million or 4.1% compared to $55.1 million for fiscal 1996. Net sales of material handlers were $84.0 million for fiscal 1997, an increase of $13.6 million or 19.3% compared to $70.4 million for fiscal 1996, Net sales of service parts were $17.3 million for fiscal 1997, an increase of $1.9 million or 12.3% compared to $15.4 million for fiscal 1996. -38- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Gradall Industries, Inc. Gross Profit. Gross profit amounted to $38.0 million for fiscal 1997, an increase of $5.2 million or 15.8% compared to $32.8 million for fiscal 1996. Gross profit as a percentage of net sales increased to 24.0% for fiscal 1997from 23.3% for fiscal 1996, primarily due to improved production efficiencies and the economics of higherproduction volume. Research and Development and Product Engineering Costs. Research and development and product engineering cost was $3.6 million for fiscal 1997, an increase of $0.6 million or 18.3% compared to $3.1 million for fiscal 1996. The increase is due to the addition of engineering personnel to support new product development. Selling, General and Administrative. SG & A expense was $13.7 million for fiscal 1997, an increase of $1.9 million or 16.1% compared to $11.8 million for fiscal 1996. This increase is attributed to the addition of marketing field sales and service representatives to improve service to the distributor organization. In addition the higher unit volume of shipments in fiscal 1997 increased the interest expense for dealer floor plan and retail subsidy above the 1996 expense level. Interest Expense. Interest expense was $0.7 million for fiscal 1997, a decrease of $2.4 million or 77.6% compared to $3.1 million for fiscal 1996. This reduction is the result of the application of the net proceeds of the Company's initial public offering to reduce outstanding indebtedness on September 3, 1996. Other. Other expense was $0.3 million for fiscal 1997, a decrease of $0.8 million or 74.8% compared to $1.0 million in fiscal 1996. In 1996 other expense included a charge of $0.8 million for settlement of a distributor litigation. Income Tax Provision. Income tax expense was $7.7 million for fiscal 1997, an increase of $2.2 million or 39.9% compared to $5.5 million for fiscal 1996, and representing an effective tax rate of 39.1% in 1997 and 39.9% in 1996. Extraordinary Item. An extraordinary charge of $1.0 million, net of taxes, related to early extinguishment of senior and subordinated debt was incurred in September 1996 to write off unamortized deferred financing costs and the discount on subordinated debt which was paid off with proceeds from the Company's initial public offering on September 3, 1996. Net Income. Net income was $12.0 million for fiscal 1997, an increase of $4.7 million or 64.0% compared to $7.3 million for fiscal 1996. This increase results from the higher level of sales in fiscal 1997 generating increased operating margins and reduced debt from the 1996 initial public offering lowering interest expense. Diluted Earnings Per Share After Extraordinary Item. Earnings per share after extraordinary item were $1.33 for fiscal 1997, a increase of $0.29 or 27.9% from $1.04 for fiscal year 1996, reflecting the $4.7 million increase in net income described above. Liquidity and Capital Resources In June 1998, the Company completed a public offering of 562,500 newly issued shares of common stock at $13.00 per share. As part of the offering, existing shareholders sold 1,250,000 shares of common stock. The $6.9 million of net proceeds to the Company was used to repay the revolving credit facility. -39- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Gradall Industries, Inc. The Company has funded its operations primarily with cash generated from operations. The Company generated net cash from operating activities of $11.1 million in 1998 compared to $3.4 million for 1997. Net cash from operating activities for 1998 resulted from $14.4 million of net income and $2.5 million of non-cash charges to income, primarily depreciation and postretirement benefit transition obligation, which were reduced by $5.7 million of net cash used by changes in operating assets and liabilities, primarily a $7.3 million increase in inventory due to more finished machines in stock. Net cash from operating activities for 1997 resulted from $12.0 million of net income, $3.4 million of non-cash charges to income, primarily depreciation and postretirement benefit transition obligation and reduced by $12.0 million from changes in operating assets and liabilities, primarily an $8.4 million increase in accounts receivable. Net cash used by investing activities, consisting of purchases of property and equipment, was $13.3 million in 1998 and $5.3 million in 1997. Capital expenditures for 1998 include $5.6 million for the purchase of a 330,000-square-foot facility in Orrville, Ohio to be used for the manufacture of material handlers. The Company continues the multi-year program to increase production efficiencies, labor productivity and the output of the Company's manufacturing facility through investments in new capital equipment. Management expects to invest approximately $10.5 million of additional capital in 1999 for start-up machinery at the Orrville facility and production improvements under the multi-year program which will be funded from internally generated cash flow. At December 31, 1998, borrowings under Gradall's revolving credit facility totaled $6.9 million and $18.1 million was available under the facility. Outstanding balances under the amended facility generally bear interest at the Company's choice of either LIBOR plus 1% or prime minus 0.5%. On December 31, 1998, the average annual interest rate under the facility was 7.25%. The Company was not required to make any principal repayments of the amount outstanding under the facility until August 31, 1999. In January 1999 the Company's Loan and Security Agreement with Heller Financial, Inc. was paid in full and terminated. A new revolving line of credit for $17 million was established with KeyBank National Association (the "Lender") with an unsecured demand promissory note. At February 28, 1999, borrowing under the new revolving credit facility totaled $9.3 million, and $5.7 million was available under the facility. The note bears interest at either LIBOR plus .80% or prime minus 1.40%. The note renews annually and terminates at the earlier of the Lender's demand or the Company's decision to terminate by written or oral communication to the Lender. A substantial amount of the Company's working capital is invested in accounts receivable and inventories. The Company periodically reviews accounts receivable for noncollectability and inventories for obsolescence and establishes allowances that it believes are appropriate. In addition, the Company continuously monitors the level of its purchase orders for raw materials and correlates these orders, and its inventory balances of various raw materials, to its current production schedule. To avoid shortages of raw materials during periods of increased demand, the Company may from time to time increase its level of purchases to meet its anticipated future level of production. -40- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Gradall Industries, Inc. The Board of Directors has approved in principle the Capacity Expansion Program which is intended to raise capacity in excess of 50% over the next three to five years. The Capacity Expansion Program will require a $30 to $50 million investment over this time frame. The acquisition of the Orrville facility and the purchase of robot welders, machining centers and lasers which total approximately $8.3 million are the investments in this program through December 31, 1998. The Company may alter or revise the Capacity Expansion Program based upon changes in market demand and/or economic conditions. The Company believes that cash flow from operations together with funds available under its new credit facility will be adequate to fund its working capital and capital expenditure requirements for the foreseeable future. Impact of the "Year 2000 Issue" The year 2000 issue is the result of computer programs having been written using two digits rather than four to define the applicable year. Any of the Company's computers, computer programs, manufacturing and administration equipment or products that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If any of the Company's systems or equipment that have date-sensitive software use only two digits, system failures or miscalculations may result causing disruptions of operations, including among other things, a temporary inability to process normal business activities. Significant uncertainty exists concerning the scope and magnitude of problems associated with the year 2000 change. The Company recognizes the need to ensure its operations will not be adversely impacted by year 2000 software failures and has established a project team to address year 2000 risks. The project team has coordinated the identification of and will coordinate the implementation of changes to computer hardware and software applications that will attempt to ensure availability and integrity of the Company's information systems and the reliability of its operational systems and manufacturing process. The Company believes that it has identified substantially all of the major computer, software applications and related equipment used in connection with its internal operations that must be modified, upgraded or replaced to minimize the possibility of a material disruption to its business. The Company has commenced the process of modifying, upgrading and replacing major systems that have been identified as adversely affected and expects to complete this process by the end of September 1999. In addition to computers, photocopiers, telephone switches, security systems, elevators and other common devices may be affected by the year 2000 problem. The Company is currently assessing the potential effect of and costs of remediating the year 2000 problem on its office and facilities equipment. The Company also faces risk to the extent that suppliers of products, services and systems purchased by the Company and others with whom the Company transacts business on a worldwide basis do not comply with year 2000 requirements. The Company has initiated formal communications with significant suppliers and customers to determine the extent to which the Company is vulnerable to the failure of such third parties to remediate their own year 2000 issues. In the event any such third parties cannot provide the Company with products, services or systems that meet the year 2000 requirements on a timely basis or in the event year 2000 issues prevent such third parties from timely delivery of products or services required by the Company, the Company's results of operations could be materially adversely affected. To the extent year 2000 issues cause significant delays in supplier shipments, the sourcing of alternative suppliers or increasing inventory levels, the Company's business, results of operations and financial position could be materially adversely affected. -41- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Gradall Industries, Inc. The Company's research and supplier response indicate that all of the Company's products manufactured to date and all future designs are year 2000 compliant. External and internal costs specifically associated with modifying internal use software for year 2000 compliance are expensed as incurred. To date the Company has spent $0.22 million on this project. Cost to be incurred in 1999 to fix year 2000 problems are estimated at approximately $0.5 million. Such costs do not include normal system upgrades and replacements. The Company does not expect the costs relating to year 2000 remediation to have a material adverse effect on its results of operations, cash flows or financial condition. As part of Gradall's contingency planning, the Company is developing business continuity plans for those areas that are critical to Gradall's business. These business continuity plans will be designed to mitigate serious disruptions to the business flow beyond the end of 1999. The major drive for contingency planning will be in the first half of 1999 with the expectation that the Company will have plans in place by the end of the second quarter of 1999. The failure to correct a material year 2000 problem could result in an interruption in or a failure of certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the year 2000 readiness of critical suppliers and customers, the Company is unable to determine at this time whether the consequences of year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The year 2000 project is expected to significantly reduce the Company's level of uncertainty about the year 2000 problem and in particular about the year 2000 compliance and readiness of its critical suppliers and customers. The Company believes that, with the implementation of new business systems and completion of the projects scheduled, the possibility of significant interruptions of normal operations should be reduced. The estimates and conclusions herein contain forward-looking statements and are based on management's best estimates of future events. Risks to completing the plan include the ability to retain human resources, our ability to discover and correct the potential year 2000 sensitive problems which could have a serious impact on operations, and the ability of suppliers and customers to bring their systems into year 2000 compliance. Inflation The overall impact of the low rate of inflation in recent years has had no significant impact on the Company. -42- Accounting Pronouncements Gradall Industries, Inc. Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," effective for fiscal years ending after December 31, 1997. Thedifference between net income and comprehensive income for the Company is due to change in its minimum pension liability adjustment. Comprehensive income is being shown in the statement of changes in stockholders' equity. In June 1997, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an Enterprise and Related Information," effective for fiscal years ending after December 15, 1997. The Company adopted SFAS No. 131 in the fourth quarter of 1998. SFAS No. 131 requires disclosure only and had no impact on the Company's consolidated financial statements. The Company's one segment of construction equipment is discussed in Note 14 to the consolidated financial statements. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 132 in the fourth quarter of 1998. SFAS No. 132 revises employers disclosures about pension and other postretirement benefits plans. It does not change the measurement or recognition of those plans and therefore, had no impact on the Company's consolidated financial statements. The Company's Pension and Postretirement Benefit Plans are discussed in Note 7 to the consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income. The new rules will be effective the first quarter of 2000. The Company is in the process of determining the impact of this new standard and, based on current market conditions, anticipates that it will not have a material impact on the Company's financial statements when effective. In March 1998, the Accounting Standards Executive Committee ("AcSEC") of the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires expenses incurred during the application development stage of a software implementation project to be capitalized and amortized over the useful life of the project. The Company adopted SOP 98-1 in the first quarter of 1999. SOP 98-1 is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows. In April 1998, the AcSEC issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 provides guidance on the financial reporting of start-up and organization costs; requiring such costs be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company's current policy is to expense such costs as incurred consistent with SOP 98-5. -43- Cautionary Statements Gradall Industries, Inc. Cautionary Statement This report and the foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's Annual Report to Shareholders, any Report on Form 10-K, 10-Q or Form 8-K or any other written or oral statements made by or on behalf of the Company may include forward looking statements. Forward looking statements represent the Company's expectations or beliefs concerning future events. Any forward looking statements made by or on behalf of the Company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Undo reliance should not be placed on any forward looking statements made by or on behalf of the Company as such statements speak only as of the date made. The Company undertakes no obligation to publicly update or revise any forward looking statement, whether as a result of new information, the occurrence of future events or otherwise. -44- The Company's Stock Gradall Industries, Inc. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is traded on the Nasdaq National Market under the symbol "GRDL." The following table sets forth, for the periods indicated, the high and low last trade price per share of the Common Stock as reported on the Nasdaq National Market.
Year Ended Year Ended December 31, 1998 December 31, 1997 ----------------- ----------------- High Low High Low First Quarter. $18 3/8 $ 15 3/8 $16 1/4 $ 12 Second Quarter 17 7/8 13 1/16 16 1/4 12 Third Quarter. 16 7/8 12 5/8 17 3/8 14 3/4 Fourth Quarter 16 13 3/32 16 7/8 15
As of February 26, 1999, there were 135 record holders of the Common Stock. The Company has not paid any cash dividends to shareholders. The declaration of any cash or stock dividends will be at the discretion of the Board of Directors, and will depend upon earnings, capital requirements and the financial position of the Company, general economic conditions and other pertinent factors. At this time, the Company does not intend to pay any cash dividends in the foreseeable future. Management intends to reinvest earnings, if any, in the development and expansion of the Company's business for an indefinite period of time. -45- General Information Gradall Industries, Inc.
Stockholder Information - - ----------------------------------------------------------------------------------------------------- Annual meeting Stock exchange Sheraton Airport Hotel, 5300 Riverside Drive Gradall Industries, Inc. common Cleveland, Ohio stock is traded under the symbol GRDL and is May 19, 1999 at 10:00 am EDT listed on the NASDAQ National Market. Transfer agent and registrar Form 10-K or investor information Chase Mellon Shareholders Services Bruce A. Jonker 85 Challenger Road, Overpeck Centre Vice President, Chief Financial Officer Ridgefield Park, NJ 07660 Gradall Industries, Inc. Phone Toll-Free 1-800-756-3353 406 Mill Ave. SW, New Philadelphia, Ohio 44663 Phone 330-339-8374, Fax 330-339-8317 Directors - - ----------------------------------------------------------------------------------------------------- Sangwoo Ahn Perry J. Lewis Chairman of the Board Founding Partner, Morgan Lewis Githens & Ahn Founding Partner, Morgan Lewis Githens & Ahn William C. Ughetta, Jr. Barry L. Phillips Managing Director, Long Point Capital President and Chief Executive Officer, Jack D. Rutherford Gradall Industries, Inc. Chairman of the Board, and Chief Executive David S. Williams Officer Emeritus, The Gradall Company Vice President, Marketing and Sales, Ernest Green Gradall Industries, Inc. Founder, President and Chief Executive Officer, John A. Morgan EGI, Inc. Founding Partner, Morgan Lewis Githens & Ahn Committees - - ----------------------------------------------------------------------------------------------------- Compensation Committee Audit Committee Sangwoo Ahn - Chairman William C. Ughetta, Jr. - Chairman Jack D. Rutherford Ernest Green Barry L. Phillips Jack D. Rutherford Officers and Senior Managers - - ----------------------------------------------------------------------------------------------------- Barry L. Phillips Joseph H. Keller President and Chief Executive Officer Vice President, Engineering and Secretary David S. Williams James C. Cahill Vice President, Marketing and Sales Vice President, Manufacturing Bruce A. Jonker Vice President, Chief Financial Officer and Treasurer
Equal Opportunity Employer - - -------------------------------------------------------------------------------- Gradall is an equal opportunity employer and seeks to attract and retain the best-qualified people regardless of race, sex, age, religion, national origin or veteran status. -46- www.gradall.com/store Authorized Gradall apparel and replicas are available to investors and contractors alike via our easy-to-navigate website. Just point your browser to www.gradall.com/store for product and pricing information. Gradall has authorized the production of a collection of scale model machine replicas. These collector-quality replicas are manufactured in exacting detail using actual Gradall engineering drawings. The 534C-9 Material Handler and the XL 5100 Wheeled Hydraulic Excavator replicas have been available for two years, while the XL 5200 Crawler Excavator was just released last year. Each replica includes such authentic details as the telescoping boom, steering mechanisms, paint and decals. Gradall also offers a full line of apparel, including shirts, hats, jackets and other items. Gradall merchandise can be purchased online at www.gradall.com/store. -47- EX-23.01 3 EXHIBIT 23.01 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We consent to the incorporation by reference in the Registration Statements of Gradall Industries, Inc. on Form S-8 (File Nos. 333-40523 and 333-58129) of our reports dated February 23, 1999, on our audits of the consolidated financial statements and financial statement schedule of Gradall Industries, Inc. and Subsidiaries as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which reports are included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Cleveland, Ohio March 26, 1999 EX-27.01 4
5 1000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1998 2457 0 26983 0 32872 65807 25838 0 98987 37965 0 10 0 0 0 98987 182607 182607 140456 140456 18219 0 380 23552 9198 14354 0 0 0 14354 1.56 1.54
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