UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21220
ALAMO GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(State or other
jurisdiction of 74-1621248
incorporation or (I.R.S. Employer
organization) Identification Number)
1502 E. WALNUT, SEGUIN, TEXAS 78155
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
830-379-1480
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock, par value ON WHICH REGISTERED
$.10 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENT FOR THE PAST 90 DAYS. Yes |X| No |_|
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. |_|
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK (WHICH CONSISTS SOLELY OF
SHARES OF COMMON STOCK) HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF FEBRUARY
26, 1999 (BASED UPON THE LAST REPORTED SALE PRICE OF $9.75 PER SHARE) WAS
APPROXIMATELY $52,620,360 ON SUCH DATE.
THE NUMBER OF SHARES OF THE ISSUER'S COMMON STOCK, PAR VALUE $.10 PER SHARE,
OUTSTANDING AS OF FEBRUARY 26, 1999 WAS 9,735,759 SHARES.
DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE REGISTRANT'S PROXY
STATEMENT RELATING TO THE 1999 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON
APRIL 27, 1999, HAVE BEEN INCORPORATED BY REFERENCE HEREIN (PART III).
<PAGE>
ALAMO GROUP INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business............................................................ 3
Item 2. Properties.......................................................... 8
Item 3. Legal Proceedings.................................................. 8
Item 4. Submission of Matters to a Vote of Security Holders................ 8
Item 4a. Executive Officers of the Company.................................. 8
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 9
Item 6. Selected Financial Data............................................. 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risks........ 15
Item 8. Financial Statements................................................ 16
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure............................. 16
PART III
Item 10. Directors and Executive Officers................................... 16
Item 11. Executive Compensation............................................. 16
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 16
Item 13. Certain Relationships and Related Transactions..................... 16
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 17
Index to Consolidated Financial Statements.................................. F-1
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Alamo Group Inc., which includes its subsidiaries ("Alamo Group," "Alamo" or
the "Company"), is a leading manufacturer of high quality, tractor-mounted
mowing and other vegetation maintenance equipment and replacement parts for
industrial and agricultural end-users. The Company believes it is one of a few
vegetation maintenance equipment manufacturers offering a comprehensive product
line that employs the three primary heavy-duty cutting technologies: rotary,
flail and sickle-bar. The Company emphasizes high quality, cost efficient
products for its customers and strives to develop and market innovative products
while constantly monitoring and containing its manufacturing and overhead costs.
The Company has a long-standing policy of supplementing its internal growth
through acquisitions of businesses or product lines that currently command, or
have the potential to achieve, a leading share of their niche markets.
The predecessor corporation to the Company was incorporated in Texas in 1969
as successor to a business that began selling mowing equipment in 1955. The
Company was reincorporated in Delaware in 1987.
Since its founding in 1969, the Company has focused on satisfying customer
needs through geographic market expansion, product development and refinement
and selected acquisitions. The Company's first products were based on the rotary
cutting technology. Through acquisitions, the Company added the flail cutting
technology in 1983 and the sickle-bar technology in 1984. The Company added to
its presence in industrial and governmental markets with the acquisition of
TIGER(R) at the end of 1994.
A major thrust into agricultural mowing markets was begun in 1986 with the
acquisition of RHINO(R), a leading manufacturer in this field. With this
acquisition, the Company embarked on an aggressive strategy to increase the
RHINO dealer network during a period of industry contraction. Distribution
network expansion remains a primary focus of the Company's marketing plans for
agricultural and industrial uses. The addition of M&W GEAR COMPANY in early 1995
allowed the Company to enter into the manufacture of hay-making equipment that
complements the RHINO products, while utilizing the same dealer network. Another
strategic move was made in 1995 with the acquisition of HERSCHEL(R), a leading
manufacturer and distributor of high wear, high turnover farm equipment
replacement parts. In addition, the Company has concentrated on developing new
products which meet the needs of its niche market customers and on adapting its
existing products to serve other applications.
In 1991, the Company began its international expansion with the acquisition
of MCCONNEL(R), a United Kingdom manufacturer of vegetation maintenance
equipment, principally hydraulic boom-mounted hedge and grass cutters and
related parts. Later acquisitions added BOMFORD(R) in the U.K. and SMA(R) in
France.
The principal executive offices of the Company are located at 1502 E.
Walnut, Seguin, Texas 78155, and its telephone number is (830) 379-1480.
TERMINATION OF MERGER AGREEMENT
As previously reported by the Company in prior filings with the Securities
and Exchange Commission, the Company had entered into a merger agreement (the
"Merger Agreement") among the Company, WEC Company, a subsidiary of Woods
Equipment Company ("WEC"), and AGI Acquisition Corp., a subsidiary of WEC
Company, which provided for the acquisition of the Company by WEC at a purchase
price of $18.50 per share of the Company's common stock. The Merger Agreement
was approved by the Company's stockholders at a special meeting held on November
18, 1998. Subsequent to the special meeting, after disagreement between the
parties as to the satisfaction of certain closing conditions (including
disagreement as to whether a material adverse effect had occurred with respect
to the Company), WEC Company and Alamo mutually agreed to terminate the Merger
Agreement and abandon the proposed merger on February 23, 1999. The Company now
intends to focus its attention on growing and strengthening its operations as an
independent company.
3
<PAGE>
MARKETING AND MARKETING STRATEGY
The Company's products are sold through the Company's seven marketing
organizations, and extensive, world-wide dealer networks under the ALAMO
INDUSTRIAL(R), RHINO(R), M&W(R), MCCONNEL(R), BOMFORD(R), SMA(R), TIGER(R), and
HERSCHEL-ADAMS (R) TRADEMARKS.
ALAMO INDUSTRIAL equipment is principally sold to governmental end-users
and, to a lesser extent, to the agricultural market and commercial turf market.
Domestic governmental agencies and contractors that perform services for such
agencies purchase primarily hydraulically-powered, tractor-mounted mowers,
including boom-mounted mowers, and replacement parts for heavy-duty, intensive
use applications, including the maintenance of highway, airport, recreational
and other public areas. Municipal park agencies, golf courses and landscape
maintenance contractors purchase certain ALAMO INDUSTRIAL mowers that deliver a
fine manicured cut.
TIGER equipment includes heavy-duty, tractor-mounted mowing and vegetation
maintenance equipment and replacement parts. A portion of TIGER sales includes
tractors, which are not manufactured by TIGER. TIGER sells to state, county and
local governmental entities through a network of dealers. In most cases, the
larger dealers' principal product line is TIGER equipment. TIGER'S dealership
network is independent of ALAMO'S dealership network.
RHINO and M&W equipment is generally sold to farmers and ranchers to clear
brush, maintain pastures and unused farmland, shred crops and for hay-making. It
is also sold to other customers, such as mowing contractors and construction
contractors, for non-agricultural purposes. RHINO equipment consists principally
of a comprehensive line of tractor-mounted equipment, including rotary cutters,
finishing mowers, flail mowers and disc mowers. RHINO also sells post hole
diggers, scraper blades and replacement parts for all RHINO equipment. Farm
equipment dealers play the primary role in the sales of RHINO equipment. M&W
hay-making equipment uses a fixed chamber, round bale technology. The RHINO
product line is also sold through MCCONNEL'S existing network of agricultural
tractor dealers in the U.K.
HERSCHEL-ADAMS replacement parts are sold for all types of tillage equipment
and tractors and certain types of mowing and construction equipment.
HERSCHEL-ADAMS products include a full range of cutting parts, chromium carbide
treated hard-faced and plain replacement tillage tools, disc blades and
fertilizer application components. HERSCHEL-ADAMS replacement tools are sold
throughout the United States, Canada and Mexico to five major customer groups:
farm equipment dealers, fleet distributors (which generally act as a buyer for a
number of farm supply stores), wholesale distributors, original equipment
manufacturers and construction equipment dealers.
MCCONNEL equipment principally includes a line of hydraulic, boom-mounted
hedge and grass cutters, as well as other tractor attachments and implements
such as hydraulic backhoes, cultivators, subsoilers, buckets and other digger
implements and replacement parts. MCCONNEL also sells turf maintenance equipment
to the golf course and leisure markets. MCCONNEL equipment is sold primarily in
the U.K. and France, and to a lesser extent in other parts of Europe and
Australia. MCCONNEL primarily focuses on the agricultural and commercial
end-user. MCCONNEL products are sold in the U.K. through a network of
agricultural tractor dealers, with exports sold primarily through distributors.
BOMFORD equipment includes hydraulic, boom-mounted hedge and hedgerow
cutters, industrial grass mowers, agricultural seed bed preparation cultivators
and replacement parts. BOMFORD equipment is sold to governmental agencies,
contractors and agricultural end-users in the U.K., France, Germany, Scandinavia
and, to a lesser extent, in North America, Australia and the Far East. BOMFORD'S
sales network is very similar to that of MCCONNEL in the U.K.
SMA equipment includes hydraulic, boom-mounted hedge and hedgerow cutters
and associated replacement parts. SMA'S principal customers are the French local
authorities. SMA'S product offerings were expanded in 1994 to include certain
quick-attach boom mowers manufactured by the Company in the U.K. to expand its
presence in agricultural dealerships.
In addition to the sales of HERSCHEL-ADAMS replacement parts, the Company
derives a significant portion of its revenues from sales of replacement parts
for each of its whole goods lines. Replacement parts represented approximately
34% of the Company's total sales for the year ended December 31, 1998.
Replacement parts are more profitable and generally less cyclical than whole
goods equipment.
4
<PAGE>
While the Company believes that the end-user of its products evaluates the
purchase of such products on the basis of product quality, such purchases are
also based on a dealer's service and support and loyalty to the dealer based on
previous purchases.
Demand for products tends to be strongest in the spring and summer growing
seasons. The Company provides incentives for off-season purchases, including
discounts, as a way to even out seasonal variations in its manufacturing cycles.
Under incentive programs, there is no right of return.
TERMINATION OF RHINO INTERNATIONAL'S OPERATIONS
During December 1998, the operations of the Company's Chinese tractor import
and marketing business, Rhino International, were terminated. Rhino
International, which was acquired in 1995, is not related to the Company's core
business. Disposal of the assets of the Rhino International operation is under
way, and the Company anticipates that these activities should be concluded by
mid-1999.
PRODUCT DEVELOPMENT
The Company's ability to quickly provide innovative responses to customer
needs, to continue to develop and manufacture new products and to enhance
existing product lines is critical to its success. The Company continually
conducts research and development activities in an effort to improve existing
products and develop new products. The Company currently employs 81 people in
its engineering department, 34 of whom are professionals and the balance of whom
are support staff. Amounts expended on research and development activities
aggregated approximately $1,685,000 in 1998, $1,712,000 in 1997 and $1,747,000
in 1996.
SEASONALITY
The vegetation maintenance equipment industry in general tends to follow the
seasonal buying patterns of its major customers with peak sales occurring in May
through August. Agricultural end-users generally purchase equipment in the early
spring for the beginning of the mowing season. Governmental end-users typically
wait to purchase new equipment until the first and second calendar quarters. The
timing of these purchases, however, may be affected by weather conditions and
general economic conditions. In order to achieve efficient utilization of
manpower and facilities throughout the year, the Company must estimate seasonal
demand months in advance, and equipment must be manufactured in anticipation of
such demand. The Company utilizes a rolling monthly sales forecast from the
Company's marketing divisions and order backlog in order to develop a master
production plan for its manufacturing facilities. Additionally, the Company
attempts to equalize demand for its products throughout the calendar year by
offering seasonal sales programs which provide additional discounts on equipment
that is ordered during off-season periods.
COMPETITION
The Company's products are sold in highly competitive markets throughout the
world. The principal competitive factors are price, quality, service and
reputation. The Company competes with several large national and international
companies that offer a broad range of agricultural equipment and replacement
parts, as well as numerous small, privately-held manufacturers and suppliers of
a limited number of products. However, the Company has fewer competitors in
wide-swath and boom-mounted mowing equipment and within the governmental niche.
Some of the Company's competitors are significantly larger than the Company and
have substantially greater financial and other resources at their disposal. The
Company believes that it is able to compete successfully in its markets by
containing its manufacturing costs, offering high quality products, developing
and designing innovative products and, to some extent, avoiding direct
competition with significantly larger competitors. There can be no assurance
that such competitors will not substantially increase the resources devoted to
the development and marketing of products competitive with those of the Company.
The Company believes that within the U.S. it is the largest supplier within
governmental markets for its kind of equipment, the third largest supplier in
the U.S. agricultural market for such equipment and one of the two largest
suppliers in the European market for such equipment.
5
<PAGE>
UNFILLED ORDERS
As of December 31, 1998, the Company had unfilled customer orders of $19.3
million compared to $35.0 million at the end of 1997, the reduction being
primarily attributable to the cyclical decline in agricultural markets.
Management expects that substantially all of the Company's backlog as of
December 31, 1998, will be shipped during fiscal year 1999. The amount of
unfilled orders at a particular time is affected by a number of factors,
including the scheduling of manufacturing and shipping of the product, which in
most instances is dependent on the Company's seasonal sales programs and the
needs of its customers. Certain of the Company's orders are subject to
cancellation anytime before shipment; therefore, a comparison of unfilled orders
from period to period is not necessarily meaningful and may not be indicative of
eventual actual shipments.
SOURCES OF SUPPLY
The principal raw materials used by the Company include steel and purchased
components. During 1998, the raw materials needed by the Company were available
from a variety of sources in adequate quantities and at prevailing market
prices. A number of the Company's units are mounted on and shipped with a
tractor. Tractors are generally available, but in some periods delays have been
experienced. No single supplier is responsible for supplying more than 10% of
the principal raw materials used by the Company.
While the Company manufactures many of the parts for its products, a
significant percentage of parts, including most drive lines, gear boxes and
hydraulic pumps and motors, are purchased from outside suppliers which
manufacture to the Company's specifications.
Approximately 15% of the aggregate dollar amount of parts purchased by the
Company's U.S. operations are imported.
PATENTS AND TRADEMARKS
The Company owns U.S. and foreign patents. While the Company considers its
patents to be advantageous to its business, it is not dependent on any single
patent or group of patents.
Products manufactured by the Company are advertised and sold under numerous
trademarks. The ALAMO INDUSTRIAL(R), RHINO(R), M&W(R), MCCONNEL(R), BOMFORD(R),
SMA(R), TIGER(R) and HERSCHEL-ADAMS(R) trademarks are the primary marks for the
Company's products. The Company also owns other trademarks which it uses to a
lesser extent such as TERRAIN KING(R), TRIUMPH(R), MOTT(R), TURNER(R), FUERST(R)
and DANDL(R). Management believes that the Company's trademarks are well known
in ITS markets and are valuable and that their value is increasing with the
development of its business, but that the business is not dependent on such
trademarks. The Company, however, vigorously protects its trademarks against
infringement. The Company has registered its trademarks in the appropriate
jurisdictions.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS
The Company is subject to numerous environmental laws and regulations
concerning air emissions, discharges into waterways and the generation,
handling, storage, transportation, treatment and disposal of waste materials.
The Company's policy is to comply with all applicable environmental, health and
safety laws and regulations, and the Company believes it is currently in
material compliance with all such applicable laws and regulations. These laws
and regulations are constantly changing, and it is impossible to predict with
accuracy the effect that changes to such laws and regulations may have on the
Company in the future. Like other industrial concerns, the Company's
manufacturing operations entail the risk of future noncompliance, and there can
be no assurance that material costs or liabilities will not be incurred by the
Company as a result thereof.
The Company is subject to various federal, state and local laws affecting
its business, as well as a variety of regulations relating to such matters as
working conditions, equal employment opportunities and product safety. A variety
of state laws regulate the Company's contractual relationships with its dealers,
some of which impose substantive standards on the relationship between the
Company and its dealers, including events of default, grounds for termination,
non-renewal of dealer contracts and equipment repurchase requirements. The
Company believes it is currently in material compliance with all such applicable
laws and regulations.
6
<PAGE>
EMPLOYEES
As of December 31, 1998, the Company employed 1,342 full-time employees. A
domestic subsidiary has a collective bargaining agreement which covers
approximately 62 employees and two U.K. subsidiaries, employing 182 persons,
have collective bargaining agreements. The Company considers its employee
relations to be satisfactory.
FOREIGN OPERATIONS AND GEOGRAPHIC INFORMATION
See Note 13 of the accompanying consolidated financial statements.
FORWARD-LOOKING INFORMATION
Part I of this Annual Report on Form 10-K and the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in Part
II of this Annual Report contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. In addition, forward-looking statements may be made orally
or in press releases, conferences, reports or otherwise, in the future by or on
behalf of the Company.
Statements that are not historical are forward-looking. When used by or on
behalf of the Company, the words "estimate," "believe," "intend" and similar
expressions generally identify forward-looking statements made by or on behalf
of the Company.
Forward-looking statements involve risks and uncertainties. These
uncertainties include factors that affect all businesses operating in a global
market, as well as matters specific to the Company and the markets it serves.
Particular risks and uncertainties facing the Company at the present include
continued deterioration in the Company's United States agricultural market and
softening in its international markets; increased competition in the Company's
businesses from competitors that have greater financial resources; the impact of
the strong dollar and British pound which increase the cost of the Company's
products in foreign markets; competitive implications and price transparencies
related to the euro conversion; the Company's ability to develop and manufacture
new and existing products profitably; market acceptance of existing and new
products; the Company's ability to maintain good relations with its employees;
and the ability to retain and hire quality employees.
In addition, the Company is subject to risks and uncertainties facing its
industry in general, including changes in business and political conditions and
the economy in general in both foreign and domestic markets; weather conditions
affecting demand; slower growth in the Company's markets; financial market
changes including increases in interest rates and fluctuations in foreign
exchange rates; unanticipated problems or costs associated with the transition
of European currencies to the euro currency; actions of competitors;
unanticipated problems or costs associated with accommodation of the year 2000
in computer applications or products; the inability of the Company's suppliers,
customers, creditors, government agencies, public utility providers and
financial service organizations to implement computer applications accommodating
the year 2000; seasonal factors in the Company's industry; unforeseen
litigation; government actions including budget levels, regulations and
legislation, primarily legislation relating to the environment, commerce,
infrastructure spending, health and safety; and availability of materials.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statement and to recognize that the statements are not
predictions of actual future results. Actual results could differ materially
from those anticipated in the forward-looking statements and from historical
results, due to the risks and uncertainties described above, as well as others
not now anticipated. The foregoing statements are not exclusive, and further
information concerning the Company and its businesses, including factors that
potentially could materially affect the Company's financial results, may emerge
from time to time. It is not possible for management to predict all risk factors
or to assess the impact of such risk factors on the Company's businesses.
7
<PAGE>
ITEM 2. PROPERTIES
At December 31, 1998, the Company utilized seven principal manufacturing
plants located in six U.S. states, Illinois, Iowa, Kansas, Oklahoma, South
Dakota and Texas, and four in Europe. In addition, there were four principal
warehouse facilities located in the United States. About 84% of the
manufacturing and office space is in owned facilities, the balance being leased.
In total the Company operates in approximately 1,385,000 square feet of
manufacturing and office space and 124,760 square feet of warehouse space. The
Company considers each of its facilities to be well maintained, in good
operating condition and adequate for its present level of operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various unresolved legal actions which arise in
the ordinary course of its business. The most prevalent of such actions relate
to product liability, which are generally covered by insurance. While amounts
claimed may be substantial, and the ultimate liability with respect to such
litigation cannot be determined at this time, the Company believes that the
ultimate outcome of these matters will not have a material adverse effect on the
Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Stockholders held on November 18, 1998 (the "Special
Meeting"), the Company's stockholders adopted the Amended and Restated Agreement
and Plan of Merger dated as of September 4, 1998 among the Company, WEC Company
and AGI Acquisition Corp. (the "Merger Agreement"). The votes of the
stockholders on this plan were as follows: 8,303,758 in favor, 324,743 opposed
and 1,107,258 abstained. As discussed above under the caption "Termination of
Merger Agreement" in Item I of this Annual Report on Form 10-K, the Company and
WEC Company mutually agreed to terminate the Merger Agreement on February 23,
1999.
ITEM 4a. EXECUTIVE OFFICERS OF THE COMPANY
Certain information is set forth below concerning the executive officers of
the Company, each of whom has been selected to serve until the 1999 annual
meeting of directors or until his successor is duly elected and qualified.
NAME AGE POSITION
------------------- ----- ---------------------------------------------
Donald J. Douglass 67 Chairman of the Board and Chief Executive
Officer
Oran F. Logan 55 President, Chief Operating Officer and a
Director
Jim A. Smith 60 Executive Vice President, Chief Financial
Officer
Robert H. George 52 Vice President, Secretary and Treasurer
Ian Burden 44 Vice President, Alamo Group (USA) Inc., Alamo
Marketing
Geoffrey Davies 51 Managing Director, Alamo Group (EUR) Ltd.
John Moon 43 Vice President, Alamo Group (USA) Inc.,
Agricultural Marketing
Donald J. Douglass founded the Company in 1969 and has served as Chairman of
the Board and Chief Executive Officer of the Company since 1969.
Oran F. Logan has been President and Chief Operating Officer of the Company
since 1984. Prior thereto, Mr. Logan served as Vice President of the Company
from 1972 to 1980. Mr. Logan was an Executive Vice President and General Manager
from 1981 to 1984. Mr. Logan has been a Director of the Company since 1984.
8
<PAGE>
Jim A. Smith joined the Company in 1996. Prior to joining the Company, Mr.
Smith served as Chief Financial Officer and a Director of Tracor, Inc., a New
York Stock Exchange listed Company, from 1966 to 1987 (employed in 1966 as
Controller). From 1987 to 1996, he served on, and as financial advisor to, the
Boards of Directors of National Instruments Corp., Mobley Environmental
Services, Inc. and Electrosource, Inc., as well as the Boards of Directors of
several privately held companies. Mr. Smith is resigning as the Company's
Executive Vice President, Chief Financial Officer as of March 31, 1999.
Robert H. George joined the Company in 1987 as Vice President and Secretary
and has served the Company in various executive capacities since that time.
Prior to joining the Company, Mr. George was Senior Vice President of Frost
National Bank from 1978 to 1987.
Ian Burden has been Vice President of Marketing of Alamo Group (USA) Inc.
since January 1994 and manages the Alamo marketing division. Prior to that time,
since 1981 Mr. Burden had served in various sales and marketing capacities for
Bomford Turner, Limited, a U.K. Company acquired by Alamo in 1993, most recently
as the head of its United States marketing efforts.
Geoffrey Davies has been Managing Director of Alamo Group (EUR) Ltd. since
December 1993. From 1988 to 1993, Mr. Davies served McConnel Corporation, a U.K.
Company acquired by Alamo in 1991, in various capacities including serving as
its Marketing Director from February 1992 until December 1993.
John C. Moon has been Vice President of Marketing of Alamo Group (USA) Inc.
since May 1991 and manages the Rhino marketing division. Prior to his
appointment as Vice President, Mr. Moon served Rhino in a number of sales and
marketing positions since November 1983.
As noted above, Mr. Smith is resigning as of March 31, 1999. Upon Mr.
Smith's resignation, Mr. Logan will assume the duties of the Chief Financial
Officer in addition to his existing duties.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the New York Stock Exchange under the
symbol: ALG. On February 26, 1999, there were 9,735,759 shares of common stock
outstanding, held by approximately 200 holders of record. The total number of
beneficial owners of Company stock exceeds this number. On February 26, 1999,
the last reported sales price of the common stock on the New York Stock Exchange
was $9.75 per share.
The following table sets forth for the period indicated, on a per share
basis, the range of high and low sales prices for the Company's common stock as
quoted by the New York Stock Exchange. These price quotations reflect
inter-dealer prices, without adjustment for retail mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions.
HIGH AND LOW STOCK PRICES FOR THE LAST TWO FISCAL YEARS WERE:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------- --------------------------------------------------
SALES PRICE CASH SALES PRICE CASH
------------------- DIVIDENDS ------------------ DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED QUARTER ENDED HIGH LOW DECLARED
- ------------------ --------- ------- --------- ------------------ ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1998 ... $21-13/16 $15-3/8 $ .10 March 30, 1997 $ 18 $15-3/8 $ .10
June 30, 1998 .... 19 14-1/2 .11 June 29, 1997 20-7/8 13-1/2 .10
September 30, 1998 19-3/4 13-1/2 .11 September 28, 1997 23-3/4 18-11/16 .10
December 31, 1998 15-7/16 10-5/8 .11 December 31, 1997 23-1/4 19-5/8 .10
</TABLE>
On January 6, 1999, the Board of Directors of the Company declared a
quarterly dividend of $.11 per share which was paid on February 3, 1999 to
holders of record on January 18, 1999. The Company expects to continue its
policy of paying regular cash dividends, although there is no assurance as to
future dividends as they depend on future earnings, capital requirements and
financial condition. In addition, the payment of dividends is subject to
restrictions under the Company's bank revolving credit agreement.
9
<PAGE>
The Company's recent amendment to its bank revolving credit agreement
prohibits the Company from paying quarterly dividends on its Common Stock in
excess of $0.11 per share through March 31, 2000. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" in Item 7 of Part II of this Annual Report in Form 10-K for a
further description of the bank revolving credit agreement.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the consolidated
financial statements of Alamo Group Inc. and Subsidiaries. The data should be
read in conjunction with the consolidated financial statements, related notes
and other financial information included herein.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1)
--------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C>
OPERATIONS:
Net sales .................................. $ 200,553 $ 203,092 $ 183,595
Income before income taxes ................. 6,535 20,595 13,722
Net income ................................. 4,115 13,600 8,762
Percent of sales ........................... 2.1% 6.7% 4.8%
Earnings per share
Basic .................................. 0.42 1.42 0.91
Diluted ................................ 0.42 1.41 0.91
Dividends per share ........................ 0.43 0.40 0.40
Average common shares
Basic .................................. 9,714 9,602 9,585
Diluted ................................ 9,730 9,674 9,641
FINANCIAL POSITION:
Total assets ............................... $ 161,638 $ 156,124 $ 153,862
Short-term debt and current maturities ..... 487 727 1,031
Long-term debt, excluding current maturities 35,858 28,617 35,299
Stockholders' equity ....................... 106,906 106,265 97,250
<CAPTION>
FISCAL YEAR ENDED(1)
--------------------------------------------
DECEMBER 30, 1995(2) DECEMBER 31, 1994(2)
-------------------- --------------------
<S> <C> <C>
OPERATIONS:
Net sales .................................. $ 163,852 $ 119,643
Income before income taxes ................. 17,779 14,255
Net income ................................. 11,615 9,166
Percent of sales ........................... 7.1% 7.7%
Earnings per share
Basic .................................. 1.36 1.21
Diluted ................................ 1.35 1.21
Dividends per share ........................ 0.40 0.36
Average common shares
Basic .................................. 8,541 7,547
Diluted ................................ 8,619 7,604
FINANCIAL POSITION:
Total assets ............................... $ 151,571 $ 99,160
Short-term debt and current maturities ..... 1,290 8,441
Long-term debt, excluding current maturities 37,309 24,513
Stockholders' equity ....................... 90,705 50,166
</TABLE>
(1) All references to 1995 and 1994 herein are to the fiscal years ended
December 30, 1995 (52 week period), and December 31, 1994 (52 week period),
respectively. Until 1996, the Company's fiscal years comprised 52 or 53 week
periods ending on the Saturday closest to December 31. In 1996, the Company
changed to a calendar year basis. There were no material differences in the
results presented that resulted from this change.
(2) Includes the results of operations of companies acquired in the respective
year from the effective dates of acquisitions.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS ANNUAL REPORT ON FORM 10-K.
The following tables set forth, for the periods indicated, certain financial
data:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Sales data in thousands:
Domestic
Agricultural ............................... $ 98,393 $ 100,398 $ 85,848
Industrial ................................. 61,133 56,453 50,228
European ....................................... 41,027 46,241 47,519
----------------- ----------------- -----------------
Total net sales ................................ $ 200,553 $ 203,092 $ 183,595
================= ================= =================
Cost and profit margins, as percentages of net sales:
Cost of sales .............................. 78.2% 73.8% 75.4%
Gross margin ............................... 21.8% 26.2% 24.6%
Selling, general and administrative expense 17.5% 15.3% 16.2%
Income from operations ..................... 4.2% 10.9% 8.4%
Income before income taxes ................. 3.3% 10.1% 7.5%
Net income ................................. 2.1% 6.7% 4.8%
</TABLE>
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Net sales for 1998 were $200.6 million, a decrease of $2.5 million or 1.3%
compared to $203.1 million for 1997. Domestic agricultural sales for 1998 were
$98.4 million compared to $100.4 million for 1997, representing a $2.0 million
or 2.0% decrease due primarily to severe drought conditions in the Company's
major domestic markets, which reduced replacement part sales in such markets,
and what the Company believes is the beginning of a cyclical decline in the
domestic agricultural market. Also reducing agricultural sales for 1998 were
lower sales from the Company's Rhino International operation, described more
fully in the paragraph below. Domestic industrial sales for 1998 were $61.1
million compared to $56.5 million in the prior year, a $4.6 million or 8.3%
increase, as a result of continued strength in customer orders. European sales
for 1998 were $41.0 million, a decrease of $5.2 million or 11.3% compared to
$46.2 million for last year. The decrease in European sales was primarily due to
continued weakness in farm income in the United Kingdom and the impact of
currency movements, particularly the strength of the British pound against the
French franc, which negatively impacted sales of the Company's U.K. manufactured
products. European sales showed some firming in the second half of 1998, but are
still below historical levels.
In December 1998, the operations of the Company's Chinese tractor import and
marketing business, Rhino International, were terminated. These operations had
experienced a decline in sales and profitability related to market factors.
Sales in 1998 were $2.2 million versus $7.8 million in 1997. Alamo is in the
process of collection of accounts receivable of Rhino International and disposal
of its remaining inventory and expects to conclude this process by mid-1999. In
1998, the effect of Rhino International, including settlement of certain
litigation as well as inventory and accounts receivable losses expected in final
collection and disposition, was an after tax loss of $6.4 million or $0.66 per
diluted share, compared to an after tax loss in 1997 of $0.9 million or $0.08
per diluted share.
Approximately 34% of the Company's 1998 sales were attributable to
replacement parts, the same percentage as in 1997. The replacement parts
business is generally less cyclical and more profitable than the whole-goods
business.
11
<PAGE>
Cost of sales in 1998 was $156.9 million or 78.2% of net sales compared to
$149.9 million or 73.8% of net sales in 1997. Impacting costs of sales in the
first quarter of 1998 were production inefficiencies, including supplier delays,
caused by the need to rapidly accelerate production to meet increasing order
rates, and in the last half of the year manufacturing cost variances as
production levels were reduced to accommodate lower business volume. Costs of
sales in 1998 also included the impacts of inventory writedowns related to
disposing of the remaining inventory at Rhino International. Gross margins in
1998 were also reduced by heavier discounts given in agricultural markets,
obsolescence charges in inventory particularly in operations acquired in 1995
and costs of operations of regional warehouse additions.
Selling, general and administrative expense in 1998 was $35.2 million or
17.5% of net sales compared to $31.0 million or 15.3% of net sales for 1997. The
increase in selling, general and administrative expense of $4.1 million was
primarily attributable to the settlement of and legal costs related to certain
litigation relating to Rhino International, accounts receivable writedowns of
Rhino International and legal and other costs related to the Company's proposed
merger transaction with Woods Equipment Company, which was terminated subsequent
to December 31, 1998. Merger costs were $0.8 million, after tax, or $0.08 per
diluted share in 1998.
Interest expense was $2.6 million in 1998 compared to $2.3 million in 1997.
The Company's income before income taxes from its U.S. operations decreased
approximately $12.6 million from $14.2 million in 1997 to $1.6 million in 1998.
The Company's income before income taxes from its foreign operations decreased
approximately $1.5 million from $6.4 million in 1997 to $4.9 million in 1998.
Net income for 1998 was $4.1 million or $0.42 per diluted share compared to
$13.6 million or $1.41 per diluted share for 1997 as a result of the factors
described above. Without the effect of the net losses of Rhino International as
described above, 1998 net income would have been $10.5 million or $1.08 per
diluted share and 1997 net income would have been $14.5 million or $1.49 per
diluted share.
1997 COMPARED TO 1996
Net sales for 1997 were $203.1 million, an increase of $19.5 million or
10.6% compared to $183.6 million for the prior year. Domestic agricultural sales
were $100.4 million compared to $85.8 million for 1996, representing a $14.6
million or 16.9% increase in such sales. Domestic industrial sales for 1997 were
$56.5 million, an increase of $6.2 million or 12.4% compared to $50.2 million
for the prior year. A return to more normal weather patterns in American markets
benefited sales along with generally favorable market conditions. European sales
for 1997 were $46.2 million, a decrease of $1.3 million or 2.7% compared to
$47.5 million for the prior year. The European sales decline of 2.7% reflects
early-1997 sales gains offset by late-1997 weakness caused largely by
competitive impacts on U.K. exports arising from the strength of the U.K.
currency versus other European currencies. Also affecting European markets were
general declines in certain European economies and, in the U.K., the continuing
impact of BSE (mad cow disease) on the U.K. agricultural market.
Costs of sales in 1997 were $149.9 million or 73.8% of net sales compared to
$138.5 million or 75.4% of net sales in 1996. Costs of sales for 1996 were
increased by year-end charges primarily related to acquisitions made in 1995.
Selling, general and administrative expense in 1997 was $31.0 million or
15.3% of net sales compared to $29.8 million or 16.2% of net sales for 1996. The
increase for 1997 was primarily attributable to increased staffing related to
Company growth and expenditures in pursuit of strategic acquisitions during
1997.
Interest expense was $2.3 million in 1997 compared to $2.6 million in 1996.
Net income for 1997 was $13.6 million or diluted earnings per share of $1.41
compared to $8.8 million or diluted earnings per share of $0.91 for 1996 as a
result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $0.5 million for 1998 compared
to $12.3 million for 1997 and $9.6 million for 1996. The consolidated balance
sheet at December 31, 1998 reflects net changes over December 31, 1997 in
accounts receivable and inventories of a $7.7 million increase and a $1.2
million decrease, respectively. The 1998 increase in accounts receivable is
largely attributable to longer terms granted in an
12
<PAGE>
agricultural marketing program which has subsequently been terminated, while the
decrease in inventories is a result of programs targeted at reducing inventories
and write-downs in Rhino International, offset by inventory increases from
decreased sales as described above and a one time increase in stocking of
replacement parts in warehouses.
Capital expenditures were $4.4 million, $4.7 million and $2.9 million for
1998, 1997 and 1996, respectively. Capital expenditures for 1999 are expected to
be approximately $5.0 million, and the Company expects to fund such expenditures
from operating cash flow.
The Company has been authorized by its Board of Directors to repurchase up
to 1,000,000 shares of the Company's common stock to be funded through working
capital and credit facility borrowings. In 1997 the Company repurchased 79,840
shares. No shares were repurchased in 1998.
As of December 31, 1998, the Company had a $45.0 million contractually
committed, unsecured, long-term bank revolving credit facility under which the
Company can borrow and repay until December 31, 2002, with interest at various
rate options based upon Prime or Eurodollar rates, with such rates either
floating on a daily basis or fixed for periods up to 180 days. Proceeds may be
used for general corporate purposes or, subject to some limitations,
acquisitions. The loan agreement contains certain financial covenants, customary
in credit facilities of this nature, including minimum financial ratio
requirements and limitations on dividends, indebtedness, liens and investments.
As discussed in Note 8 of Notes to Financial Statements, the Company was
initially not in compliance with certain financial covenants at December 31,
1998. The bank amended the covenant requirements effective for the period ended
December 31, 1998 and for future periods. After this amendment, the Company was
in compliance with all covenants as of December 31, 1998. At December 31, 1998,
$29.6 million was borrowed under the revolving credit facility at various
interest rate options, with an average effective rate of 5.7%. At December 31,
1998, $1.2 million of the revolver capacity was committed to irrevocable standby
letters of credit issued in the ordinary course of business as required by
certain vendor contracts. The Company's borrowing levels are seasonal with the
greatest utilization generally occurring in the first quarter and early spring.
Management believes that the bank credit facility and the Company's ability
to internally generate funds from operations should be sufficient to meet the
Company's cash requirements for the foreseeable future.
INFLATION
The Company believes that inflation generally has not had a material impact
on its operations or liquidity to date.
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit format.
If not addressed, such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions in the U.S.
and internationally (the "Year 2000" issue). The potential costs and
uncertainties associated with the Year 2000 issue will depend on a number of
factors, including software, hardware and the nature of the industry in which a
company operates. Additionally, companies must coordinate with other entities
with which they electronically interact. Both U.S. and international companies
that do not address the Year 2000 issue could experience business disruptions
such as system failures or miscalculations that could cause disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
STATE OF READINESS
To date, the Company has fully completed its assessment of all its
information systems that could be significantly affected by the Year 2000. The
completed assessment indicated that most of the Company's significant
information technology systems in its domestic operations would not be affected.
This is due to the fact that the Company's primary operating system does not
utilize a two digit date format. The Company presently believes that required
modifications will be made in the ordinary course of business and will be
completed by mid-1999.
13
<PAGE>
The Company's systems utilized in its European operations are an older
version of the U.S. operating system and are not 100% Year 2000 compliant. The
Company is in the process of testing and updating those programs which are not
compliant. This process is expected to be completed in the third quarter of
1999, and such modifications will be made in the ordinary course of business.
The Company has substantially completed the assessment of its software and
hardware (embedded chips) used in production and manufacturing systems and does
not anticipate any significant required modifications.
The Company's products are generally not dependent on computer chips, and
accordingly, the Company does not believe that the Year 2000 issue presents a
material exposure as it relates to its products.
In addition, the Company has gathered information about the Year 2000
compliance status of its significant suppliers and subcontractors (external
agents) and continues to monitor their compliance. To date, the Company is not
aware of any external agent with a Year 2000 issue that would materially impact
the Company's results of operations, liquidity or capital resources. However,
the Company has no means of ensuring that external agents will be Year 2000
ready. The effect of non-compliance by external agents is not determinable.
However, the inability of external agents to complete their Year 2000 resolution
process in a timely fashion could materially impact the Company.
COSTS
The Company will utilize primarily internal resources to reprogram, or
replace, test and implement software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is not expected to exceed
$100,000 and is being expensed as incurred.
RISKS AND WORST CASE SCENARIO
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. Although no
assurances can be given as to the Company's compliance, particularly as it
relates to third parties, including governmental entities, based upon the
progress to date, the Company does not expect that the future costs of
modifications or the consequences of any unsuccessful modifications will have a
material adverse impact on the Company's financial position or results of
operations. Accordingly, the Company believes the most reasonably likely worst
case Year 2000 scenario would not have a material adverse impact on the
Company's financial position or results of operations. However, there can be no
assurance that the Company will not experience unanticipated costs and/or
business interruptions due to Year 2000 problems in its internal systems or its
supply chain, or that such costs and/or interruptions will not have a material
adverse effect on the Company's consolidated results of operations.
CONTINGENCY PLAN
The Company currently has no contingency plans in place in the event it does
not complete all phases of the Year 2000 program. The Company plans to evaluate
the status of completion during the second quarter of 1999 and determine whether
such a plan is necessary.
EURO CONVERSION
On January 1, 1999, the European Economic and Monetary Union (EMU) entered a
three-year transition phase during which a new common currency, the "euro," was
introduced in participating countries which established fixed conversion rates
through the European Central Bank (ECB) between existing local currencies and
the euro. From that date, the euro is traded on currency exchanges.
Following introduction of the euro, local currencies will remain legal
tender until December 31, 2001. During this transition period, goods and
services may be paid for with the euro or the local currency under the EMU's "no
compulsion, no prohibition" principle.
14
<PAGE>
Based on its evaluation to date, management believes that the introduction
of the euro will not have a material adverse impact on the Company's financial
position, results of operations or cash flows. However, uncertainty exists as to
the effects the euro will have on the marketplace, and there is no guarantee
that all issues will be foreseen and corrected or that other third parties will
address the conversion successfully.
The Company has reviewed its information systems software and identified
modifications necessary to ensure business transactions can be conducted
consistent with the requirements of the conversion to the euro. Certain of these
modifications have been implemented, and others will be implemented during the
course of the transition period. The Company expects that modifications not yet
implemented will be made on a timely basis and expects the incremental cost of
the euro conversion to be immaterial. Any costs associated with implementing
changes to comply with the euro conversion are expensed as incurred.
The euro introduction is not expected to have a material impact on the
Company's overall currency risk. The Company anticipates the euro will simplify
financial issues related to cross-border trade in the EMU and reduce the
transaction costs and administrative time necessary to manage this trade and
related risks. However, the Company believes that the associated savings will
not be material to corporate results.
PENDING ACCOUNTING STANDARDS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998,
the Financial Accounting Standards Board issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which is required to be
adopted in years beginning after June 15, 1999. Because of the Company's minimal
use of derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
COSTS OF COMPUTER SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL-USE. In
March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs of Computer
Software Developed For or Obtained For Internal-Use." The SOP is effective
beginning January 1, 1999. The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal-use. The Company does not anticipate the
adoption of this SOP will have a material impact on the Company's future
earnings or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to various market risks. Market risk is the potential
loss arising from adverse changes in market prices and rates. The Company does
not enter into derivative or other financial instruments for trading or
speculative purposes.
FOREIGN CURRENCY RISK
AS A RESULT OF FOREIGN SALES
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures its products in
the United States, the United Kingdom (UK) and France. The Company sells its
products primarily within the markets where the products are produced, but
certain of the Company's sales from its UK operations are denominated in other
European currencies. As a result, the Company's financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the other European markets in which the UK subsidiary
distributes its products.
To mitigate the short-term effect of changes in currency exchange rates on
the Company's functional currency based sales, the Company regularly hedges by
entering into foreign exchange forward contracts to hedge approximately 80% of
its future net foreign currency sales transactions over a period of six months.
As of December 31, 1998, the Company had outstanding forward exchange contracts
to sell $7.7 million of foreign currencies including $5.0 million related to a
short-term intercompany cash transfer. A 15% fluctuation in exchange rates for
these currencies would change the fair value by approximately $1.2 million.
However, since these contracts hedge foreign currency denominated transactions,
any change in the fair value of the contracts should be offset by changes in the
underlying value of the transaction being hedged.
15
<PAGE>
AS A RESULT OF FOREIGN TRANSLATION
The Company's earnings and financial position are affected by foreign
exchange rate fluctuations related to its significant wholly-owned subsidiaries
in the United Kingdom and France as the British pound and French franc are the
functional currencies of these subsidiaries. Changes in the exchange rate
between the U.S. dollar and the British pound or French franc can impact the
Company's results of operations and financial position. The impact of a
hypothetical change in the exchange rate between the U.S. dollar and the British
pound or French franc cannot be reasonably estimated. The translation adjustment
during 1998 was a gain of $584,000. On December 31, 1998, the British pound
closed at .6026 relative to 1.00 U.S. dollar, and the French franc closed at
.1076 relative to 1.00 British pound. By comparison, on December 31, 1997, the
British pound closed at .6058 relative to 1.00 U.S. dollar, and the French franc
closed at .1010 relative to 1.00 British pound. No assurance can be given as to
future valuation of the British pound or French franc or how further movements
in those currencies could affect future earnings or the financial position of
the Company.
INTEREST RATE RISK
At December 31, 1998 the Company's long-term debt bears interest at variable
rates. Accordingly, the Company's net income is affected by changes in interest
rates. Assuming the current level of borrowings at variable rates and a two
percentage point change in the 1998 average interest rate under these
borrowings, the Company's 1998 interest expense would have changed by
approximately $600,000. In the event of an adverse change in interest rates,
management could take actions to mitigate its exposure. However, due to the
uncertainty of the actions that would be taken and their possible effects, this
analysis assumes no such actions. Further, this analysis does not consider the
effects of the change in the level of overall economic activity that could exist
in such an environment.
ITEM 8. FINANCIAL STATEMENTS
The financial statements and supplementary data described in Item 14(a)1 of
this report and included on pages F-1 through F-18 of this Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
There is incorporated herein, by reference, that portion of the Company's
definitive proxy statement for the 1999 Annual Meeting of Stockholders, which
appears therein under the captions "Item 1: Election of Directors," "Information
Concerning Directors," and "Section 16(a) Beneficial Ownership Reporting
Compliance." See also the information in Item 4a. of Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
There is incorporated in this Item 11, by reference, that portion of the
Company's definitive proxy statement for the 1999 Annual Meeting of
Stockholders, which appears under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated in this Item 12, by reference, that portion of the
Company's definitive proxy statement for the 1999 Annual Meeting of
Stockholders, which appears under the caption "Beneficial Owners of Common
Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated in this Item 13, by reference, that portion of the
Company's definitive proxy statement for the 1999 Annual Meeting of
Stockholders, which appears under the captions "Certain Relationships and
Related Transactions" and "Compensation Committee Interlocks and Insider
Participation."
16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included
following the Index to Consolidated Financial Statements on page F-1 of this
Report.
PAGE
------
Report of Ernst & Young LLP, Independent Auditors............... F-2
Consolidated Statements of Income............................... F-3
Consolidated Balance Sheets..................................... F-4
Consolidated Statements of Stockholders' Equity................. F-5
Consolidated Statements of Cash Flows........................... F-6
Notes to Consolidated Financial Statements...................... F-7
(A)2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable or not
required under the instructions or the information requested is set forth in the
consolidated financial statements or related notes thereto.
(A)3. EXHIBITS
The following Exhibits are incorporated by reference to the filing indicated
or are included following the Index to Exhibits.
17
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
FROM THE FOLLOWING
EXHIBITS EXHIBIT TITLE DOCUMENTS
- ------------ ----------------------------------------------------------------------- ------------------------------
<S> <C> <C>
3.1 -- Certificate of Incorporation, as amended, of Alamo Group Inc. Form S-1, February 5, 1993
3.2 -- By-Laws of Alamo Group Inc. Form 10-K, March 29, 1996
10.1 -- Warrant Agreement between Alamo Group Inc. and Capital Southwest Form S-1, February 5, 1993
Corporation, dated November 25, 1991
*10.2 -- 1993 Non-Qualified Stock Option Plan, adopted by the Board of
Directors on February 2, 1993 Form S-1, February 5, 1993
*10.3 -- Alamo Group Inc. Executive Loan Program of 1991 Form S-1, March 18, 1993
*10.4 -- 1994 Incentive Stock Option Plan, adopted by the Board of Form 10-K, March 28, 1994
Directors on January 25, 1994
10.5 -- Third Amended and Restated Revolving Credit and Term Loan Form 10-K, March 29, 1996
Agreement between NationsBank of Texas, N.A. and Alamo Group Inc.
and certain subsidiaries dated December 29, 1995
10.6 -- First Amendment to Third Amended and Restated Revolving Credit and
Term Loan Agreement dated April 10, 1996 Form 10-K, March 27, 1997
10.7 -- Second Amendment to Third Amended and Restated Revolving Credit and
Term Loan Agreement dated December 23, 1996 Form 10-K, March 27, 1997
10.8 -- Form of indemnification agreements with Directors of Alamo Group Inc. Form 10-Q, May 15, 1997
10.9 -- Form of indemnification agreements with certain executive officers of Form 10-Q, May 15, 1997
Alamo Group Inc.
10.10 -- Third Amendment to Third Amended and Restated Revolving Credit and Term Form 10-Q, August 15, 1997
Loan Agreement dated June 23, 1997
10.11 -- Fourth Amendment to Third Amended and Restated Revolving Credit and Term Form 10-K, March 31, 1998
Loan Agreement dated December 31, 1997
*10.12 -- Incentive Compensation Plan, adopted on December 9, 1997 Form 10-K, March 31, 1998
*10.13 -- 401(k) Restoration Plan for Highly Compensated Employees, adopted on Form 10-K, March 31, 1998
December 9, 1997
*10.14 -- Severance Pay Agreement for Twelve Months Between Alamo Group Inc. Form 10-Q, August 14, 1998
and Certain Officers and Employees of Alamo Group Inc.
*10.15 -- Severance Pay Agreement for Eighteen Months Between Alamo Group Inc. Form 10-Q, August 14, 1998
and Certain Officers and Employees of Alamo Group Inc.
10.16 -- Amended and Restated Agreement and Plan of Merger by and among Alamo Schedule 14A, October 22, 1998
Group Inc., WEC Company and AGI Acquisition Corp. dated as of September 4, 1998
10.17 -- Letter Agreement Between Alamo Group Inc., WEC Company and AGI Acquisition Corp. Filed Herewith
dated February 23, 1999 terminating the Merger Agreement Between the Parties
dated September 4, 1998
10.18 -- Fifth Amendment to Third Amended and Restated Revolving Credit and Term Loan Filed Herewith
Agreement dated effective as of December 31, 1998
21.1 -- Subsidiaries of the Registrant Form 10-K, March 31, 1998
23.1 -- Consent of Ernst & Young LLP Filed Herewith
27.1 -- Financial Data Schedule Electronic Filing Only
</TABLE>
* Compensatory Plan
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 1998
On November 4, 1998, the Company filed a Current Report on Form 8-K. Under
Item 5-Other Events, the Company reported its Preliminary Unaudited Earnings
Summary for the three and nine-month periods ended September 30, 1998, which was
included as an exhibit.
On November 20, 1998, the Company filed a Current Report on Form 8-K. Under
Item 5-Other Events, the Company reported on a Special Meeting of Stockholders
held on November 18, 1998. Letters between the Company and WEC Company and a
press release dated November 19, 1998 were included as exhibits.
18
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ALAMO GROUP INC.
Date: March 23, 1999 By:/s/ DONALD J. DOUGLASS
----------------------
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- ------------------------------------------------ ------------------
<S> <C> <C>
/S/ DONALD J. DOUGLASS Chairman of the Board March 23, 1999
Donald J. Douglass Chief Executive Officer and Director
(Principal Executive Officer)
/S/ORAN F. LOGAN President, Chief Operating Officer and a March 23, 1999
Oran F. Logan Director (Principal Operating Officer)
/S/ JIM A. SMITH Executive Vice President, March 23, 1999
Jim A. Smith Chief Financial Officer (Principal Financial
and Accounting Officer)
/S/ JOSEPH C. GRAF Director March 23, 1999
Joseph C. Graf
/S/ DAVID H. MORRIS Director March 23, 1999
David H. Morris
/S/ O. S. SIMPSON, JR. Director March 23, 1999
O.S. Simpson, Jr.
/S/ JAMES B. SKAGGS Director March 23, 1999
James B. Skaggs
/S/ WILLIAM R. THOMAS Director March 23, 1999
William R. Thomas
</TABLE>
19
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................. F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, December 31, 1997 and December 31, 1996.. F-3
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and December 31, 1997................................. F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, December 31, 1997 and December 31, 1996.. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, December 31, 1997 and December 31, 1996.. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Alamo Group Inc.
We have audited the accompanying consolidated balance sheets of Alamo
Group Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Alamo Group Inc. and subsidiaries at December 31, 1998 and
1997, and the consolidated 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.
ERNST & YOUNG LLP
San Antonio, Texas
February 26, 1999
F-2
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ........................................ $ 200,553 $ 203,092 $ 183,595
Cost of sales .................................... 156,895 149,940 138,460
------------ ------------ ------------
Gross profit ................................... 43,658 53,152 45,135
Selling, general and administrative expense ...... 35,169 31,026 29,785
------------ ------------ ------------
Income from operations ......................... 8,489 22,126 15,350
Interest expense ................................. (2,647) (2,262) (2,631)
Interest income .................................. 697 523 664
Other income (expense), net ...................... (4) 208 339
------------ ------------ ------------
Income before income taxes ................... 6,535 20,595 13,722
Provision for income taxes ....................... 2,420 6,995 4,960
------------ ------------ ------------
Net income ..................................... $ 4,115 $ 13,600 $ 8,762
============ ============ ============
Net income per common share:
Basic .......................................... $ 0.42 $ 1.42 $ 0.91
============ ============ ============
Diluted ........................................ $ 0.42 $ 1.41 $ 0.91
============ ============ ============
Average common shares:
Basic .......................................... 9,714 9,602 9,585
============ ============ ============
Diluted ........................................ 9,730 9,674 9,641
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 2,748 $ 789
Accounts receivable......................................... 49,834 42,165
Inventories................................................. 64,578 65,752
Deferred income taxes....................................... 5,087 2,288
Prepaid expenses and other.................................. 1,067 2,152
------------- --------------
Total current assets..................................... 123,314 113,146
Property, plant and equipment................................... 55,893 51,693
Less: Accumulated depreciation............................. (32,989) (29,216)
------------- --------------
22,904 22,477
Goodwill........................................................ 11,411 12,632
Other assets.................................................... 4,009 7,869
------------- --------------
Total assets............................................. $ 161,638 $ 156,124
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable...................................... $ 9,461 $ 12,787
Income taxes payable........................................ 478 266
Accrued liabilities......................................... 6,996 6,096
Current maturities of long-term debt........................ 487 727
------------- --------------
Total current liabilities................................ 17,422 19,876
Long-term debt, net of current maturities....................... 35,858 28,617
Deferred income taxes........................................... 1,452 1,366
Stockholders' equity:
Common stock, $.10 par value, 20,000,000 shares
authorized; 9,735,759 and 9,684,874 issued at
December 31, 1998 and December 31, 1997, respectively. 973 968
Additional paid-in capital................................. 50,507 50,395
Retained earnings.......................................... 54,775 54,835
Accumulated other comprehensive income..................... 651 67
------------- --------------
Total stockholders' equity............................... 106,906 106,265
------------- --------------
Total liabilities and stockholders' equity.................. $ 161,638 $ 156,124
============= ==============
</TABLE>
See accompanying notes.
F-4
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED OTHER TOTAL STOCK-
---------------- PAID-IN TREASURY RETAINED COMPREHENSIVE HOLDERS'
SHARES AMOUNT CAPITAL STOCK EARNINGS INCOME EQUITY
------ ------ ---------- -------- -------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1995 ........ 9,577 $ 958 $ 49,278 $ -- $ 40,142 $ 327 $ 90,705
Net income ..................... -- -- -- -- 8,762 -- 8,762
Change in unrealized gains on
securities,
net of income taxes ......... -- -- -- -- -- (289) (289)
Translation adjustment ......... -- -- -- -- -- 1,680 1,680
------------
Total comprehensive income ...... 10,153
Sale of common stock and related 13 1 224 -- -- -- 225
Dividends paid ($.40 per share) -- -- -- -- (3,833) -- (3,833)
------ ------ ---------- -------- -------- ----------------- ------------
Balance at December 31, 1996 ........ 9,590 959 49,502 -- 45,071 1,718 97,250
Net income ..................... -- -- -- -- 13,600 -- 13,600
Change in unrealized gains on
securities,
net of income taxes ......... -- -- -- -- -- (90) (90)
Translation adjustment ......... -- -- -- -- -- (1,561) (1,561)
------------
Total comprehensive income ...... 11,949
Purchase of treasury stock ..... (80) -- -- (1,631) -- -- (1,631)
Sale of common stock and related 175 9 893 1,631 -- -- 2,533
Dividends paid ($.40 per share) -- -- -- -- (3,836) -- (3,836)
------ ------ ---------- -------- -------- ----------------- ------------
Balance at December 31, 1997 ........ 9,685 968 50,395 -- 54,835 67 106,265
Net income ..................... -- -- -- -- 4,115 -- 4,115
Translation adjustment .......... -- -- -- -- -- 584 584
------------
Total comprehensive income ...... 4,699
Sale of common stock ........... 51 5 112 -- -- -- 117
Dividends paid ($.43 per share) -- -- -- -- (4,175) -- (4,175)
------ ------ ---------- -------- -------- ----------------- ------------
Balance at December 31, 1998 ........ 9,736 $ 973 $ 50,507 $ -- $ 54,775 $ 651 $ 106,906
====== ====== ========== ======== ======== ================= ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income ...................................................... $ 4,115 $ 13,600 $ 8,762
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for doubtful accounts ........................ 1,099 675 662
Depreciation ........................................... 3,938 3,700 3,972
Amortization ........................................... 1,897 1,364 1,369
Provision for deferred income tax benefit .............. (2,711) (286) (128)
Realized gain on marketable securities ................. -- (70) (528)
Gain on sale of equipment ............................. (124) (152) (163)
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable .................................... (8,540) 321 1,836
Inventories ............................................ 1,470 (6,367) (536)
Prepaid expenses and other ............................. 1,731 (1,655) (2,241)
Trade accounts payable and accrued liabilities ......... (2,617) 1,756 (2,431)
Income taxes payable ................................... 205 (583) (947)
----------------- ----------------- -----------------
Net cash provided by operating activities ....................... 463 12,303 9,627
INVESTING ACTIVITIES
Acquisitions, net of cash acquired .............................. -- -- (941)
Purchase of property, plant and equipment ....................... (4,403) (4,685) (2,868)
Proceeds from sale of property, plant and equipment ............. 342 224 251
Purchase of long-term investment ................................ (500) -- --
Sale of long-term investment .................................... 3,200 -- --
Proceeds from sale of marketable securities ..................... -- 150 634
----------------- ----------------- -----------------
Net cash (used) by investing activities ......................... (1,361) (4,311) (2,924)
FINANCING ACTIVITIES
Net change in bank revolving credit facility .................... 7,600 (5,500) (1,100)
Principal payments on long-term debt and capital leases ......... (729) (841) (2,265)
Proceeds from issuance of long-term debt ........................ -- -- 641
Dividends paid .................................................. (4,175) (3,836) (3,833)
Proceeds from sale of common stock and related .................. 117 2,533 225
Cost of common stock repurchased ................................ -- (1,631) --
----------------- ----------------- -----------------
Net cash provided (used) by financing activities ................ 2,813 (9,275) (6,332)
Effect of exchange rate changes on cash ......................... 44 (156) 18
----------------- ----------------- -----------------
Net change in cash and cash equivalents ......................... 1,959 (1,439) 389
Cash and cash equivalents at beginning of the year .............. 789 2,228 1,839
----------------- ----------------- -----------------
Cash and cash equivalents at end of the year .................... $ 2,748 $ 789 $ 2,228
================= ================= =================
Cash paid during the year for:
Interest ................................................... $ 2,547 $ 2,215 $ 2,608
Income taxes ............................................... 5,100 6,979 6,400
</TABLE>
See accompanying notes.
F-6
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS AND SEGMENTS
The Company manufactures tractor-mounted mowing and vegetation maintenance
equipment and replacement parts for industrial and agricultural end-users.
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (Statement
131). Statement 131 superseded FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
Statement 131 also establishes standards for related disclosures about products
and services, geographic areas and major customers. The adoption of Statement
131 did not affect results of operations or financial position. The Company
operates in one business segment, the tractor-mounted mowing and vegetation
maintenance equipment and replacement parts segment. The adoption of Statement
131 requires certain geographic disclosures which are included in Footnote 13.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Alamo Group Inc. and its subsidiaries (the Company), all of which are wholly
owned. Other investments are accounted for under the equity method or the cost
method, as appropriate. All significant intercompany accounts and transactions
have been eliminated. Certain prior year amounts have been reclassified to
conform with the 1998 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FISCAL YEAR
Until 1996, the Company's fiscal year comprised either a 52- or 53-week
period that ended on the Saturday closest to December 31. All references to 1995
herein are to the fiscal year ended December 30, 1995 (52 weeks). In 1996, the
Company changed to a calendar-year basis. There are no material differences in
the results presented that result from this change.
FOREIGN CURRENCY
The Company translates the assets and liabilities of foreign-owned
subsidiaries at rates in effect at the end of the year. Revenues and expenses
are translated at average rates in effect during the reporting period.
Translation adjustments are included in accumulated comprehensive income within
the statement of stockholders' equity.
The Company enters into foreign currency forward contracts to hedge its
exposure on material foreign currency transactions. The Company does not hold or
issue financial instruments for trading purposes. Changes in the market value of
the foreign currency instruments are recognized in the financial statements upon
settlement of the
F-7
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
hedged transaction. At December 31, 1998, the Company had foreign currency
forward contracts, maturing at various dates to September 1999, for $7,789,000.
Foreign currency transaction gains or losses are included in Other income, net.
For 1998, 1997 and 1996, such transactions netted a gain of $99,000 and losses
of $346,000 and $436,000, respectively.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with a maturity date no
longer than 90 days.
MARKETABLE SECURITIES
Marketable securities are carried at fair market value in Prepaid expenses
and other, with unrealized gains and losses, net of tax, reported in Accumulated
other comprehensive income.
Realized gains on sales of marketable securities, included in Other income,
were $70,000 and $528,000 for the years 1997 and 1996, respectively.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
credit risk is limited because of the large numbers and types of customers and
their geographic dispersion.
INVENTORIES
Inventories of U.S. operating subsidiaries are principally stated at the
lower of cost (last-in, first-out method) ("LIFO") or market, and the Company's
foreign subsidiaries' inventories are stated at the lower of cost (first-in,
first-out) ("FIFO") or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Major
renewals and betterments are charged to the property accounts while
replacements, maintenance and repairs which do not improve or extend the lives
of the respective assets are expensed currently. Depreciation is provided at
amounts calculated to amortize the cost of the assets over their estimated
useful economic lives using the straight-line method.
GOODWILL
Goodwill is related to purchase acquisitions and, with minor exceptions, is
being amortized over fifteen years from respective acquisition dates. Goodwill
is shown net of amortization of $5,036,000 and $3,531,000 for the years ended
December 31, 1998 and December 31, 1997, respectively. The Company continually
evaluates the existence of goodwill impairment on the basis of whether the
goodwill is fully recoverable from projected, undiscounted net cash flows of the
related business unit.
F-8
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
LONG-TERM INVESTMENTS
At December 31, 1998 and 1997, respectively, the Company had $1,000,000 and
$500,000 invested in a Small Business Investment Company which is carried at
cost in Other assets. The Company is committed to invest up to an additional
$1,000,000. Due to inherent risk factors in such investments, the ultimate
realization of these amounts, included in Other assets in the accompanying
financial statements, is not determinable at this date.
Additionally in 1997, long-term investments carried in Other assets included
an investment of approximately $3,200,000 in an auto parts manufacturer which
was sold in 1998 for approximately its carrying value.
RELATED PARTY TRANSACTIONS
Notes receivable from officers of the Company for $1,300,000 and $1,280,000
for the years ended 1998 and 1997, respectively, are included in Other assets.
REVENUE RECOGNITION
Revenue is recognized when the product is shipped. Provisions for sales
incentives and other sales-related expenses are made at the time of the sale.
RESEARCH AND DEVELOPMENT
Product development and engineering costs charged to Selling, general and
administrative expense amounted to $1,685,000, $1,712,000 and $1,747,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between the financial reporting basis and tax basis of assets and liabilities
and are measured using presently enacted tax rates and laws.
STOCK-BASED COMPENSATION
Effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, and
elected to continue to use the intrinsic value method in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized in the
financial statements for these plans. The pro forma effects of fair value
accounting for compensation costs related to options, on net income and earnings
per share, would not be material.
F-9
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
2. EARNINGS PER SHARE
The following table sets forth the reconciliation from basic to diluted
average common shares and the calculations of net income per common share. Net
income for basic and diluted calculations do not differ. (In thousands, except
per share amounts).
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net Income .................................. $ 4,115 $ 13,600 $ 8,762
============ ============ ============
Average Common Shares:
BASIC (weighted-average outstanding shares) 9,714 9,602 9,585
Dilutive potential common shares from
stock options and warrants ............. 16 72 56
============ ============ ============
DILUTED (weighted-average outstanding
shares) ................................. 9,730 9,674 9,641
============ ============ ============
Basic earnings per share .................... $ 0.42 $ 1.42 $ 0.91
============ ============ ============
Diluted earnings per share .................. $ 0.42 $ 1.41 $ 0.91
============ ============ ============
</TABLE>
Stock options and warrants for 48,000 shares were not included in the 1998
diluted earnings per share calculation as they were antidilutive.
3. TERMINATION OF OPERATIONS OF SUBSIDIARY
In December 1998, the operations of the Company's Chinese tractor import and
marketing business, Rhino International, were terminated. This operation
experienced a decline in sales and profitability related to market factors.
Sales in 1998 were $2.2 million versus $7.8 million in 1997 and $4.5 million in
1996. Alamo is in the process of collection of accounts receivable of Rhino
International and disposing of its remaining inventory and expects to conclude
by mid-1999. In 1998, the effect of Rhino International operating losses,
including settlement of certain litigation, charges of $0.9 million related to
impairment of goodwill and other intangibles, $0.6 million of various other
costs involved in terminating operations, and reserves for inventory and
accounts receivable losses expected in final collection and disposition, was an
after-tax loss of $6.4 million, or $0.66 per share, compared to an after-tax
loss in 1997 of $0.9 million, or $0.08 per share. These charges are included in
Net sales, Cost of sales and Selling, general and administrative expense as
appropriate.
F-10
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
4. VALUATION AND QUALIFYING ACCOUNTS
Valuation and qualifying accounts included the following (in thousands):
<TABLE>
<CAPTION>
BALANCE CHARGED TO TRANSLATIONS, NET WRITE-OFFS BALANCE
BEGINNING OF COSTS AND RECLASSIFICATIONS OR DISCOUNTS END OF
YEAR EXPENSES AND ACQUISITIONS TAKEN YEAR
------------ ---------- ----------------- -------------- -------
<S> <C> <C> <C> <C> <C>
1998
Allowance for doubtful accounts ........................ $ 1,840 $ 1,099 $ 9 $ (701) $ 2,247
Reserve for sales discounts ............................ 3,484 16,241 -- (14,536) 5,189
Reserve for inventory obsolescence ..................... 3,779 2,363 13 (449) 5,706
1997
Allowance for doubtful accounts ........................ $ 1,521 $ 675 $ (27) $ (329) $ 1,840
Reserve for sales discounts ............................ 3,866 14,177 (2) (14,557) 3,484
Reserve for inventory obsolescence ..................... 4,110 281 (113) (499) 3,779
1996
Allowance for doubtful accounts ........................ $ 1,192 $ 662 $ (180) $ (153) $ 1,521
Reserve for sales discounts ............................ 4,303 12,883 25 (13,345) 3,866
Reserve for inventory obsolescence ..................... 4,157 450 567 (1,064) 4,110
</TABLE>
5. INVENTORIES
Inventories valued at LIFO cost represented 87% and 81% of total inventory
for the years ended December 31, 1998 and 1997, respectively. The excess of
current costs over LIFO-valued inventories was $3,981,000 and $3,310,000 at
December 31, 1998 and December 31, 1997, respectively. Net inventories consist
of the following (in thousands):
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Finished wholegoods and parts .................... $ 57,571 $ 57,804
Work in process .................................. 2,840 3,792
Raw materials .................................... 4,167 4,156
============ ============
$ 64,578 $ 65,752
============ ============
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
DECEMBER 31, DECEMBER 31, USEFUL
1998 1997 LIVES
------------ ------------ ------------
Land ............................ $ 1,965 $ 2,012
Buildings and improvements ...... 19,484 19,299 15-25 yrs.
Machinery and equipment ......... 25,485 22,413 5 yrs.
Office furniture and
equipment ....................... 5,602 4,781 5 yrs.
Transportation equipment ........ 3,357 3,188 3-5 yrs.
------------ ------------
55,893 51,693
Accumulated depreciation ...... (32,989) (29,216)
============ ============
$ 22,904 $ 22,477
============ ============
F-11
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
Property, plant and equipment at December 31, 1998 and December 31, 1997
includes $6,513,000 and $7,070,000, respectively, for buildings held under
capitalized leases.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following balances (in thousands):
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Salaries, wages and bonuses ...................... $ 3,227 $ 2,876
Warranty ......................................... 1,750 1,254
Other ............................................ 2,019 1,966
============ ============
$ 6,996 $ 6,096
============ ============
8. LONG-TERM DEBT
The components of long-term debt at December 31 are as follows (in
thousands):
1998 1997
------- -------
Bank revolving credit facility ................. $29,600 $22,000
Capital lease obligations ...................... 6,514 6,802
Other notes payable ............................ 231 542
------- -------
Total long-term debt ........................... 36,345 29,344
Less current maturities ........................ 487 727
======= =======
$35,858 $28,617
======= =======
As of December 31, 1998, the Company had a $45,000,000 contractually
committed, unsecured, long-term bank revolving credit facility under which the
Company can borrow and repay until December 31, 2002, with interest at various
rate options based upon Prime or Eurodollar rates, with such rates either
floating on a daily basis or fixed for periods up to 180 days. Proceeds may be
used for general corporate purposes or, subject to some limitations,
acquisitions. The loan agreement contains certain financial covenants, customary
in credit facilities of this nature, including minimum financial ratio
requirements and limitations on dividends, indebtedness, liens and investments.
Due to the losses related to Rhino International discussed in Note 3, the
Company was not initially in compliance with certain of the covenants at
December 31, 1998. The bank amended the covenant requirements effective for the
period ended December 31, 1998 and for future periods. After this amendment the
Company was in compliance with all covenants as of December 31, 1998. At
December 31, 1998, $29,600,000 was drawn on the revolver at various interest
rate options, with an average effective rate of 5.7%. At December 31, 1998,
$1,161,000 of the revolver capacity was committed to irrevocable standby letters
of credit issued in the ordinary course of business as required by certain
vendor contracts.
The aggregate maturities of long-term debt for the next five years, as of
December 31, 1998, are as follows: $487,000 in 1999, $529,000 in 2000, $566,000
in 2001, $30,213,000 in 2002 and $670,000 in 2003.
Long-term debt is substantially floating rate debt and is stated essentially
at fair value.
F-12
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
9. INCOME TAXES
U.S. and non-U.S. income before income taxes is as follows (in thousands):
1998 1997 1996
------- ------- -------
Income before income taxes:
Domestic .............................. $ 1,614 $14,210 $ 7,359
Foreign ............................... 4,921 6,385 6,363
======= ======= =======
$ 6,535 $20,595 $13,722
======= ======= =======
The provision for income taxes consists of (in thousands):
1998 1997 1996
------- ------- -------
Current:
Federal ............................ $ 3,289 $ 4,892 $ 2,860
Foreign ............................ 1,907 2,176 1,987
State .............................. (63) 419 297
------- ------- -------
5,133 7,487 5,144
Deferred:
Federal ............................ (2,718) (492) (550)
Foreign ............................ 5 -- 366
------- ------- -------
(2,713) (492) (184)
======= ======= =======
Total income taxes ........... $ 2,420 $ 6,995 $ 4,960
======= ======= =======
Reconciliation of the statutory U.S. federal rate to actual tax rate is as
follows (in thousands):
1998 1997 1996
------- ------- -------
Statutory U.S. federal tax at 34%
(35% in 1997 and 1996) .................. $ 2,222 $ 7,208 $ 4,803
Increase (reduction) from:
Non-U.S. taxes ...................... 240 (292) 126
U.S. State taxes .................... (42) 272 193
Other ............................... -- (193) (162)
======= ======= =======
Provision for income taxes .............. $ 2,420 $ 6,995 $ 4,960
======= ======= =======
Actual tax rate ......................... 37% 34% 36%
At December 31, 1998, the Company had unremitted earnings of foreign
subsidiaries of $17,474,000. These earnings, which reflect full provision for
non-U.S. income taxes, are indefinitely reinvested in non-U.S. operations or can
be remitted without substantial additional tax. Accordingly, no provision has
been made for taxes that might be payable upon remittance of such earnings nor
is it practicable to determine the amount of this liability.
F-13
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
The components of deferred tax assets and liabilities included in the
balance sheets are as follows (in thousands):
1998 1997
------ ------
Deferred tax asset:
Inventory ......................................... $1,942 $1,242
Accounts receivable ............................... 2,127 486
Depreciation ...................................... 1,151 1,005
Net operating loss carryforwards .................. 48 374
Insurance ......................................... 322 280
Other current ..................................... 948 447
Other non-current ................................. 1,005 783
------ ------
Total deferred asset ............................. $7,543 $4,617
====== ======
Deferred tax liability:
Difference between book basis and tax
basis of assets .................................. $3,232 $3,079
Other ............................................. 676 616
------ ------
Total deferred liability ......................... $3,908 $3,695
====== ======
At December 31, 1998, net current deferred tax assets were $5,087,000
($2,288,000 in 1997). Net non-current deferred tax liabilities were $1,452,000
($1,366,000 in 1997).
The net deferred tax asset for the consolidated company rose from $922,000
at December 31, 1997 to $3,635,000 at December 31, 1998. This was in part due to
the $4,907,000 of write-downs for the shutdown of Rhino International. These
write-downs created a current deferred tax asset as of December 31, 1998 which
is expected to be utilized in 1999. The net deferred tax asset for Rhino
International was $2,297,000 and $321,000 as of December 31, 1998 and December
31, 1997, respectively.
10. COMMON STOCK
In conjunction with the issuance of debt in a prior year, the Company issued
warrants to purchase 62,500 shares of common stock to the lender. The exercise
price of $16 per share is subject to adjustment, and the warrants expire in
January 2000. The Company has reserved 62,500 shares of common stock for the
warrants.
Subsequent to December 31, 1998, the Company declared and paid a dividend of
$0.11 per share.
11. STOCK OPTIONS
INCENTIVE OPTIONS
On April 28, 1994, the stockholders approved an incentive stock option plan
for key employees. Each option becomes vested and exercisable for up to 20% of
the total optioned shares each year after grant. Under the terms of this plan,
the exercise price of the shares subject to each option granted will not be less
than the fair market value of the common stock at the date the option is
granted. At December 31, 1998, the Company has reserved 276,450 shares of common
stock for these options.
F-14
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
Following is a summary of activity in the incentive stock option plans for the
periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Options outstanding at beginning of
year .................................. 83,385 123,373 106,711
Granted .............................. -- -- 43,000
Exercised ............................ (30,885) (14,863) (12,938)
Cancelled ............................ (1,300) (25,125) (13,400)
------------ ------------ ------------
Options outstanding at end of year ...... 51,200 83,385 123,373
============ ============ ============
Options exercisable at end of year ...... 26,750 44,385 35,098
============ ============ ============
Options available for grant at end
of year ................................. 225,250 224,400 199,950
============ ============ ============
</TABLE>
PER SHARE OPTION PRICES, FOR OPTIONS OUTSTANDING AT DECEMBER 31, 1998,
RANGED FROM $15.38 TO $18.75.
NONQUALIFIED OPTIONS
On February 2, 1993, the Company granted nonqualified options for 200,000
shares of common stock to key employees of the Company at $11.50 per share. Each
option becomes vested and exercisable for up to 20% of the total optioned shares
after one year following the grant of the option and for an additional 20% of
the total optioned shares after each succeeding year until the option is fully
exercisable at the end of the fifth year. During 1998 and 1997, 20,000 and
160,000 shares were exercised, respectively, and 20,000 shares remain
outstanding and exercisable at December 31, 1998.
12. RETIREMENT BENEFIT PLANS
The Company provides a defined contribution 401(k) retirement and savings
plan for eligible U.S. employees. Company matching contributions are based on a
percentage of employee contributions. Company contributions to the plan during
1998, 1997 and 1996 were $620,000, $399,000 and $458,000, respectively.
Two of the Company's foreign subsidiaries also participate in a defined
contribution and savings plan covering eligible employees. The Company's foreign
subsidiaries contribute between 5.8% and 9.6% of the participant's salary up to
a specific limit. Contributions were $428,000 in 1998, $453,000 in 1997 and
$508,000 in 1996.
13. FOREIGN OPERATIONS AND GEOGRAPHIC INFORMATION
Following is selected financial information on the Company's foreign
operations (located in Europe) (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales ..................................... $ 41,027 $ 46,241 $ 47,519
Income from operations ........................ 5,060 7,053 7,406
Income before income taxes and allocated
interest expense .............................. 4,921 6,385 6,363
Identifiable assets ........................... 42,117 39,744 43,480
</TABLE>
F-15
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
Following is other selected geographic financial information on the
Company's operations (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Geographic net sales:
United States ........................ $ 156,809 $ 152,492 $ 132,676
United Kingdom ....................... 13,534 17,446 18,991
France ............................... 19,466 19,305 19,641
Other ................................ 10,744 13,849 12,287
------------ ------------ ------------
Total net sales ......................... $ 200,553 $ 203,092 $ 183,595
============ ============ ============
Geographic location of long lived assets:
United States ........................ $ 23,697 $ 27,684 $ 26,321
United Kingdom ....................... 10,132 10,686 11,855
France ............................... 4,495 4,608 5,829
------------ ------------ ------------
Total long lived assets ................. $ 38,324 $ 42,978 $ 44,005
============ ============ ============
</TABLE>
Net sales are attributed to countries based on the location of customers.
14. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. The adoption of this Statement has no impact on the net
income or stockholders' equity. Statement 130 requires unrealized gains or
losses on the Company's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported in stockholders'
equity, to be included, along with net income, in Comprehensive income. Prior
years' data have been conformed to the requirements of Statement 130.
For 1998, 1997 and 1996 the Company's Comprehensive income was $4,699,000,
$11,949,000 and $10,153,000, respectively.
The components of Accumulated Other Comprehensive Income are as follows (in
thousands):
1998 1997 1996
---- ---- ------
Unrealized gains on securities
(net of income taxes of
$48,000) .......................................... $ -- $ -- $ 90
Foreign currency translation
adjustments ....................................... 651 67 1,628
---- ---- ------
Accumulated other comprehensive
income ............................................ $651 $ 67 $1,718
==== ==== ======
15. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and transportation equipment under various
operating leases which generally are expected to be renewed or replaced by other
leases. The Company has certain capitalized leases consisting principally of
leases of buildings. At December 31, 1998, future minimum lease payments under
these noncancelable leases and the present value of the net minimum lease
payments for the capitalized leases are (in thousands):
F-16
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
1999 ................................................. $ 849 $ 964
2000 ................................................. 457 985
2001 ................................................. 435 985
2002 ................................................. 147 985
2003 ................................................. 30 985
Thereafter ........................................... 61 5,030
--------- -----------
Total minimum lease payments ......................... $ 1,979 9,934
========= ===========
Less amount representing interest .................... 3,420
-----------
Present value of net minimum lease payments .......... 6,514
Less current portion ................................. 441
===========
Long-term portion .................................... $ 6,073
===========
Rental expense for operating leases was $1,221,000 for 1998, $1,176,000 for
1997 and $1,217,000 for 1996.
OTHER
The Company is subject to various unresolved legal actions which arise in
the ordinary course of its business. The most prevalent of such actions relate
to product liability which are generally covered by insurance. While amounts
claimed may be substantial and the ultimate liability with respect to such
litigation cannot be determined at this time, the Company believes that the
ultimate outcome of these matters will not have a material adverse effect on the
Company's consolidated financial position.
The Company was involved in a lawsuit between Rhino International and
certain of its dealers and former dealers. This lawsuit involved claims against
Rhino International totaling $3.8 million. In April 1998, a judgment was entered
requiring the Company to pay $110,000, net of its recovery. The judgment is
being appealed by both parties. While the ultimate outcome of this matter cannot
be determined at this time, the Company believes this matter will not have a
material adverse effect on the Company's consolidated financial position. In
1998, the Company settled (with prejudice) certain other litigation relating to
the Company's acquisition of Rhino International. The cost to the Company of the
settlement of this litigation is reflected in Selling, general and
administrative expense in 1998.
The Company has an executive loan program pursuant to which the Company may
make loans to certain officers and employees of the Company as approved by the
Compensation Committee of the Board of Directors to purchase stock of the
Company. All loans are secured by the pledge of shares being purchased. The
maximum aggregate amount which officers and employees may borrow is $400,000 and
$200,000, respectively. Each loan bears interest at prime and is payable
quarterly. As of December 31, 1998, and 1997, $585,000 and $46,000,
respectively, were outstanding under the program and are included in Additional
paid-in capital.
Certain equipment receivables have been sold under financing agreements with
third-party lending institutions whereby the Company is potentially subject to
recourse. At December 31, 1998, $1,300,000 is outstanding under these
arrangements.
F-17
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1998 and 1997 is presented below.
Seasonal influences affect the Company's sales and profits with peak business
occurring in May through August. (In thousands, except per share amounts).
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------- -------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales ...................... $ 48,727 $ 60,392 $ 51,024 $ 40,410 $ 51,643 $ 58,433 $ 52,220 $ 40,796
Gross profit ............... 11,348 16,200 13,631 2,479 12,736 16,569 15,624 8,223
Net income (loss) .......... 1,926 4,472 2,061 (4,344) 3,278 5,190 4,910 222
Earnings per share
Diluted ............... $ .20 $ .46 $ .21 $ (.45) $ .34 $ .54 $ .51 $ .02
Average shares
Diluted ............... 9,715 9,720 9,747 9,736 9,647 9,654 9,687 9,709
Dividends per share ........ $ .10 $ .11 $ .11 $ .11 $ .10 $ .10 $ .10 $ .10
Market price of common stock
High .................. $ 21-13/16 $ 19 $ 19-3/4 $ 15-7/16 $ 18 $ 20-7/8 $ 23-3/4 $ 23-1/4
Low ................... 15-3/8 14-1/2 13-1/2 10-5/8 15-3/8 13-1/2 18-11/16 19-5/8
</TABLE>
Financial data for the 1998 third and fourth quarters is impacted by the
settlement of certain litigation and termination of operations of Rhino
International, as described in Footnote 3.
EXHIBIT 10.17
Alamo Group Inc.
750 E. Mulberry, Suite 401
San Antonio, TX 78212
February 23, 1999
WEC Company
c/o Madison Dearborn Partners, Inc.
Three First National Plaza, Suite 3800
Chicago, IL 60602
Gentlemen:
Reference is made to that certain Amended and Restated Agreement and Plan of
Merger dated as of September 4, 1998 by and among Alamo Group Inc., a Delaware
corporation ("Alamo"), WEC Company, a Delaware corporation ("WEC") and AGI
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of WEC
("AGI") (the "Merger Agreement"). Alamo, WEC and AGI hereby terminate the Merger
Agreement pursuant to, and in accordance with, Section 8(a)(i) thereof effective
as of the date hereof.
Alamo Group Inc.
a Delaware corporation
By: /S/ DONALD J. DOUGLASS
Name: Donald J. Douglass
Title: Chairman and Chief
Executive Officer
Agreed and Accepted as of
the date written above.
WEC Company, AGI Acquisition Corp.
a Delaware corporation a Delaware corporation
By: /S/ PAUL WOOD By: /S/ PAUL WOOD
Name: Paul Wood Name: Paul Wood
Title: Chairman Title: Chairman
EXHIBIT 10.18
FIFTH AMENDMENT TO THIRD AMENDED AND RESTATED
REVOLVING CREDIT AND TERM LOAN AGREEMENT
(WITH LETTER OF CREDIT FACILITY)
This FIFTH AMENDMENT TO THIRD AMENDED AND RESTATED REVOLVING CREDIT AND
TERM LOAN AGREEMENT (WITH LETTER OF CREDIT FACILITY) (this "FIFTH AMENDMENT") is
entered into effective the 31st day of December, 1998, by and between ALAMO
GROUP INC., a Delaware corporation (the "COMPANY"), Alamo Group (USA) Inc.,
Alamo Group (Tx) Inc., Alamo Group (Ks) Inc., Alamo Group (Il) Inc., Alamo Sales
Corp., Tiger Corporation f/k/a Alamo Group (SD) Inc. , M&W Gear Company, Adams
Hard-Facing Company, Inc., Herschel-Adams Inc., Alamo Group (IA) Inc.
(collectively, the "GUARANTORS") and NATIONSBANK, N.A. (the "BANK").
R E C I T A L S:
A. Company and Bank executed a Third Amended and Restated Revolving Credit
and Term Loan Agreement (With Letter of Credit Facility), dated December 29,
1995 (the "THIRD AMENDED LOAN AGREEMENT"), pursuant to which Bank provided to
Company a $35,000,000.00 loan facility to be used for general working capital
purposes, financing new acquisitions, and to support letters of credit;
B. Among the credit support for this facility are the Guaranty Agreements,
dated December 29, 1995 (collectively, the "GUARANTIES"), executed by Alamo
Group (USA) Inc., Alamo Group (Tx) Inc., Alamo Group (Ks) Inc., Alamo Group (Il)
Inc., Alamo Sales Corp., Tiger Corporation f/k/a Alamo Group (SD) Inc. , Alamo
Group (WA) Inc., M&W Gear Company, Adams Hard-Facing Company, Inc.,
Herschel-Adams Inc., Alamo Group (IA) Inc. (collectively, the "GUARANTORS");
C. Effective April 10, 1996, Company and Bank executed First Amendment to
Third Amended and Restated Revolving Credit and Term Loan Agreement (With Letter
of Credit Facility) (the "FIRST AMENDMENT"), pursuant to which Bank increased
the amount available under this facility to $40,000,000.00, on the terms and
conditions stated in the First Amendment.
D. Effective December 23, 1996, Company and Bank executed Second Amendment
to Third Amended and Restated Revolving Credit and Term Loan Agreement (with
Letter of Credit Facility) (the "SECOND AMENDMENT"), pursuant to which Bank
agreed to (i) give a one-year extension of the maturity of the term and
revolving loans evidenced by this facility; (ii) reduce the interest rate margin
on certain LIBOR-priced borrowings under the facility; and (iii) adjust the
threshold for application of an unused facility fee and the timing of payment
thereof.
E. Effective June 23, 1997, Company and Bank executed Third Amendment to
Third Amended and Restated Revolving Credit and Term Loan Agreement (with Letter
of Credit Facility) (the "THIRD AMENDMENT") pursuant to which (i) the loan and
note amounts were increased to $45,000,000.00; (ii) the interest rate margin on
certain LIBOR-priced borrowings under the facility was reduced; (iii) the
requirement for a separate Consolidated Tangible Net Worth Retention Percentage
of 60% on Tier 1 pricing was eliminated; (iv) the minimum Consolidated Tangible
Net Worth amount for calendar year 1996 was established at $80,000,000.00, less
adjustments for certain Treasury stock additions; and (v) Bank consented to
stock repurchases of up to $17,000,000.00.
F. Effective December 31, 1997, Company and Bank executed a Fourth
Amendment, to further amend the Third Amended Loan Agreement (the "FOURTH
AMENDMENT"), including (i) to eliminate the Total Liabilities to Tangible Net
Worth covenant, (ii) to replace the Current Maturity Coverage with a Fixed
Charge Coverage, (iii) to eliminate all Interest Margin Factors other than
Operating Leverage Ratio, (iv) to eliminate Company's ability to convert from
revolving credit advances to a term loan, and (v) to extend the maturity of the
Loan to December 31, 2002.
G. Company has requested, and Bank has agreed, to (i) modify the
definition in the third Amended Loan Agreement of Operating Cash Flow to take
into account non-recurring items relating to the third and fourth quarters of
1998 that do not constitute "extraordinary losses" for purposes of generally
accepted accounting
Page 1
<PAGE>
principles, and (ii) modify the Fixed Charge Coverage Ratio, effective January
1, 1999. In addition, Company has agreed to limit the dividends that are payable
during calendar year 1999 and, beginning in calendar year 2000, to include
dividends as one of the "Fixed Charges" included within the "Fixed Charge
Coverage Ratio."
H. Bank has agreed that Company's liquidation of its "Rhino International"
subsidiary, Alamo Group (WA) Inc., is not a violation of SECTION 9.07 of the
Third Amended Loan Agreement.
I. Although not required to do so for the Guaranties to continue to be
fully effective, the Guarantors confirm by their execution of this Fifth
Amendment that they acknowledge the amendments effected hereby and that their
Guaranties are unaffected.
J. Each capitalized term used in this Fifth Amendment shall have the
meaning given to it in the Third Amended Loan Agreement, as previously amended
by the First Amendment, Second Amendment, Third Amendment and Fourth Amendment.
NOW, THEREFORE, in consideration of the mutual promises herein contained
and for other valuable consideration, Company and Bank agree as follows:
A G R E E M E N T:
1. RECITALS. The foregoing recitals are true and correct.
2. AMENDMENTS. The following provisions of the Third Amended Loan
Agreement are hereby amended:
(a) The following terms are substituted for the current definitions of the
same terms contained in SECTION 1.01 of the Third Amended Loan Agreement, as
previously amended:
(I) "FIXED CHARGES" MEANS, FOR ANY PERIOD FOR COMPANY AND ITS
CONSOLIDATED SUBSIDIARIES, THE SUM OF (A) INTEREST EXPENSE, (B) OPERATING
LEASE EXPENSES, (C) RENT EXPENSES, (D) CURRENT MATURITIES OF LONG-TERM
DEBT AND CAPITAL LEASES, (E) CAPITAL EXPENDITURES AND (F) BEGINNING ON
APRIL 1, 2000, DIVIDENDS PAID BY COMPANY ON ITS SHARES OF ISSUED AND
OUTSTANDING COMMON STOCK.
(II) "OPERATING CASH FLOW" MEANS FOR THE COMPANY AND ITS
CONSOLIDATED SUBSIDIARIES, CONSOLIDATED ADJUSTED NET INCOME, MINUS (A)
EXTRAORDINARY GAINS, PLUS (B) EXTRAORDINARY LOSSES, MINUS (C) GAINS DUE TO
THE WRITE-UP OF ASSETS, PLUS (D) LOSSES DUE TO THE WRITE-DOWN OF ASSETS,
PLUS (E) THE SUM OF (I) DEPRECIATION EXPENSE, AND (II) AMORTIZATION
EXPENSE, PLUS (F) INTEREST EXPENSE, PLUS (G) INCOME TAXES, PLUS (H) FOR
THE QUARTER ENDING SEPTEMBER 30, 1998, THE AGGREGATE AMOUNT OF $2,411,000,
AND FOR THE QUARTER ENDING DECEMBER 31, 1998 THE AMOUNT OF $6,113,000
(REPRESENTING NON-RECURRING LITIGATION AND WRITE-DOWN COSTS RELATING TO
CLOSURE OF RHINO INTERNATIONAL AND MERGER EXPENSES), IN ALL CASES
DETERMINED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR
THE TWELVE (12) MONTH PERIOD ENDING ON THE DATE OF DETERMINATION.
(b) Effective April 1, 1999, SECTION 2.04(D) is amended and restated to
read as follows:
(D) APPLICABLE MARGIN. AS USED IN THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, "APPLICABLE MARGIN" MEANS, AS TO THE LOANS, A RATE PER ANNUM
DETERMINED FOR EACH FISCAL QUARTER DURING COMPANY'S FISCAL YEAR, BEGINNING
WITH THE QUARTER ENDING DECEMBER 31, 1998, BY REFERENCE TO THE OPERATING
LEVERAGE RATIO (THE "INTEREST MARGIN FACTOR") AS OF THE END OF THE FISCAL
QUARTER (HEREIN CALLED THE "DATE OF DETERMINATION"), AND THE TYPE OF
ADVANCE, AS FOLLOWS:
Page 2
<PAGE>
(I) IF, ON ANY DATE OF DETERMINATION, THE FOLLOWING IS MET: THE
OPERATING LEVERAGE RATIO IS EQUAL TO OR LESS THAN 1.25 TO 1.0, THEN
THE APPLICABLE MARGIN DURING THE FISCAL QUARTER FOLLOWING THE DATE
OF DETERMINATION, EXPRESSED AS A RATE PER ANNUM, SHALL BE (- 1%) FOR
FLOATING BASE ADVANCES, AND 7/8 OF 1% FOR EURODOLLAR ADVANCES; AND
IF NOT, THEN
(II) IF, ON ANY DATE OF DETERMINATION, THE FOLLOWING IS MET: THE
OPERATING LEVERAGE RATIO IS GREATER THAN 1.25 TO 1.0 AND LESS THAN
OR EQUAL TO 1.50 TO 1.0, THEN THE APPLICABLE MARGIN DURING THE
FISCAL QUARTER FOLLOWING THE DATE OF DETERMINATION, EXPRESSED AS A
RATE PER ANNUM, SHALL BE (-1/2 OF 1%) FOR FLOATING BASE ADVANCES,
AND 1.5% FOR EURODOLLAR ADVANCES; AND IF NOT, THEN.
(III) IF, ON ANY DATE OF DETERMINATION, THE FOLLOWING IS MET: THE
OPERATING LEVERAGE RATIO IS GREATER THAN 1.50 TO 1.0 AND LESS THAN
OR EQUAL TO 1.75 TO 1.0, THEN THE APPLICABLE MARGIN DURING THE
FISCAL QUARTER FOLLOWING THE DATE OF DETERMINATION, EXPRESSED AS A
RATE PER ANNUM, SHALL BE ZERO (0) FOR FLOATING BASE ADVANCES, AND
1-3/4% FOR EURODOLLAR ADVANCES, AND IF NOT, THEN
(IV) IF, ON ANY DATE OF DETERMINATION, THE FOLLOWING IS MET: THE
OPERATING LEVERAGE RATIO IS GREATER THAN 1.75 TO 1.0 AND LESS THAN
OR EQUAL TO 2.25 TO 1.0, THEN THE APPLICABLE MARGIN DURING THE
FISCAL QUARTER FOLLOWING THE DATE OF DETERMINATION, EXPRESSED AS A
RATE PER ANNUM, SHALL BE ZERO (0) FOR FLOATING BASE ADVANCES, AND 2%
FOR EURODOLLAR ADVANCES, AND IF NOT, THEN
(V) IF, ON ANY DATE OF DETERMINATION, THE FOLLOWING IS MET: THE
OPERATING LEVERAGE RATIO IS GREATER THAN 2.25 TO 1.0, THEN THE
APPLICABLE MARGIN DURING THE FISCAL QUARTER FOLLOWING THE DATE OF
DETERMINATION, EXPRESSED AS A RATE PER ANNUM, SHALL BE 1/4% FOR
FLOATING BASE ADVANCES, AND 2-1/4% FOR EURODOLLAR ADVANCES,,
THE PRICING PROVIDED IN SUBPARAGRAPH (V) SHALL BE APPLICABLE IF COMPANY
FAILS TO SATISFY THE INTEREST MARGIN FACTOR STATED THEREIN, BUT HAS NOT
SUFFERED AN EVENT OF DEFAULT (E.G. BY FAILING TO SATISFY EACH OF THE
COVENANTS CONTAINED IN SECTIONS 8.15, AND 8.17).
FOR CONVENIENCE OF REFERENCE, SECTION 2.04(D) IS SUMMARIZED IN THE PRICING
GRID ATTACHED AS EXHIBIT "K".
FOR EURODOLLAR ADVANCES, THE APPLICABLE MARGIN FOR A LOAN YEAR APPLIES
BOTH TO (I) ADVANCES MADE DURING THE CURRENT LOAN YEAR AND (II) ADVANCES
OUTSTANDING DURING THE CURRENT LOAN YEAR THAT WERE MADE DURING A PRIOR
LOAN YEAR.
IF THE INTEREST RATE CHANGES HEREUNDER BECAUSE OF A CHANGE IN THE
APPLICABLE MARGIN, INTEREST SHALL ACCRUE AT THE CHANGED RATE BEGINNING THE
FIRST DAY OF THE MONTH AFTER THE EARLIER OF THE DATE ON WHICH THE COMPANY
PROVIDES, OR BY WHICH IT WAS REQUIRED TO PROVIDE, PURSUANT TO SECTION
8.01(D) OF THE THIRD AMENDED LOAN AGREEMENT, THE FINANCIAL INFORMATION
NECESSARY TO DETERMINE THE APPLICABLE MARGIN.
(c) SECTION 8.14 is hereby amended to read as follows:
"8.14 MINIMUM FIXED CHARGE COVERAGE RATIO. THE COMPANY SHALL
MAINTAIN A MINIMUM FIXED CHARGE COVERAGE RATIO (I) FOR THE PERIOD
BEGINNING OCTOBER 1, 1998 AND ENDING ON MARCH 31, 2000, OF AT LEAST 1.25
TO 1.0, (II) FOR THE PERIOD BEGINNING APRIL 1, 2000 AND ENDING ON
SEPTEMBER 30, 2000, OF AT LEAST 1.15 TO 1.0, AND (III) FOR THE PERIOD
BEGINNING ON OCTOBER 1, 2000 AND ENDING ON THE TERMINATION DATE, OF AT
LEAST 1.25 TO 1.0. THE FOREGOING COVENANT SHALL BE
Page 3
<PAGE>
MET BY THE COMPANY AT THE END OF EACH OF ITS FISCAL QUARTERS USING A
ROLLING FOUR QUARTERS OF HISTORICAL OPERATING CASH FLOW AND FIXED CHARGES
INFORMATION.
(d) There shall be added a new SECTION 9.11 to read as follows:
"9.11 LIMITATION ON DIVIDENDS. FOR THE PERIOD FROM JANUARY 1, 1999
THROUGH MARCH 31, 2000, COMPANY SHALL NOT PAY DIVIDENDS ON ITS ISSUED AND
OUTSTANDING SHARES OF COMMON STOCK IN ANY CALENDAR QUARTER, IN EXCESS OF
$0.11 PER SHARE.
3. LIQUIDATION OF RHINO. Bank agrees that Company's liquidation of Alamo
Group (WA) Inc., a/k/a Rhino International, did not and does not constitute a
breach of the covenant contained in SECTION 9.07 of the Third Amended Loan
Agreement. Effective with its liquidation, Alamo Group (WA) Inc., a/k/a Rhino
International, is no longer a member of the Obligated Group, as defined in the
Third Amended Loan Agreement (as previously amended).
4. LIMITATION ON ACQUISITIONS. Notwithstanding anything to the contrary
contained in the Third Amended Loan Agreement, as previously amended, Company
shall make no Acquisitions without Bank's prior written consent.
5. AMENDMENT FEE. In consideration of Bank's efforts to structure this
Fifth Amendment, Company shall pay to Bank within three (3) business days after
the execution of this Agreement by Bank, an amendment fee of $56,250.00 (1/8 of
1% of the aggregate Commitment of Bank under the Third Amended Loan Agreement).
6. GUARANTIES. The Guarantors (excluding Alamo Group (WA) Inc.) hereby
confirm that the Guaranties cover the entire amount of the Loans, as previously
increased, are in full force and effect and are in no way diminished or
adversely affected by this Fifth Amendment.
7. NO OTHER AMENDMENTS. All other provisions of the Third Amended Loan
Agreement, as previously amended by the First Amendment, Second Amendment, Third
Amendment and Fourth Amendment, that are not specifically modified or amended by
this Fifth Amendment, shall remain in full force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Fifth
Amendment as of the day and year first above written.
COMPANY: BANK:
ALAMO GROUP INC. NATIONSBANK, N.A.
By: /S/ ROBERT H. GEORGE By:/S/ R. MARK BEARFIELD
Robert H. George R. Mark Bearfield,
Vice President Vice President
Page 4
<PAGE>
GUARANTORS:
ALAMO GROUP (USA) INC. M&W GEAR COMPANY
By:/S/ ROBERT H. GEORGE By:/S/ROBERT H. GEORGE
Robert H. George Robert H. George
Vice President - Administration Vice President - Administration
ALAMO GROUP (Tx) INC. ADAMS HARD-FAClNG COMPANY, INC.
By:/S/ROBERT H. GEORGE By:/S/ROBERT H. GEORGE
Robert H. George Robert H. George
Vice President - Administration Vice President - Administration
ALAMO GROUP (Ks) INC. HERSCHEL-ADAMS INC.
By:/S/ROBERT H. GEORGE By:/S/ROBERT H. GEORGE
Robert H. George Robert H. George
Vice President - Administration Vice President - Administration
ALAMO GROUP(Il) INC. ALAMO GROUP (IA) INC.
By:/S/ROBERT H. GEORGE By:/S/ROBERT H. GEORGE
Robert H. George Robert H. George
Vice President - Administration Vice President - Administration
ALAMO SALES CORP.
By:/S/ROBERT H. GEORGE
Robert H. George
Vice President - Administration
TIGER CORPORATION
By:/S/ROBERT H. GEORGE
Robert H. George
Vice President - Administration
Page 5
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-92986) pertaining to the Alamo Group, Inc. 1994 Incentive Stock
Option Plan of our report dated February 26, 1999, with respect to the
consolidated financial statements of Alamo Group, Inc. and subsidiaries included
in the Form 10-K for the year ended December 31, 1998.
ERNST & YOUNG LLP
San Antonio, Texas
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,748
<SECURITIES> 0
<RECEIVABLES> 49,834
<ALLOWANCES> 0
<INVENTORY> 64,578
<CURRENT-ASSETS> 123,314
<PP&E> 55,893
<DEPRECIATION> 32,989
<TOTAL-ASSETS> 161,638
<CURRENT-LIABILITIES> 17,422
<BONDS> 0
0
0
<COMMON> 973
<OTHER-SE> 105,933
<TOTAL-LIABILITY-AND-EQUITY> 161,638
<SALES> 200,553
<TOTAL-REVENUES> 200,553
<CGS> 156,895
<TOTAL-COSTS> 156,895
<OTHER-EXPENSES> 35,173
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,950
<INCOME-PRETAX> 6,535
<INCOME-TAX> 2,420
<INCOME-CONTINUING> 4,115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,115
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
