-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UV8beTQb6v52c4yw7XB8My3jAWJ/v2hVsOCLj9STyWa+8CirJfLI20mJM9YMJl+r dYO+L5LeRJAfn9t8NPsa3Q== 0000897069-99-000071.txt : 19990215 0000897069-99-000071.hdr.sgml : 19990215 ACCESSION NUMBER: 0000897069-99-000071 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OSHKOSH TRUCK CORP CENTRAL INDEX KEY: 0000775158 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 390520270 STATE OF INCORPORATION: WI FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-13886 FILM NUMBER: 99534284 BUSINESS ADDRESS: STREET 1: 2307 OREGON ST STREET 2: P O BOX 2566 CITY: OSHKOSH STATE: WI ZIP: 54903 BUSINESS PHONE: 4142359151 MAIL ADDRESS: STREET 2: 2307 OREGON ST P O BOX 2566 CITY: OSHKOSH STATE: WI ZIP: 54903 10-K/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K/A AMENDMENT TO NO. 1 TO (Mark One) (X) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended September 30, 1998, or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________________________ to _____________________________ Commission file number: 0-13886 Oshkosh Truck Corporation (Exact name of registrant as specified in its charter) Wisconsin 39-0520270 (State or other jurisdiction of (I.R.S.Employer Identification) incorporation or organization) P. O. Box 2566, Oshkosh, WI 54903-2566 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (920) 235-9151 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Aggregate market value of the voting stock held by non-affiliates of the registrant as of November 18, 1998: Class A Common Stock, $.01 par value - No Established Market Value Common Stock, $.01 par value - $216,104,000 Number of shares outstanding of each of the registrant's classes of common stock as of November 18, 1998: Class A Common Stock, $.01 par value - 296,888 shares Common Stock, $.01 par value - 8,124,613 shares DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV incorporate, by reference, portions of the Annual Report to Shareholders for the year ended September 30, 1998. Part III incorporates, by reference, portions of the Proxy Statement dated December 23, 1998. The undersigned registrant hereby amends and restates Items 1, 2, 5, 7, 8, 10 and 14 of its Annual Report on Form 10-K for the fiscal year ended September 30, 1998 to provide in their entirety as follows: Forward-Looking Statements As used herein, the "Company" refers to Oshkosh Truck Corporation, including Pierce Manufacturing, Inc. ("Pierce"), McNeilus Companies, Inc. ("McNeilus") and its other wholly-owned subsidiaries, and "Oshkosh" refers to Oshkosh Truck Corporation, not including Pierce or McNeilus or their wholly-owned subsidiaries. This Annual Report on Form 10-K contains statements that management believes are "forward looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this report, including, without limitation, statements regarding the Company's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may", "will", "expect", "intend", "estimates", "anticipate", "believe", "should", "plans", or "continue", or the negative thereof or variations thereon or similar terminology. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations include, without limitation, the following: (1) the consequences of financial leverage; (2) the cyclical nature of the construction industry; (3) the risks related to reductions or changes in government expenditures; (4) the uncertainty inherent in government contracts; (5) the challenges of integration of acquired businesses; (6) competition; (7) disruptions in the supply of parts or components from sole source suppliers and subcontractors; (8) product liability and warranty claims; (9) labor relations and market conditions; and (10) unanticipated events relating to resolving Year 2000 issues. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements. PART I Item 1 BUSINESS The Company The Company commenced business in 1917 and was incorporated in 1930. The Company is a leading designer, manufacturer and marketer of a broad range of fire and emergency apparatus and specialty commercial and military trucks under the "Oshkosh," "Pierce," "McNeilus" and "MTM" trademarks. The Company's custom and commercial fire apparatus and emergency vehicles include pumpers, aerial and ladder trucks, tankers, heavy-duty rescue vehicles, wildland rough terrain response vehicles, aircraft rescue and firefighting ("ARFF") and snow removal vehicles. The Company's commercial truck lines include refuse truck bodies and rear- and forward-discharge concrete mixers. As the leading manufacturer of severe-duty heavy tactical trucks for the United States Department of Defense ("DoD"), the Company manufactures vehicles that perform a variety of demanding tasks such as hauling tanks, missile systems, ammunition, fuel and cargo for combat units. McNeilus has an equity interest in Oshkosh/McNeilus Financial Services Partnership ("OMFSP") which provides lease financing to the Company's customers. The Company's objective is to continue to enhance market positions by providing innovative design, sophisticated engineering, efficient, low-cost manufacturing, extensive distribution and superior customer service to its commercial, municipal and military customers within its core markets. Competitive Strengths The following competitive strengths support the Company's business strategy: Strong Market Positions. The Company has developed strong market positions in each of its core businesses, which management attributes to the Company's reputation for innovation, vehicle performance, reliability and customer service. The Company has the leading share of the severe-duty heavy tactical truck segment of the domestic defense truck market, and also believes it has a leading share in: (i) custom and commercial fire apparatus, including pumpers, aerial and ladder trucks, tankers, heavy duty rescue, wildland rough terrain response vehicles and ARFF vehicles for the domestic fire apparatus market; (ii) the domestic refuse truck body market; (iii) the domestic rear- and forward-discharge concrete mixer markets; and (iv) the domestic airport snow removal vehicle market. The Company intends to continue to strengthen its market share by capitalizing on its strong reputation, introducing innovative products and services and leveraging its extensive distribution capabilities. Extensive Distribution Capabilities. With the addition of the commercial and municipal distribution capabilities of Pierce and McNeilus, the Company has established an extensive domestic and international distribution system for specialty trucks and truck bodies covering over 70 countries. In addition to its network of dealers and distributors, the Company employs over 100 in-house sales and service representatives. Management believes the Company's broad distribution system has enabled the Company to: (i) maximize sales of new products and technologies: (ii) become a benchmark for government customers in establishing their bid 3 specifications; (iii) provide customer service on a national and international scale; and (iv) reduce distribution expenses through significant economies of scale. Flexible and Efficient Manufacturing. The Company believes it has competitive advantages over larger truck manufacturers in its specialty truck markets due to its manufacturing flexibility and custom fabrication capabilities. For example, the Company has successfully configured its defense truck and fire apparatus manufacturing plants for the simultaneous manufacture of many different types and models of vehicles on the same assembly line. In addition, the Company believes it has a competitive advantage over smaller competitors due to its: (i) manufacturing in relatively higher volumes; (ii) purchasing power across its product lines; and (iii) investing in fixturing and robotics to improve efficiency and reduce costs. Quality Products and Customer Service. Oshkosh, Pierce and McNeilus have each developed strong brand recognition based on their commitments to meet the stringent product quality and reliability requirements of their customers and the specialty truck markets they serve. The Company's commitment to product quality is exemplified by the ISO 9001 certification of Oshkosh and Pierce, which achieved ISO 9001 certification in April 1998. The Company also achieves high quality customer service through its extensive service and parts support program, which is available to domestic customers 365 days a year in all product lines throughout the Company's distribution systems. Proprietary Components. The Company's advanced design and engineering capabilities have contributed to the development of proprietary, severe-duty components that enhance truck performance, reduce manufacturing costs and strengthen customer relationships. These proprietary components include front drive and steer axles, transfer cases, cabs, the ALL-STEER electronic all-wheel steering system, independent suspension, the Sky-Arm articulating aerial ladder and the McNeilus Auto Reach Arm, an automated side-loading refuse body. See "Products and Markets" for further discussion of these products and technologies. Management believes these proprietary components provide the Company a competitive advantage by increasing its vehicles' durability, operating efficiency and vehicle effectiveness. The integration of many of these components across various product lines also reduces the Company's costs to manufacture its products compared to manufacturers who simply assemble purchased components. Business Strategy The Company is focused on increasing its net sales, profitability and cash flow by capitalizing on its competitive strengths. Key elements of the Company's business strategy include: Focusing on Specialized Truck Markets. The Company plans to continue its focus on those specialized truck and truck body markets where it has strong market positions and where the Company can leverage synergies in purchasing, manufacturing, technology and distribution. The Company's objective is to achieve and maintain market leadership through internal growth and strategic acquisitions. Management believes the higher sales volumes associated with market leadership would allow the Company to continue to enhance productivity in manufacturing operations, fund innovative product development and invest in further expansion. Expanding Distribution and International Sales. The Company plans to add new distribution capabilities for the municipal segment of the refuse truck body market and in targeted geographic areas in the domestic fire apparatus market. The Company intends to increase international sales beyond the $35.0 million volume achieved in fiscal 1998 by introducing McNeilus refuse truck bodies, rear-discharge concrete mixers and ready-mix batch plants to international markets and by continuing the expansion of Pierce's international customer base through the Company's expanding international distribution capabilities. Reducing Costs While Maintaining Quality. The Company actively benchmarks its competitors' costs and best industry practices, and continuously seeks to implement process improvements to increase cash flow and improve profitability. With each of its acquisitions, the Company has established cost reduction targets. At Pierce, the Company exceeded its two-year cost reduction target of $6.5 million as a result of consolidating facilities, reengineering the manufacturing process and leveraging increased purchasing power. The Company is planning for additional cost savings at Pierce in fiscal 1999. The Company intends to further improve efficiencies by taking advantage of the Company's greater purchasing power and by developing additional manufacturing synergies across product lines following its acquisition of McNeilus and has established a $5-$7 million two-year cost reduction target with respect to this acquisition. In the first seven months following the acquisition of McNeilus, $1.45 million of the cost reduction target was realized. Introducing New Products. The Company has increased its emphasis on new product development in recent years, and seeks to expand sales by introducing new or improved products in its core markets, either through internal development or strategic acquisition. For example, in December 1997, the Company purchased the aerial fire apparatus product line of Nova Quintech, a division of Nova Bus Corporation. This acquisition broadened Pierce's aerial product line and provided Pierce with three new products in fiscal 1998. 4 Diversifying DoD Contracts. The Company is seeking to diversify its business with the DoD beyond its traditional contracts relating to the manufacture of severe-duty heavy tactical trucks. Management believes the Company has a reputation within the DoD for advanced engineering, quality manufacturing and vehicle performance that will assist the Company in obtaining contracts to provide other types of vehicles to the DoD. For example, the Company was one of two manufacturers selected to participate in a DoD program to produce upgraded medium-duty prototype vehicles for the Medium Tactical Truck Remanufacture ("MTTR") program. The Company expects the initial production contract to be awarded to the Company or the competing bidder in December 1998. The Company is also one of two manufacturers currently preparing prototype Family of Medium Tactical Vehicles ("FMTV") trucks for testing by the DoD. Upon conclusion of this testing, the Company will compete to be a second source supplier for the $15.6 billion FMTV program which extends through 2020. Increasing Aftermarket Sales and Service. The Company is focused on increasing its aftermarket sales and service revenues. In the fire apparatus and commercial truck markets, the Company has expanded and plans to continue to expand its refurbishment facilities and parts distribution capabilities. In the defense truck market, the Company plans to continue to pursue parts and maintenance contracts for upgrading and reconditioning trucks at both domestic and international U.S. military bases. Pursuing Strategic Acquisitions. The Company intends to selectively pursue additional strategic acquisitions, both domestically and internationally, in order to enhance its product line and expand its international presence in specialized truck markets. The Company intends to focus its acquisition strategy in specialty truck and truck body markets where it can enhance its strong market positions and achieve significant acquisition synergies. Products and Markets The Company is focused on the following core specialty truck and truck body markets: Fire Apparatus. The Company, through Pierce, is among the leading domestic manufacturers of custom and commercial fire apparatus. The Company primarily serves domestic governmental markets, but also sells fire apparatus to airports, universities and large industrial companies. In addition, the Company sells fire apparatus in international markets. Pierce's history of research and development in consultation with firefighters has resulted in a broad product line that features a wide range of innovative, high-quality custom and commercial firefighting equipment with advanced fire suppression capabilities. The Company's engineering expertise also allows it to design its vehicles to meet stringent government regulations for safety and effectiveness. Refuse Truck Bodies. Management believes the Company, through McNeilus, is a leading domestic manufacturer of refuse truck bodies for the waste services industry. The Company manufactures a wide range of automated rear, front, side and top loading refuse truck bodies, which the Company mounts on commercial chassis. The Company sells its refuse vehicles primarily to commercial waste management companies. Management believes the Company's refuse vehicles have a reputation for efficient, cost-effective, dependable operation that supports the Company's continued expansion into municipal and international markets. Concrete Mixers and Snow Removal Vehicles. Management believes the Company is a leading domestic manufacturer of rear- and forward-discharge concrete mixers. The Company sells rear- and forward-discharge concrete mixers and portable concrete mixer plants to construction companies throughout the United States and internationally. Management believes the Company is one of the only domestic concrete mixer manufacturers that markets both rear- and forward-discharge concrete mixers. The Company is also among the leading domestic manufacturers of snow removal vehicles for airports. The Company's specially designed airport snow removal vehicles can cast up to 4,000 tons of snow per hour and are used by some of the largest airports in the United States, such as Denver International Airport, LaGuardia International Airport, Minneapolis-St. Paul International Airport and O'Hare International Airport. Management believes the reliability of the Company's high performance snow removal vehicles contributes to its strong market position. Defense Trucks. The Company has sold products to the DoD for over 70 years and is the leading manufacturer of a broad line of severe-duty heavy tactical trucks for the DoD. The Company's proprietary military all-wheel drive product line includes: (i) the Palletized Load System ("PLS"), a highly mobile self-contained truck and trailer system that loads and unloads a wide range of cargo in a short period of time; (ii) the Heavy Expanded Mobility Tactical Truck ("HEMTT"), a cross-country cargo and supply carrier that, among other tasks, is used for direct rearming of the Multiple Launch Rocket System, transport of Patriot erector/launchers, resupply of field artillery ammunition and refueling of tanks, trucks and helicopters in forward areas; (iii) the Heavy Equipment Transporter ("HET"), the primary hauler of the M1A1 main battle tank and also a hauler of other tanks, fighting and recovery vehicles, self-propelled howitzers and construction equipment; and (iv) the Logistic Vehicle System ("LVS"), a highly mobile cargo carrier with a maximum payload capacity of 20 tons. The Company also exports its severe-duty heavy tactical trucks to approved foreign customers. 5 The Company has developed a strong relationship with the DoD that has resulted in the Company operating under "family contracts" with the DoD for the PLS, HEMTT, HET and LVS and for DoD vehicle parts. "Family contracts" is the term given to contracts between the Company and the DoD that group similar models together to simplify the acquisition process. Under the vehicle family contracts, the DoD orders a specified range of volume of either PLS and HET trucks or HEMTT and LVS trucks at fixed prices, which allows the Company to predict and plan its long term production and delivery schedules for vehicles. Current family contracts were established in 1996 and 1997 and expire in fiscal years 2000 and 2001. Markets and Products Description Fire and Emergency Market Firefighting apparatus that are Custom Pumpers......... equipped with a water tank, water pump, and foam system (optional). The Pierce line of * Quantum - Flagship of the Pierce custom pumpers is available on each of these line. Features advanced ergonomics, custom chassis: unique styling, enhanced maneuverability, and a cab that seats up to 10 personnel. * Lance 2000 - Features a split-tilt cab. High gross vehicle weight rating enables this truck to support aerial devices. * Dash 2000 - Custom tilt cab, designed for comfort, space and maneuverability. * Saber - Value-priced chassis featuring a tilt-cab, select options, and seating for up to 8 personnel. * Arrow - Cab-forward design. Commercial Pumpers..... Firefighting apparatus that arewith a water tank, equipped water pump and foam system (optional). Commercial pumpers have the firefighting bodies mounted on customer-specified commercial truck chassis. Aerial Apparatus....... Firefighting apparatus with an aerial device mounted on the body for access and rescues in elevated locations. These devices are available on the Pierce line of custom chassis. Products include: * 105' and 85' aerial platforms. * 75' and 105' heavy-duty ladders. * 105' super heavy-duty ladder. * 105' aerial tiller - Tractor-drawn trailer has an Aerial ladder mounted on the trailer and steering capability for the rear axle. * Sky Arm - Four-section, 100-foot aerial ladder with an articulating platform. * Sky Five - Five-section aerial ladder that is available in rear- and mid-mount configurations. The Company believes that, at rest, this is the shortest 100-foot aerial ladder available. * Sky Boom - Elevated water tower boom with an attached ladder. Available in 55' and 60' lengths. Rescue Vehicles........ These units are designed to carr and large personnel quantities of equipment. Pierce rescue vehicles are used for extrication, water rescue, hazardous materials response, fire fighting, command center, and lighting operations. Mini-Pumper............ This initial response vehicle is a fast, lightweight, scaled-down version of full-sized pumper. Elliptical Tanker...... Elliptical tankers are used to large amounts of transport water to fire scenes and can be equipped with a variety of pumping packages so the vehicles can also be used as a front line of attack. Water capacity ranges from 1,500 to 5,000 gallons. Hawk Wildland Rapid Response Vehicle.............. Four-wheel-drive vehicle takes firefighters into off-road terrain that can be difficult or even impassable for larger, two-wheel-drive pumpers. Designed specifically as a first-strike vehicle, the Hawk features a water tank, water pump, and a compressed air foam system. H-Series............... An airport snow removal vehicle that can clear 4,000 tons of snow per hour. Optional sweepers, blowers and plows are Available. P-Series............... A super heavy-duty frame vehicle that can break through heavily drifted snow. The vehicle also has the added flexibility of being durable enough to meet the demands of off-road applications. 6 Refuse Truck Body Market Front Loader........... Refuse is loaded into a container at the front of the vehicle; The container is lifted by large arms and dumped into the body. The front loader can carry 40 to 43 cubic yards of refuse and is available on a selection of commercial chassis. A self-leveling system for keeping the container level during dumping cycle is optional. Rear Loader............ McNeilus offers three different models of rear-loading refuse bodies. Refuse is loaded into the rear of the vehicle and compacted toward the front of the refuse body. McNeilus rear loaders can carry from 17 to 32 cubic yards of refuse Autoreach Automated Side Loader............... This refuse body features a boomless arm for loading large containers of refuse from the side of the vehicle. The side-loading arm is designed to articulate left to right and dump from any angle. The driver can keep the vehicle in one position after stopping for a pick-up rather than having to move the vehicle to put the arm in the proper position for lifting the next refuse container. The McNeilus Autoreach is available in 28-, 33- and 36-cubic yard capacities and features a continuous packing cycle. Manual Side Loader..... Designed for one-person refuse collection operations and can carry up to 33 cubic yards. The body can be loaded from either side and is typically mounted on a low-entry chassis. Concrete Mixer Market F-Series............... Designed for a variety of severe-duty all-wheel drive applications, including rear-discharge concrete mixers, concrete block trucks, dry wall haulers, wall form trucks, digger derricks, aerial buckets and oil field service. S-Series............... A forward-discharge concrete mixer that allows the driver to approach a job with greater visibility, improved placement and greater safety. The two-speed transfer case and front driving gear gives extra power to maneuver into tighter spots in challenging terrain. Bridgemaster III....... Rear-discharge mixer featuring a trailing axle. This mixer lineup can carry from 9 to 11.5 cubic yards of concrete. The Bridgemaster IIIs are available on a variety of commercial truck chassis. Standard Rear Discharge Mixer................ Rear-discharge concrete mixer that can handle from 4 to 11 cubic yards and are available with a variety of axle Configurations including tag axles. Options include remote pendant controls for controlling discharge near the rear of the vehicle. Sliding Mixer System... Mounted on a trailer that can be extended up to 13 feet depending on the size of the mixer selected. It is designed for transport and large pours. It typically can carry 11 to 13 yards of concrete. Defense Truck Market Heavy Expanded Mobility Tactical Truck ("HEMTT").............. Cross-country cargo and supply carrier with maximum payload capacity of 11 tons. The HEMTT is used for direct rearming of the Multiple Launch Rocket System, transport of Patriot erector/launchers and resupply of field artillery ammunition and refueling of tanks, trucks and helicopters in forward areas. Heavy Equipment Transporter ("HET").............. Primary hauler of the M1A1 main battle tank and also transports other tanks, fighting and recovery vehicles, self-propelled howitzers and construction equipment. Palletized Load System ('PLS").............. Cargo hauler with maximum payload capacity of 33 tons. The truck and trailer system hauls a variety of cargo and can load or unload in a short period of time. Logistic Vehicle System ("LVS").............. Highly mobile cargo carriers with a maximum payload capacity of 20 tons. The LVS can carry military vehicles and supply containers over rough terrain and steep g grades due to its separating chassis module design. 7 Sales and Distribution The Company believes it differentiates itself from many of its larger competitors by tailoring its distribution to the needs of its specialized truck markets and from its smaller competitors with its national and global sales and service capabilities. Distribution personnel use demonstration trucks to show customers how to properly use the Company's trucks and truck bodies, compared to the showroom sales approach of the typical dealers of large truck manufacturers. The Company backs all products by same-day parts shipment, and its service technicians are available in person or by telephone to domestic customers 365 days a year. The Company believes that its dedication to keeping its trucks in-service in demanding conditions worldwide has contributed to customer loyalty. The Company provides its salespeople, representatives and distributors with product and sales training on the operation and specifications of its products. The Company's engineers, along with its product managers, develop operating manuals and provide field support at truck delivery for certain markets. Distributors, where used, enter into agreements with the Company that allow for termination by either party generally upon 90 days' notice. Distributors are not permitted to market and sell competitive products. Fire and Emergency. The Company believes that the geographical breadth, size and quality of its fire apparatus sales and service organization are competitive advantages in a market characterized by a few large manufacturers and numerous small, regional competitors. Pierce's fire apparatus are sold through 38 sales and service organizations with more than 260 sales representatives nationwide, which combine broad geographical reach with frequency of contact with fire departments and municipal government officials. Management believes that frequency of contact and local presence are important to cultivate major, and typically infrequent, purchases involving the city or town council and fire department, purchasing, finance, and mayoral offices, among others, that may participate in a fire truck bid and selection. After the sale, Pierce's nationwide local parts and service capability is available to help municipalities maintain peak readiness for this vital municipal service. Pierce primarily focused its sales efforts in rural and small suburban domestic markets prior to its acquisition by Oshkosh. Due to the Company's expertise and long-standing relationships in numerous large urban markets, the Company has extended Pierce's sales focus into several key metropolitan areas. Pierce substantially strengthened its competitive position overseas in fiscal 1998. Pierce's worldwide distribution network was expanded to include 43 international representatives. This network has delivered several new orders including the award in December 1997 of a $35 million contract for 130 custom fire trucks for Saudi Arabia to be delivered from November 1998 through October 1999. The Company has invested in the development of sales tools for its representatives that it believes creates a competitive advantage in the sale of fire apparatus. For example, Pierce's Pride II PC-based sales tool can be used by its sales representatives to develop the detail specifications, price the base truck and options and draw the configured truck on the customer's premises. The quote, if accepted, is directly interfaced into Pierce's sales order systems. Oshkosh maintains 22 full-time sales and service dealers focused on the sale of snow removal vehicles, principally to airports, but also to municipalities, counties and other governmental entities. Defense. Substantially all domestic defense products are sold direct to principal branches of the DoD. The Company maintains a liaison office in Washington, D.C. to represent its interests with the Pentagon, Congress and the Office of the President. The Company also sells and services defense products to foreign governments directly through four Company-owned international sales offices, through agents, consultants and representatives, and through the United States Foreign Military Sales ("FMS") program. The DoD has begun to rely on industry for support and sustainability of its vehicles which has opened up new opportunities for maintenance, service and contract support to the U.S. Army and U.S. Marine Corps. In addition to marketing its current truck offerings and competing for new contracts in the medium- and light-duty segments, the Company actively works with the Armed Services to develop new applications for its vehicles. For example, the Company is: o Developing new applications for its PLS vehicle beyond its traditional ammunition transportation role. A contract for construction models has already been awarded, and several other models of the PLS are currently under evaluation. o Modifying its HEMTT vehicle for alternate uses. The Company has integrated a foam proportioning fire fighting package on a HEMTT for use by the U.S. military and other governmental agencies in the extinguishment of wildland fires. The HEMTT has also been modified to include a load handling system to meet lower payload requirements. 8 o Upgrading existing products such as the HEMTT, PLS and HET in order to achieve better performance and new technology. As an example, the Company has separate development contracts for each product with the U.S. Army to develop a new HEMTT, HET and PLS with new engines, transmissions, transfer cases and numerous other components that increase reliability and performance at reduced costs. In addition, the HEMTT Extended Service Program ("ESP") and HET Technology Insertion Program ("TIP") vehicles incorporate facets of the new "sealed hood" concept in which vehicle systems are monitored electronically and maintenance recommendations are delivered directly to the operator without ever having to open the hood. Commercial. Oshkosh maintains four distribution centers with 26 in-house sales and service representatives in the U.S. to sell and service its forward- and rear-discharge concrete mixers. All of the Oshkosh facilities provide full service, mounting and parts distribution to customers in their geographic regions, while two also have paint facilities. In addition, Oshkosh utilizes one independent distributor in this market. McNeilus operates eight distribution centers with 83 in-house sales and service representatives in the U.S. to sell and service its refuse truck bodies, rear-discharge concrete mixers and ready-mix batch plants. Six of such distribution centers provide full service, mounting and parts distribution to customers in their geographic regions while the remainder are primarily sales offices with limited parts and service capabilities. Five of the McNeilus distribution centers also have paint facilities and provide significant additional paint and mounting services during peak demand periods. With respect to McNeilus, the Company has begun to: o Combine the McNeilus and Oshkosh distribution capabilities. Because there is little geographic overlap between the rear-discharge markets of McNeilus and the forward-discharge markets of Oshkosh, management retained all existing distribution centers of both companies. The Company believes that the combined network represents one of the largest refuse truck body and concrete mixer distribution networks in the U.S. o Apply Oshkosh's and Pierce's sales and marketing expertise in municipal markets to increase sales of McNeilus refuse truck bodies to municipal customers. Prior to the Company's acquisition of McNeilus, virtually all McNeilus refuse truck body sales were to commercial customers. The Company believes that commercial customers represent a majority of the refuse truck body market. However, many municipalities purchase their own refuse trucks. The Company believes that it is positioned to create an effective municipal distribution in the refuse truck body market by building upon its present base of municipal distributors. Following its acquisition and new focus in municipal markets, McNeilus has been awarded new business for the city of Los Angeles and has targeted other major metropolitan areas. o Offer McNeilus refuse truck bodies, rear-discharge concrete mixers and ready-mix batch plants to Oshkosh's international dealers for sales and service worldwide. McNeilus' international sales have historically been limited because McNeilus has focused on the domestic market. However, management believes that refuse body exports are a significant percentage of certain competitors' sales, and represents a meaningful opportunity for the Company. The Company has trained its international Oshkosh and Pierce dealers to sell and service the McNeilus product line and has commenced sales of McNeilus products through these dealers in the first seven months following the acquisition. Competition The Company operates in highly competitive industries. The Company competes in the fire apparatus and defense truck markets principally on the basis of lowest qualified bid. To submit a qualified bid, the bidder must demonstrate that the fire apparatus or defense truck meets stringent specifications and, for most defense truck contracts, passes extensive testing. In addition, decreases in the DoD budget have resulted in a reduction in the number and size of contracts, which has intensified the competition for remaining available contracts. The Company and its competitors continually undertake substantial efforts in order to maintain existing levels of defense business and to succeed in bid competitions for available contracts. In the refuse truck body and concrete mixer markets, the Company also faces intense competition on the basis of price, innovation, quality, service and product performance capabilities. As the Company seeks to expand its sales of refuse truck bodies to municipal customers, management believes the principal basis of competition for such business will be lowest qualified bid. In all of the Company's markets, competitors include smaller, specialized manufacturers as well as large, mass producers. The Company believes that, in its specialized truck markets, it has been able to effectively compete against large, mass producers due to its manufacturing flexibility and specialized distribution systems. The Company believes that its competitive cost structure, engineering expertise and global distribution systems have enabled it to effectively compete with other specialized manufacturers. 9 Pierce's principal competitors in the fire apparatus market include Emergency One, Inc. (a subsidiary of Federal Signal Corporation), Kovatch Mobile Equipment Corp., and numerous small, regional manufacturers. Principal competitors of McNeilus, in the refuse truck body market, include The Heil Company (a subsidiary of Dover Corporation), Leach Company, and McClain E-Z Pack, Inc. Principal competitors of McNeilus and Oshkosh in concrete mixer markets include Advance Mixer, Inc., London Machinery, Inc., Rexworks, Inc., and T.L. Smith Machine Co., Inc. Oshkosh's principal competitors in snow removal markets include Monroe Truck Equipment, Inc. and Stewart & Stevenson Services, Inc. Oshkosh's principal competitors for DoD contracts include AM General Corporation and Stewart & Stevenson Services, Inc. The Company also faces competition from its competitors for acquisition opportunities. Several of the Company's competitors have greater financial, marketing, manufacturing and distribution resources than the Company. There can be no assurance that the Company's products will continue to compete successfully with the products of competitors or that the Company will be able to retain its customer base or to improve or maintain its profit margins on sales to its customers, all of which could materially adversely affect the Company's financial condition, results of operations and debt service capability. Customers and Backlog Sales to the DoD comprised approximately 28% of the Company's net sales for fiscal 1998. No other single customer accounted for more than 2% of the Company's sales for this period. A substantial majority of the Company's net sales are derived from customer orders prior to commencing production. The Company's backlog at September 30, 1998 was $377.5 million compared to $361.1 million at September 30, 1997. Backlog related to DoD contracts decreased by $94.1 million in 1998 compared to 1997 due to the completion of the IPF contract and because the Company's family contracts are coming up for renewal. The Company's fire and emergency and commercial backlogs increased by $51.2 million and $59.3 million, respectively, generally due to higher sales volumes for Pierce and due to the inclusion of McNeilus in 1998. Substantially all of the Company's backlog at September 30, 1998 pertains to fiscal 1999 business and is expected to be filled in fiscal 1999. Reported backlog excludes purchase options and announced orders for which definitive contracts have not been executed. Additionally, backlog excludes unfunded portions of DoD long-term family contracts. Backlog information and comparisons thereof as of different dates may not be accurate indicators of future sales or the ratio of the Company's future sales to the DoD versus its sales to other customers. Government Contracts Approximately 28% of the Company's net sales for fiscal 1998 were made to the U.S. government under long-term contracts and programs, substantially all of which were in the defense truck market. Accordingly, a significant portion of the Company's sales are subject to inherent risks, including uncertainty of economic conditions, changes in government policies and requirements that may reflect rapidly changing military and political developments and the availability of funds. The Company's sales into defense truck markets are substantially dependent upon periodic awards of new contracts and the purchase of base vehicle quantities and the exercise of options under existing contracts. The Company's existing contracts with the DoD may be terminated at any time for the convenience of the government. Upon such termination, the Company would generally be entitled to reimbursement of its incurred costs and, in general, to payment of a reasonable profit for work actually performed. In November 1996, the U.S. Army Tank Automotive and Armaments Command awarded the Company and one other defense contractor $6.9 million prototype contracts for Phase I competition of the MTTR program. The MTTR program was initiated to update and modernize the 5-ton tactical vehicle fleet of the U.S. Marine Corps and the U.S. Army. The goal of the U.S. Marine Corps portion of the program is to remanufacture the current configuration to carry a much greater payload with substantially increased cross-country mobility. The U.S. Army portion of the program was designed to increase the useful life and decrease operation and support costs of a portion of the U.S. Army's existing fleet but this portion of the program was subsequently cancelled. Phase I covers the design, development, and production of five prototype test vehicles for the U.S. Marine Corps and five additional prototype test vehicles for the U.S. Army. Testing of the ten-prototype test vehicles commenced August 1997 and was concluded in fiscal 1998. Phase II of the program is currently expected to include the production of up to 8,168 vehicles for the U.S. Marine Corps at a value that could exceed $1.0 billion over a period of years. Competition for the Phase II production contract is intense between the two Phase I contractors. Phase I testing along with the Phase II proposal will determine the single supplier of any production contract awarded. No assurance can be given that the DoD will award a Phase II Contract or that federal budgets will provide future funding for a Phase II contract. The DoD has targeted to announce an award of the MTTR contract to either Oshkosh or its competition in December 1998. 10 The U.S. Army has announced a competition to add a second supplier to build FMTV trucks. Oshkosh and one competitor have been awarded contracts to build three trucks for testing by the DoD. Based on current plans announced by the DoD, the winner of the competition would be awarded an initial production contract for approximately 763 vehicles. Upon completion of this production contract and the current supplier's present contract, the U.S. Army is expected to conduct a competition between these two manufacturers for the production of approximately 50,000 FMTV trucks. No assurance can be given that the DoD will award the FMTV second source contract or that federal budgets will provide future funding for the FMTV program. Under firm fixed-price contracts with the government, the price paid to the Company is generally not subject to adjustment to reflect the Company's actual costs, except costs incurred as a result of contract changes ordered by the government. The Company generally attempts to negotiate with the government the amount of increased compensation to which the Company is entitled for government-ordered changes that result in higher costs. In the event that the Company is unable to negotiate a satisfactory agreement to provide such increased compensation, the Company may file an appeal with the Armed Services Board of Contract Appeals or the U.S. Claims Court. The Company has no such appeals pending. The Company, as a U.S. government contractor, is subject to financial audits and other reviews by the U.S. government of performance of, and the accounting and general practices relating to, U.S. government contracts, and like most large government contractors, the Company is audited and reviewed on a continual basis. Costs and prices under such contracts may be subject to adjustment based upon the results of such audits and reviews. Additionally, such audits and reviews can and have led to civil, criminal or administrative proceedings. Such proceedings could involve claims by the government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company or one or more of its subsidiaries can also be suspended or debarred from government contracts, or lose its export privileges based on the results of such proceedings. The Company believes, based on all available information, that the outcome of all such audits, reviews and proceedings will not have a material adverse effect on its consolidated financial condition or results of operations. Suppliers The Company is highly dependent on its suppliers and subcontractors in order to meet commitments to its customers, and many major components are procured or subcontracted on a sole-source basis with a number of domestic and foreign companies. Through its reliance on this supply network for the purchase of certain components, the Company is able to avoid many of the preproduction and fixed costs associated with the manufacture of those components. The Company maintains an extensive qualification and performance measurement system to control risks associated with such reliance on suppliers. The Company occasionally experiences problems with supplier and subcontractor performance and must identify alternate sources of supply and/or address related warranty claims from customers. While the Company purchases many costly components such as engines, transmissions and axles, it manufactures certain proprietary components that are deemed material to the Company's business. These components include front drive and steer axles, transfer cases, cabs, the ALL-STEER electronic all-wheel steering system, independent suspension, the Sky-Arm articulating aerial ladder, the McNeilus Auto Reach Arm, body structures and many smaller parts which add uniqueness and value to the Company's products. Some of these proprietary components are marketed to other manufacturers. Engineering, Research and Development The Company maintains three facilities for new product development and testing with a staff of 46 engineers and technicians who are responsible for improving existing products and development and testing of new trucks, truck bodies and components. The Company prepares annual new product development and improvement plans for each of its markets and measures progress against those plans. Virtually all of the Company's sales of fire apparatus require some custom engineering to meet the customer's specifications. Engineering is also a critical factor in defense truck markets due to the severe operating conditions under which the Company's trucks are utilized, new customer requirements and stringent government documentation requirements. In the refuse truck body, concrete mixer and snow equipment markets, product innovation is highly important to meet customers' changing requirements. Accordingly, the Company maintains a permanent staff of over 240 engineers and engineering technicians, and it regularly outsources significant engineering activities in connection with major DoD bids and proposals. For fiscal years 1998, 1997, and 1996, Oshkosh incurred engineering, research and development expenditures of $9.7 million, $7.8 million and $6.3 million, respectively, portions of which were recoverable from customers, principally the U.S. government. 11 Intellectual Property Patents and licenses are important in the operation of the Company's business, as one of management's key objectives is developing proprietary components in order to provide the Company's customers with advanced technological solutions at attractive prices. The Company holds in excess of 50 active domestic patents. Management believes patents for all-wheel steer and independent suspension systems, which have remaining lives of 9 to 19 years, provide the Company with a competitive advantage in the fire apparatus business and the sale of ARFF and snow removal vehicles. The independent suspension system was also added to the U.S. Marine Corps portion of the MTTR program, which the Company believes should be a competitive advantage in the competition for the Phase II production contract. While other proprietary components provide the Company a competitive advantage, management believes that none of the Company's other patents individually are significant to the business. The Company holds trademarks for "Oshkosh," "Pierce," "McNeilus" and "MTM." These trademarks are considered to be important to the future success of the Company's business. Quality Management In 1994, Oshkosh commenced a program to educate and train all employees at its Oshkosh facilities in quality principles and to seek ISO 9001 certification to improve the Company's competitiveness in its global markets. ISO 9001 is a set of internationally accepted quality requirements, established by the International Organization for Standardization, which indicates that a company has established and follows a rigouous set of requirements aimed at achieving customer satisfaction by preventing nonconformity in design, development, production, installation and servicing of products. Employees at all levels of the Company are encouraged to understand customer and supplier requirements, measure performance, develop systems and procedures to prevent nonconformance with requirements and produce continuous improvement in all work processes. Oshkosh achieved ISO 9001 certification in 1995 and Pierce achieved ISO 9001 certification in April 1998. The Company is evaluating whether to pursue ISO 9001 certification for McNeilus. Although management does not consider such certification essential for McNeilus' domestic markets, the Company may conclude it is valuable in marketing to certain international customers. Employees As of September 30, 1998, the Company had approximately 3,500 employees, of which approximately 1,300, 1300 and 900 employees are located at its principal facilities in Oshkosh, Wisconsin, Appleton, Wisconsin and Dodge Center, Minnesota, respectively. Production workers totaling approximately 800 employees at the Company's Oshkosh facilities are represented by the United Auto Workers union. The Company's five-year contract with the United Auto Workers union extends through September 30, 2001. The Company believes its relationship with employees is satisfactory. Manufacturing The Company manufactures trucks and truck bodies at ten manufacturing facilities. Employee involvement is encouraged to improve production processes and product quality. In order to reduce production costs, the Company maintains a continuing emphasis on the development of proprietary components, self-sufficiency in fabrication, just-in-time inventory management, improvement in production flows, interchangeability and simplification of components among product lines, creation of jigs and fixtures to ensure repeatability of quality processes, utilization of robotics, and performance measurement to assure progress toward cost reduction targets. The Company intends to continue to upgrade its manufacturing capabilities by adopting best practices across its manufacturing facilities, relocating manufacturing activities to the most efficient facility, investing in further fixturing and robotics, re-engineering manufacturing processes and adopting lean manufacturing management practices across all facilities. The Company is drawing upon its recent experience with the Pierce acquisition in integrating the McNeilus manufacturing facilities. Within the first year following the Pierce acquisition, the Company consolidated three Pierce manufacturing facilities down to two while increasing Pierce's capacity by improving product flow. In addition, among other things, the Company reduced the number of operating shifts at the Pierce paint plant from three to one to substantially reduce utility costs, implemented indexing of production lines and relocated chassis frame build-up to Oshkosh to improve production efficiencies, and eliminated storage rooms to relocate inventory to point of use thereby eliminating duplicate material handling. Likewise, at McNeilus, the Company has installed additional robots, commenced re-arrangement of weld and mount activities and developed plans to expand paint capacity in order to improve production facilities, all in the first seven months following the acquisition. 12 Item 2. PROPERTIES Management believes the Company's equipment and buildings are modern, well maintained and adequate for its present and anticipated needs. As of September 30, 1998, the Company operated in eleven manufacturing plants. The Company's manufacturing plants include: The Company's manufacturing plants include:
Approximate Square Footage Principal Location (# of facilities) Owned Leased Products Manufactured Oshkosh, Wisconsin(3).... 688,000 Defense Trucks; Front-Discharge Mixers; Snow removal Vehicles; ARFF Vehicles Appleton, Wisconsin(2)... 589,000 19,000 Fire Apparatus Rear-Discharge Mixers; Refuse Truck Dodge Center, Minnesota(1) 604,000 Bodies Bradenton, Florida(1).... 287,000 Defense Trucks; Riceville, Iowa(1)....... 108,000 Components for Rear-Discharge Mixers and refuse Truck Bodies Kensett, Iowa(1)......... 65,000 Not currently in use McIntire, Iowa(1)........ 28,000 Components for Rear-Discharge Mixers and Refuse Truck Bodies Weyauwega, Wisconsin(1).. 28,000 Refurbished Fire Apparatus
The Company's facilities are pledged as collateral under the terms of the Senior Credit Facility. The Company's manufacturing facilities generally operate five days per week on one shift, except for one-week shutdowns in July and December. Management believes the Company's manufacturing capacity could be approximately doubled with limited capital spending by working an additional shift at each facility. The Company maintains twelve sales and service centers throughout the United States. The Company owns such facilities in Colton, California; Commerce City, Colorado; Villa Rica, Georgia; Lithia Springs, Georgia; Hutchins, Texas; Morgantown, Pennsylvania; Gahanna, Ohio; and Oshkosh, Wisconsin. The Company leases such facilities in Tacoma, Washington; Salt Lake City, Utah; Aurora, Illinois; and East Granby, Connecticut. These facilities range in size from approximately 5,450 square feet to approximately 36,000 square feet and are used primarily for sales and service of concrete mixers and refuse bodies. 13 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information as of November 15, 1998 concerning the Company's executive officers and other officers. All of the Company's officers serve terms of one year and until their successors are elected and qualified.
Name Age Title -------------------------- ---------------------------------- Robert G. Bohn............ 45 President and Chief Executive Officer Timothy M. Dempsey........ 58 Executive Vice President, General Counsel and Secretary Paul C. Hollowell......... 57 Executive Vice President and President, Defense Business Dan J. Lanzdorf........... 50 Executive Vice President and President, McNeilus Companies, Inc. John W. Randjelovic....... 54 Executive Vice President and President, Pierce Manufacturing, Inc. Charles L. Szews.......... 41 Executive Vice President and Chief Financial Officer Matthew J. Zolnowski...... 45 Executive Vice President, Corporate Administration, Strategic Planning and Marketing J. David Brantingham...... 40 Vice President, Information Systems Fred C. Fielding.......... 64 Vice President, Government Operations, Washington D.C.Office Ted Henson................ 47 Vice President, International Sales Mark A. Meaders........... 40 Vice President, Corporate Purchasing and Logistics Scott L. Ney.............. 47 Vice President and Treasurer Thomas J. Polnaszek....... 41 Vice President and Controller Donald H. Verhoff......... 52 Vice President, Technology James D. Voss............. 57 Vice President, Human Resources
Robert G. Bohn. Mr. Bohn joined the Company in 1992 as Vice President-Operations. He was appointed President and Chief Operating Officer in 1994. He was appointed President and Chief Executive Officer in October 1997. Prior to joining the Company, Mr. Bohn was Director-European Operations for Johnson Controls, Inc., Milwaukee, Wisconsin, which manufactures, among other things, automotive products. He worked for Johnson Controls from 1984 until 1992. He was elected a Director of the Company in June 1995. Timothy M. Dempsey. Mr. Dempsey joined the Company in October 1995 as Vice President, General Counsel and Secretary. Mr. Dempsey has been and continues to be a partner in the law firm of Dempsey, Magnusen, Williamson and Lampe in Oshkosh, Wisconsin. Paul C. Hollowell. Mr. Hollowell joined the Company in April 1989 as Vice President-Defense Products and assumed his present position in February 1994. Dan J. Lanzdorf. Mr. Lanzdorf joined the Company in 1973 as a design engineer and has served in various assignments including Chief Engineer -- Defense, Director of Defense Engineering, Director of the Defense Business unit, and Vice President of Manufacturing prior to assuming his current position in September 1998. 14 John W. Randjelovic. Mr. Randjelovic joined the Company in October 1992 as Vice President and General Manager in charge of the Bradenton, Florida Division. In September 1996, he was appointed Vice President of Manufacturing, Purchasing, and Materials for Pierce and assumed his present position in October 1997. Charles L. Szews. Mr. Szews joined the Company in March 1996 as Vice President and Chief Financial Officer and assumed his present position in October 1997. Mr. Szews was previously employed by Fort Howard Corporation, a manufacturer of tissue products, from June 1988 until March 1996 in various positions, including Vice President and Controller from September 1994 until March 1996. Matthew J. Zolnowski. Mr. Zolnowski joined the Company as Vice President-Human Resources in January 1992 and assumed his present position in September 1998. J. David Brantingham. Mr. Brantingham joined the Company in April 1995 as Manager of Technical Services and assumed his present position in November 1997. Mr. Brantingham was previously employed by Western Publishing, Inc., a printer and publisher of children's books and a manufacturer of adult games, in various positions including Director of Technical Services from May 1989 through April 1995. Fred C. Fielding. Mr. Fielding joined the Company in October 1989 and assumed his present position in January 1991. Ted Henson. Mr. Henson joined the Company in January 1990 as Contract Specialist and assumed his current position in September 1998. Prior to joining the Company, Mr. Henson served in the U.S. Army, most recently as Brigade Commander Sargent Major. Mark A. Meaders. Mr. Meaders joined the Company as Director of Purchasing for Pierce in September 1996 and assumed his present position as Vice President-Corporate Purchasing and Logistics in November 1997. Prior to joining the Company, Mr. Meaders was Vice President-Purchasing for the CA Short Co., Inc., a marketer and distributor of novelty consumer items, from 1995 until joining Pierce. Mr. Meaders began his career at the Company's former Chassis Division as the plant manager from 1993-1995. He previously served 13 years in the U.S. Army and departed after attaining the rank of Major. Scott L. Ney. Mr. Ney joined the Company in May 1973 as Credit Manager. He served as Treasurer prior to assuming his present position in September 1998. Thomas J. Polnaszek. Mr. Polnaszek joined the Company in January 1998 as Corporate Controller and assumed his present position in September 1998. Mr. Polnaszek was previously employed by Wisconsin Pharmacal Company, Inc., a consumer products manufacturer and marketer, from July 1991 to January 1998 as Vice President - Finance and Chief Financial Officer. Donald H. Verhoff. Mr. Verhoff joined the Company in May 1973 as a development engineer. He has held positions as Manager of the Test Lab, and Director of New Product Development prior to assuming his present position in November 1997. James D. Voss. Mr. Voss joined the Company in March 1992 as Director of Human Resources. Prior to joining the Company, Mr. Voss was employed by the University of Wisconsin as Human Resource Coordinator. Mr. Voss assumed his present position in September 1998. PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The information under the captions "Financial Highlights" and Notes 7 and 12 to the Consolidated Financial Statements contained in the company's Annual Report to Shareholders for the fiscal year ended September 30, 1998, is hereby incorporated by reference in answer to this item. The approximate number of record holders of the Company's Class A Common Stock and Common Stock was 114 and 930, respectively, as of November 6, 1998. In July 1995, the company's board of directors authorized the repurchase of up to 1,000,000 shares of Common Stock. As of December 17, 1998, the Company has repurchased 461,535 shares under this program at a cost of $6.6 million. 15 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information under the caption "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" contained in the company's Annual Report to Shareholders for the fiscal year ended September 30, 1998, is hereby incorporated by reference in answer to this item. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements set forth in the company's Annual Report to Shareholders for the fiscal year ended September 30, 1998, are hereby incorporated by reference in answer to this item. Data regarding quarterly results of operations included in Note 12 to the Consolidated Financial Statements contained in the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1998, is hereby incorporated by reference. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the company's definitive proxy statement for the annual meeting of shareholders on February 1, 1999, as filed with the Securities and Exchange Commission, is hereby incorporated by reference in answer to this item. Reference is also made to the information under the heading "Executive Officers of the Registrant" included under Part I of this report. 16 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 and the report of independent auditors included in the Annual Report to Shareholders for the fiscal year ended September 30, 1998, are incorporated by reference in Item 8: Report of Ernst & Young LLP, Independent Auditors Consolidated Statements of Income (Loss) for the years ended September 30, 1998, 1997, and 1996 Consolidated Balance Sheets at September 30, 1998, and 1997 Consolidated Statements of Shareholders' Equity for the years ended September 30, 1998, 1997, and 1996. Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1997, and 1996 Notes to Consolidated Financial Statements 2.Financial Statement Schedules: Schedule II - Valuation & Qualifying Accounts (Previously filed and incorporated by reference to the Company's Form 10-K for the year ended September 30, 1998.) All other schedules are omitted because they are not applicable, or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits: 2.1 Stock Purchase Agreement by and among McNeilus Companies, Inc., the shareholders of McNeilus Companies, Inc., and Oshkosh Truck Corporation dated December 8, 1997 (incorporated by reference to Exhibit 2.1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997 (File No. 0-13886)). 2.2 First Amendment to Stock Purchase Agreement dated February 26, 1998, by and among McNeilus Companies, Inc., the shareholders of McNeilus Companies, Inc. and Oshkosh Truck Corporation (incorporated by reference to Exhibit 2.2 to the Company' Current Report on Form 8-K dated February 26, 1998 (File No. 0-13886)). 3.1 Restated Articles of Incorporation of Oshkosh Truck Corporation (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997 (File No. 0-13886)). 3.2 By-Laws of Oshkosh Truck Corporation, as amended (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4 (Reg. No. 333-47931)). 4.1 Credit Agreement dated February 26, 1998, among Oshkosh Truck Corporation, Bank of America National Trust and Savings Association, as Agent and as Swing Line Lender, and certain other financial institutions (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated February 26, 1998 (File No. 0-13886)). 4.2 Indenture dated February 26, 1998, among Oshkosh Truck Corporation, the Subsidiary Guarantors and Firstar Trust Company (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated February 26, 1998 (File No. 0-13886)). 4.3 Form of 8 3/4% Senior Subordinated Note due 2008 (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-4 (Reg. No. 333-47931)). 4.4 Form of Note Guarantee (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-4 (Reg. No. 333-47931)). 10.1 1990 Incentive Stock Plan for Key Employees, as amended, subject to shareholder approval at the Company's 1999 Annual Meeting of Shareholders.* + 17 10.2 1994 Long-Term Incentive Compensation Plan dated March 29, 1994 (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994) (File No. 0-13886)).* 10.3 Form of Key Employees Employment and Severance Agreement with Messrs. R.G. Bohn, T.M. Dempsey, P.C. Hollowell, C.L. Szews, and M.J. Zolnowski (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 0-13886)).* 10.4 Employment Agreement with P.C. Hollowell, Executive Vice President (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997 (File No. 0-13886)).* 10.5 Form of Oshkosh Truck Corporation 1990 Incentive Stock Plan, as amended, Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 (Reg. No. 33-6287)).* 10.6 Form of Oshkosh Truck Corporation 1990 Incentive Stock Plan, as amended, Nonqualified Director Stock Option Agreement (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 (Reg. No. 33-6287)).* 10.7 Form of 1994 Long-Term Incentive Compensation Plan Award Agreement (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended September 30, 1995 (File No. 0-13886)).* 10.8 Stock Purchase Agreement, dated April 26, 1996, among Oshkosh Truck Corporation, J. Peter Mosling, Jr. and Stephen P. Mosling, and consented to by R. Eugene Goodson (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended September 30, 1996 (File No. 0-13886)). 10.9 Employment Agreement dated as of October 15, 1998, between Oshkosh Truck Corporation and Robert G. Bohn.* + 10.10 Letter Agreement dated as of June 5, 1998, between Oshkosh Truck Corporation and R. Eugene Goodson.* + 10.11 Employment Agreement with R. E. Goodson as of April 16, 1992 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended September 30, 1992 (File No. 0-13886)).* 11. Computation of per share earnings (contained in Note 1 of "Notes to Consolidated Financial Statements" of the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1998). 13. 1998 Annual Report to Shareholders, to the extent incorporated herein by reference.+ 21. Subsidiaries of Registrant.+ 23. Consent of Ernst & Young LLP 27. Financial Data Schedule+ 99. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations and Financial Statements and Supplementary Data. *Denotes a management contract or compensatory plan or arrangement. +Previously filed. (b) The company was not required to file a report on Form 8-K during the quarter ended September 30, 1998. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. OSHKOSH TRUCK CORPORATION February 12, 1999 /S/ C. L. Szews ------------------------------------------------------ C. L. Szews, Executive Vice President and Chief Financial Officer (Principal Financial Officer) 19 INDEX TO EXHIBITS 3. Exhibits: 2.1 Stock Purchase Agreement by and among McNeilus Companies, Inc., the shareholders of McNeilus Companies, Inc., and Oshkosh Truck Corporation dated December 8, 1997 (incorporated by reference to Exhibit 2.1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997 (File No. 0-13886)). 2.2 First Amendment to Stock Purchase Agreement dated February 26, 1998, by and among McNeilus Companies, Inc., the shareholders of McNeilus Companies, Inc. and Oshkosh Truck Corporation (incorporated by reference to Exhibit 2.2 to the Company' Current Report on Form 8-K dated February 26, 1998 (File No. 0-13886)). 3.1 Restated Articles of Incorporation of Oshkosh Truck Corporation (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997 (File No. 0-13886)). 3.2 By-Laws of Oshkosh Truck Corporation, as amended (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4 (Reg. No. 333-47931)). 4.1 Credit Agreement dated February 26, 1998, among Oshkosh Truck Corporation, Bank of America National Trust and Savings Association, as Agent and as Swing Line Lender, and certain other financial institutions (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated February 26, 1998 (File No. 0-13886)). 4.2 Indenture dated February 26, 1998, among Oshkosh Truck Corporation, the Subsidiary Guarantors and Firstar Trust Company (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated February 26, 1998 (File No. 0-13886)). 4.3 Form of 8 3/4% Senior Subordinated Note due 2008 (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-4 (Reg. No. 333-47931)). 4.4 Form of Note Guarantee (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-4 (Reg. No. 333-47931)). 10.1 1990 Incentive Stock Plan for Key Employees, as amended, subject to shareholder approval at the Company's 1999 Annual Meeting of Shareholders.*+ 10.2 1994 Long-Term Incentive Compensation Plan dated March 29, 1994 (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994) (File No. 0-13886)).* 10.3 Form of Key Employees Employment and Severance Agreement with Messrs. R.G. Bohn, T.M. Dempsey, P.C. Hollowell, C.L. Szews, and M.J. Zolnowski (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 0-13886)).* 10.4 Employment Agreement with P.C. Hollowell, Executive Vice President (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997 (File No. 0-13886)).* 10.5 Form of Oshkosh Truck Corporation 1990 Incentive Stock Plan, as amended, Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 (Reg. No. 33-6287)).* 10.6 Form of Oshkosh Truck Corporation 1990 Incentive Stock Plan, as amended, Nonqualified Director Stock Option Agreement (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 (Reg. No.33-6287)).* 10.7 Form of 1994 Long-Term Incentive Compensation Plan Award Agreement (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended September 30, 1995 (File No. 0-13886)).* 21 10.8 Stock Purchase Agreement, dated April 26, 1996, among Oshkosh Truck Corporation, J. Peter Mosling, Jr. and Stephen P. Mosling, and consented to by R. Eugene Goodson (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended September 30, 1996 (File No. 0-13886)). 10.9 Employment Agreement dated as of October 15, 1998, between Oshkosh Truck Corporation and Robert G. Bohn.* + 10.10 Letter Agreement dated as of June 5, 1998, between Oshkosh Truck Corporation and R. Eugene Goodson.* + 10.11 Employment Agreement with R. E. Goodson as of April; 16, 1992 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended September 30, 1992 (File No. 0-13886)).* 11. Computation of per share earnings (contained in Note 1 of "Notes to Consolidated Financial Statements" of the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1998). 13. 1998 Annual Report to Shareholders, to the extent incorporated herein by reference. + 21. Subsidiaries of Registrant. + 23. Consent of Ernst & Young LLP 27. Financial Data Schedule + 99. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations and Financial Statements and Supplementary Data. *Denotes a management contract or compensatory plan or arrangement. + Previously filed. 22 EX-23 2 CONSENT OF INDEPENDENT AUDITORS CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the use of our report dated October 30, 1998, except for Note 11, as to which the date is December 8, 1998, included in the Annual Report on Form 10-K of Oshkosh truck Corporation for the year ended September 30, 1998, with respect to the consolidated financial statements, as amended, included in this Form 10-K/A. /s/ Ernst & Young LLP Milwaukee, Wisconsin February 9, 1999 EX-99 3 MANAGEMENT'S DISCUSSION AND ANALYSIS Exhibit 99 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations and other sections of this annual report contain "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact included in this report, including, without limitation, statements regarding Oshkosh Truck Corporation's (the "Company" or "Oshkosh") future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may", "will", "expect", "intend", "estimates", "anticipate", "believe", "should", "plans", or "continue", or the negative thereof or variations thereon or similar terminology. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations include, without limitation, the following: (1) the consequences of financial leverage; (2) the cyclical nature of the construction industry; (3) the risks related to reductions or changes in government expenditures; (4) the uncertainty inherent in government contracts; (5) the challenges of integration of acquired businesses; (6) competition; (7) disruptions in the supply of parts or components from sole source suppliers and subcontractors; (8) product liability and warranty claims; (9) labor relations and market conditions; and (10) unanticipated events relating to resolving Year 2000 issues. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements. RESULTS OF OPERATIONS Fiscal 1998 Compared to Fiscal 1997 The Company reported net income of $15.1 million, or $1.77 per share, on net sales of $902.8 million for the year ended September 30, 1998, compared to net income of $10.0 million, or $1.17 per share, on sales of $683.2 million for the year ended September 30, 1997. Fiscal 1998 results include seven months of sales and earnings of McNeilus Companies, Inc. ("McNeilus"), a leading manufacturer and marketer of rear-discharge concrete mixers for the construction industry and refuse truck bodies for the waste services industry in the United States, which was acquired on February 26, 1998 (see Acquisitions). Fiscal 1998 results were adversely affected by after-tax charges of $5.6 million, including $1.2 million related to early repayment of debt, $3.5 million related to impairment losses with respect to the Company's Florida manufacturing facilities and its Summit brand mixer system technology intangible asset (see Note 13 to Notes to Consolidated Financial Statements) and $0.9 million of organization start-up costs incurred in connection with establishing a lease financing partnership. These charges were partially offset by a $2.1 million after-tax gain on the sale of an interest in a Mexican bus manufacturer. Sales of commercial products in fiscal 1998 were $653.8 million, an increase of $259.2 million, or 65.7%, from fiscal 1997, largely as a result of the inclusion of McNeilus sales of $240.0 million since the date of its acquisition and a $25.6 million increase in sales of Pierce Manufacturing, Inc. ("Pierce"). Commercial export sales increased $13.9 million to $34.6 million in fiscal 1998 compared to fiscal 1997, primarily as a result of increases in exports of fire apparatus by Pierce following the introduction of Pierce products to Oshkosh's international dealer network. Sales of defense products totaled $249.0 million in fiscal 1998, a decrease of $39.6 million, or 13.7%, compared to fiscal 1997. The decrease in defense sales is primarily due to a decline in heavy tactical truck procurement by the U.S. Department of Defense (the "DoD"). Fiscal 1998 and 1997 defense sales included $32.0 million and $41.4 million, respectively, of ISO-Compatible Palletized Flatracks ("IPF") for which the production was subcontracted to Steeltech Manufacturing, Inc. ("Steeltech"). This contract was completed in July 1998. Company management expects that its defense-related sales will decline by approximately $20.0 to $30.0 million in fiscal 1999. Defense export sales decreased to $0.5 million in fiscal 1998 compared to $16.6 million in fiscal 1997. Fiscal 1997 defense export sales include $13.0 million from a sale of Heavy Expanded Mobility Tactical Truck ("HEMTT") vehicles to Taiwan. Company management expects that its defense-related sales will decline by approximately $20.0 to $30.0 million in fiscal 1999. Gross income in fiscal 1998 totaled $136.4 million, or 15.1% of net sales, compared to $88.8 million, or 13.0% of net sales, in fiscal 1997. The increase in gross income and gross margins in fiscal 1998 was principally due to inclusion of McNeilus operating results since the date of its acquisition. 1 Operating expenses totaled $87.7 million, or 9.7% of net sales, in fiscal 1998 compared to $60.1 million, or 8.8% of net sales in fiscal 1997. The increase principally reflects the expenses of McNeilus since the date of its acquisition. Operating expenses also were adversely impacted by net pre-tax charges of $2.4 million involving the impairment of the Company's Florida manufacturing facility ($3.9 million) and the impairment of its Summit brand mixer system technology intangible asset ($1.9 million), which were partially offset by the gain on sale of the Company's interest in a Mexican bus manufacturer ($3.4 million). Interest expense increased to $21.5 million in fiscal 1998 compared to $12.7 million in fiscal 1997 as a result of financing the McNeilus acquisition. The provision for income taxes in fiscal 1998 was $12.7 million, or 44.2% of pre-tax income, compared to $6.5 million, or 39.4% of pre-tax income, in fiscal 1997. The effective income tax rate in fiscal 1998 and fiscal 1997 was adversely affected by non-deductible goodwill of $4.2 million and $2.6 million, respectively, related to the acquisitions of Pierce in September 1996 and McNeilus in February 1998. Fiscal 1997 also benefited from the reversal of $0.9 million of prior years' provisions for income taxes. Equity in earnings of unconsolidated partnership of $0.3 million in fiscal 1998 represents the Company's after-tax share of income of the lease financing partnership. These results include the Company's share of the write-off of organization costs ($1.5 million pre-tax, $0.9 million after-tax) incurred by the partnership in fiscal 1998. See Note 12 of the Notes to Consolidated Financial Statements. The $1.2 million after-tax extraordinary charge recorded in fiscal 1998 represents the write-off of deferred financing costs for that portion of debt prepaid during the year. Fiscal 1997 Compared to Fiscal 1996 The Company reported net income of $10.0 million, or $1.17 per share, on sales of $683.2 million for the year ended September 30, 1997, compared to a net loss of $3.1 million, or $0.35 per share, on sales of $413.5 million for the year ended September 30, 1996. The fiscal 1997 results include a full year of sales and earnings of Pierce, a leading manufacturer and marketer of fire trucks and other fire apparatus in the U.S., which was acquired on September 18, 1996. The fiscal 1996 results were adversely affected by after-tax charges of $11.3 million, including $3.2 million related to the IPF subcontract to Steeltech, $3.5 million associated with the Company's Mexican bus affiliates, and warranty and other related costs of $4.6 million. In fiscal 1996, the Company also recognized after-tax benefits of $2.0 million on the reversal of income tax provisions and related accrued interest. Sales of both commercial and defense products increased in fiscal 1997 compared to fiscal 1996. Commercial sales in fiscal 1997 were $394.6 million, an increase of $232.6 million, or 143.6% from 1996, principally due to inclusion of a full year of Pierce sales in fiscal 1997. Commercial export sales totaled $20.7 million and $20.4 million, respectively, in fiscal 1997 and fiscal 1996. Sales of defense products totaled $288.6 million in fiscal 1997, an increase of $37.2 million, or 14.8%, compared to fiscal 1996. The increase in defense sales was primarily due to an increase in IPF sales which were produced by Steeltech (which increased from $8.7 million in fiscal 1996 to $41.4 million in fiscal 1997). Defense export sales also increased to $16.6 million in fiscal 1997 compared to $2.1 million in fiscal 1996. Gross income in fiscal 1997 totaled $88.8 million, or 13.0% of sales, compared to $35.1 million, or 8.5% of sales, in fiscal 1996. The increase in gross income in fiscal 1997 was principally due to increased sales volume as a result of the acquisition of Pierce. In addition, fiscal 1996 gross income was reduced by pre-tax charges of $5.1 million related to production delays and cost overruns associated with the IPF subcontract to Steeltech and increased warranty and other related costs of $5.5 million (pre-tax). Operating expenses totaled $60.1 million, or 8.8% of sales, in fiscal 1997 compared to $38.7 million, or 9.4% of sales, in fiscal 1996. The increase in operating expenses in fiscal 1997 related principally to the operating expenses of Pierce and amortization of goodwill and other intangible assets associated with the acquisition of Pierce. The Company recognized pre-tax charges of $3.2 million in fiscal 1996 to write off its investment in Steeltech and to write off its remaining investments and advances associated with its Mexican bus affiliates due to prolonged weakness in the Mexican economy and continuing high losses and high leverage reported by the Mexican affiliates. Interest expense increased to $12.7 million in fiscal 1997 compared to $0.9 million in fiscal 1996 as a result of the financing for the Pierce acquisition. Miscellaneous expense was $0.3 million in fiscal 1997 compared to miscellaneous income of $1.5 million in fiscal 1996. The miscellaneous income in fiscal 1996 arose primarily from the reversal of accrued interest related to income taxes. 2 The provision for income taxes in fiscal 1997 was $6.5 million, or 39.4% of pre-tax income, compared to a credit for income taxes of $1.7 million in fiscal 1996. Fiscal 1997 and fiscal 1996 benefited from the reversal of $0.9 million and $1.0 million, respectively, of prior years' provisions for income taxes. In addition, the effective income tax rate in fiscal 1997 was adversely affected by non-deductible goodwill of $2.6 million arising from the Pierce acquisition. The $2.9 million after-tax loss from discontinued operations ($4.7 million pre-tax) in fiscal 1996 resulted from the write-off of receivables of $2.6 million (pre-tax) related to the Company's Mexican bus affiliates and from a $2.1 million pre-tax charge for additional warranty and other related costs with respect to the Company's former U.S. chassis business which was sold in June 1995. Acquisitions On February 26, 1998, the Company acquired for cash all of the issued and outstanding capital stock of McNeilus and entered into related non-compete and ancillary agreements for $217.6 million, including acquisition costs and net of cash acquired. The acquisition was financed from borrowings under a Senior Credit Facility and the issuance of Senior Subordinated Notes. McNeilus is a leading manufacturer and marketer of rear-discharge concrete mixers for the construction industry and refuse truck bodies for the waste services industry in the United States. On December 19, 1997, the Company, through Pierce, acquired certain inventory, machinery and equipment, and intangible assets of Nova Quintech, a division of Nova Bus Corporation ("Nova Quintech") using available cash for $3.5 million. Nova Quintech was engaged in the manufacture and sale of aerial devices for fire trucks. On September 18, 1996, the Company acquired for cash all of the issued and outstanding stock of Pierce, a leading manufacturer and marketer of fire trucks and other fire apparatus in the U.S. The acquisition price of $156.9 million, including acquisition costs and net of cash acquired, was financed from borrowings under a bank credit facility. On November 9, 1995, Oshkosh, through its wholly owned subsidiary, Summit Performance Systems, Inc. ("Summit"), acquired the inventory, land, buildings, machinery and equipment, and technology of Friesz Manufacturing Company ("Friesz"), a manufacturer of concrete mixer systems and related after-market replacement parts, using available cash for $3.9 million. FINANCIAL CONDITION Year Ended September 30, 1998 During fiscal 1998, cash decreased by $19.6 million to $3.6 million at September 30, 1998. Cash available at the beginning of the year of $23.2 million, $11.1 million of cash equivalents acquired from McNeilus and not used to reduce the McNeilus acquisition indebtedness and cash provided from operations of $79.9 million were used primarily to fund $78.0 million of debt repayments (including $25.0 million prior to the acquisition of McNeilus), a $16.3 million reduction of the Revolving Credit Facility, the acquisition of Nova Quintech for $3.5 million, property, plant and equipment additions of $8.6 million and dividends of $4.2 million. The Company borrowed $347.3 million in February 1998 ($225.0 million under a multi-tranche Senior Term Loan Facility, $100.0 million of Senior Subordinated Notes and $22.3 million under a new $100.0 million Revolving Credit Facility). Borrowings were utilized to refinance outstanding indebtedness under the Company's previous credit facility ($110.0 million), close the McNeilus transaction ($249.5 million consideration plus $6.0 million in acquisition costs less cash acquired of $37.9 million, $11.1 million of which was temporarily invested at the acquisition date), and to pay $8.6 million of debt issuance costs. Year Ended September 30, 1997 During fiscal 1997, cash increased $23.1 million. Cash provided from operating activities of $65.8 million was used primarily to fund $6.3 million of property, plant and equipment additions, $1.7 million of payments related to discontinued operations, $22.9 million of long-term debt and revolving credit it payments, $6.5 million of purchases of Common Stock and Common Stock warrants (net of stock option exercise proceeds) and $4.2 million of dividends. Liquidity and Capital Resources The Company had approximately $81.9 million of unused availability under the terms of its Revolving Credit Facility as of September 30, 1998. The Company's primary cash requirements include working capital, interest and principal payments on indebtedness, capital expenditures, dividends and potentially future acquisitions. The primary sources of cash are cash flow from operations and borrowings under the Senior Credit Facility. Based upon current and anticipated future operations, the Company believes capital resources will be adequate to meet future working capital, debt service and other capital requirements for the 3 foreseeable future. There can be no assurance, however, that the Company's business will generate cash flow that, together with the other sources of capital, will enable the Company to meet those requirements. The Company's cash flow from operations has fluctuated, and will likely continue to fluctuate, significantly from quarter to quarter due to changes in working capital arising principally from seasonal fluctuations in sales of the Company's construction products. If received, an award of the Medium Tactical Truck Replacement ("MTTR") contract or any other major DoD contract would likely entail increases in the Company's working capital needs as it uses working capital to produce vehicles or other equipment for shipment. The Senior Credit Facility and the Senior Subordinated Notes pose various restrictions and covenants on the Company that could potentially limit the Company's ability to respond to market conditions, to provide for unanticipated capital investments, to raise additional debt or equity capital or to take advantage of business opportunities. See Note 4 to Notes to Consolidated Financial Statements. The Senior Credit Facility accrues interest at variable rates. The Company presently has no plans to enter into interest rate swap arrangements to limit its exposure to future increases in interest rates. The Company's capital expenditures for fiscal years 1999 through 2001 are expected to be approximately $12.0 to $15.0 million annually. Year 2000 General The Company commenced a corporate-wide Year 2000 project ("Project 2000") in 1997 to address issues with respect to the ability of computer programs and embedded computer chips to distinguish between the years 1900 and 2000. Project 2000 is on schedule in all material respects. All of the Company's principal, enterprise resource planning systems are scheduled to be Year 2000 ready by March 31, 1999. Other information systems that are believed to pose lesser risks in the event of Year 2000 failure are scheduled to be upgraded or replaced by mid-1999. Issues with respect to embedded computer chips will continue to be addressed throughout 1999 based on a prioritization of risks. Tests have been and will continue to be conducted with respect to information systems, telephone systems, manufacturing equipment, Company-produced trucks and equipment and other systems and equipment which might exhibit Year 2000 issues in order to determine the extent of any continuing corrective action required. Project 2000 Project 2000 is addressing four principal areas--Infrastructure and Applications Software; Company-produced trucks and equipment; Process Controls and Instrumentation ("PC&I"); and third-party suppliers and customers ("External Parties"). The project phases common to each area include: (1) development of an inventory of Year 2000 risks; (2) assignment of priorities to identified risks; (3) assessment of Year 2000 compliance and impact of noncompliance; (4) tests to determine whether any upgrade or replacement is required; (5) upgrade or replacement of items that are determined not to be Year 2000 compliant if the impact of noncompliance is material; and (6) design and implementation of contingency and business continuation plans for each organization and facility. At September 30, 1998, the inventory and priority assessment phases for each area of Project 2000 had been completed. Material items are those believed by the Company to have a risk involving the safety of individuals, or that may cause damage to property or affect revenues and expenses. Infrastructure and Applications Software--As the Company addresses its infrastructure and applications software, it tests and then upgrades or replaces the affected hardware and systems software, as necessary. The Company maintains two enterprise resource planning ("ERP") computer systems at its Oshkosh operations and one system each at its Pierce, McNeilus and Florida operations. The Company installed an upgraded release of software (which is certified by the software vendor as being Year 2000 ready) to its ERP system for truck operations in Oshkosh in July 1998. Programming to upgrade the remaining Oshkosh ERP system for its parts operations is targeted to be completed by December 31, 1998. As of November 1, 1998, Pierce was approximately two-thirds complete with respect to a project to replace all of its hardware and business systems with a new, Year 2000 ready, ERP system and related hardware. This project is scheduled for completion by March 31, 1999. McNeilus installed an upgraded release to its ERP systems in August and September 1998. Validation testing at McNeilus to assure that the upgrade is Year 2000 ready is scheduled for 4 completion by March 31, 1999. The Company is planning the consolidation of its Florida computer operations into Oshkosh's computer operations by September 30, 1999 and, accordingly, will not upgrade the ERP systems currently in use at this facility. Other infrastructure and applications software, including engineering systems, are believed to pose lesser risks in the event of Year 2000 noncompliance due to a wider range of less disruptive commercial options available to cure noncompliance. The Company is generally in the assessment phase as it relates to non-ERP infrastructure and applications software and plans to upgrade or replace all such non-compliant systems by June 30, 1999. Company-Produced Trucks and Equipment--The Company has communicated with suppliers that are critical to the manufacture of its products to verify whether computer chips embedded in its trucks and equipment are Year 2000 ready, and has issued Service Bulletins to customers with respect to the findings. While the Company has not identified any material issues with respect to computer chips embedded into its products, investigations as to such issues, if any, will continue. Nevertheless, there can be no assurance at this time that its investigation was complete or that material warranty and product liability issues will not develop with respect to this matter. To the extent that suppliers of the Company experience Year 2000 problems (or are unable to certify that their products are Year 2000 compliant) and the Company is unable to source alternate suppliers, changes to the Company's products may be necessary to avoid warranty and liability, both as to products already in use, and as to products to be shipped in the future. PC&I--The Company expects to complete the assessment of all PC&I embedded computer chips by December 31, 1998. Certain systems, such as telephone systems, have been upgraded to be Year 2000 ready, or are planned to be upgraded by March 31, 1999. Current indications are that the Company's critical equipment and systems will not require material upgrades or replacements. The testing and necessary improvements of PC&I equipment will continue throughout 1999. External Parties--The Company is surveying all parts and chassis suppliers to assess the Year 2000 readiness of their products and business systems. The Company's largest suppliers are large public companies and, as such, generally have significant projects underway similar to Project 2000. There can be no assurance that these suppliers or the Company's smaller suppliers will not have Year 2000 issues with their processes or business systems that ultimately could have a material effect on the Company in spite of such projects. Where suppliers are deemed to pose significant risk to the Company, alternate suppliers or contingency plans are being developed. The Company does not maintain significant computer interfaces with its customers, except with the DoD, where invoices and remittances are sent by electronic data interchange. The DoD has not provided the Company with any assurances that its systems are Year 2000 compliant, or whether DoD computer interfaces with other U.S. government entities are Year 2000 ready. Should the DoD encounter Year 2000 difficulties, the Company's sales and cash flows could be materially adversely affected. There also can be no assurance that the Company's other customers will not lose business or otherwise encounter Year 2000 issues that could ultimately affect the sales and earnings of the Company. Costs Based on the Company's assessment to date and considering known items, the total cost associated with required hardware, equipment and software modifications to become Year 2000 ready is not expected to be material to the Company's financial position. The total estimated capital costs (which would have been incurred regardless of Year 2000 issues and which have the incidental consequence of Year 2000 readiness) and period expenses of Project 2000 are $8.0 million and $0.6 million, respectively, of which $5.0 million and $0.5 million, respectively, have been expended as of September 30, 1998. Approximately $7.3 million of the estimated capital costs relate to the replacement of all the hardware and business systems at Pierce, which is scheduled for completion by March 31, 1999. To date, none of the Company's other information systems projects have been delayed due to Project 2000. Risks Under Project 2000 (as in any project of this magnitude and scope), the risk of underestimating the tasks and difficulties to be encountered, or in obtaining necessary personnel, exist. Risk also exists in that the failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, cash flows and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, cash flows or financial condition. Project 2000 is expected to significantly reduce the Company's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 compliance and readiness 5 of its material External Parties. The Company believes that, with the installation of new or upgraded ERP business systems and completion of Project 2000 as scheduled, the possibility of significant interruptions of normal operations should be reduced. The Company is in the process of establishing contingency plans in the event that any unexpected issues arise when the Year 2000 arrives. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 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 the results of operations or on the financial position of the Company. In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes the standards for the manner in which public enterprises are required to report financial and descriptive information about their operating segments. The statement defines operating segments as components of an enterprise for which separate financial information is available and evaluated regularly as a means for assessing segment performance and allocating resources to segments. A measure of profit or loss, total assets and other related information are required to be disclosed for each operating segment. In addition, this statement requires the annual disclosure of information concerning revenues derived from the enterprise's products or services, countries in which it earns revenue or holds assets, and major customers. The statement is also effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 131 will not affect the Company's results of operations or financial position, but will affect the disclosure of its segment information. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes the standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains, and losses) as part of a full set of financial statements. This statement requires that all elements of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The statement is effective for fiscal years beginning after December 15, 1997. Since this statement applies only to the presentation of comprehensive income, it will not have any impact on the Company's results of operations, financial position or cash flows. Customers and Backlog Sales to the DoD comprised approximately 28% of the Company's net sales for fiscal 1998. No other single customer accounted for more than 2% of the Company's net sales for this period. A substantial majority of the Company's net sales are derived from customer orders prior to commencing production. The Company's backlog at September 30, 1998 was $377.5 million compared to $361.1 million at September 30, 1997. Backlog related to DoD contracts decreased by $94.1 million in 1998 compared to 1997 due to the completion of the IPF contract and because the Company's family contracts are coming up for renewal. The Company's fire and emergency and commercial backlogs increased by $51.2 million and $59.3 million, respectively, generally due to higher sales volumes for Pierce and due to the inclusion of McNeilus in 1998. Substantially all of the Company's backlog pertains to fiscal 1999 business and is expected to be filled in fiscal 1999. Reported backlog excludes purchase options and announced orders for which definitive contracts have not been executed. Additionally, backlog excludes unfunded portions of DoD long-term family contracts. Backlog information and comparisons thereof as of different dates may not be accurate indicators of future sales or the ratio of the Company's future sales to the DoD versus its sales to other customers. Subsequent Event On December 8, 1998, the Wisconsin Court of Appeals ordered a state court judge to reinstate a jury verdict against the Company awarding damages totaling approximately $4.5 million plus interest to Super Steel Products Corporation, the Company's former supplier of mixer systems for front-discharge concrete mixer trucks (see Note 11 to Notes to Consolidated Financial Statements). The Company intends to petition for review of this decision by the Wisconsin Supreme Court. The ultimate outcome of this matter cannot be predicted at the present time. At September 30, 1998, the Company does not have a reserve relating to this matter. 6 Market Risk The Company's primary market risk exposures consist of interest rate risk from its fixed and variable rate long-term debt and foreign currency risk resulting from multi-unit sales contracts denominated in foreign currencies. The Company's interest expense is sensitive to changes in the interest rates in the U.S. and off-shore markets. In this regard, changes in U.S. and off-shore interest rates affect interest payable on the Company's long-term borrowing under its Senior Credit Facility (see Note 4 to the Consolidated Financial Statements). Likewise, changes in U.S. interest rates affect the fair value of the Company's $100 million Senior Subordinated 8 3/4% Notes due March 1, 2008. Increases in interest rates generally result in a reduction in the fair value of the long-term, fixed-rate notes (and decreases in interest rates generally result in an increase in the fair value of the long-term, fixed-rate notes). The Company has not historically utilized derivative securities to fix variable rate interest obligations or to make fixed-rate interest obligations variable. Generally, if short-term interest rates averaged 2% more in fiscal 1999 than in fiscal 1998, the Company's interest expense would increase, and pre-tax income would decrease by approximately $3 million. Similarly, the fair value of the Company's $100 million fixed rate, long-term notes at September 30, 1998, would decrease by $12 million. These amounts are determined by considering the impact of the hypothetical interest rates on the Company's borrowing cost, but do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to mitigate the Company's exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the foregoing sensitivity analysis assumes no changes in the Company's financial structure. The Company's operations consist of manufacturing in the U.S. and sales activities in the U.S. and in various foreign jurisdictions. Export sales were less than 4% of overall sales in fiscal 1998. Generally, the Company attempts to seek payment in U.S. dollars for large, multi-unit sales contracts which span several months or years. From time to time, the Company has entered into foreign exchange forward contracts to minimize foreign currency risk in sales contracts denominated in currency other than U.S. dollars. Foreign currency denominated transactions are immaterial to the Company's operations. 7 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors Oshkosh Truck Corporation We have audited the accompanying consolidated balance sheets of Oshkosh Truck Corporation (the Company) as of September 30, 1998 and 1997, and the related consolidated statements of income (loss), shareholders' equity and cash flows for each of the three years in the period ended September 30, 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at September 30, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Milwaukee, Wisconsin October 30, 1998, except for Note 11, as to which the date is December 8, 1998 8 OSHKOSH TRUCK CORPORATION Consolidated Statements of Income (Loss)
Fiscal Year Ended September 30, 1998 1997 1996 (In thousands, except per share amounts) Continuing operations: Net sales............................................ $ 902,792 $ 683,234 $ 413,455 Cost of sales....................................... 766,348 594,390 378,376 ------- ------- ------- Gross income.................................... 136,444 88,844 35,079 Operating expenses: Selling, general and administrative.................. 69,728 47,742 32,205 Engineering research and development................. 9,681 7,847 6,304 Amortization of goodwill and other intangibles....... 8,315 4,470 171 ------- ------- ------- Total operating expenses...................... 87,724 60,059 38,680 ------- ------- ------- Operating income (loss)................................... 48,720 28,785 (3,601) Other income (expense): Interest expense...................................... (21,490) (12,722) (929) Interest income....................................... 1,326 717 1,040 Miscellaneous, net.................................... 92 (278) 1,508 ------- ------- ------- (20,072) (12,283) 1,619 ------- ------- ------- Income (loss) from continuing operations before income taxes, equity in earnings of unconsolidated partnership and extraordinary item................................. 28,648 16,502 (1,982) Provision (credit) for income taxes....................... 12,655 6,496 (1,741) ------- ------- ------- 15,993 10,006 (241) Equity in earnings of unconsolidated partnership, net of income taxes of $166................................... 260 -- -- ------- ------- ------- Income (loss) from continuing operations.................. 16,253 10,006 (241) Discontinued operations--loss on disposal of operations, net of income tax benefit of $1,827........................ -- -- (2,859) Extraordinary charge for early retirement of debt, net of income tax benefit of $757............................. (1,185) -- -- ------- ------- ------- Net income (loss) ........................................ $ 15,068 $ 10,006 $ (3,100) ======= ======= ======= Earnings (loss) per share: Continuing operations................................. $ 1.93 $ 1.18 $ (0.03) Discontinued operations............................... -- -- (0.32) Extraordinary item.................................... (0.14) -- -- ------- ------- ------- Net income (loss) .................................... $ 1.79 $ 1.18 $ (0.35) ======= ======= ======= Earnings (loss) per share assuming dilution: Continuing operations................................. $ 1.91 $ 1.17 $ (0.03) Discontinued operations............................... -- -- (0.32) Extraordinary item.................................... (0.14) -- -- ------- ------- ------- Net income (loss) .................................... $ 1.77 $ 1.17 $ (0.35) ======= ======= =======
See accompanying notes. 9 OSHKOSH TRUCK CORPORATION Consolidated Balance Sheets September 30, 1998 1997 (In thousands, except ` share amounts) Assets Current assets: Cash and cash equivalents................ $ 3,622 $ 23,219 Receivables, net......................... 80,982 81,235 Inventories.............................. 149,191 76,497 Prepaid expenses......................... 3,768 3,405 Deferred income taxes.................... 12,281 9,479 ------- ------- Total current assets.................. 249,844 193,835 Deferred charges............................. 342 1,067 Investment in unconsolidated partnership..... 13,496 -- Other long-term assets....................... 13,856 6,660 Property, plant and equipment: Land..................................... 7,574 7,172 Buildings................................ 64,566 42,220 Machinery and equipment.................. 84,643 78,270 ------- ------- 156,783 127,662 Less accumulated depreciation............ (75,947) (72,174) ------- ------- Net property, plant and equipment..... 80,836 55,488 Goodwill and other intangible assets, net.... 326,665 163,344 ------- ------- Total assets................................. $685,039 $420,394 ======= ======= Liabilities and Shareholders' Equity Current liabilities: Accounts payable......................... $ 65,171 $ 48,220 Floor plan notes payable................. 11,645 -- Customer advances........................ 44,915 30,124 Payroll-related obligations.............. 24,124 15,157 Accrued warranty......................... 15,887 12,320 Other current liabilities................ 43,498 22,901 Current maturities of long-term debt..... 3,467 15,000 ------- ------- Total current liabilities........... 208,707 143,722 Long-term debt............................... 277,337 120,000 Postretirement benefit obligations........... 10,935 10,147 Deferred income taxes........................ 47,832 22,452 Other long-term liabilities.................. 8,932 3,173 Shareholders' equity: Preferred Stock, $.01 par value; authorized - 2,000,000 shares; none issued and outstanding......................... - - Class A Common Stock, $.01 par value; authorized - 1,000,000 shares; issued - 296,888 in 1998 and 406,878 in 1997..... 3 4 Common Stock, $.01 par value; authorized - 18,000,000 shares; issued - 9,061,277 in 1998 and 8,951,287 in 1997.............. 90 89 Paid-in capital.......................... 14,712 13,591 Retained earnings........................ 130,959 120,085 ------- ------- 145,764 133,769 Common Stock in treasury, at cost: 1998-937,664; 1997-1,050,806............ (12,664) (12,869) Minimum pension liability adjustment..... (1,804) -- ------- ------- Total shareholders' equity........... 131,296 120,900 ------- ------- Total liabilities and shareholders' equity... $685,039 $420,394 ======= ======= See accompanying notes. 10 OSHKOSH TRUCK CORPORATION Consolidated Statements of Shareholders' Equity
Cost of Minimum Common Pension Common Paid-In Retained Stock in Liability Stock Capital Earnings Treasury Adjustment Total (In thousands, except share and per share amounts) Balance at September 30, 1995........ $ 93 $16,533 $ 121,697 $ (3,403) $(1,507) $ 133,413 Net loss............................. -- -- (3,100) -- -- (3,100) Cash dividends: Class A Common Stock ($.435 per share)............ -- -- (177) -- -- (177) Common Stock ($.500 per share)... -- -- (4,174) -- -- (4,174) Purchase of Common Stock for treasury -- -- -- (5,618) -- (5,618) Exercise of stock options............ -- 43 -- 225 -- 268 Termination of incentive compensation awards........................... -- (517) -- -- -- (517) Minimum pension liability adjustment. -- -- -- -- 1,507 1,507 ----- ------- ------- ------- ------- ------- Balance at September 30, 1996........ 93 16,059 114,246 (8,796) -- 121,602 Net income........................... -- -- 10,006 -- -- 10,006 Cash dividends: Class A Common Stock ($.435 per share)............ -- -- (177) -- -- (177) Common Stock ($.500 per share)... -- -- (3,990) -- -- (3,990) Purchase of Common Stock for treasury -- -- -- (4,246) -- (4,246) Purchase of 1,250,000 stock warrants. -- (2,504) -- -- -- (2,504) Exercise of stock options............ -- 36 -- 173 -- 209 ----- ------- ------- ------- ------- ------- Balance at September 30, 1997........ 93 13,591 120,085 (12,869) -- 120,900 Net income........................... -- -- 15,068 -- -- 15,068 Cash dividends: Class A Common Stock ($.435 per share)............ -- -- (153) -- -- (153) Common Stock ($.500 per share)... -- -- (4,041) -- -- (4,041) Exercise of stock options............ -- 255 -- (217) -- 38 Tax effect of stock options exercised -- 468 -- -- -- 468 Issuance of Common Stock under incentive compensation plan...... -- 398 -- 422 -- 820 Minimum pension liability adjustment. -- -- -- -- (1,804) (1,804) ----- ------- ------- ------- ------- ------- Balance at September 30, 1998........ $ 93 $14,712 $ 130,959 $ (12,664) $(1,804) $ 131,296 ===== ======= ======= ======= ======= =======
See accompanying notes. 11 OSHKOSH TRUCK CORPORATION Consolidated Statements of Cash Flows
Fiscal Year Ended September 30, 1998 1997 1996 (In thousands) Operating activities: Income (loss) from continuing operations.......... $ 16,253 $ 10,006 $ (241) Provision for impairment of assets................ 5,800 -- -- Depreciation and amortization..................... 18,698 14,070 8,798 Write-off (gain from sale) of investments......... (3,375) 200 4,125 Deferred income taxes............................. 26 (3,980) (1,381) Equity in earnings of unconsolidated partnership.. (427) -- -- (Gain) loss on disposal of property, plant and equipment................................... 122 (43) 77 Changes in operating assets and liabilities: Receivables, net.............................. 20,900 (4,611) (10,648) Inventories................................... 9,958 29,792 (25,071) Prepaid expenses.............................. (260) 214 469 Deferred charges.............................. 725 1,578 333 Accounts payable.............................. 956 (958) 13,314 Floor plan notes payable...................... (11,377) -- -- Customer advances............................. 10,718 2,331 930 Payroll-related obligations................... 3,480 2,314 213 Accrued warranty.............................. (1,883) 3,378 2,094 Other current liabilities..................... 6,750 10,893 (9,914) Other long-term liabilities................... 2,877 598 665 -------- --------- --------- Net cash provided from (used for) operating activities............................ 79,941 65,782 (16,237) Investing activities: Acquisitions of businesses, net of cash acquired.. (221,144) -- (160,838) Additions to property, plant and equipment........ (8,555) (6,263) (5,355) Proceeds from sale of investments................. 3,375 -- -- Proceeds from sale of property, plant and equipment 1,524 395 2,086 Increase in other long-term assets................ (3,817) (1,532) (2,124) -------- --------- ---------- Net cash used for investing activities...... (228,617) (7,400) (166,231) Net cash provided from (used for) discontinued operations.................................... (1,093) (1,658) 4,743 Financing activities: Net borrowings (repayment) under revolving credit facility.......................................... 6,000 (7,882) 7,882 Proceeds from issuance of long-term debt.......... 325,000 -- 150,000 Repayment of long-term debt....................... (188,049) (15,000) -- Debt issuance costs............................... (8,641) -- -- Purchase of Common Stock, Common Stock warrants and proceeds from exercise of stock options, net.. 38 (6,541) (5,350) Dividends paid.................................... (4,176) (4,209) (4,396) -------- --------- ---------- Net cash provided from (used for) financing activities................................ 130,172 (33,632) 148,136 -------- --------- ---------- Increase (decrease) in cash and cash equivalents.. (19,597) 23,092 (29,589) Cash and cash equivalents at beginning of period.. 23,219 127 29,716 -------- --------- ---------- Cash and cash equivalents at end of period........ $ 3,622 $ 23,219 $ 127 ======== ========= ========== Supplemental disclosures: Cash paid for interest........................ $ 17,240 $ 12,974 $ 538 Cash paid for income taxes.................... 11,097 2,998 3,116
See accompanying notes. 12 OSHKOSH TRUCK CORPORATION Notes to Consolidated Financial Statements September 30, 1998 (In thousands, except share and per share amounts) 1. Summary of Significant Accounting Policies Operations -- Oshkosh Truck Corporation and its wholly-owned subsidiaries (the "Company" or "Oshkosh") is a leading manufacturer of a wide variety of heavy duty specialized trucks and truck bodies predominately for the U.S. market. The Company sells its products into three principal markets -- fire and emergency, defense, and other commercial truck markets. The Company's fire and emergency business is principally conducted through its wholly-owned subsidiary, Pierce Manufacturing Inc. ("Pierce"). The Company's commercial truck business is principally conducted through its wholly-owned subsidiary, McNeilus Companies, Inc. ("McNeilus"). The defense business and certain fire and emergency and commercial truck businesses are conducted through the operations of the parent company. McNeilus is one of two general partners in Oshkosh/McNeilus Financial Services Partnership ("OMFSP") which provides lease financing to the Company's customers. Each of the two general partners have identical participating and protective rights and responsibilities, and accordingly, the Company accounts for its equity interest in OMFSP of 68% at September 30, 1998 under the equity method. Principles of Consolidation and Presentation -- The consolidated financial statements include the accounts of Oshkosh Truck Corporation and all its wholly-owned subsidiaries and are prepared in conformity with U.S. generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents -- The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents, consisting principally of commercial paper, totaled $785 and $23,022 at September 30, 1998 and 1997, respectively. The cost of these securities, which are considered "available for sale" for financial reporting purposes, approximates fair value at September 30, 1998 and 1997. Inventories -- The Company values its inventories at the lower of cost, computed principally on the last-in, first-out (LIFO) method, or market. Property, Plant and Equipment -- Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the respective assets using accelerated and straight-line methods. The estimated useful lives range from 10 to 40 years for buildings and improvements and from 4 to 25 years for machinery and equipment. Deferred Charges -- Deferred charges include certain engineering and technical support costs incurred in connection with multi-year government contracts. These costs are charged to cost of sales when the related project is billable to the government, or are amortized to cost of sales as base units are delivered under the related contracts. Other Long-Term Assets -- Other long-term assets include capitalized software and related costs which are amortized on a straight-line method over a three-to-ten year period, deferred financing costs which are amortized using the interest method over the term of the debt, prepaid funding of pension costs and certain investments. Goodwill and Other Intangible Assets -- The cost of goodwill and other intangible assets is amortized on a straight-line basis over the estimated periods benefited ranging from 5 to 40 years. Impairment of Long-Lived Assets -- Property, plant and equipment, other long-term assets and goodwill and other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. Such analyses necessarily involve significant judgment. See Note 13. 13 Customer Advances -- Customer advances principally represent amounts received in advance of the completion of fire and emergency and commercial vehicles. Most of these advances bear interest at variable rates approximating the prime rate. Revenue Recognition -- Sales under fixed-price defense contracts are recorded as units are accepted by the government. Change orders are not invoiced until agreed upon by the government. Recognition of profit on change orders and on contracts that do not involve fixed prices is based upon estimates, which may be revised during the terms of the contracts. Sales to fire and emergency and commercial customers are recorded when the goods or services are billable at time of shipment or delivery of the trucks. Warranty -- Provisions for estimated warranty and other related costs are recorded at the time of sale and are periodically adjusted to reflect actual experience. Amounts expensed in fiscal 1998, 1997, and 1996 were $9,403, $9,658 and $7,741, respectively. Income Taxes -- Deferred income taxes are provided to recognize temporary differences between the financial reporting basis and the income tax basis of the Company's assets and liabilities using currently enacted tax rates and laws. Fair Values -- The carrying amounts of receivables, accounts payable and long-term debt approximated fair value as of September 30, 1998 and 1997. Concentration of Credit Risk -- Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, trade accounts receivable and leases receivable of OMFSP. The Company maintains cash and cash equivalents, investments, and certain other financial instruments with various major financial institutions. The Company performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any institution. Concentration of credit risk with respect to trade accounts and leases receivable is limited due to the large number of customers and their dispersion across many geographic areas. However, a significant amount of trade receivables are with the U.S. Government, with companies in the ready-mix concrete industry and with several large waste haulers in the United States. The Company does not currently foresee a credit risk associated with these receivables. Environmental Remediation Costs -- Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities," became effective for the Company in fiscal 1997. In accordance with SOP 96-1, the Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. The accruals are adjusted as further information develops or circumstances change. Earnings (Loss) Per Share -- Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," became effective for the Company in fiscal 1998. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to SFAS No. 128 requirements. The following table sets forth the computation of basic and diluted weighted average shares used in the per share calculations: Fiscal Year Ended September 30, 1998 1997 1996 Denominator for basic earnings per share......................... 8,398,399 8,502,166 8,828,224 Effect of dilutive options, warrants and incentive compensation awards........... 107,934 43,916 -- --------- --------- --------- Denominator for dilutive earnings per share....................... 8,506,333 8,546,082 8,828,224 ========= ========= ========= 14 New Accounting Standards -- In June 1998, the Financial Accounting Standards Board issued SFAS 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 the results of operations or on the financial position of the Company. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes the standards for the manner in which public enterprises are required to report financial and descriptive information about their operating segments. The statement defines operating segments as components of an enterprise for which separate financial information is available and evaluated regularly as a means for assessing segment performance and allocating resources to segments. A measure of profit or loss, total assets and other related information are required to be disclosed for each operating segment. In addition, this statement requires the annual disclosure of information concerning revenues derived from the enterprise's products or services, countries in which it earns revenue or holds assets, and major customers. The statement is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 131 will not affect the Company's results of operations, financial position or cash flows, but will affect the disclosure of segment information. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes the standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains, and losses) as part of a full set of financial statements. This statement requires that all elements of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The statement is effective for fiscal years beginning after December 15, 1997. Since this statement applies only to the presentation of comprehensive income, it will not have any impact on the Company's results of operations, financial position or cash flows. 2. Balance Sheet Information September 30, Receivables 1998 1997 U.S. Government: Amounts billed..................... $ 22,197 $ 34,399 Amounts unbilled................... -- 1,782 ------- ------- 22,197 36,181 Commercial customers................... 58,776 45,603 Other.................................. 2,077 1,421 ------- ------- 83,050 83,205 Less allowance for doubtful accounts... (2,068) (1,970) ------- ------- $ 80,982 $ 81,235 ======= ======= The unbilled amounts represent estimated claims for government-ordered changes which will be invoiced upon completion of negotiations and price adjustment provisions which will be invoiced when they are agreed upon by the government. September 30, Inventories 1998 1997 Finished products...................... $27,916 $ 6,430 Partially finished products............ 52,700 36,661 Raw materials.......................... 77,675 44,455 ------- ------- Inventories at FIFO cost............... 158,291 87,546 Less: Progress payments on U.S. government contracts............... -- (2,988) ------- ------- Excess of FIFO cost over LIFO cost (9,100) (8,061) $149,191 $76,497 ======= ======= 15 Title to all inventories related to government contracts, which provide for progress payments, vests with the government to the extent of unliquidated progress payments. September 30, Goodwill and Other Intangible Assets 1998 1997 Useful Lives Goodwill 40 Years............ $212,746 $103,887 Distribution network 40 Years............ 63,800 53,000 Non-compete agreements 15 Years............ 38,000 -- Other 5-40 Years.......... 24,860 11,098 ------- ------- 339,406 167,985 Less accumulated amortization............ (12,741) (4,641) ------- ------- $326,665 $163,344 ======= ======= The Company engaged third party business valuation appraisers to determine the fair value of the distribution network in connection with its acquisition of Pierce (see Note 3). The Company believes Pierce maintains the largest North American fire apparatus distribution network and has exclusive contracts with each distributor related to the fire apparatus product offerings manufactured by Pierce. To establish the useful lives of the distribution network, a historical turnover analysis was performed. On February 26, 1998, concurrent with the Company's acquisition of McNeilus (see Note 3), the Company and BA Leasing & Capital Corporation ("BALCAP") formed OMFSP, a general partnership, for the purpose of offering lease financing to customers of the Company. Each partner contributed existing lease assets (and in the case of the Company, related notes payable to third party lenders which were secured by such leases) to capitalize the partnership. Leases and related notes payable contributed by the Company were originally acquired in connection with the McNeilus acquisition. OMFSP manages the contributed assets and liabilities and engages in new vendor lease business providing financing to customers of the Company. The partners finance purchases of trucks to be leased to user-customers by investing equity in an amount equal to approximately 11.0% to 14.0% of the cost of the trucks. Banks and other financial institutions lend to OMFSP the remaining percentage, with recourse solely to OMFSP, secured by a pledge of the user-lessees. Each partner funds one-half of the equity needed to finance the new truck purchases, and each partner is allocated its proportionate share of OMFSP cash flow and taxable income. Indebtedness of OMFSP is secured by the underlying leases and assets of, and is with recourse to, OMFSP. However, such indebtedness is non-recourse to the Company. Summarized financial information of OMFSP as of September 30, 1998 (its fiscal year end) and for the period February 26, 1998 (the date OMFSP was formed) to September 30, 1998, is as follows: September 30, 1998 ------------------ Cash and cash equivalents............................ $ 4,584 Investment in sales type leases, net................. 123,973 Other................................................ 204 -------- $ 128,761 ======== Notes payable........................................ $ 105,473 Other liabilities.................................... 2,908 Partners' equity..................................... 20,380 -------- $ 128,761 ======== Period From February 26, 1998 to September 30, 1998 --------------------- Interest income...................................... $ 6,605 Net interest income.................................. 1,622 Excess of revenue over expenses...................... 644 Excess of revenues over expenses includes a $1,466 nonrecurring, non-cash charge to write off start-up expenses incurred in fiscal 1998 to establish OMFSP (see Note 12). 16 3. Acquisitions On February 26, 1998, the Company acquired for cash all of the issued and outstanding capital stock of McNeilus and entered into related non-compete and ancillary agreements for $217,581, including acquisition costs and net of cash acquired. McNeilus is a leading manufacturer and marketer of rear-discharge concrete mixers for the construction industry and refuse truck bodies for the waste services industry in the United States. The acquisition was financed from borrowings under a Senior Credit Facility and the issuance of Senior Subordinated Notes (see Note 4). The acquisition was accounted for using the purchase method of accounting and, accordingly, the operating results of McNeilus are included in the Company's consolidated statements of income since the date of acquisition. The purchase price, including acquisition costs, was allocated based on the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition. Approximately $60,985 of the purchase price was allocated to intangible assets, including non-competition agreements. The excess of the purchase price over the estimated fair value of net assets acquired amounted to $108,859, which has been accounted for as goodwill. Pro forma unaudited consolidated operating results of the Company, assuming McNeilus had been acquired as of October 1, 1997 and 1996, are summarized below: Fiscal Year Ended September 30, 1998 1997 --------------- ------------ Net sales....................................... $1,040,986 $998,031 Income before extraordinary item................ 18,590 14,954 Net income...................................... 17,405 14,954 Earnings per share: Before extraordinary item.................. 2.21 1.76 Net income................................. 2.07 1.76 Earnings per share assuming dilution: Before extraordinary item.................. 2.19 1.75 Net income................................. 2.05 1.75 These pro forma results have been prepared for informational purposes only and include certain adjustments to depreciation expense related to acquired plant and equipment, amortization expense arising from goodwill and other intangible assets, interest expense on acquisition debt, elimination of certain non-recurring expenses directly attributable to the transaction (including elimination of the write-off of the Company's share of start-up expenses), and the estimated related income tax effects of all such adjustments. Anticipated efficiencies from the consolidation of certain manufacturing activities between the Company and McNeilus and anticipated lower material costs related to the consolidation of purchasing between the Company and McNeilus have been excluded from the amounts included in the pro forma operating results. These pro forma results do not purport to be indicative of the results of operations which would have resulted had the combination been in effect as of October 1, 1997 and 1996 or of the future results of operations of the consolidated entities. On December 19, 1997, the Company, through Pierce, acquired certain inventory, machinery and equipment, and intangible assets of Nova Quintech, a division of Nova Bus Corporation ("Nova Quintech") using available cash for $3,563. Nova Quintech was engaged in the manufacture and sale of aerial devices for fire trucks. Approximately $1,849 of the purchase price has been allocated to intangible assets, principally aerial device designs and technology. The Nova Quintech products have been integrated into Pierce's product line and are being manufactured at Pierce. The acquisition was accounted for using the purchase method of accounting, and accordingly, the operating results of Nova Quintech are included in the Company's statement of income since the date of the acquisition. Had the acquisition occurred as of October 1, 1997 or 1996, there would have been no material pro forma effect on net sales, net income, or earnings per share in fiscal 1998 or 1997. On September 18, 1996, the Company acquired for cash all of the issued and outstanding stock of Pierce, a leading manufacturer and marketer of fire trucks and other fire apparatus in the U.S. The acquisition price of $156,926, including acquisition costs and net of cash acquired, was financed from borrowings under a subsequently retired bank credit facility. The acquisition was accounted for using the purchase method of accounting, and accordingly, the operating results of Pierce are included in the Company's consolidated statements of income since the date of acquisition. The purchase price, including acquisition costs, was allocated based on the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition and were subsequently adjusted during fiscal 1997. Approximately $62,000 of the purchase price was allocated to the distribution network and other intangible assets. The 17 excess of the purchase price over the estimated fair value of net assets acquired amounted to $103,887, which has been accounted for as goodwill. On November 9, 1995, the Company, through its wholly-owned subsidiary, Summit Performance Systems, Inc. ("Summit"), acquired the land, buildings, machinery and equipment, and technology of Friesz Manufacturing Company ("Friesz") using available cash for $3,912. Friesz was engaged in the manufacture and sale of concrete mixer systems and related aftermarket replacements parts. Approximately $2,150 of the purchase price was allocated to intangible assets, principally designs and related technology (see Note 13). The acquisition was accounted for using the purchase method of accounting, and accordingly, the operating results of Friesz are included in the Company's consolidated statements of income (loss) since the date of acquisition. 4. Long-Term Debt On February 26, 1998, the Company entered into the Senior Credit Facility and issued $100,000 of 8 3/4% Senior Subordinated Notes due March 1, 2008 to finance the acquisition of McNeilus (see Note 3) and to refinance a previous credit facility. The Senior Credit Facility consists of a six year $100,000 revolving credit facility ("Revolving Credit Facility") and three term loan facilities ("Term Loan A," "Term Loan B," and "Term Loan C"--collectively, the "Term Loan Facility"). Term Loan A was for $100,000 and matures on March 31, 2004. Term Loans B and C each were for $62,500 and mature on March 31, 2005 and March 31, 2006, respectively. Term Loan A required principal payments of $5,000 in fiscal 1998, and requires principal payments of $11,000 in fiscal 1999, $13,500 in fiscal 2000, $15,000 in fiscal 2001, $19,500 in fiscal 2002 and $24,000 in fiscal 2003, with the remaining outstanding principal amount of $12,000 due in fiscal 2004. Term Loans B and C each require principal payments of $200 per quarter through March 31, 2004 (for Term Loan B) and through March 31, 2005 (for Term Loan C). Any remaining outstanding principal balances on Term Loans B and C are due in quarterly installments through March 31, 2005 and March 31, 2006, respectively. From February 26, 1998 through September 30, 1998, the Company has paid from available cash $53,000 on the Term Loan Facility. All prepayments are first applied to the next twelve months mandatory principal payments and then on a pro rata basis to the principal payments due over the remainder of the loans. All mandatory principal payments have been paid through June 1999. The outstanding balances as of September 30, 1998 on Term Loan A, Term Loan B, and Term Loan C are $87,000, $42,500, and $42,500, respectively, after prepayments. At September 30, 1998, borrowings of $6,000 and letters of credit of $12,146 reduced available capacity under the Company's Revolving Credit Facility to $81,854. Interest rates on borrowings under the Revolving Credit and Term Loan Facilities are variable and are equal to the "Base Rate" (which is equal to the higher of a bank's reference rate and the federal funds rate plus 0.5%) or the "IBOR Rate" (which is a bank's inter-bank offered rate for U.S. dollars in off-shore markets) plus a margin of 0.50%, 0.50%, 1.00% and 1.25% for Base Rate loans and a margin of 1.75%, 1.75%, 2.25%, and 2.50% for IBOR Rate loans under the Revolving Credit Facility, Term Loan A, Term Loan B, and Term Loan C, respectively, as of September 30, 1998. The margins are subject to adjustment, up or down, based on whether certain financial criteria are met. The weighted average interest rates on borrowings outstanding at September 30, 1998 were 7.417% on the Revolving Credit Facility and 7.435%, 7.923% and 8.173% for Term Loans A, B, and C, respectively. The Company is charged a 0.30% annual fee with respect to any unused balance under its Revolving Credit Facility, and a 1.75% annual fee with respect to any letters of credit issued under the Revolving Credit Facility. These fees are subject to adjustment if certain financial criteria are met. Substantially all the tangible and intangible assets of the Company and its subsidiaries (including the stock of certain subsidiaries) are pledged as collateral under the Senior Credit Facility. Among other restrictions, the Senior Credit Facility: (1) limits payments of dividends, purchases of the Company's stock, and capital expenditures; (2) requires that certain financial ratios be maintained at prescribed levels; (3) restricts the ability of the Company to make additional borrowings, or to consolidate, merge or otherwise fundamentally change the ownership of the Company; (4) requires mandatory prepayments to the extent of "excess cash flows"; and (5) limits investments, dispositions of assets and guarantees of indebtedness. The Company believes that such limitations should not impair its future operating activities. The Senior Subordinated Notes were issued pursuant to an Indenture dated February 26, 1998 (the "Indenture"), between the Company, the Subsidiary Guarantors (as defined below) and Firstar Trust Company, as trustee. The Indenture contains customary affirmative and negative covenants. The Senior Subordinated Notes are due March 1, 2008 and can be redeemed by the Company for 18 a premium after March 1, 2003. However, the Company may redeem up to $35,000 of the Senior Subordinated Notes at any time prior to March 1, 2001, at a redemption price of 108.75% of the principal amount redeemed, with net cash proceeds of any public offerings of Common Stock, provided that such redemption occurs within 45 days of the date of the closing of such public offering. In addition to the Company, certain of the Company's subsidiaries, fully, unconditionally, jointly and severally guarantee the Company's obligations under the Senior Subordinated Notes. McNeilus has unsecured notes payable to several of its former shareholders aggregating $2,804 at September 30, 1998. Interest rates on these notes range from 5.7% to 8.0% with annual principal and interest payments ranging from $20 to $155 with maturities through October 2033. The aggregate annual maturities of long-term debt for the five years succeeding September 30, 1998, are as follows: 1999 -- $3,472; 2000 -- $14,621; 2001 -- $16,099; 2002 -- $20,602; and 2003 -- $25,088. 5. Income Taxes Fiscal Year Ended September 30, 1998 1997 1996 Income Tax Provision (Credit) Current: Federal.............................. $ 10,555 $ 8,236 $ 2,988 State................................ 2,162 1,866 368 ------- ------- ------ Total current..................... 12,717 10,102 3,356 Deferred: Federal.............................. (53) (3,271) (4,630) State................................ (9) (335) (467) ------- ------- ------ Total deferred.................... (62) (3,606) (5,097) ------- ------- ------ $ 12,655 $ 6,496 $ (1,741) ======= ======= ====== Fiscal Year Ended September 30, 1998 1997 1996 Effective Rate Reconciliation U.S. federal tax rate................... 35.0% 35.0% (34.0)% State income taxes, net................. 4.9 6.0 (5.0) Reduction of prior years' excess tax provisions.............................. -- (5.5) (50.5) Foreign sales corporation............... (1.5) (1.5) (5.2) Goodwill amortization................... 5.1 5.4 -- Other, net.............................. 0.7 -- 6.9 ------ ------ ------ 44.2% 39.4% (87.8)% ====== ====== ====== September 30, 1998 1997 Deferred Tax Assets and Liabilities Deferred tax assets: Other current liabilities..................... $ 6,284 $ 5,277 Accrued warranty.............................. 8,625 4,439 Postretirement benefit obligations............ 4,219 3,916 Payroll-related obligations................... 3,177 1,846 Investments................................... 406 1,887 Other......................................... 949 729 ------- ------- Total deferred tax assets................. 23,660 18,094 Deferred tax liabilities: Intangible assets............................. 31,498 23,402 Investment in unconsolidated partnership...... 16,496 -- Property, plant and equipment................. 7,288 4,175 Inventories................................... 3,038 2,341 Deferred charges.............................. 850 1,091 Other......................................... 41 58 ------- ------- Total deferred tax liabilities............ 59,211 31,067 ------- ------- Net deferred tax liability................ $ (35,551) $ (12,973) ======== ======== The Company has not recorded a valuation allowance with respect to any deferred tax assets. 19 6. Employee Benefit Plans The Company has defined benefit pension plans covering substantially all employees, except McNeilus employees. The plans provide benefits based on compensation, years of service and date of birth. The Company's policy is to fund the plans in amounts which comply with contribution limits imposed by law. Components of net periodic pension cost for these plans for fiscal 1998, 1997, and 1996, including costs of discontinued operations for 1996 which are not significant, but excluding Pierce pension costs for 1996 due to the proximity of its acquisition to the Company's fiscal year end, are as follows: Fiscal Year Ended September 30, 1998 1997 1996 Service cost-- benefits earned during year $ 1,744 $ 1,387 $ 1,149 Interest cost on projected benefit obligations............................. 2,751 2,439 1,979 Actual return on plan assets............ 1,647 (8,789) (3,347) Net amortization and deferral........... (4,575) 6,123 1,232 ------ ------ ------ Net periodic pension cost............... $ 1,567 $ 1,160 $ 1,013 ====== ====== ====== The following table summarizes the funded status of the pension plans and the amounts recognized in the Company's consolidated balance sheets at September 30, 1998 and 1997:
1998 1997 -------------------------------------------- --------------------- Assets Exceed Accumulated Benefits Assets Exceed Accumulated Benefits Exceed Assets Accumulated Benefits Actuarial present value of benefit obligations: Vested........................................... $ 17,355 $ 16,953 $ 29,334 Nonvested........................................ 318 1,515 694 ------- ------- ------- Accumulated benefit obligations...................... 17,673 18,468 30,028 Adjustment for projected benefit obligations......... 5,719 -- 4,759 ------- ------- ------- Projected benefit obligations........................ 23,392 18,468 34,787 Plan assets at fair value............................ 21,907 15,862 39,556 ------- ------- ------- Plan assets in excess of (less than) projected benefit Obligations...................................... (1,485) (2,606) 4,769 Unrecognized net transition asset.................... (173) (354) (594) Unrecognized net (gain) loss......................... 2,729 3,311 (1,538) Unrecognized prior service cost...................... 36 1,878 1,229 Adjustment required to recognize minimum pension liability........................................ -- (4,835) -- ------- ------- ------- Prepaid pension asset (accrued liability)............ $ 1,107 $ (2,606) $ 3,866 ======= ======= =======
Generally accepted accounting principles require the recognition of a minimum pension liability for each defined benefit plan for which the accumulated benefit obligation exceeds plan assets ($2,606 at September 30, 1998) and recognition of an intangible asset to the extent of unrecognized past service cost ($1,878 at September 30, 1998). These amounts are included in other long-term liabilities and intangible assets, respectively, at September 30, 1998. An adjustment of $1,804 has been recorded as a reduction of shareholders' equity in fiscal 1998 to recognize the minimum liability of $4,835, net of both the intangible asset recorded of $1,878 and the related income tax benefit of $1,153. The plans' assets consist of investments in commingled equity and fixed income funds and individually managed equity portfolios. Actuarial assumptions are as follows: September 30, 1998 1997 1996 Discount rate........................... 7.25% 7.25% 7.75% Rate of increase in compensation........ 4.50 4.50 4.50 Expected long-term rate of return on plan assets................ 9.25 9.25 9.25 20 The Company provides health benefits to certain of its retirees and their eligible spouses. Approximately 35% of the Company's employees become eligible for these benefits if they reach normal retirement age while working for the Company. The following table summarizes the status of the postretirement benefit plan and the amounts recognized in the Company's consolidated balance sheets for the periods indicated: September 30, 1998 1997 Postretirement benefit obligations: Retirees........................................ $ 3,055 $ 2,828 Fully eligible active participants.............. 563 522 Other active participants....................... 6,453 5,647 ------ ------ 10,071 8,997 Unrecognized net gain............................... 864 1,150 ------ ------ Postretirement benefit obligations.................. $10,935 $10,147 ====== ====== Net periodic postretirement benefit cost for fiscal 1998, 1997, and 1996, including discontinued operations for 1996 which are not significant, includes the following components: Fiscal Year Ended September 30, 1998 1997 1996 Service cost................................... $ 397 $ 366 $ 353 Interest cost on the accumulated postretirement benefit obligation........... 676 613 580 Amortization of unrecognized net gain.......... (13) (32) -- ------ ------ ----- Net periodic postretirement benefit cost....... $1,060 $ 947 $ 933 ====== ====== ===== Net change in postretirement benefit obligations includes the following: Fiscal Year Ended September 30, 1998 1997 Balance at beginning of year.......................... $ 10,147 $ 9,517 Benefits paid......................................... (272) (317) Net periodic postretirement benefit cost.............. 1,060 947 ------- ------ Balance at end of year................................ $ 10,935 $10,147 ======= ====== The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 9.8% in fiscal 1998, declining to 6.5% in fiscal 2006. The weighted average discount rate used in determining the postretirement benefit obligation was 7.25% and 7.75% in fiscal 1998 and 1997, respectively. If the health care cost trend rate was increased by 1%, the postretirement benefit obligation at September 30, 1998 would increase by $896 and net periodic postretirement benefit cost for fiscal 1998 would increase by $120. The Company has defined contribution 401(k) plans covering substantially all employees. The plans allow employees to defer 2% to 19% of their income on a pre-tax basis. Each employee who elects to participate is eligible to receive Company matching contributions. Amounts expensed for Company matching contributions were $1,345, $825, and $401 in fiscal 1998, 1997, and 1996, respectively. 21 7. Shareholders' Equity On May 2, 1997, the Company and Freightliner Corporation ("Freightliner") formally terminated a strategic alliance formed on June 2, 1995. The Company repurchased from Freightliner 350,000 shares of its Common Stock and 1,250,000 warrants for the purchase of additional shares of Common Stock for a total of $6,750. The Company has a stock restriction agreement with two shareholders owning the majority of the Company's Class A Common Stock. The agreement is intended to allow for an orderly transition of Class A Common Stock into Common Stock. The agreement provides that at the time of death or incapacity of the survivor of them, the two shareholders will exchange all of their Class A Common Stock for Common Stock. At that time, or at such earlier time as there are no more than 150,000 shares of Class A Common Stock issued and outstanding, the Company's Articles of Incorporation provide for a mandatory conversion of all Class A Common Stock into Common Stock. Each share of Class A Common Stock is convertible into Common Stock on a one-for-one basis. As of September 30, 1998, 296,888 shares of Common Stock are reserved for the conversion of Class A Common Stock. In July 1995, the Company authorized the buyback of up to one million shares of the Company's Common Stock. As of September 30, 1998 and 1997, the Company had purchased 461,535 shares of its Common Stock at an aggregate cost of $6,551. Dividends are required to be paid on both the Class A Common Stock and Common Stock at any time that dividends are paid on either. Each share of Common Stock is entitled to receive 115% of any dividend paid on each share of Class A Common Stock, rounded up or down to the nearest $0.0025 per share. Holders of the Common Stock have the right to elect or remove as a class 25% of the entire Board of Directors of the Company rounded to the nearest whole number of directors, but not less than one. Holders of Common Stock are not entitled to vote on any other Company matters, except as may be required by law in connection with certain significant actions such as certain mergers and amendments to the Company's Articles of Incorporation, and are entitled to one vote per share on all matters upon which they are entitled to vote. Holders of Class A Common Stock are entitled to elect the remaining directors (subject to any rights granted to any series of Preferred Stock) and are entitled to one vote per share for the election of directors and on all matters presented to the shareholders for vote. The Common Stock shareholders are entitled to receive a liquidation preference of $7.50 per share before any payment or distribution to holders of the Class A Common Stock. Thereafter, holders of the Class A Common Stock are entitled to receive $7.50 per share before any further payment or distribution to holders of the Common Stock. Thereafter, holders of the Class A Common Stock and Common Stock share on a pro rata basis in all payments or distributions upon liquidation, dissolution or winding up of the Company. 8. Stock Option Plan The Company has reserved 992,168 shares of Common Stock at September 30, 1998 to provide for the exercise of outstanding stock options and the issuance of Common Stock under incentive compensation awards. Under the 1990 Incentive Stock Plan for the Key Employees (the "Plan"), officers, other key employees and directors may be granted options to purchase up to an aggregate of 1,250,000 shares of the Company's Common Stock (including 425,000 shares for which approval from the holders of the Class A Common Stock will be obtained at the Company's 1999 Annual Shareholders' Meeting) at not less than the fair market value of such shares on the date of grant. Participants may also be awarded grants of restricted stock under the Plan. The Plan expires on April 9, 2000. Options become exercisable ratably on the first, second, and third anniversary of the date of grant. Options to purchase shares expire not later than ten years and one month after the grant of the option. 22 The following table summarizes the transactions of the Plan for the three-year period ended September 30, 1998. Weighted- Average Number of Exercise Options Price Unexercised options outstanding September 30, 1995..... 477,068 $ 10.96 Options granted................................... 14,500 14.68 Options exercised................................. (24,515) 9.72 Options forfeited................................. (6,251) 12.58 ------- Unexercised options outstanding September 30, 1996..... 460,802 11.12 Options granted................................... 5,000 12.00 Options exercised................................. (20,331) 10.34 Options forfeited................................. (7,570) 12.97 ------- Unexercised options outstanding September 30, 1997..... 437,901 11.14 Options granted................................... 414,000 20.35 Options exercised................................. (139,200) 10.50 Options forfeited................................. (1,000) 13.88 ------- Unexercised options outstanding September 30, 1998..... 711,701 $ 16.62 ======= Price range $7.88-- $11.25 (weighted-average contractual life of 5.3 years)........................ 187,951 $ 9.82 Price range $12.00-- $16.75 (weighted-average contractual life of 7.8 years)........................ 214,750 15.44 Price range $19.13-- $23.63 (weighted-average contractual life of 9.8 years)........................ 309,000 21.57 Exercisable options at September 30, 1998.............. 289,869 11.37 Shares available for grant at September 30, 1998....... 280,467 SFAS No. 123, "Accounting for Stock-Based Compensation," became effective for the Company in fiscal 1997. As allowed by SFAS 123, the Company has elected to continue to follow Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" in accounting for the Plan. Under APB No. 25, the Company does not recognize compensation expense on the issuance of its stock options because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. As required by SFAS No. 123, the Company has determined the pro forma information as if the Company had accounted for stock options granted since September 30, 1995 under the fair value method of SFAS No. 123. The Black-Scholes option pricing model was used with the following weighted-average assumptions: risk-free interest rates of 5.87%, 5.44% and 4.62% in 1998, 6.27% in 1997, and 5.39% and 6.38% in 1996; dividend yield of 2.99%, 2.61% and 2.12% in 1998, 4.17% in 1997 and 3.60% and 3.28% in 1996; expected common stock market price volatility factor of .308 in 1998 and .305 in 1997 and 1996; and a weighted-average expected life of the options of six years. The weighted-average fair value of options granted in 1998, 1997, and 1996 was $6.11, $3.07 and $4.08 per share, respectively. The pro forma effect of these options on net earnings and earnings per share was not material. These pro forma calculations only include the effects of 1998, 1997, and 1996 grants. As such, the impacts are not necessarily indicative of the effects on reported net income of future years. 9. Operating Leases and Related Party Transactions Total rental expense for plant and equipment charged to continuing operations under noncancelable operating leases was $1,114, $886, and $797 in fiscal 1998, 1997, and 1996, respectively. Minimum rental payments due under operating leases for subsequent fiscal years are: 1999 -- $842; 2000 -- $382; 2001 -- $281; 2002 -- $206; and 2003 -- $137. Included in rental expense are charges of $128, $128, and $128 in fiscal 1998, 1997, and 1996, respectively, relating to a building lease between the Company and certain shareholders. In September 1998, the Company purchased the building which had been leased from such shareholders for $773. The Company's new product development operations are conducted in the building. The purchase price was based on the average of two independent appraisals. 10. Discontinued Operations On June 2, 1995, Freightliner acquired certain assets of the Company's motor home, bus and van chassis business. The consideration included cash of $23,815 and the assumption by Freightliner of certain liabilities. The assets sold to Freightliner consisted of inventories, property, plant and equipment and an option to buy the Company's joint venture ownership interest in a Mexican chassis manufacturer, which option has subsequently expired. The liabilities assumed by Freightliner included certain warranty obligations related to previously produced chassis in excess of certain specified amounts for which the Company retained 23 liability and industrial revenue bonds that were secured by the underlying real estate. The disposition of the chassis business has been accounted for as a discontinued operation. In fiscal 1996, the Company incurred charges totaling $2,623 arising from the write-off of receivables and other obligations related to the Company's former joint venture in Mexico. In addition, in fiscal 1996, the Company recognized additional warranty and other related costs totaling $2,063 with respect to the Company's former U.S. chassis business. 11. Contingencies, Significant Estimates and Concentrations The Company is engaged in litigation against Super Steel Products Corporation ("SSPC"), the Company's former supplier of mixer systems for front discharge concrete mixer trucks under a long-term supply contract. SSPC sued the Company in state court claiming that the Company breached the contract. The Company counterclaimed for repudiation of contract. On July 26, 1996, a jury returned a verdict for SSPC awarding damages totaling $4,485. On October 10, 1996, the state court judge overturned the verdict against the Company, granted judgment for the Company on its counterclaim, and ordered a new trial for damages on the Company's counterclaim. Both SSPC and the Company appealed the state court judge's decision. On December 8, 1998, the Wisconsin Court of Appeals ordered a state court judge to reinstate the jury verdict against the Company awarding damages totaling $4,485 plus interest to SSPC. The Company intends to petition for review of this decision by the Wisconsin Supreme Court. The outcome of this matter cannot be predicted at the present time. The Company does not have a reserve relating to this matter. The Company was engaged in the arbitration of certain disputes between the Oshkosh Florida Division and O.V. Containers, Inc., ("OV") which arose out of the performance of a contract to deliver 690 skeletal container chassis. The Company contested warranty and other claims made against it, and reached a settlement in June 1998, which included payment by the Company of $1,000 to OV. As part of its routine business operations, the Company disposes of and recycles or reclaims certain industrial waste materials, chemicals and solvents at third party disposal and recycling facilities, which are licensed by appropriate governmental agencies. In some instances, these facilities have been and may be designated by the United States Environmental Protection Agency ("EPA") or a state environmental agency for remediation. Under the Comprehensive Environmental Response, Compensation, and Liability Act (the "Superfund" law) and similar state laws, each potentially responsible party ("PRP") that contributed hazardous substances may be jointly and severally liable for the costs associated with cleaning up the site. Typically, PRPs negotiate a resolution with the EPA and/or the state environmental agencies. PRPs also negotiate with each other regarding allocation of the cleanup cost. As to one such Superfund site, Pierce is one of 414 PRPs participating in the costs of addressing the site and has been assigned an allocation share of approximately 0.04%. Currently a remedial investigation/ feasibility study is being completed, and as such, an estimate for the total cost of the remediation of this site has not been made to date. However, based on estimates and the assigned allocations, the Company believes its liability at the site will not be material and its share is adequately covered through reserves established by the Company at September 30, 1998. Actual liability could vary based on results of the study, the resources of other PRPs, and the Company's final share of liability. The Company is addressing a regional trichloroethylene ("TCE") groundwater plume on the south side of Oshkosh, Wisconsin. The Company believes there may be multiple sources in the area. TCE was detected at the Company's North Plant facility with recent testing showing the highest concentrations in a monitoring well located on the upgradient property line. Because the investigation process is still ongoing, it is not possible for the Company to estimate its long-term total liability associated with this issue at this time. Also, as part of the regional TCE groundwater investigation, the Company conducted a groundwater investigation of a former landfill located on Company property. The landfill, acquired by the Company in 1972, is approximately 2.0 acres in size and is believed to have been used for the disposal of household waste. Based on the investigation, the Company does not believe the landfill is one of the sources of the TCE contamination. Based upon current knowledge, the Company believes its liability associated with the TCE issue will not be material and is adequately covered through reserves established by the Company at September 30, 1998. However, this may change as investigations proceed by the Company, other unrelated property owners, and the government. The Company is subject to other environmental matters and legal proceedings and claims, including patent, antitrust, product liability and state dealership regulation compliance proceedings, that arise in the ordinary course of business. Although the final results of all such matters and claims cannot be predicted with certainty, management believes that the ultimate resolution of all such matters and claims, after taking into account the liabilities accrued with respect to such matters and claims, will not have a material adverse effect on the Company's financial condition or results of operations. Actual results could vary, among other things, due to the uncertainties involved in litigation. 24 The Company has guaranteed certain customers' obligations under deferred payment contracts and lease purchase agreements totaling approximately $1,000 at September 30, 1998. The Company is also contingently liable under bid, performance and specialty bonds totaling approximately $86,885 and open standby letters of credit issued by the Company's bank in favor of third parties totaling $12,146 at September 30, 1998. Provisions for estimated warranty and other related costs are recorded at the time of sale and are periodically adjusted to reflect actual experience. As of September 30, 1998 and 1997, the Company has accrued $15,887 and $12,320 for warranty claims. Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. Infrequently, a material warranty issue can arise which is beyond the scope of the Company's historical experience. During fiscal 1998, 1997 and 1996, the Company recorded warranty and other related costs for matters beyond the Company's historical experience totaling $3,200, $3,770 and $5,602, respectively, with respect to continuing operations and $2,063 with respect to discontinued operations in fiscal 1996 (see Note 10). The additional charges in fiscal 1998, 1997 and 1996 with regard to continuing operations principally related to a dispute involving the Company's former trailer manufacturing operations with OV, which was settled in fiscal 1998, and secondarily to repair certain matters related to refuse and front-discharge chassis. The additional warranty charges with respect to discontinued operations in fiscal 1996 resulted from the underestimation of the warranty liabilities retained by the Company upon the sale of the Company's former chassis business. It is reasonably possible that additional warranty and other related claims could arise from disputes or other matters beyond the scope of the Company's historical experience. The Company subcontracted production under an $85,000 ISO-Compatible Palletized Flatracks ("IPF") contract for the U.S. Army to Steeltech Manufacturing, Inc. ("Steeltech"), a minority-owned firm, pursuant to Department of Defense regulations under the IPF contract. Due to financial difficulties encountered by Steeltech, the Company advanced working capital requirements to Steeltech in fiscal 1995 and 1996. As a result of delays in the start-up of full-scale production under the IPF contract, the Company wrote off certain of its advances and an investment in Steeltech totaling $3,300 in fiscal 1996. Such charges were determined based on the amount of advances that were deemed to be unrealizable based on a projection of Steeltech's cash flows through completion of the IPF contract. Steeltech's IPF production was completed in July 1998. In fiscal 1996, the Company also wrote off an investment of $900 in a joint venture, which leases equipment to Steeltech and accrued $1,084 for the potential satisfaction of a guarantee of 50% of the outstanding indebtedness of the joint venture. Such charges were based on a projection of Steeltech's cash flows, which indicated that Steeltech could not sustain its lease payments to the joint venture, and because the Company believed that there was not a market for the sale of the leased equipment. Given the completion of the IPF contract, the Company is attempting to dispose of its investment in the joint venture and simultaneously satisfy in cash the remainder of its guarantee. The Company believes that it is adequately reserved at September 30, 1998, for any matters relating to the disposition of such investment and guarantee. The Company derives a significant portion of its revenue from the U.S. Department of Defense, as follows: Fiscal Year Ended September 30, 1998 1997 1996 Defense: U.S. Department of Defense $ 248,577 $ 272,042 $ 249,413 Export.................. 452 16,584 2,059 --------- --------- --------- 249,029 288,626 251,472 Commercial: Domestic................ 619,170 373,946 141,540 Export.................. 34,593 20,662 20,443 --------- --------- --------- 653,763 394,608 161,983 --------- --------- --------- Net sales.................... $ 902,792 $ 683,234 $ 413,455 ========= ========= ========= U.S. Department of Defense sales include $10,437, $17,723 and $58,855 in fiscal 1998, 1997 and 1996, respectively, for products sold internationally under the Foreign Military Sales ("FMS") Program. Inherent in doing business with the U.S. Department of Defense are certain risks, including technological changes and changes in levels of defense spending. All U.S. Department of Defense contracts contain a provision that they may be terminated at any time at the convenience of the government. In such an event, the Company is entitled to recover allowable costs plus a reasonable profit earned to the date of termination. Various actions or claims have been asserted or may be asserted in the future by the government against the Company. A potential action by the government against the Company in connection with a grand jury investigation was commenced in 1989. In 1996, the 25 government discontinued this investigation without any action against the Company or its employees. A subsequent, related civil investigation was dismissed in fiscal 1998. 12. Unaudited Quarterly Results
Fiscal 1998 Fiscal 1997 ------------------------------------------ ----------------------------------------------- 4th 3rd 2nd 1st 4th 3rd 2nd 1st Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Net sales............... $243,051 $290,104 $217,836 $151,801 $185,853 $176,596 $170,465 $150,320 Gross income............ 42,138 42,071 29,928 22,307 24,496 21,897 22,868 19,583 Income from continuing operations............. 4,952 5,000 3,161 3,140 3,116 2,792 2,474 1,624 Extraordinary item...... -- (450) (735) -- -- -- -- -- Net income.............. 4,952 4,550 2,426 3,140 3,116 2,792 2,474 1,624 Earnings per share: Continuing operations $ .59 $ .59 $ .38 $ .38 $ .38 $ .33 $ .28 $ .19 Extraordinary item..... -- (.05) (.09) -- -- -- -- -- Net income............. .59 .54 .29 .38 .38 .33 .28 .19 Earnings per share assuming dilution: Continuing operations .58 .58 .38 .37 .37 .33 .28 .19 Extraordinary item..... -- (.05) (.09) -- -- -- -- -- Net income............. .58 .53 .29 .37 .37 .33 .28 .19 Dividends per share: Class A Common Stock... $ 0.10875 $ 0.10875 $ 0.10875 $ 0.10875 $ 0.10875 $ 0.10875 $ 0.10875 $ 0.10875 Common Stock........... 0.12500 0.12500 0.12500 0.12500 0.12500 0.12500 0.12500 0.12500
For the fourth quarter of fiscal 1998, continuing operations includes, on a pre-tax basis, a $3,865 non-cash charge related to an impairment loss for the Company's Florida manufacturing facilities, a $1,935 non-cash charge related to an impairment loss on the Company's Summit brand mixer system technology intangible asset, and a $3,375 cash gain from the sale of an interest in a Mexican bus manufacturer (see Note 13). In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of Start-up Activities." Prior to fiscal 1998, the Company had not capitalized any costs covered by SOP 98-5. In February 1998, OMFSP, which the Company accounts for using the equity method, incurred and capitalized approximately $1,466 of costs ($895 net of income taxes) related to the organization of the partnership. In the fourth quarter of fiscal 1998, OMFSP elected to adopt early the provisions of SOP 98-5 which requires that adoption be as of the beginning of the year. As a result, the Company has restated the previously reported results for the second quarter of fiscal 1998 to write-off its share of the costs previously capitalized by the partnership. The charge has been included in the consolidated statements of income under the caption "Equity in earnings of unconsolidated partnership, net of income taxes." 13. Impairment Losses and Gain on Sale of Affiliate Following the acquisition of McNeilus and after conducting an internal study to determine how to integrate the concrete mixer businesses of the Company and McNeilus, the Company revised its plans regarding the use of the Company's Florida manufacturing facility and of the previously acquired concrete mixer technology of Friesz (see Note 3). The Florida manufacturing facility was originally acquired in connection with the Company's acquisition of assets and the business of a manufacturer of truck trailers in fiscal 1991. In 1996, the Company exited the manufacture of truck trailers but retained the Florida facility to manufacture products for the U.S. military and the Company's Summit brand of rear-discharge cement mixers. During the fourth quarter of fiscal 1998, following the completion of the internal study, management determined that all of the Company's U.S. requirements for rear-discharge concrete mixers would be sourced through the McNeilus manufacturing facilities due to the quality of the McNeilus brand and the efficient manufacturing processes at its facilities. In the fourth quarter of fiscal 1998, the Company further decided to begin to consolidate all its U.S. defense-related manufacturing in its Oshkosh, Wisconsin facility due to available capacity in Oshkosh and the ability to improve management of defense programs from this facility. As a result, management determined that Oshkosh's Florida facility and the Summit intangible asset may be impaired. Management estimated the projected undiscounted future cash flows from the Florida facility and the Friez mixer technology and determined that such cash flows were less than the carrying value of the assets. Accordingly, pre-tax impairment losses of $3,865 and $1,935, respectively, were recognized in fiscal 1998 and are included in selling, general and administrative expense. The fair value of the Florida facility was based on a third party appraisal. The fair value of the mixer intangible asset was based on the absence of future cash flows. 26 During fiscal 1996, the Company wrote off (as a charge to selling, general and administrative expense) its $3,025 equity investment in a Mexican bus manufacturer due to prolonged weakness in the Mexican economy and continuing high losses and high leverage reported by the Mexican affiliate. Also, in fiscal 1996, the Company wrote off a $200 equity investment in Steeltech and a $900 investment in a joint venture which leases equipment to Steeltech (see Note 11). In September 1998, the Company sold its 5.0% ownership interest in the Mexican bus manufacturer and recorded a pre-tax gain of $3,375. This gain has been recorded as a reduction of selling, general and administrative expense in fiscal 1998. 14. Subsidiary Guarantors The following tables present condensed consolidating financial information for fiscal 1998 for: (a) the Company; (b) on a combined basis, the guarantors of the Senior Subordinated Notes, which include all of the wholly-owned subsidiaries of the Company ("Subsidiary Guarantors") other than McNeilus Financial Services, Inc., Oshkosh/McNeilus Financial Services, Inc., and Nation's Casualty Insurance, Inc., which are the only non-guarantor subsidiaries of the Company ("Non-Guarantor Subsidiaries"); and (c) on a combined basis, the Non-Guarantor Subsidiaries. Condensed consolidating financial information has not been presented for any period prior to fiscal 1998 because no Non-Guarantor Subsidiaries existed prior to the issuance of the Senior Subordinated Notes on February 26, 1998. Separate financial statements of the Subsidiary Guarantors are not presented because the guarantors are jointly, severally, and unconditionally liable under the guarantees, and the Company believes separate financial statements and other disclosures regarding the Subsidiary Guarantors are not material to investors. The Company is comprised of Wisconsin and Florida manufacturing operations and certain corporate management, information services and finance functions. Borrowings and related interest expense under the Senior Credit Facility and the Senior Subordinated Notes are charged to the Company. The Company has allocated a portion of this interest expense to certain Subsidiary Guarantors through a formal lending arrangement. There are presently no management fee arrangements between the Company and its Non-Guarantor Subsidiaries. 27 Condensed Consolidating Statement of Income Year Ended September 30, 1998
Subsidiary Non-Guarantor Company Guarantors Subsidiaries Eliminations Consolidated (In thousands) Net sales................................ $ 393,720 $ 509,072 $ -- $ -- $ 902,792 Cost of sales............................ 342,978 423,370 -- -- 766,348 --------- -------- ---------- -------- ---------- Gross income............................. 50,742 85,702 -- -- 136,444 Operating expenses:...................... Selling, general and administrative.. 37,861 31,844 23 -- 69,728 Engineering research and development. 7,161 2,520 -- -- 9,681 Amortization of goodwill and other intangibles.................... -- 8,315 -- -- 8,315 --------- -------- ---------- -------- ---------- Total operating expenses................. 45,022 42,679 23 -- 87,724 --------- -------- ---------- -------- ---------- Operating income (loss).................. 5,720 43,023 (23) -- 48,720 Other income (expense): Interest expense..................... (16,878) (7,195) (180) 2,763 (21,490) Interest income...................... 418 3,248 423 (2,763) 1,326 Miscellaneous, net................... (96) 18 170 -- 92 --------- -------- ---------- -------- ---------- (16,556) (3,929) 413 -- (20,072) --------- -------- ---------- -------- ---------- Income (loss) from operations before income taxes, equity in earnings of subsidiaries and unconsolidated partnership and extraordinary item... (10,836) 39,094 390 -- 28,648 Provision (credit) for income taxes...... (4,075) 16,578 152 -- 12,655 --------- -------- ---------- -------- ---------- (6,761) 22,516 238 -- 15,993 Equity in earnings of subsidiaries and unconsolidated partnership, net of income taxes......................... 23,014 -- 260 (23,014) 260 --------- -------- ---------- -------- ---------- Income (loss) from continuing operations. 16,253 22,516 498 (23,014) 16,253 Extraordinary charge for early retirement of debt, net of income tax benefit... (1,185) -- -- -- (1,185) --------- -------- ---------- -------- ---------- Net income............................... $ 15,068 $ 22,516 $ 498 $ (23,014) $ 15,068 ========= ======== ========== ======== ==========
28 Condensed Consolidating Balance Sheet September 30, 1998
Subsidiary Non-Guarantor Company Guarantors Subsidiaries Eliminations Consolidated (In thousands) ASSETS Current assets: Cash and cash equivalents.............. $ 1,065 $ 979 $ 1,578 $ -- $ 3,622 Receivables, net....................... 41,009 39,863 110 -- 80,982 Inventories............................ 47,191 102,000 -- -- 149,191 Prepaid expenses and other............. 9,059 5,099 1,891 -- 16,049 --------- -------- -------- -------- --------- Total current assets................ 98,324 147,941 3,579 -- 249,844 Investment in and advances to: Subsidiaries........................... 338,720 (7,161) -- (331,559) -- Unconsolidated partnership............. -- -- 13,496 -- 13,496 Other long-term assets..................... 9,276 4,960 (38) -- 14,198 Net property, plant and equipment.......... 23,789 57,047 -- -- 80,836 Goodwill and other intangible assets, net.. 1,108 325,557 -- -- 326,665 --------- -------- -------- -------- --------- Total assets............................... $ 471,217 $ 528,344 $ 17,037 $ (331,559) $ 685,039 ========= ======== ======== ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable....................... $ 30,843 $ 34,294 $ 34 $ -- $ 65,171 Floor plan notes payable............... -- 11,645 -- -- 11,645 Customer advances...................... 1,689 43,226 -- -- 44,915 Payroll-related obligations............ 8,749 15,348 27 -- 24,124 Accrued warranty....................... 5,689 10,198 -- -- 15,887 Other current liabilities.............. (759) 36,930 7,327 -- 43,498 Current maturities of long-term debt... 3,216 251 -- -- 3,467 --------- -------- -------- -------- --------- Total current liabilities.......... 49,427 151,892 7,388 -- 208,707 Long-term debt............................. 274,784 2,553 -- -- 277,337 Deferred income taxes...................... (2,394) 33,416 16,810 -- 47,832 Other long-term liabilities ............... 18,104 1,763 -- -- 19,867 Investment by and advances from (to) Parent................................. -- 338,720 (7,161) (331,559) -- Shareholders' equity....................... 131,296 -- -- -- 131,296 --------- -------- -------- -------- --------- Total liabilities and shareholders' equity. $ 471,217 $ 528,344 $ 17,037 $ (331,559) $ 685,039 ========= ======== ======== ======== =========
29 Condensed Consolidating Statement of Cash Flows Year Ended September 30, 1998
Subsidiary Non-Guarantor Company Guarantors Subsidiaries Eliminations Consolidated (In thousands) Operating activities: Income (loss) from continuing operations $ 16,253 $ 22,516 $ 498 $(23,014) $ 16,253 Non-cash adjustments.................... 9,707 14,292 (3,155) -- 20,844 Changes in operating assets and liabilities......................... 21,655 21,101 88 -- 42,844 --------- -------- -------- ------- --------- Net cash provided from (used for) operating activities................ 47,615 57,909 (2,569) (23,014) 79,941 Investing activities: Acquisitions of businesses, net of cash acquired....................... (217,581) (3,563) -- -- (221,144) Investments in and advances to subsidiaries........................ 17,101 (44,749) 4,634 23,014 -- Additions to property, plant and equipment........................... (2,585) (5,970) -- -- (8,555) Other................................... 4,177 (2,608) (487) -- 1,082 --------- -------- -------- ------- --------- Net cash provided from (used for) investing activities................ (198,888) (56,890) 4,147 23,014 (228,617) Net cash used for discontinued operations.............................. (1,093) -- -- -- (1,093) Financing activities: Net borrowings under revolving credit facility............................ 6,000 -- -- -- 6,000 Proceeds from issuance of long-term debt 325,000 -- -- -- 325,000 Repayment of long-term debt............. (188,000) (49) -- -- (188,049) Debt issuance costs..................... (8,641) -- -- -- (8,641) Dividends paid.......................... (4,176) -- -- -- (4,176) Other................................... 38 -- -- -- 38 --------- -------- -------- ------- --------- Net cash provided from (used for) financing activities................ 130,221 (49) -- -- 130,172 --------- -------- -------- ------- --------- Increase (decrease) in cash and cash equivalents............................. (22,145) 970 1,578 -- (19,597) Cash and cash equivalents at beginning of period.................................. 23,210 9 -- -- 23,219 --------- -------- -------- ------- --------- Cash and cash equivalents at end of period.. $ 1,065 $ 979 $ 1,578 $ -- $ 3,622 ========= ======== ======== ======= =========
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