Filed Pursuant to Rule 424(b)(2)
Registration No. 333-109086
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 29, 2003)
3,000,000 SHARES
[Gardner Denver logo]
COMMON STOCK
We are offering 3,000,000 shares of common stock.
Our common stock is listed on the New York Stock Exchange under the symbol
"GDI." On March 23, 2004, the last reported sale price of our common stock
was $24.96 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. YOU SHOULD CAREFULLY CONSIDER
THE RISK FACTORS BEGINNING ON PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT BEFORE
PURCHASING OUR COMMON STOCK.
===============================================================================
PER SHARE TOTAL
Public Offering Price $24.500 $73,500,000
Underwriting Discount $ 1.286 $ 3,858,000
Proceeds, Before Expenses, to Us $23.214 $69,642,000
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The underwriters may also purchase up to an additional 450,000 shares
from us at the public offering price, less the underwriting discount, within
30 days from the date of this prospectus supplement to cover any
over-allotments.
Delivery of the shares will be made on or about March 29, 2004.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BEAR, STEARNS & CO. INC.
ROBERT W. BAIRD & CO.
MCDONALD INVESTMENTS INC.
MORGAN JOSEPH & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MARCH 23, 2004.
[GARDNER DENVER LOGO]
[PHOTO]
[PHOTO] GENERAL PLANT AIR
The eXact RPM(R) series of rotary screw compressors
combines variable speed technology and key features
industrial customers demand from a compressed air or
"fourth utility" provider.
PET BOTTLE BLOWING [PHOTO]
The Belliss & Morcom(R) direct-drive reciprocating
compressor provides reliable oil-free air at low cost,
making it ideal for the PET container blowing industry.
[PHOTO] MEDICAL AND DENTAL
Advanced design features and oil-less air technology
have made the PureAir(R) OF compressor a proven choice
for hospital, dental, laboratory and research
facilities.
AUTOMOTIVE SERVICE AND RENTAL [PHOTO]
Used by many national automotive service franchises,
Champion(R) and Gardner Denver(R) reciprocating
compressors produce the air used by pneumatic tools,
vehicle lifts, fluid dispensing systems and tire
mounting equipment.
[PHOTO] LOCOMOTIVE BRAKING AND AIR SYSTEMS
Gardner Denver is a major supplier of reciprocating
compressors for installation on locomotives to produce
air for the braking system, horn and instrumentation.
FLUID TRANSPORT [PHOTO]
The compact and lightweight Drum(R) oil-free rotary vane
blower pressurizes road transport vehicles to discharge
fluids into storage tanks or process lines more quickly.
[PHOTO] PNEUMATIC CONVEYING
Pneumatic conveying systems, used to unload rail cars or
transfer and blend raw materials during the production
of plastics, concrete, cereals and foodstuffs, are
powered by Sutorbilt(R), DuroFlow(R) and CycloBlower(R)
positive displacement blowers.
WATER AND WASTEWATER TREATMENT [PHOTO]
Gardner Denver(R) multistage centrifugal blowers
facilitate aerobic digestion, the process of supplying
oxygen to support microorganisms that digest and remove
unwanted contaminants from wastewater.
[PHOTO] FLUID TRANSFER
Designed and manufactured to meet specific applications,
Emco Wheaton(R) loading arms move fluids such as
petroleum products, chemicals and foodstuffs on and off
of ships, railcars and road transport vehicles.
WELL AND SITE SERVICE [PHOTO]
Gardner Denver offers a wide range of piston and plunger
pumps used in oil and gas well servicing applications
such as fracturing, cementing and workover.
[PHOTO] OIL AND GAS DRILLING
Gardner Denver(R) mud pumps are designed to economically
perform continuous downwhole cleaning, cooling and
lubricating during the drilling process.
SURFACE CLEANING AND PREPARATION [PHOTO]
Gardner Denver Water Jetting Systems offers a
comprehensive line of high pressure water blaster
packages, designed specifically for surface stripping
and preparation on numerous applications from bridges
and ships to airport runways.
ABOUT THIS PROSPECTUS SUPPLEMENT
THIS DOCUMENT IS IN TWO PARTS. THE FIRST PART IS THIS PROSPECTUS
SUPPLEMENT, WHICH DESCRIBES THE TERMS OF THIS OFFERING AND ALSO ADDS TO AND
UPDATES INFORMATION CONTAINED IN THE ACCOMPANYING PROSPECTUS AND THE
DOCUMENTS INCORPORATED BY REFERENCE. THE SECOND PART IS THE ACCOMPANYING
PROSPECTUS, WHICH PROVIDES FURTHER INFORMATION, SOME OF WHICH MAY NOT APPLY
SPECIFICALLY TO THIS OFFERING. GENERALLY, WHEN WE REFER TO THIS
"PROSPECTUS," WE ARE REFERRING TO BOTH DOCUMENTS. REFERENCES TO THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS ALSO INCLUDE THE INFORMATION
CONTAINED IN DOCUMENTS INCORPORATED BY REFERENCE. TO THE EXTENT THAT
INFORMATION APPEARING IN A LATER DOCUMENT IS INCONSISTENT WITH PRIOR
INFORMATION, THE LATER STATEMENT WILL CONTROL. IF THIS PROSPECTUS SUPPLEMENT
IS INCONSISTENT WITH THE PROSPECTUS, YOU SHOULD RELY ON THIS PROSPECTUS
SUPPLEMENT.
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS IS ACCURATE ONLY AS OF THEIR RESPECTIVE DATES, REGARDLESS OF TIME
OF DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR
OF ANY SALE OF OUR COMMON STOCK. WE ARE NOT MAKING AN OFFER OF THESE
SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.
Unless this prospectus supplement indicates otherwise or the context
otherwise requires, references to "we," "our," "us," the "Company," or
"Gardner Denver" are to Gardner Denver, Inc., its subsidiaries and their
predecessors. References to "Syltone" are to Syltone plc. Service marks,
trademarks and/or trade names and related designs or logo types owned by us
or our subsidiaries are shown in italics.
S-i
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus and
documents we incorporate by reference into this prospectus supplement and
accompanying prospectus contain statements that do not directly or
exclusively relate to historical facts. Such statements are forward-looking
statements made in reliance upon the safe harbor of the Private Securities
Litigation Reform Act of 1995. As a general matter, forward-looking
statements are those focused upon anticipated events or trends and
expectations and beliefs relating to matters that are not historical in
nature. Such forward-looking statements are subject to uncertainties and
factors relating to our operations and business environment, all of which
are difficult to predict and many of which are beyond our control. These
uncertainties and factors could cause actual results to differ materially
from those matters expressed in or implied by such forward-looking
statements.
The following uncertainties and factors, among others, could affect
future performance and cause actual results to differ materially from those
expressed in or implied by forward-looking statements:
o our ability to maintain and to enter into key purchasing,
supply and outsourcing relationships;
o our ability to effectively manage the transition of iron
casting supply to alternate sources and the skill, commitment
and availability of such alternate sources;
o our ability to identify, negotiate and complete future
acquisitions;
o the speed with which we are able to integrate acquisitions and
realize the related financial benefits;
o the successful implementation of other strategic initiatives,
including, without limitation, restructuring plans, inventory
reduction programs and other cost reduction efforts;
o the domestic and/or worldwide level of oil and natural gas
prices and oil and gas drilling and production, which affect
demand for our petroleum products;
o changes in domestic and/or worldwide industrial production and
industrial capacity utilization rates, which affect demand for
our compressed air products;
o pricing of our products;
o the degree to which we are able to penetrate niche and
international markets;
o changes in currency exchange rates (primarily among the U.S.
dollar, the euro and the British pound);
o changes in interest rates;
o our ability to attract and retain quality management
personnel;
o market performance of our pension plan assets and changes in
discount rates used for actuarial assumptions in our pension
and other postretirement obligation and expense calculations;
o our continued ability to effectively manage and defend
litigation matters pending, or asserted in the future, against
us;
o the development and acceptance of our new product offerings;
and
o the continued successful implementation and utilization of our
electronic services.
We do not undertake, and hereby disclaim, any duty to update these
forward-looking statements, even though our situation and circumstances may
change in the future.
S-ii
MARKET AND INDUSTRY DATA
Some of the market and industry data and other statistical information
used throughout this prospectus supplement are based on independent industry
publications, government publications, reports by market research firms or
other published independent sources. Some data are also based on our good
faith estimates, which are derived from our review of internal surveys, as
well as the independent sources referred to above. Although we believe these
sources to be reliable, we have not independently verified the information
and cannot guarantee its accuracy or completeness.
S-iii
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PROSPECTUS SUPPLEMENT SUMMARY
This summary may not contain all of the information that is important
to you. You should read the entire prospectus supplement and the
accompanying prospectus and the documents incorporated and deemed to be
incorporated by reference therein, including the consolidated financial
statements and related notes and other financial data, before making an
investment decision. This summary includes a discussion of our acquisition
of Syltone plc under " - Recent Developments" but does not otherwise reflect
the effect of the Syltone acquisition. Financial information relating to
Syltone is reported in British pounds. Where Syltone financial information
is presented in U.S. dollars, we have converted such information from
British pounds. The Syltone financial information included in this
prospectus supplement was prepared in accordance with the accounting
principles generally accepted in the United Kingdom unless otherwise
specified.
OUR COMPANY
We are a leading designer, manufacturer and marketer of highly
engineered stationary air compressors and blowers and reciprocating pumps.
Our products primarily are used to move fluids, gases or solids through the
application of pressure, or other mechanical influences, often in highly
demanding applications or environments. Our compressors and blowers are used
in a broad range of industrial applications, and our reciprocating pumps are
used primarily in oil and natural gas well drilling, servicing and
production and in water jetting systems. We report our results of operations
through two segments, Compressed Air Products and Pump Products, which
represented approximately 84% and 16% of our 2003 revenues, respectively.
Our history dates back to 1859 when Robert Gardner redesigned the fly-ball
governor to provide speed control for steam engines. For the fiscal year
ended December 31, 2003, we had revenues of $439.5 million, EBITDA of $49.7
million and net income of $20.6 million.
We sell our products and services globally to customers in diverse
industries around the world. The following charts show the percentage of
revenues generated in 2003 by industries served and by geographic regions.
INDUSTRIES SERVED
[GRAPH]
Industrial/Manufacturing 31%
Energy 19%
Food Processing 13%
Automotive Services 9%
Transportation 9%
Water Treatment 9%
Chemical 4%
Medical/Healthcare 2%
Other 4%
GEOGRAPHIC REGIONS
[GRAPH]
United States 58%
Europe 22%
Asia 9%
Canada 6%
Latin America 4%
Other 1%
The majority of our products are marketed through our global network of
over 1,000 independent distributors and representatives, many of whom sell
our products exclusively. We offer our distributors access to one of the
broadest product lines in our served markets. In addition, we provide our
distributors with sales and product literature, technical assistance and
training programs, advertising and sales promotions, order-entry and
tracking systems and an annual restocking program. Our distributors maintain
an inventory of complete units and parts and provide aftermarket service to
end-users. We service original equipment manufacturers ("OEMs") and
engineering firms through our direct sales force
S-1
as these customers typically require higher levels of technical assistance,
more coordinated shipment scheduling and more complex product service than
customers of our less specialized products.
We have an extensive installed base of equipment for which we supply
replacement parts and repair services. Our aftermarket parts and service
businesses provide us with a recurring source of revenues with attractive
margins. Our aftermarket businesses also allow us to be in frequent contact
with customers, enabling us to provide enhanced customer service and product
information, which often generates additional sales of new products. We
estimate that aftermarket parts and services represented approximately
one-third of our revenues in 2003.
OUR BUSINESS SEGMENTS
We report our results of operations through two segments: Compressed
Air Products and Pump Products.
COMPRESSED AIR PRODUCTS. Our Compressed Air Products segment designs,
manufactures, markets and services the following products and related
aftermarket parts for industrial and commercial applications: rotary screw,
reciprocating, sliding vane and centrifugal compressors, and positive
displacement and centrifugal blowers. Compressors are used in applications
that require high-pressure air, while blowers are used when higher-volume,
low-pressure air or vacuums are needed in an application. Stationary air
compressors are used primarily in manufacturing, process applications and
materials handling, and to power air tools and equipment. Blowers are used
primarily in pneumatic conveying, wastewater aeration and engineered vacuum
systems. In general, our standard compressors and blowers are sold through
distributors or directly to OEMs, while our more specialized products and
those designed for a specific application are sold through independent
representatives or directly to end-users.
PUMP PRODUCTS. Our Pump Products segment designs, manufactures, markets
and services reciprocating pumps, water jetting systems and related
aftermarket parts used in oil and natural gas well drilling, servicing and
production, and industrial cleaning and maintenance. Most of our pump
products are sold directly to end-users or to packagers. Packagers are
customers that combine our products with ancillary products before they are
sold to end-users.
OUR COMPETITIVE STRENGTHS
MARKET LEADERSHIP POSITIONS. We believe we are the second largest
manufacturer of compressed air products in the United States and the third
largest in the world, as measured by revenues. We believe we are one of the
two largest manufacturers of oil and natural gas well servicing pumps in the
world. We also believe we are one of the two largest manufacturers of oil
and natural gas well drilling pumps in the world. We have achieved our
leadership positions through our commitment to product innovation and
quality, our well-developed distribution channels and our strategic
acquisitions. We believe that, as a market leader, we have greater access to
distributors and are more likely to be specified as a supplier when our
target customers develop new requirements.
BRAND NAME RECOGNITION. Our products are marketed under a variety of
well-known brand names in our industries served, including: Gardner Denver
compressors, blowers and pumps, Champion compressors, Belliss & Morcom
compressors, Tamrotor compressors, Sutorbilt blowers, DuroFlow blowers,
Hoffman blowers, Lamson blowers, Partek water jetting pumps and
Liqua-Blaster water jet pumping systems. Each of these brands enjoys a
strong reputation in its market segment built over many years. We believe
that the strength of these brand names helps reduce the importance of price
as a competitive factor and provides a measure of built-in demand when we
introduce new products.
STRONG DISTRIBUTION NETWORK AND OEM ALLIANCES. We offer our customers
one of the industry's broadest selections of high quality products and
services. As a result, we have been able to establish strong customer
relationships with several key OEMs and exclusive supply arrangements with
many of
S-2
our distributors. These relationships strengthen our market position,
facilitate our sales efforts and provide a valuable conduit for feedback
when developing new products.
LARGE INSTALLED EQUIPMENT BASE. We have maintained strong positions in
our market segments over a number of years, which has allowed us to
establish a large base of installed equipment. For most of the products in
our installed base, a significant portion of total lifecycle cost consists
of replacement parts and maintenance. Therefore, our installed base provides
us with a recurring source of aftermarket revenues, typically with
attractive margins. Additionally, we believe that when our customers replace
existing equipment they prefer to do so with equipment of the same type or
brand to avoid incremental costs relating to training, operations and
maintenance. As a result, we believe that our large installed base also
provides a source of new product revenues.
BROAD AND DIVERSE PRODUCT AND CUSTOMER BASE. We have a product-driven
strategy that is based on our core competencies of manufacturing compressed
air and pump equipment. As a result, we have developed products and services
for an extensive array of applications that we market globally to a diverse
group of industries and customers. In 2003, no customer represented more
than 3% of our total revenues. We believe that our diversity of products and
customers reduces our dependence on any particular geographic or served
industry segment. Additionally, we believe that our presence in many
different industries generates greater brand awareness and facilitates the
development and introduction of new products.
STRONG CASH FLOW FROM OPERATIONS. Since becoming an independent
company, we have increased our annual cash flow from operations from $17.5
million in 1994 to $46.3 million in 2003. We have achieved this through
growth in revenues and earnings and by aggressively managing working capital
and controlling expenses on an ongoing basis throughout our organization.
Our strong cash flow from operations provides us with the financial
flexibility to pursue acquisitions and internal investments.
EXPERIENCED MANAGEMENT TEAM. Our senior management team has significant
experience, averaging more than 10 years with us and more than 20 years in
manufacturing. In addition, this team has substantial experience in
identifying, structuring and integrating acquisitions, supply chain
management programs and lean manufacturing techniques, all of which are
important to our long-term growth.
STRONG CORPORATE GOVERNANCE. We believe that our corporate culture is
based on strong corporate governance and a commitment to stockholder
accountability. Six of our seven Board members are non-employee directors
and our senior executives are required to maintain meaningful holdings of
our common stock. We believe our culture and operating performance have been
and will continue to be enhanced by our strong corporate governance.
OUR BUSINESS STRATEGY
REDUCE COSTS. We continually seek to increase our efficiency and
improve margins in existing and acquired lines of business through the
implementation of cost reduction initiatives. The areas we are focusing on
include:
o Lean manufacturing techniques. We have implemented lean
manufacturing programs at all of our facilities, which translate
directly into lower-cost manufacturing, shorter lead times, better
quality and reduced inventory investment. Examples of lean
manufacturing initiatives include reconfiguring production
workspaces into a cellular format to improve labor productivity and
reducing production lot sizes to decrease work-in-progress
inventory and increase manufacturing throughput. As a result of our
lean manufacturing efforts, we have freed more than 300,000 square
feet of manufacturing and office space, which has enabled us to
consolidate newly acquired operations into existing facilities. Our
lean manufacturing techniques have also facilitated better
communications and problem resolution among production personnel
and reduced the likelihood of errors. As we have implemented lean
techniques, we have developed an internal "lean council" to ensure
that our best manufacturing practices are extended throughout
S-3
our organization. We also have gone beyond internal implementation
by partnering with suppliers to achieve additional efficiencies in
the supply chain.
o Purchasing and sourcing. Throughout our organization, we have
formed purchasing teams tasked with identifying the most
cost-effective way to source and manufacture our products. Our
purchasing teams seek to reduce basic material costs by identifying
the best-value suppliers, implementing global sourcing strategies
and working with our manufacturing and engineering personnel to
identify less expensive manufacturing input alternatives. Our
purchasing teams also review non-critical product components, such
as liners and valves, to determine whether it is more
cost-effective to manufacture or outsource such products.
o Capital investments. We evaluate capital expenditures based on the
ability of the investment to generate adequate returns by
increasing our operating efficiency and flexibility, expanding
production capacity and increasing product quality. In a
challenging operating environment, we continued to invest capital,
including $12.0 million spent in 2003 and $13.6 million spent in
2002. For example, we invested in a number of flexible machining
centers that reduced labor and setup expenses and improved product
lead time by automatically and simultaneously performing multiple
complex tasks. We believe that our ongoing capital investments have
positioned us to take full advantage of any economic recovery.
PURSUE INTERNATIONAL MARKETS. In 2003, we generated 42% of our revenues
in international markets. We believe international markets continue to offer
attractive growth opportunities. Between 1994 and 2003, our revenues from
international sales grew at a compound annual growth rate of 20%. The growth
of our non-U.S. revenues and our improved market position in Europe and Asia
are a result of successful acquisitions and the expansion of our
distribution channels. We sell through distributors and representatives in
more than 20 countries and have manufacturing facilities in Finland, the
United Kingdom (the "U.K."), Germany and Canada. We are a leader in
utilizing independent, full-service distributors to sell products in Europe.
On January 2, 2004, we completed our acquisition of Syltone, a United
Kingdom-based company which designs, manufactures, sells and services
specialty equipment for the transportation and fluid transfer industries. We
expect the acquisition to increase our manufacturing capabilities and
distribution channels throughout the world, particularly in Europe. In
addition to our Syltone acquisition, we are increasing our global sourcing
and extending our sales through new distributor relationships in China and
South America. In 2004, we also plan to open a facility in China that
assembles and packages our compressors and blowers to serve growing demand
in Asian markets.
ACCELERATE NEW PRODUCT DEVELOPMENT. As a leader in our industry, we
consistently develop new products and enhance existing products to meet the
evolving demands of our customers, as well as to enter into new markets and
reduce costs. We have implemented formal processes that coordinate research,
development and engineering activity with feedback from distributors,
end-users and suppliers. We believe that these processes can accelerate the
product development cycle by up to 50% and reduce the time to market for new
products. For example, we recently introduced a two stage oil-free
compressor which provides air for applications that cannot tolerate oil in
the compression process such as semiconductor and pharmaceutical
manufacturing and food and beverage processing. This product was introduced
in approximately six months, which we estimate is half the time that would
have been required to develop a product of this type prior to implementing
our new processes. We intend to continue to leverage our engineering
capabilities to design and develop new products in response to customers'
needs.
MANUFACTURE PROPRIETARY PRODUCTS. We seek to differentiate our products
from those of our competitors by developing proprietary products that offer
superior performance at the lowest total life cycle cost. We also reengineer
products and develop new controls and other product functionalities to
improve their key performance characteristics. We believe that commodity-
like products, such as consumer-grade air compressors, are more susceptible
to pricing pressure and are more likely to dilute
S-4
brand equity. Conversely, we believe that our proprietary products enhance
our brand names, provide value to customers and build customer loyalty,
allowing us to increase market share and achieve premium pricing.
EMBRACE NEW TECHNOLOGIES. We continue to embrace new technologies to
increase efficiency and better serve our distributors, OEM customers and
end-users. In addition to expanding our distribution channels across the
globe, we are employing web-based tools to more efficiently meet the
information needs of our customers and help secure sales for our
distributors. Our e-commerce website is designed to communicate the breadth
and benefits of our product offerings directly to end-users anywhere in the
world. We are utilizing our computer systems and Internet technology to
allow our business partners immediate and continuous access to sales and
technical literature, order processing and tracking, and service and
warranty information. We are also linking these ordering systems directly to
our manufacturing facilities to reduce order processing paperwork, lead
times and the amount of working capital employed.
PURSUE STRATEGIC ACQUISITIONS. We believe that our acquisition and
integration expertise is a critical element for the successful
implementation of our strategic growth and profitability initiatives. Since
our spin-off from Cooper Industries, Inc. in 1994, we have acquired and
successfully integrated 15 businesses prior to the Syltone acquisition. We
believe that our industry is relatively fragmented and offers opportunities
to grow our business by acquiring companies that complement or expand our
product offerings, distribution capabilities and geographic presence. As
acquired companies are integrated, we rationalize manufacturing capacity,
product lines and distribution channels to maximize our returns. For
example, in September 2001, we acquired Hoffman Air and Filtration Systems,
a manufacturer of centrifugal blowers. We relocated manufacturing to an
existing facility where we already manufactured centrifugal blowers, and
streamlined our sales representative network and product offering. Syltone
is another example of the type of synergistic acquisition we seek. We
believe Syltone will improve our access to bulk transportation customers in
Europe by strengthening our distribution and service networks and enhancing
the breadth and quality of our products utilized for liquid bulk material
applications. It will also allow us to better leverage manufacturing,
marketing, purchasing and aftermarket resources.
OUR INDUSTRY
Our Compressed Air Product segment competes in a worldwide market for
compressed air products and services which we estimate to be in excess of $5
billion per year in sales. Our Pump Product segment competes in a worldwide
market for pump products which we estimate to be in excess of $22 billion
per year in sales. Our reciprocating pumps compete for approximately $2
billion of that market. Products in both of these markets are sold to a
diverse group of customers across a wide range of industries.
Competition in our markets is generally robust and is based on product
quality, performance, price and availability. The relative importance of
each of these factors varies depending on the specific type of product.
Given the potential for equipment failures to cause expensive operational
disruption, our customers generally view quality and reliability as critical
factors in their equipment purchasing decision. The required frequency of
maintenance is highly variable based on the type of equipment and
application.
Although there are a few large manufacturers of compressed air
products, the marketplace for these products remains highly fragmented due
to the wide variety of product technologies, applications and selling
channels. The marketplace for pumps, although dominated by a few
multinational manufacturers with a broad product offering, is still highly
fragmented, as the ten largest pump manufacturers account for only
approximately 40% of annual industry sales. Because we are currently focused
on pumps used in oil and natural gas drilling, servicing and production, we
do not typically compete directly with the major full-line manufacturers.
However, competition in the market segment for oil and natural gas pumps is
much more concentrated than in the market for pumps generally.
S-5
RECENT DEVELOPMENTS
On January 2, 2004, we effectively acquired Syltone, previously a
publicly traded company listed on the London Stock Exchange. The purchase
price of (pounds)61.2 million including assumed bank debt (net of cash
acquired) was paid in the form of cash ((pounds)43.1 million), new loan
notes ((pounds)5.2 million) and the assumption of Syltone's existing bank
debt, net of cash ((pounds)12.9 million). We financed the cash portion of
the acquisition with drawings under our existing revolving credit line and
cash reserves. Syltone generated revenues and operating profit (in
accordance with accounting principles generally accepted in the United
Kingdom) of (pounds)84.4 million and (pounds)6.3 million, respectively for
the twelve months ended September 30, 2003.
Syltone is one of the world's largest manufacturers of equipment used
for loading and unloading liquid and dry bulk products on commercial
transportation vehicles. This equipment includes compressors, blowers and
other ancillary products that are complementary to our product line. Syltone
is also one of the world's largest manufacturers of fluid transfer equipment
(including loading arms, swivel joints, couplers and valves) used to load
and unload ships, tank trucks and rail cars.
Syltone markets its transportation-related products under the Drum,
Emco Wheaton, Perolo, Priestman, Sam System, Webster and AirDrive brand
names through a network of independent distributors in the United States and
Europe and through company-owned fitting shops around the world. Fitting
shops are facilities where Syltone installs its manufactured components and
other accessories onto commercial vehicles and also provides aftermarket
support. Syltone markets its loading arms under the Emco Wheaton and Perolo
brand names directly to end users and through distribution.
The acquisition of Syltone strengthens our position, particularly in
Europe, as the leading global provider of bulk handling solutions for the
commercial transportation industry. Syltone's emphasis on systems-oriented
handling solutions expands our product offering and manufacturing
capabilities and provides incremental growth opportunities. In addition,
Syltone's installation and aftermarket capabilities are expected to
strengthen our distribution and service networks. Through the acquisition of
Syltone, Gardner Denver expands its product lines to include loading arms.
We view loading arms as an attractive market segment given its stability in
developed regions where product demand is driven primarily by replacement
activity, and its growth potential in emerging economies that are expanding
their transportation infrastructure.
The following charts reflect our consolidated revenue mix by industries
served and geographic regions for 2003 on a combined basis as if Syltone had
been acquired at the beginning of 2003.
COMBINED - INDUSTRIES SERVED
[GRAPH]
Industrial/Manufacturing 25%
Transportation 24%
Energy 19%
Food Processing 10%
Automotive Services 7%
Water Treatment 7%
Chemical 4%
Medical/Healthcare 1%
Other 3%
COMBINED - GEOGRAPHIC REGIONS
[GRAPH]
United States 48%
Europe 32%
Asia 9%
Canada 5%
Latin America 4%
Other 2%
--------------
Our principal executive offices are located at 1800 Gardner Expressway,
Quincy, Illinois 62305, and our telephone number is (217) 222-5400. Our
website address is www.gardnerdenver.com. Information contained on our
website does not constitute part of this prospectus supplement.
S-6
THE OFFERING
Issuer ...................................... Gardner Denver, Inc.
Common stock offered......................... 3,000,000 shares of common stock,
par value $0.01 per share.
Common stock outstanding after this
offering ................................. 19,278,468 shares.
Use of proceeds ............................. We estimate that the net proceeds
of this offering will be $69.3
million ($79.7 million if the
underwriters exercise their
over-allotment option in full).
We expect to use the net
proceeds from the sale of our
common stock in this offering
for general corporate purposes,
which may include repayment of
outstanding debt and financing
future acquisitions.
Risk factors................................. You should carefully consider
all of the information set forth
in this prospectus supplement
and the accompanying prospectus
and, in particular, should
evaluate the specific factors
set forth under "Risk Factors"
in deciding whether to invest in
shares of the common stock.
Dividend policy.............................. We have not paid cash dividends
in 2002 or 2003 and we do not
expect to pay cash dividends in
2004.
New York Stock Exchange symbol............... GDI
Over-allotment option ....................... We have granted the underwriters
a 30-day option to purchase from
us, from time to time, up to an
additional 450,000 shares of our
common stock to cover any
over-allotments.
The number of shares of our common stock to be outstanding after this
offering is based on our shares outstanding as of March 23, 2004, as adjusted
for the 3,000,000 shares offered by this prospectus supplement. It excludes:
o Up to 450,000 shares issuable by us if the underwriters exercise
their over-allotment option in full;
o 1,853,919 shares reserved for issuance under our existing stock
incentive plans, including 1,514,021 shares issuable upon exercise
of options outstanding as of that date at a weighted average
exercise price of $19.02 per share;
o 264,603 shares reserved for issuance under our employee stock
purchase plan; and
o 328,658 shares reserved for issuance under our retirement savings
plan.
Except as otherwise noted in this prospectus supplement, we have
assumed that the underwriters will not exercise their over-allotment option.
S-7
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The summary historical consolidated financial information shown below
is as of and for each of the years ended December 31, 2001, 2002 and 2003.
The information for the three years ended December 31, 2001, 2002 and 2003
is derived from our consolidated financial statements for such years, which
are included herein beginning on page F-1.
The table below also sets forth unaudited pro forma information after
giving effect to the Syltone acquisition. The unaudited pro forma
consolidated statement of operations data for the year ended December 31,
2003 is presented as if the transaction had taken place on January 1, 2003.
The unaudited pro forma consolidated balance sheet data is presented as if
the transaction had been completed on December 31, 2003.
You should read this information in conjunction with the information
under "Unaudited Pro Forma Consolidated Financial Statements" and related
notes thereto, "Selected Consolidated Financial Information" and the
respective consolidated financial statements and accompanying notes of the
Company and Syltone included elsewhere in this prospectus supplement. Our
consolidated financial statements for the years ended December 31, 2002 and
2003 have been audited by KPMG LLP, independent auditors. Our consolidated
financial statements for the year ended December 31, 2001 have been audited
by Arthur Andersen LLP, independent auditors.
YEAR ENDED DECEMBER 31,
---------------------------------------------
PRO FORMA
UNAUDITED
2001 2002 2003 2003
------------- ------------- ------------- -------------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 419,770 $ 418,158 $ 439,530 $ 570,079
Costs and expenses:
Cost of sales (excluding depreciation and
amortization).................................. 294,249 289,631 307,753 391,396
Depreciation and amortization (1)................ 17,567 14,139 14,566 19,918
Selling and administrative expenses.............. 69,678 79,400 85,326 120,659
Interest expense................................. 6,796 6,365 4,748 8,943
Other income, net................................ (3,203) (204) (3,221) (3,110)
------------- ------------- ------------- -------------
Total costs and expenses.......................... 385,087 389,331 409,172 537,806
------------- ------------- ------------- -------------
Income before income taxes........................ 34,683 28,827 30,358 32,273
Provision for income taxes........................ 12,659 9,225 9,715 10,537
------------- ------------- ------------- -------------
Net income........................................ $ 22,024 $ 19,602 $ 20,643 $ 21,736
============= ============= ============= =============
Basic earnings per share ......................... $ 1.42 $ 1.24 $ 1.29 $ 1.35
============= ============= ============= =============
Diluted earnings per share........................ $ 1.40 $ 1.22 $ 1.27 $ 1.33
============= ============= ============= =============
Basic shares outstanding.......................... 15,553 15,854 16,061 16,061
Diluted shares outstanding........................ 15,783 16,042 16,312 16,312
BALANCE SHEET DATA (AS OF END OF PERIOD):
Total assets....................................... $ 488,688 $ 478,730 $ 589,733 $ 650,682
Long-term debt, less current maturities............ 160,230 112,663 165,756 153,420
Total liabilities.................................. 289,960 255,807 323,828 385,154
Stockholders' equity............................... 198,728 222,923 265,905 265,528
OTHER FINANCIAL DATA:
Gross margin (2)................................... $ 125,521 $ 128,527 $ 131,777 $ 178,683
EBITDA (3)......................................... 59,046 49,331 49,672 61,134
Cash flows provided by operating activities (4).... 44,153 52,481 46,283 58,636
Capital expenditures (4)........................... 11,524 13,641 11,950 14,489
Orders (5)......................................... 413,438 402,019 425,620 557,579
(1) As a result of adopting Statement of Financial Accounting Standards No.
142 "Goodwill and Other Intangibles Assets," period goodwill
amortization ceased effective January 1, 2002. Amortization of goodwill
in 2001 was $4,380.
(2) Gross margin consists of revenues minus cost of sales (excluding
depreciation and amortization).
(3) EBITDA consists of net income before provision for income taxes,
interest expense and depreciation and amortization. EBITDA is not a
measurement of financial performance or liquidity determined in
accordance with accounting principles generally accepted in the United
States and should not be considered as an
S-8
alternative to net income, net cash provided by operating activities or
other consolidated income or cash flow statement data prepared in
accordance with generally accepted accounting principles. We present
EBITDA because we believe it is frequently used by analysts, investors
and other interested parties in the financial evaluation of companies
in our industry, and we believe it provides useful information to
investors. Our definition of EBITDA, however, may differ from the
definition used by other companies. A reconciliation of net income to
EBITDA is provided as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
PRO FORMA
UNAUDITED
2001 2002 2003 2003
------------- ------------- ------------- -------------
(in thousands)
Net income.......................................... $ 22,024 $ 19,602 $ 20,643 $ 21,736
Provision for income tax............................ 12,659 9,225 9,715 10,537
Interest expense.................................... 6,796 6,365 4,748 8,943
Depreciation and amortization....................... 17,567 14,139 14,566 19,918
------------ ------------ ------------ -------------
EBITDA ............................................. $ 59,046 $ 49,331 $ 49,672 $ 61,134
============ ============ ============ =============
(4) Pro forma cash flows provided by operating activities and capital
expenditures represent the sum of our actual cash flows provided by
operations and capital expenditures for the year ended December 31,
2003 and Syltone's for the twelve months ended September 30, 2003.
These amounts have not been adjusted for any impact resulting from our
acquisition of Syltone.
(5) Orders consists of bookings we believe to be firm for which a customer
purchase order has been received or communicated. Since orders can be
rescheduled or canceled at any time, orders do not necessarily reflect
future sales levels.
S-9
RISK FACTORS
Before you invest in our shares, you should consider carefully the risk
factors described below together with all of the other information included
in this prospectus supplement, the accompanying prospectus and the documents
we have incorporated by reference into this document. If any of the
following risks actually occur, our business, financial condition or results
of operations could be materially adversely affected and you may lose all or
part of your investment.
RISKS RELATED TO OUR BUSINESS
-----------------------------
WE HAVE EXPOSURE TO ECONOMIC DOWNTURNS AND OPERATE IN CYCLICAL MARKETS.
As a supplier of capital equipment to a variety of industries, we are
adversely affected by general economic downturns. Demand for our compressed
air products is dependent upon capital spending by manufacturing and process
industries. Many of our customers, particularly industrial customers, will
delay capital projects, including non-critical maintenance and upgrades,
during economic downturns. Demand for our pump products is primarily tied to
the number of working and available drilling rigs and oil and natural gas
prices. The energy market, in particular, is cyclical in nature as the
worldwide demand for oil and natural gas fluctuates. When worldwide demand
for these commodities is depressed, the demand for our products used in
drilling and recovery applications is reduced.
Accordingly, our operating results for any particular period are not
necessarily indicative of the operating results for any future period. The
industrial market has historically experienced downturns in demand. Future
downturns could have a material adverse effect on our operating results.
Similarly, future downturns in demand for oil and natural gas could have a
material adverse effect on our operating results.
WE FACE INTENSE COMPETITION IN THE MARKETS WE SERVE, WHICH COULD MATERIALLY
AND ADVERSELY AFFECT OUR OPERATING RESULTS.
We actively compete with companies producing the same or similar
products. Depending on the particular product, we experience competition
based on a number of factors, including quality, performance, price and
availability. We compete against many companies, including divisions of
larger companies, that have greater financial resources than us. As a
result, these competitors may be better able to withstand a change in
conditions within the markets in which we compete and throughout the economy
as a whole. In addition, new competitors could enter our markets. In
particular, it is possible that our European-based competitors could seek to
establish a greater presence in the United States market. If we cannot
compete successfully, our sales and operating results could be materially
and adversely affected.
LARGE OR RAPID INCREASES IN THE COSTS OF RAW MATERIALS OR SUBSTANTIAL
DECREASES IN THEIR AVAILABILITY AND OUR DEPENDENCE ON PARTICULAR SUPPLIERS
OF RAW MATERIALS COULD MATERIALLY AND ADVERSELY AFFECT OUR OPERATING
RESULTS.
The primary raw materials we use are cast iron and steel. While we are
seeking to enter into long-term contracts with our suppliers, most of our
suppliers are not currently parties to long-term contracts with us.
Consequently, we are vulnerable to fluctuations in prices of such raw
materials. Factors such as supply and demand, freight costs and
transportation availability, inventory levels of brokers and dealers, the
level of imports and general economic conditions may affect the price of
cast iron and steel. We utilize single sources of supply for certain iron
castings and other selected components. The trend of consolidation among
domestic cast iron suppliers caused disruption to our supply deliveries in
2002 and 2003 and, as this consolidation trend continues, we may experience
further supply disruptions. Any such disruption could have a material
adverse effect on our ability to meet our commitments to customers.
THERE CAN BE NO ASSURANCE THAT THE SYLTONE ACQUISITION WILL BE SUCCESSFUL.
Our ability to realize synergies and capitalize on business
opportunities associated with the Syltone acquisition will depend in part on
our ability to effectively integrate the Syltone business into our
operations. Among other things, we may face significant challenges which
could cause us to be unsuccessful in the integration process. We may learn
additional information about the Syltone business
S-10
that adversely impacts the achievement of such synergies and business
opportunities. With the foregoing in mind, there can be no assurance that
the Syltone acquisition will be successful.
WE MAY NOT BE ABLE TO CONTINUE TO MAKE THE ACQUISITIONS NECESSARY FOR US TO
REALIZE OUR GROWTH STRATEGY OR INTEGRATE ACQUISITIONS SUCCESSFULLY.
One of our growth strategies is to increase our sales and expand our
markets through acquisitions. We have made 16 acquisitions since becoming an
independent company in 1994 and we expect to continue making acquisitions if
appropriate opportunities arise in our industry. We may not be able to
identify and successfully negotiate suitable acquisitions, obtain financing
for future acquisitions on satisfactory terms or otherwise complete future
acquisitions. Furthermore, our acquired companies may encounter unforeseen
operating difficulties and may require significant financial and managerial
resources which would otherwise be available for the ongoing development or
expansion of our existing operations. Largely as a consequence of our
acquisitions, a substantial portion of our assets consists of goodwill. If
we are unable to successfully integrate and operate our acquired business,
we may determine that our goodwill assets are impaired and be required to
reduce the stated value of such assets. If we are unable to successfully
identify acquisition candidates, complete acquisitions and integrate the
acquired businesses with our existing businesses, our business, results of
operations and financial condition may be materially and adversely affected.
ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
For the fiscal year ended December 31, 2003, approximately 42% of our
revenues were from customers in countries outside of the United States and,
on a combined basis after giving effect to the Syltone acquisition,
approximately 52% of our revenues were from customers in countries outside
of the United States. We have manufacturing facilities in Finland, the
United Kingdom, Germany and Canada. We anticipate that we may continue to
expand our international operations to the extent that suitable
opportunities become available, including the planned establishment of a
packaging facility in China in late 2004.
Accordingly, our future results could be harmed by a variety of factors
which are not present for companies with operations and sales solely within
the United States. Our international operations and United States export
sales are exposed to such risks as:
o nationalization of private enterprises;
o political or economic instability in certain countries;
o differences in foreign laws, including increased difficulties in
protecting intellectual property and uncertainty in enforcement of
contract rights;
o changes in the legal and regulatory policies of foreign
jurisdictions;
o credit risks;
o currency fluctuations;
o exchange controls;
o changes in tariff restrictions;
o royalty and tax increases;
o export and import restrictions and restrictive regulations of
foreign governments;
o potential problems obtaining supply of raw materials; and
o shipping products during times of crisis or war, as well as other
factors inherent in foreign operations.
S-11
WE ARE A DEFENDANT IN CERTAIN ASBESTOSIS AND SILICOSIS PERSONAL INJURY
LAWSUITS WHICH COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
We have been named as a defendant in an increasing number of asbestos
and silicosis personal injury lawsuits. The plaintiffs in these suits allege
exposure to asbestos or silica from multiple sources, and typically we are
one of approximately 25 or more named defendants. In our experience to date,
the substantial majority of the plaintiffs have not been physically impaired
with a disease by the alleged exposure.
We believe that the pending lawsuits will not, in the aggregate, have a
material adverse effect on our consolidated financial position, results of
operations or liquidity. However, future developments, including, without
limitation, potential insolvencies of insurance companies, could cause a
different outcome. Accordingly, there can be no assurance that the
resolution of pending or future lawsuits, whether by judgment, settlement,
or dismissal, will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity.
THE NATURE OF OUR PRODUCTS CREATES THE POSSIBILITY OF SIGNIFICANT PRODUCT
LIABILITY AND WARRANTY CLAIMS WHICH COULD HARM OUR BUSINESS.
Customers use some of our products in potentially hazardous drilling,
completion and production applications that can cause injury or loss of life
and damage to property, equipment or the environment. In addition, our
products are integral to the production process for some end-users and any
failure of our products could result in a suspension of their operations.
Although we maintain strict quality controls and procedures, we cannot
be certain that our products will be completely free from defect. We
maintain amounts and types of insurance coverage that we believe are
adequate and consistent with normal industry practice. However, we cannot
guarantee that insurance will be adequate to cover all liabilities we may
incur. We also may not be able to maintain insurance in the future at levels
we believe are necessary and at rates we consider reasonable. We may be
named as a defendant in product liability or other lawsuits asserting
potentially large claims if an accident occurs at a location where our
equipment and services have been used.
ENVIRONMENTAL COMPLIANCE COSTS AND LIABILITIES COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION.
Our operations and properties are subject to increasingly stringent
domestic and foreign laws and regulations relating to environmental
protection, including laws and regulations governing air emissions, water
discharges, waste management and workplace safety. Under such laws and
regulations we can be subject to substantial fines and sanctions for
violations and be required to install costly pollution control equipment or
effect operational changes to limit pollution emissions and/or decrease the
likelihood of accidental hazardous substance releases. We must conform our
operations and properties to these domestic and foreign laws and
regulations.
We use and generate hazardous substances and wastes in our
manufacturing operations. In addition, many of our current and former
properties are or have been used for industrial purposes. We have been
identified as a potentially responsible party with respect to several sites
designated for cleanup under federal "Superfund" or similar state laws. We
have an accrued liability on our balance sheet reflecting costs which are
probable and estimable for our projected financial obligations relating to
these matters. If we have underestimated our remaining financial
obligations, we may face greater exposure which could have an adverse effect
on our financial condition. Stringent fines and penalties may be imposed for
non-compliance with regulatory requirements relating to environmental
matters, and many environmental laws impose joint and several liability for
remediation for cleanup of certain waste sites and for related natural
resource damages.
We have experienced, and expect to continue to experience, operating
costs to comply with environmental laws and regulations. In addition, new
laws and regulations, stricter enforcement of existing laws and regulations,
the discovery of previously unknown contamination or the imposition of new
clean-up requirements could require us to incur costs or become the basis
for new or increased
S-12
liabilities that could have a material adverse effect on our business,
financial condition, results of operations or liquidity.
OUR SUCCESS DEPENDS ON OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL.
Our future success depends to a significant degree on the skills,
experience and efforts of our executive officers and other key personnel.
The loss of the services of any of our executive officers, particularly our
Chairman, President and Chief Executive Officer, Ross J. Centanni, could
have an adverse impact on us. None of our executive officers has an
employment agreement with us. However, we have a common stock ownership
requirement and provide certain benefits for our executive officers,
including change in control agreements, which provide incentives for them to
make a long-term commitment to us. Our future success will also depend on
our ability to attract and retain qualified personnel and a failure to
attract and retain new qualified personnel could have an adverse effect on
our operations.
OUR BUSINESS COULD SUFFER IF WE EXPERIENCE EMPLOYEE WORK STOPPAGES OR OTHER
LABOR DIFFICULTIES.
After giving effect to the Syltone acquisition, we have approximately
2,700 full-time employees, of which approximately 1,000, including most of
our employees outside of the United States, are represented by labor unions.
Although we do not anticipate future work stoppages by our union employees,
there can be no assurance that work stoppages will not occur.
Although we believe that our relations with our employees are good and
we have not experienced any recent strikes or work stoppages, we cannot
assure you that we will be successful in negotiating new collective
bargaining agreements, that such negotiations will not result in significant
increases in the cost of labor or that a breakdown in such negotiations will
not result in the disruption of our operations. If any of the preceding were
to occur, it could impair our ability to manufacture our products and result
in increased costs and/or decreased operating results.
OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.
As of December 31, 2003, after giving effect to this offering, the
anticipated use of proceeds from this offering and the Syltone acquisition,
our total debt would have been approximately $114.8 million. We have
incurred and will likely continue to incur indebtedness to fund potential
future acquisitions, other strategic initiatives and general corporate
purposes. Although we believe that the cash flow generated by our continuing
operations is sufficient to meet the resulting repayment obligations, there
can be no assurance that this will be the case. Our incurrence of additional
indebtedness could have important consequences to you. For example, it
could:
o increase our vulnerability to general adverse economic and industry
conditions;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, acquisitions, research and development efforts and
other general corporate purposes, as well as to pay dividends;
o limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
o place us at a competitive disadvantage relative to our competitors
that have less debt; and
o limit, along with the financial and other restrictive covenants in
our indebtedness, our ability to borrow additional funds which
could affect our ability to make future acquisitions, among other
things.
OUR CREDIT AGREEMENTS IMPOSE RESTRICTIONS WITH RESPECT TO VARIOUS BUSINESS
MATTERS.
Our credit agreements contain numerous restrictive covenants that limit
the discretion of management with respect to certain business matters. These
covenants place restrictions on, among other things, our
S-13
ability to incur additional indebtedness, to create liens or other
encumbrances, to pay dividends or make other payments in respect of our
shares of common stock, to engage in transactions with affiliates, to make
certain payments and investments and to merge or consolidate with another
entity. The credit agreements also contain a number of financial covenants
that require us to meet certain financial ratios and tests. If we fail to
comply with the obligations in the credit agreements, it could result in an
event of default under the credit agreement. If such an event of default
were to occur and not be cured or waived, it could result in acceleration of
the indebtedness under our credit agreement and under other instruments that
may contain cross-acceleration or cross-default provisions, any of which
could have a material adverse effect on our business.
THIRD PARTIES MAY INFRINGE UPON OUR INTELLECTUAL PROPERTY AND WE MAY EXPEND
SIGNIFICANT RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY.
Our success depends in part on our proprietary technology. We rely on a
combination of patents, copyrights, trademarks, trade secrets,
confidentiality provisions and licensing arrangements to establish and
protect our proprietary rights. We may be required to spend significant
resources to monitor and police our intellectual property rights. If we fail
to successfully enforce our intellectual property rights, our competitive
position could suffer, which could harm our operating results.
OUR PENSION AND OTHER POSTRETIREMENT BENEFIT OBLIGATIONS AND EXPENSE (OR
INCOME) ARE DEPENDENT UPON ASSUMPTIONS USED IN CALCULATING SUCH AMOUNTS AND
ACTUAL RESULTS OF INVESTMENT ACTIVITY.
Pension and other postretirement benefit obligations and expense (or
income) are dependent on assumptions used in calculating such amounts and
actual results of investment activity. These assumptions include discount
rate, rate of compensation increases, expected return on plan assets and
expected healthcare trend rates. While we believe that the assumptions are
appropriate, differences in actual experience or future changes in
assumptions may affect our obligations, future expense and funding
requirements. For example, in the fourth quarter of 2002, we recorded a
non-cash charge to stockholders' equity in the amount of $8.5 million to
offset a deficit in the accumulated benefit obligation of our defined
benefit pension plans.
RISKS RELATED TO THE OFFERING
-----------------------------
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE, WHICH COULD
RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES IN THIS
OFFERING.
The trading price of our common stock has fluctuated, ranging between
$17.90 and $30.30 per share over the 52 weeks preceding the date of this
prospectus supplement. The overall market and the price of our common stock
may continue to be volatile. The trading price of our common stock may be
significantly affected by various factors, including:
o general economic and market conditions;
o variations in our quarter to quarter operating results;
o changes in investors' and analysts' perceptions of the business
risks and conditions of our business;
o the expiration of the lock-up period (90 days after the offering);
and
o the limited public float of our common stock.
In addition, there can be no assurance that shares issued in this
offering and potential future offerings will not have an adverse effect on
the trading price of our common stock.
VARIOUS RESTRICTIONS IN OUR GOVERNING DOCUMENTS AND DELAWARE LAW COULD
HINDER A TAKEOVER THAT IS NOT SUPPORTED BY OUR BOARD OF DIRECTORS.
Certain provisions in our corporate documents and Delaware law could
delay or prevent a change in control. Our Certificate of Incorporation and
By-Laws contain provisions that may make it difficult to
S-14
acquire control of us, including provisions: regulating the ability of our
stockholders to bring matters for action at annual meetings; prohibiting the
stockholders from acting by written consent; authorizing the Board of
Directors to issue and set the terms of preferred stock; and creating a
Board of Directors comprised of three classes of directors with staggered
terms. We also have a rights plan in place that would cause extreme dilution
to any person or group which attempts to acquire a significant interest in
us without advance approval of the Board of Directors. In addition, Section
203 of the Delaware General Corporation law imposes restrictions on mergers
and other business combinations between us and any holder of 15% or more of
our common stock.
IT IS UNLIKELY YOU WOULD BE ABLE TO RECOVER ANY DAMAGES FROM OUR FORMER
INDEPENDENT AUDITOR, ARTHUR ANDERSEN LLP.
We have been unable to obtain any required consents from our former
independent auditor, Arthur Andersen LLP. It is unlikely you would be able
to recover damages from them.
Certain financial statements and schedules included in this Prospectus
and elsewhere in the Registration Statement, to the extent and for the
periods indicated in their report, have been audited by Arthur Andersen, our
former independent auditor. On June 15, 2002, Arthur Andersen was convicted
on a federal obstruction of justice charge and subsequently ceased
conducting business. On June 26, 2002, we dismissed Arthur Andersen and
retained KPMG LLP as our independent auditors for the fiscal year ended
December 31, 2002. We have been unable to obtain any required consents from
Arthur Andersen relating to the financial statements. Because we have not
obtained Arthur Andersen's consent to the incorporation of their report and
because Arthur Andersen has ceased conducting business, it is unlikely you
would be able to recover damages from Arthur Andersen for any claim against
them.
Furthermore, Arthur Andersen will be unable to participate in the due
diligence process that would customarily be performed by potential investors
in our securities, which process includes having independent accountants
perform procedures to ensure the continued accuracy of their reports on
audited financial statements.
USE OF PROCEEDS
The net proceeds to us from the offering are estimated to be
approximately $69.3 million after deducting the underwriting discount and
commissions and offering expenses payable by us. If the underwriters' option
to purchase 450,000 additional shares in this offering is exercised in full,
we estimate our net proceeds will be approximately $79.7 million. We will
use the net proceeds from the sale of the securities for general corporate
purposes, which may include repayment of outstanding loans under our
revolving line of credit and financing future acquisitions. The loans under
our revolving line of credit bear interest at a variable rate based on
prime, federal funds and/or LIBOR for the applicable currency, and our debt
to adjusted income ratio. As of March 23, 2004, we had borrowed $89 million
under our revolving line of credit, with an interest rate of 2.6% and a
final maturity of March 6, 2005. Pending the application of the net
proceeds, we expect to invest the proceeds in investment-grade,
interest-bearing securities.
S-15
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the New York Stock Exchange under the
trading symbol "GDI". The following table sets forth, for the periods
indicated, the high and low sales prices per share of our common stock as
reported on the New York Stock Exchange.
HIGH LOW
---- ---
FISCAL YEAR ENDED DECEMBER 31, 2002
First Quarter...................................................... $ 25.25 $ 19.55
Second Quarter..................................................... $ 28.00 $ 18.34
Third Quarter...................................................... $ 21.00 $ 15.00
Fourth Quarter..................................................... $ 21.39 $ 14.34
FISCAL YEAR ENDED DECEMBER 31, 2003
First Quarter...................................................... $ 20.44 $ 16.35
Second Quarter..................................................... $ 20.80 $ 18.10
Third Quarter...................................................... $ 25.10 $ 20.05
Fourth Quarter .................................................... $ 24.99 $ 19.95
FISCAL YEAR ENDED DECEMBER 31, 2004
First Quarter (through March 23, 2004)............................. $ 30.30 $ 23.97
On March 23, 2004, the last reported sale price of our common stock on
the New York Stock Exchange was $24.96. As of March 23, 2004 there were
approximately 8,010 stockholders of record of our common stock.
DIVIDEND POLICY
We have not paid a dividend on our common stock since our spin-off from
Cooper Industries, Inc. in April 1994. We plan to retain all net earnings
for debt service and capital accumulation and reinvestment. We do not plan
to pay dividends on our common stock for the foreseeable future. Our Board
of Directors has sole discretion over the declaration and payment of future
dividends. Any future dividends will depend upon our profitability,
financial condition, cash requirements, future prospects, general business
conditions, legal and contractual restrictions on the payment of dividends
and other factors our Board of Directors believes are relevant. Our debt
instruments contain restrictions on the payment of cash dividends.
S-16
CAPITALIZATION
The following table sets forth our cash and cash equivalents,
short-term debt, long-term debt and stockholders' equity as of December 31,
2003: (1) on an actual basis and (2) on a pro forma basis to give effect to
this offering, the application of the estimated net proceeds from this
offering as described under "Use of Proceeds", the Syltone acquisition and
the financing for the Syltone acquisition as described under "Unaudited Pro
Forma Consolidated Financial Statements." You should read this information
in conjunction with the information under "Selected Consolidated Financial
Information," "Management's Discussion and Analysis of Financial Conditions
and Results of Operations" and our consolidated financial statements and
related notes beginning on page F-1.
DECEMBER 31, 2003
---------------------------------
PRO FORMA
ACTUAL UNAUDITED
-------------- --------------
(in thousands except share data)
Cash and equivalents........................................................ $ 132,803 $ 26,358
============== ==============
Total short-term debt (1): $ 16,875 $ 30,706
============== ==============
Long-term debt:
Credit Line, due 2005.................................................... 114,000(2) 14,937(3)
Term Loan, due 2007...................................................... 33,750 33,750
Unsecured Senior Note, due 2006.......................................... 10,000 10,000
Variable Rate Industrial Revenue Bonds, due 2016......................... 8,000 8,000
Other long-term debt..................................................... 6 17,451
-------------- --------------
Total long-term debt................................................... $ 165,756 $ 84,138
-------------- --------------
Stockholders' equity:
Common stock (shares authorized: 50,000,000, par value $0.01; shares
issued: 16,117,026 actual; 19,117,026 pro forma)....................... 178 208
Capital in excess of par value........................................... 174,474 243,726
Retained earnings........................................................ 102,307 101,930
Accumulated other comprehensive income................................... 14,893 14,893
Treasury stock at cost................................................... (25,947) (25,947)
-------------- --------------
Total stockholders' equity............................................. 265,905 334,810
-------------- --------------
Total capitalization................................................. $ 448,536 $ 449,654
============== ==============
(1) Short-term debt consisted of the following current maturities of
long-term debt: $11,875 under the Term Loan, due 2007 and $5,000 under
the Unsecured Senior Note, due 2006. On a pro forma basis, short-term
debt also included $9,230 aggregate principal amount of Loan Notes
issued and $4,601 of debt assumed in connection with the Syltone
acquisition.
(2) We incurred $92,000 of additional indebtedness in connection with the
Syltone acquisition and had $36,000 available for future use or for
letters of credit, subject to the terms of the credit agreement.
(3) On a pro forma basis, the Credit Line had $135,063 available for future
use or for letters of credit, subject to the terms of the credit
agreement.
S-17
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollar and British pound amounts in thousands)
GENERAL DESCRIPTION
The following unaudited pro forma consolidated financial statements are
based on our historical consolidated financial statements and the historical
consolidated financial statements of Syltone plc ("Syltone"), each included
in this prospectus supplement, adjusted to give effect to the Syltone
acquisition and the financing for the Syltone acquisition. The unaudited pro
forma consolidated statement of operations for the year ended December 31,
2003 gives effect to the Syltone acquisition and the financing for the
Syltone acquisition as if each had occurred on January 1, 2003. The
unaudited pro forma consolidated balance sheet as of December 31, 2003 gives
effect to the Syltone acquisition and the financing for the Syltone
acquisition as if each had occurred on December 31, 2003. The unaudited pro
forma consolidated financial statements do not give effect to the use of the
proceeds from this offering.
SYLTONE ACQUISITION FINANCING
Our cash offer to acquire all of the outstanding shares of Syltone was
made by UBS Investment Bank ("UBS") on behalf of GD First (UK) plc ("GD
First"), our wholly-owned subsidiary. In order for UBS to represent that
sufficient cash resources were available to complete the offer, we (through
GD First) deposited (pounds)62,416 with UBS on November 10, 2003. These
funds were obtained by us from $92,000 of U.S. dollar denominated borrowings
under our existing Credit Line on November 10, 2003 and $12,050 of existing
cash reserves for a total of $104,050 (converted to (pounds)62,416 on that
same date). The (pounds)62,416 of sufficient resources required by UBS were
based on:
(a) (pounds)48,236 to fund the estimated cash portion of the purchase
price (excluding our direct acquisition costs) for all of the issued
and outstanding share capital, including share options, of Syltone
(based on our (pounds)1.85 per share cash offer price); and
(b) (pounds)14,180 to provide funds, if required, for the repayment of
Syltone's estimated bank debt (upon completion of the Syltone
acquisition).
As the offer period for the Syltone shares was still open as of
December 31, 2003, the (pounds)62,416 of funds remained on deposit at UBS.
At December 31, 2003, the U.S. dollar equivalent of the (pounds)62,416 on
deposit was $111,475 at an exchange rate of (pounds)1.00=$1.7860.
Upon receiving acceptances to our offer representing almost 97% of the
issued and outstanding share capital of Syltone, we declared the offer to
purchase all of Syltone's share capital unconditional in all respects and
effectively took control of Syltone on January 2, 2004. In order to complete
the Syltone acquisition on GD First's behalf, funds on deposit at UBS were
disbursed as follows:
(a) (pounds)43,128 in exchange for all the issued and outstanding
shares and share options, exclusive of the value of the shares
tendered in exchange for the receipt of "Loan Notes" in lieu of cash
((pounds)5,168);
(b) (pounds)16,210 was converted to U.S. dollars and used to repay a
portion of our November 10, 2003 U.S. dollar denominated Credit Line
borrowing; and
(c) (pounds)2,800 was converted to U.S. dollars and used to repay U.S.
dollar denominated debt obligations of Syltone.
The remaining balance, including interest income earned, was used to
pay a portion of the direct acquisition costs related to the Syltone
acquisition.
PRO FORMA ADJUSTMENTS
The unaudited pro forma consolidated financial statements reflect pro
forma adjustments that are described in the accompanying notes and are based
on available information and certain assumptions we believe are reasonable
but are subject to change. In our opinion, all adjustments that are
necessary to
S-18
fairly present the pro forma information have been made. The unaudited pro
forma consolidated financial statements do not purport to represent what our
results of operations or financial position would actually have been if the
Syltone acquisition and the financing for the Syltone acquisition had
occurred on such dates or to project our results of operations or financial
position for any future date or period.
The unaudited pro forma consolidated financial statements reflect our
preliminary estimates of the allocation of the purchase price for the
Syltone acquisition and are subject to change. The unaudited pro forma
consolidated financial statements do not reflect any operating efficiencies
and cost savings that we may achieve with respect to the combined entities
nor any expense associated with achieving these benefits.
SYLTONE AND GARDNER DENVER HISTORICAL FINANCIAL STATEMENTS
The historical consolidated financial statements of Syltone in the pro
forma consolidated financial information are based on Syltone's consolidated
financial statements after conversion to accounting principles generally
accepted in the United States ("U.S. GAAP") and U.S. dollars. Reference is
made to Note 29 to Syltone's audited consolidated financial statements for
the fiscal year ended March 31, 2003 (included in this prospectus
supplement) for a discussion of the nature of the significant differences
between accounting principles generally accepted in the United Kingdom and
U.S. GAAP. We derived Syltone's consolidated financial statements as of and
for the twelve months ended September 30, 2003 based on (i) the unaudited
consolidated financial statements as of and for the six-month period ended
September 30, 2003, and (ii) the unaudited results for the six-month period
ended March 31, 2003 derived from Syltone's consolidated financial
statements for the fiscal year ended March 31, 2003.
Syltone's historical consolidated statement of operations for the
twelve months ended September 30, 2003 was prepared in British pounds. As
noted above, the unaudited pro forma consolidated statement of operations
for the year ended December 31, 2003 gives effect to the Syltone acquisition
and the financing for the Syltone acquisition as if each had occurred on
January 1, 2003. Accordingly, Syltone's historical consolidated statement of
operations has been converted into U.S. dollars using the average exchange
rate for the twelve months ended September 30, 2003 of (pounds)1.00=$1.6022.
Syltone's historical consolidated balance sheet as of September 30, 2003 was
prepared in British pounds. As noted above, the unaudited pro forma
consolidated balance sheet as of December 31, 2003 gives effect to the
Syltone acquisition and the financing for the Syltone acquisition as if each
had occurred on December 31, 2003. Accordingly, Syltone's historical
consolidated balance sheet has been converted into U.S. dollars using the
actual exchange rate at the December 31, 2003 rate of (pounds)1.00=$1.7860.
You should read the following unaudited pro forma consolidated
financial statements in conjunction with our historical audited consolidated
financial statements, the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Syltone's
historical audited and unaudited consolidated financial statements and the
related notes, each included in this prospectus supplement.
S-19
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gardner Pro Forma
Denver Syltone Adjustments Pro Forma
------------- ------------- ------------- -------------
Revenues.................................... $ 439,530 $ 130,549 $ -- $ 570,079
Costs and expenses:
Cost of sales (excluding depreciation and
amortization)........................... 307,753 83,643 -- 391,396
Depreciation and amortization............. 14,566 3,494 1,858 (a) 19,918
Selling and administrative expenses....... 85,326 35,333 -- (b) 120,659
Interest expense.......................... 4,748 1,546 2,649 (c) 8,943
Other (income) expense, net............... (3,221) 111 -- (3,110)
------------- ------------- ------------- -------------
409,172 124,127 4,507 537,806
------------- ------------- ------------- -------------
Income before income taxes.................. 30,358 6,422 (4,507) 32,273
Provision for income taxes.................. 9,715 2,294 (1,472)(d) 10,537
------------- ------------- ------------- -------------
Net income.................................. $ 20,643 $ 4,128 $ (3,035) $ 21,736
============= ============= ============= =============
Basic earnings per share.................... $ 1.29 $ 1.35
============= =============
Diluted earnings per share.................. $ 1.27 $ 1.33
============= =============
Basic weighted average number of shares
outstanding............................... 16,061 16,061
============= =============
Diluted weighted average number of shares
outstanding............................... 16,312 16,312
============= =============
See accompanying notes to unaudited pro forma consolidated financial statements
S-20
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
(IN THOUSANDS)
Gardner Pro Forma
Denver Syltone Adjustments Pro Forma
------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and equivalents............................... $ 132,803 $ 8,348 $ (89,757)(e) $ 26,358
(25,552)(f)
516 (g)
Receivables, net................................... 81,345 31,169 (536)(e) 111,424
(554)(h)
Inventories, net................................... 64,327 21,720 1,204 (i) 86,358
(893)(e)
Deferred income taxes.............................. 3,652 1,172 920 (e) 5,744
Other current assets............................... 5,682 -- -- 5,682
----------- ----------- ------------ ------------
Total current assets............................. 287,809 62,409 (114,652) 235,566
----------- ----------- ------------ ------------
Property, plant and equipment, net.................... 75,428 30,441 5,738 (j) 111,607
Goodwill.............................................. 205,488 24,532 27,900 (e) 257,920
Other intangibles, net................................ 10,341 -- 30,898 (e) 41,239
Deferred income taxes................................. 5,374 1,909 (7,266)(e) 17
Other assets.......................................... 5,293 -- (960)(g) 4,333
----------- ----------- ------------ ------------
Total assets................................... $ 589,733 $ 119,291 $ (58,342) $ 650,682
=========== =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............... $ 16,875 $ 5,185 $ 9,230 (f) $ 30,706
(584)(f)
Accounts payable and accrued liabilities........... 84,081 32,872 2,590 (e) 118,922
(444)(g)
(177)(h)
----------- ----------- ------------ ------------
Total current liabilities........................ 100,956 38,057 10,615 149,628
----------- ----------- ------------ ------------
Long-term debt, less current maturities............... 165,756 21,862 (34,198)(f) 153,420
Postretirement benefits other than pensions........... 32,110 -- -- 32,110
Other liabilities..................................... 25,006 10,575 14,415 (e) 49,996
----------- ----------- ------------ ------------
Total liabilities................................ 323,828 70,494 (9,168) 385,154
----------- ----------- ------------ ------------
Total stockholders' equity.................... 265,905 48,797 (48,797)(k) 265,528
(377)(h)
----------- ----------- ------------ ------------
Total liabilities and stockholders' equity..... $ 589,733 $ 119,291 $ (58,342) $ 650,682
=========== =========== ============ ============
See accompanying notes to unaudited pro forma consolidated financial statements
S-21
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLAR AND BRITISH POUND AMOUNTS IN THOUSANDS)
(a) Reflects the change in Syltone's depreciation and amortization expense
due to the depreciation of the step-up in its property, plant and
equipment to fair value over estimated average useful lives ranging
from 3 to 25 years, and the amortization of the separately identifiable
intangible assets with finite lives at estimated fair values over
estimated useful lives ranging from 1 to 20 years. This adjustment is
based on our estimated allocation of the purchase price for the Syltone
acquisition. We will base the final allocation on appraisals that have
not yet been completed.
(b) The Syltone historical statement of operations includes (pounds)614
($984) of compensation expense (pretax) related to Syltone stock
options treated as variable options under U.S. GAAP. All of the
outstanding Syltone stock options were settled in conjunction with the
Syltone acquisition. As a result, there will be no recurring
compensation expense related to such variable Syltone stock options
subsequent to the Syltone acquisition. Notwithstanding this fact, the
compensation expense related to such variable stock options has not
been eliminated in the pro forma consolidated statement of operations
for the twelve months ended December 31, 2003.
(c) Reflects the following interest expense on the estimated incremental
borrowings necessary to finance the Syltone acquisition (as discussed
above under "Syltone Acquisition Financing"):
Interest on the incremental Credit Line borrowing ($62,219 at 2.72%).............. $ 1,695
Interest on the Loan Notes ((pounds)5,168 at 3.27%)............................... 276
Incremental interest on our previously existing average borrowings (excluding
the Syltone acquisition related borrowings) due to an increase in rates on
borrowings and commitments resulting from the increased leverage from the
Syltone acquisition.......................................................... 554
Amortization of debt issue costs related to the Syltone acquisition............... 176
Elimination of historical interest expense on Syltone's U.S. dollar
denominated debt repaid in conjunction with the Syltone acquisition............ (208)
Elimination of historical interest expense on the actual Credit Line borrowing
from Nov. 10 to Dec. 31, 2003 related to the Syltone acquisition............... (354)
Elimination of the interest income earned by us on the (pounds)62,416 on deposit
at UBS from Nov. 10, 2003 through Dec. 31, 2003................................ 510
-----------
Total interest expense adjustment................................................. $ 2,649
===========
For purposes of determining the adjustment to interest expense in the
pro forma statement of operations, the applicable LIBOR rate plus a
margin of 145 basis points was used for the U.S. dollar denominated
borrowing under our Credit Line. For the British pound denominated Loan
Notes, the applicable LIBOR rate less 50 basis points was used (which
is the credit spread applicable under the terms of the Loan Notes).
The Syltone historical statement of operations includes (pounds)205
($328) of additional interest expense (pretax) related to interest rate
swap agreements that did not meet the criteria for hedge accounting
under U.S. GAAP related to accounting for derivatives. Effective with
the Syltone acquisition, and as part of the financing of the
Acquisition, two of the three existing interest rate swaps were
settled. The required documentation related to the remaining interest
rate swap was modified as of the effective date of the Syltone
acquisition and it is anticipated that it will fully qualify for hedge
accounting under U.S. GAAP from the effective date of the acquisition.
Notwithstanding this fact, the interest expense related to the interest
rate swaps has not been eliminated in the pro forma consolidated
statement of operations for the twelve months ended December 31, 2003.
(d) Reflects the income tax effect of the pro forma adjustments at the
combined effective income tax rate for Gardner Denver and Syltone of
32.7%.
(e) Reflects the following estimated purchase price allocation and
estimated net fair value adjustments to Syltone's assets and
liabilities, including goodwill:
S-22
Consideration paid at closing for the shares of Syltone ((pounds)48,296).... $ 86,257
Cash to be paid for estimated direct acquisition costs, including financial
advisory, legal, accounting, auditing and other costs.................... 3,500
-----------
Aggregate purchase price................................................ 89,757
Book value of Syltone's net assets.......................................... (48,797)
Capitalized estimated manufacturing profit in inventory acquired ........... (1,204)
Step-up in property, plant and equipment to fair value...................... (5,738)
Separately identifiable intangible assets (other than goodwill) ............ (30,898)
Adjustment of pension liabilities (equal to the excess of the projected
benefit obligation over the fair value of plan assets less Syltone's
existing liability)...................................................... 14,415
Additional deferred tax liabilities, net (on fair value changes to assets
and liabilities)......................................................... 6,346
Other asset and liability fair value adjustments, net....................... 4,019
-----------
Net adjustment to goodwill.............................................. $ 27,900
===========
This reflects our preliminary estimates of the purchase price
allocation for the Syltone acquisition, which may change upon
completion of appraisals. Further, we may identify other assets and
liabilities to which a portion of the purchase price will be allocated.
The purchase price allocation also does not include an accrual for any
anticipated restructuring activities in connection with the Syltone
acquisition. We have not yet performed a detailed analysis to identify
and measure additional adjustments that may be necessary to conform
Syltone's accounting policies with our accounting policies.
The adjusted pro forma balance of Syltone's other separately
identifiable intangible assets is estimated to be comprised of the
following:
Other Intangible Assets:
Customer lists and relationships, to be amortized over 20 years......... $ 19,646
Trademarks and trade names, indefinite lives............................ 8,930
Other (computer software, service and supply contracts and patents), to
be amortized over 1 - 10 years..................................... 2,322
-----------
Total other intangible assets........................................... $ 30,898
===========
In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets," the pro forma statement of operations does not include
amortization of goodwill and other intangible assets with indefinite
useful lives acquired in the Syltone acquisition.
(f) Reflects the repayment of a portion of the U.S. dollar denominated
Credit Line borrowing ($29,781) and existing Syltone U.S. dollar
denominated debt ($5,001) that were outstanding at December 31, 2003
and, as detailed above under "Syltone Acquisition Financing," were
repaid in conjunction with consummating the Syltone acquisition.
Reflects the issuance of (pounds)5,168 of Loan Notes ($9,230) in lieu
of cash for a portion of the Syltone shares.
(g) Reflects the elimination of the portion of our direct acquisition costs
related to the Syltone acquisition that had been capitalized as of
December 31, 2003, and included in "Other assets" ($960) as they had
been paid ($516) or accrued and unpaid ($444) as of December 31, 2003.
The addition to cash represents the portion of the direct acquisition
costs paid in 2003 by us ($516) that is included in the total estimated
direct acquisition costs in the aggregate gross purchase price for the
Syltone shares (as detailed in Note (e) above).
(h) Reflects the elimination of the accrued interest receivable reflected
on our balance sheet as of December 31, 2003 (and the related impact on
stockholders' equity, or retained earnings, and accrued income taxes
payable) related to the funds on deposit at UBS from November 10, 2003
through December 31, 2003 in conjunction with the financing of the
Syltone acquisition.
S-23
(i) Reflects the estimated purchase accounting adjustment for
capitalization of estimated manufacturing profit in inventory acquired
with Syltone. The pro forma statement of operations does not reflect
the impact of the one-time adjustment on cost of sales during the
period this inventory is sold.
(j) Reflects the estimated purchase accounting adjustment to Syltone's
property, plant and equipment to step-up the basis to estimated fair
value. This adjustment is based on the estimated allocation of the
purchase price for the Syltone acquisition. The final allocation of the
purchase price will be based on appraisals that have not yet been
completed.
(k) Reflects the elimination of Syltone's historical consolidated equity.
S-24
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected historical consolidated financial information presented
under the captions "Statement of Operations Data," "Other Financial Data"
and "Balance Sheet Data" is for, and as of the end of, each of the years in
the five-year period ended December 31, 2003. Our consolidated financial
statements for the years ended December 31, 2002 and 2003 have been audited
by KPMG LLP, independent auditors. Our consolidated financial statements for
the years ended December 31, 1999, 2000 and 2001 have been audited by Arthur
Andersen LLP, independent auditors. The consolidated financial statements as
of December 31, 2002 and 2003, and for each of the years in the three-year
period ended December 31, 2003, and the report thereon, are included in this
prospectus supplement beginning on page F-1.
The selected consolidated financial data should be read in conjunction
with the consolidated financial statements for the years ended December 31,
2003, 2002 and 2001, the related notes, and the independent auditors'
reports.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 2000 2001 2002 2003
------------- ------------- ------------ -------------- -------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 327,067 $ 379,358 $ 419,770 $ 418,158 $ 439,530
Costs and expenses:
Cost of sales (excluding depreciation
and amortization)....................... 226,550 268,290 294,249 289,631 307,753
Depreciation and amortization (1)......... 14,222 15,881 17,567 14,139 14,566
Selling and administrative expenses....... 53,080 59,784 69,678 79,400 85,326
Interest expense.......................... 5,934 7,669 6,796 6,365 4,748
Other income, net......................... (1,876) (2,160) (3,203) (204) (3,221)
------------- ------------- ------------ -------------- -------------
297,910 349,464 385,087 389,331 409,172
------------- ------------- ------------ -------------- -------------
Income before income taxes.................. 29,157 29,894 34,683 28,827 30,358
Provision for income taxes.................. 11,109 11,210 12,659 9,225 9,715
------------- ------------- ------------ -------------- -------------
Net income.................................. $ 18,048 $ 18,684 $ 22,024 $ 19,602 $ 20,643
============= ============= ============ ============== =============
Basic earnings per share.................... $ 1.20 $ 1.22 $ 1.42 $ 1.24 $ 1.29
============= ============= ============ ============== =============
Diluted earnings per share.................. $ 1.18 $ 1.21 $ 1.40 $ 1.22 $ 1.27
============= ============= ============ ============== =============
Basic shares outstanding.................... 15,018 15,300 15,553 15,854 16,061
Diluted shares outstanding.................. 15,358 15,489 15,783 16,042 16,312
BALANCE SHEET DATA (AS OF END OF PERIOD):
Total assets................................ $ 379,419 $ 403,881 $ 488,688 $ 478,730 $ 589,733
Long-term debt, less
current maturities...................... 114,200 115,808 160,230 112,663 165,756
Total liabilities........................... 226,810 232,733 289,960 255,807 323,828
Stockholders' equity........................ 152,609 171,148 198,728 222,923 265,905
OTHER FINANCIAL DATA:
Gross margin (2)............................ $ 100,517 $ 111,068 $ 125,521 $ 128,527 $ 131,777
EBITDA (3).................................. 49,313 53,444 59,046 49,331 49,672
Cash flows provided by operating
activities................................ 26,619 30,636 44,153 52,481 46,283
Capital expenditures........................ 11,941 13,549 11,524 13,641 11,950
Orders (4).................................. 318,635 379,985 413,438 402,019 425,620
(1) As a result of adopting Statement of Financial Accounting Standards No.
142 "Goodwill and Other Intangibles Assets," period goodwill
amortization ceased effective January 1, 2002.
(2) Gross margin consists of revenues minus cost of sales (excluding
depreciation and amortization).
(3) EBITDA consists of net income before provision for income taxes,
interest expense and depreciation and amortization. EBITDA is not a
measurement of financial performance or liquidity determined in
accordance with accounting principles generally accepted in the United
States and should not be considered as an alternative to net income,
net cash provided by operating activities or other consolidated income
or cash flow statement data prepared in accordance with generally
accepted accounting principles. We present EBITDA because we believe it
is frequently used by analysts, investors and other interested parties
in the financial evaluation of companies in our industry, and we
believe it provides useful information to investors. Our definition of
EBITDA, however, may differ from the definition used by other
companies. A reconciliation of net income to EBITDA is provided as
follows:
S-25
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 2000 2001 2002 2003
------------- ------------- ------------- ------------- -------------
(in thousands)
Net income............................... $ 18,048 $ 18,684 $ 22,024 $ 19,602 $ 20,643
Provision for income tax................. 11,109 11,210 12,659 9,225 9,715
Interest expense......................... 5,934 7,669 6,796 6,365 4,748
Depreciation and amortization............ 14,222 15,881 17,567 14,139 14,566
------------- ------------- ------------- ------------- -------------
EBITDA .................................. $ 49,313 $ 53,444 $ 59,046 $ 49,331 $ 49,672
============= ============= ============= ============= =============
(4) Orders consists of bookings we believe to be firm for which a customer
purchase order has been received or communicated. Since orders can be
rescheduled or canceled at any time, orders do not necessarily reflect
future sales levels.
S-26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto.
OVERVIEW
The Company is organized based on the products and services it offers.
Under this organizational structure, the Company has three operating
divisions: Compressor, Blower and Pump. These divisions comprise two
reportable segments, Compressed Air Products and Pump Products. The
Compressor and Blower Divisions are aggregated into one reportable segment
(Compressed Air Products) since the long-term financial performance of these
businesses is affected by similar economic conditions, coupled with the
similar nature of their products, manufacturing processes and other business
characteristics.
In the Compressed Air Products segment, the Company designs,
manufactures, markets and services the following products and related
aftermarket parts for industrial and commercial applications: rotary screw,
reciprocating, sliding vane and centrifugal compressors, and positive
displacement and centrifugal blowers. The primary customers and applications
for Gardner Denver's compressed air products are durable and non-durable
goods manufacturers; process industries such as petroleum, primary metals,
pharmaceuticals, food and paper; original equipment manufacturers;
manufacturers of carpet cleaning equipment, pneumatic conveying equipment
and dry bulk trailers; wastewater treatment facilities; automotive service
centers; and niche applications such as polyethylene terephthalate ("PET")
bottle blowing, breathing air equipment and compressed natural gas. Revenues
of the Compressed Air Products segment constituted approximately 84% of
total revenues in 2003.
In the Pump Products segment, the Company designs, manufactures,
markets and services reciprocating pumps, water jetting systems and related
aftermarket parts used in oil and natural gas drilling, servicing and
production, and industrial cleaning and maintenance. Typical applications
for pumps include oil transfer, saltwater disposal, ammine pumping for gas
processing, enhanced oil recovery, hydraulic power and other liquid transfer
applications. Applications for water jetting systems include runway and
shiphull cleaning, concrete demolition and metal surface preparation.
Revenues of the Pump Products segment constituted approximately 16% of total
revenues in 2003.
The Company sells its products through independent distributors and
sales representatives, and directly to original equipment manufacturers,
engineering firms, packagers and end-users.
In August 2003, the Company acquired a small machine shop operation in
Odessa, Texas to service and repair well stimulation and drilling pumps
serving the Permian Basin. This business also has a line of pumps and
uniquely designed fluid cylinders, which enhances the Company's existing
product offering. This acquisition provides opportunities to strengthen
relationships with existing customers and expand its share of aftermarket
business in this key geographic region. The financial results of this
acquisition are included in the Company's Pump Products segment.
In September 2001, the Company acquired Hoffman Air and Filtration
Systems ("Hoffman") and Hamworthy, Belliss & Morcom ("Belliss & Morcom").
Hoffman, previously headquartered in Syracuse, New York, manufactures and
distributes multistage centrifugal blowers and vacuum systems, primarily for
wastewater treatment and industrial applications. The acquisition of Hoffman
expanded Gardner Denver's product offering and distribution capabilities and
enhanced its position as a leading international supplier of centrifugal
products to the air and gas handling industry. During 2002, manufacturing of
Hoffman products was transferred to the Company's existing centrifugal
blower facility in Peachtree City, Georgia. Belliss & Morcom, headquartered
in Gloucester, England, manufactures and distributes reciprocating air
compressors used for a variety of niche applications, such as PET bottle
blowing, breathing air equipment and compressed natural gas. The acquisition
of Belliss & Morcom broadened the
S-27
Company's range of product offerings, strengthened its distribution and
service networks and increased its participation in sales of products with
applications that have the potential to grow faster than the overall
industrial economy. The Hoffman and Belliss & Morcom acquisitions provided
growth opportunities through synergistic product lines and domestic and
international market penetration and are included in the Company's
Compressed Air Products segment.
The following table sets forth percentage relationships to revenues of
certain income statement items for the years presented.
YEAR ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
------------- ------------- -------------
Revenues ............................................ 100.0% 100.0% 100.0%
------------- ------------- -------------
Costs and expenses:
Cost of sales (excluding depreciation and
amortization) .................................. 70.0 69.3 70.1
Depreciation and amortization .................... 3.3 3.3 4.2
Selling and administrative expenses .............. 19.4 19.0 16.6
Interest expense ................................. 1.1 1.5 1.6
Other income, net ................................ (0.7) -- (0.8)
------------- ------------- -------------
93.1 93.1 91.7
------------- ------------- -------------
Income before income taxes .......................... 6.9 6.9 8.3
Provision for income taxes .......................... 2.2 2.2 3.0
------------- ------------- -------------
Net income .......................................... 4.7% 4.7% 5.3%
============= ============= =============
RECENT DEVELOPMENTS
On January 2, 2004, the Company effectively acquired Syltone plc
("Syltone"), previously a publicly traded company listed on the London Stock
Exchange. The purchase price of (pounds)61.2 million (approximately $109.2
million) including assumed bank debt (net of cash acquired) was paid in the
form of cash ((pounds)43.1 million), new loan notes ((pounds)5.2 million)
and the assumption of Syltone's existing bank debt, net of cash
((pounds)12.9 million). The cash portion of the purchase price was funded
from the Company's existing revolving credit line and cash reserves. The
loan notes are unsecured and bear interest payable every six months, in
arrears, at a rate per annum of one-half of one percent below the British
pound based London Interbank Offered Rate for six-month deposits. The loan
notes are redeemable at par at the option of the loan noteholder, in whole
or in part, on any interest payment date falling on or after December 31,
2004. If at any time the aggregate nominal amount of all loan notes
outstanding is (pounds)0.5 million or less, the Company has the right to
redeem all of the outstanding loan notes. Any loan notes outstanding on June
30, 2009 will be redeemed in full, together with interest on that day.
Syltone, headquartered in Bradford, United Kingdom, is one of the
world's largest manufacturers of equipment used for loading and unloading
liquid and dry bulk products on commercial transportation vehicles. This
equipment includes compressors, blowers and other ancillary products that
are complementary to the Company's product line. Syltone is also one of the
world's largest manufacturers of fluid transfer equipment (including loading
arms, swivel joints, couplers and valves) used to load and unload ships,
tank trucks and rail cars. Syltone generated revenues and operating profit
(in accordance with accounting principles generally accepted in the U.K.) of
(pounds)84.4 million and (pounds)6.3 million, respectively (approximately
$151.1 million and $11.3 million, respectively as calculated using the
December 31, 2003 exchange rate of $1.79/(pounds)) for the twelve months
ended September 30, 2003. Syltone's largest markets are Europe and North
America, which represent approximately 67% and 20% of its revenues,
respectively. Of the total sales to Europe, approximately 38% are to the
U.K., 18% to France, 11% to Germany and 33% to other European countries.
Approximately 70% of Syltone's revenues are generated through
transportation-related activities while the remaining 30% are derived from
fluid transfer-related activities.
The acquisition of Syltone strengthens the Company's position,
particularly in Europe, as the leading global provider of bulk handling
solutions for the commercial transportation industry. Syltone's emphasis on
systems-oriented handling solutions expands the Company's product offering
and
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manufacturing capabilities and provides incremental growth opportunities. In
addition, Syltone's installation and aftermarket capabilities are expected
to strengthen the Company's distribution and service networks. Through the
acquisition of Syltone, the Company expanded its product line to include
loading arms. The Company views loading arms as an attractive market segment
given its stability in developed regions where product demand is driven
primarily by replacement activity, and its growth potential in emerging
economies that are expanding their transportation infrastructure.
YEAR ENDED DECEMBER 31, 2003, COMPARED WITH
YEAR ENDED DECEMBER 31, 2002
REVENUES
Revenues increased $21.3 million to $439.5 million in 2003, compared to
$418.2 million in 2002, primarily due to changes in currency exchange rates.
Revenues outside the United States, as a percentage of total revenues,
increased to 42% in 2003, compared to 37% in 2002. This increase is due to
changes in currency exchange rates (primarily the euro and British pound)
and volume increases in Asia and Canada.
Revenues for the Compressed Air Products segment increased $19.0
million (5%) to $369.0 million in 2003, compared to $350.0 million in 2002.
Revenues in this segment increased approximately $17.3 million due to
changes in currency exchange rates. Increased prices contributed
approximately $2.6 million but were partially offset by lower volumes of
centrifugal blowers.
Revenues in the Pump Products segment increased $2.4 million (4%) to
$70.5 million in 2003, compared to $68.1 million in 2002. Volume increases
contributed approximately 3 percentage points of the change primarily due to
increased shipments of well stimulation pumps and petroleum pump parts which
was partially offset by lower drilling pump shipments. Increased prices
contributed the remaining 1 percentage point increase. In 2002, Pump
Products segment revenues were supported by drilling pump backlog carried
over from 2001 orders.
COSTS AND EXPENSES
During the fourth quarter of 2003, the Company announced and initiated
restructuring plans to eliminate redundant manufacturing capacity,
streamline operations and reduce costs. These activities represent further
integration of previously completed acquisitions, which the Company expects
will better leverage existing manufacturing facilities. As a result of the
restructuring, the Company expects to realize a net reduction in headcount
of approximately 80 personnel (approximately 4% of its workforce as of
September 30, 2003) by the end of 2005. The substantial majority of this
headcount reduction was realized during the fourth quarter of 2003. As part
of the restructuring program, the Company refocused the marketing strategies
of its German blower business to place more emphasis on the truck blower
market rather than industrial applications for its products. In addition,
the Company exited the marketing and manufacturing of certain highly
engineered compressor packages in the U.K. and U.S. The Company also
announced its plan to implement new manufacturing processes and systems
improvements to reduce inventory and its intent to establish a compressor
packaging and assembly operation in China. The aggregate financial impact of
these profitability improvement programs (restructuring plans, inventory
reduction plan and establishment of China operations) resulted in a
reduction in diluted earnings per share of approximately $0.12 in the fourth
quarter of 2003.
Atchison Casting Corporation, the Company's largest supplier of iron
castings in 2002, downsized and subsequently closed its LaGrange, Missouri
foundry ("LaGrange Foundry") in the second half of 2002. As a result, the
Company implemented its previously developed contingency plan to secure
alternate supply sources. There was a negative impact on the Company's
financial performance (estimated at $0.04-$0.05 and $0.01-$0.03 diluted
earnings per share in 2003 and 2002, respectively) as additional costs were
incurred to expedite delivery of castings from new suppliers and accelerate
depreciation expense of pattern modification charges from alternate casting
suppliers who are no longer servicing the Company. The changes related to
the LaGrange Foundry closure have been completed and
S-29
the Company expects to benefit going forward from reduced material costs
from alternate suppliers. At the same time, the Company anticipates that it
will need to address some residual problems in 2004 as it re-balances its
casting supply chain while dealing with suppliers that are experiencing
lower volumes, high fixed cost structures and increased competitive
pressures.
Gross margin (defined as revenues less cost of sales) in 2003 increased
$3.3 million (3%) to $131.8 million compared to $128.5 million in 2002.
Gross margin as a percentage of revenues (gross margin percentage) decreased
to 30.0% in 2003 from 30.7% in 2002. This decrease in the gross margin
percentage was principally attributable to charges to cost of sales of $2.1
million incurred in conjunction with implementing the profitability
improvement programs discussed above. This factor contributed 0.5 percentage
points of the 0.7 percentage point decrease in gross margin as a percentage
of revenues. Unfavorable sales mix (including a lower proportion of drilling
pump and centrifugal blower sales which generate higher gross margins, and a
higher proportion of compressor package sales, which generate lower gross
margins), and incremental costs associated with the disruption in the
Company's casting supply chain also contributed to this decrease. These
negative factors were partially offset by cost reduction efforts, including
continued acquisition integration.
Selling and administrative expenses increased in 2003 by 7% to $85.3
million from $79.4 million in 2002, primarily due to changes in currency
exchange rates. Selling and administrative expenses increased 4% due to
changes in currency exchange rates and 1% due to expenses associated with
the profitability improvement programs. The remaining increase of 2% was
primarily attributable to higher compensation and postretirement expenses,
which were partially offset by lower medical costs and other cost reduction
efforts, including continued acquisition integration. As a percentage of
revenues, selling and administrative expenses were 19.4% in 2003, compared
to 19.0% in 2002. The increase in this ratio was primarily attributable to
the factors discussed above, partially offset by the impact of higher
revenues.
Compressed Air Products' operating earnings (defined as revenues less
cost of sales, depreciation and amortization, and selling and administrative
expenses) decreased $2.0 million (7%) to $27.8 million, compared to $29.8
million in 2002. This decrease was primarily attributable to $2.7 million of
charges incurred in the fourth quarter of 2003 for the profitability
improvement programs. Higher compensation, postretirement and warranty
expenses combined with costs associated with the disruption within the
Company's casting supply chain also contributed to this decrease. These
negative factors were partially offset by changes in currency exchange
rates, lower medical costs and cost reductions efforts, including continued
acquisition integration. As a percentage of revenues, operating earnings
decreased to 7.5% in 2003, compared to 8.5% in 2002, as a result of the
factors noted above. The expenses incurred in the fourth quarter of 2003
related to implementing the profitability improvement programs contributed
0.8 percentage points of this 1.0 percentage point decrease in operating
earnings as a percentage of revenues.
Operating earnings for the Pump Products segment decreased $1.1 million
to $4.1 million in 2003, a 21% decrease from $5.2 million in 2002. This
decrease was primarily attributable to a less favorable sales mix due to a
lower proportion of revenues from drilling pumps, which generate higher
margins than other pump products. Higher compensation and postretirement
expenses also contributed to this decrease. As a percentage of revenues,
operating earnings for this segment decreased to 5.8% in 2003, compared to
7.6% in 2002, as a result of the factors noted above.
Interest expense decreased $1.6 million (25%) to $4.7 million for 2003,
compared to $6.4 million in 2002, due to lower average borrowings and
interest rates. The average interest rate for 2003 was 3.9% compared to 4.4%
in 2002. See Note 9 to the Consolidated Financial Statements for further
information on the Company's borrowing arrangements.
Other income, net increased $3.0 million to $3.2 million in 2003
compared to $0.2 million in 2002, due to an unrealized currency transaction
gain of $3.2 million recorded in the fourth quarter of 2003. This gain
related to a portion of the proceeds from U.S. dollar borrowings, which were
converted to British pounds in November 2003 and appreciated in U.S. dollars
prior to being used to consummate the Syltone
S-30
acquisition in January 2004. See Note 16 to the Consolidated Financial
Statements for further information on the Syltone acquisition.
Income before income taxes increased $1.5 million (5%) to $30.4 million
in 2003 from $28.8 million in 2002. This increase was primarily the result
of the unrealized currency transaction gain, lower interest expense and
changes in currency exchange rates discussed above. These positive factors
were partially offset by the lower operating earnings in each segment.
The provision for income taxes increased by $0.5 million (5%) to $9.7
million in 2003, compared to $9.2 million in 2002, as a result of the higher
income before taxes. The Company's effective tax rate was 32% in both years.
Net income increased $1.0 million (5%) to $20.6 million ($1.27 diluted
earnings per share) in 2003, compared to $19.6 million ($1.22 diluted
earnings per share) in 2002. Net income included $0.2 million ($0.02 diluted
earnings per share) and $0.3 million ($0.02 diluted earnings per share) in
after-tax LIFO income in 2003 and 2002, respectively. The increase in net
income was primarily attributable to the same factors that resulted in
increased income before taxes discussed above. Changes in currency exchange
rates also contributed favorably by increasing net income by approximately
$0.8 million in 2003.
OUTLOOK
In 2003, orders for compressed air products were $352.7 million,
compared to $347.9 million in 2002. Order backlog for the Compressed Air
Products segment was $48.7 million as of December 31, 2003, compared to
$58.7 million as of December 31, 2002. The favorable impact of changes in
currency exchange rates was approximately $16.6 million and $2.9 million for
compressed air products orders and backlog, respectively, for the year ended
and as of December 31, 2003. Excluding this impact, the decrease in orders
and backlog compared to the prior year is primarily due to softer U.S. and
European industrial economies combined with the Company's exit from the
marketing and manufacture of certain highly engineered compressor packages
in the U.K. and U.S. as discussed above.
Because air is often used as a fourth utility in the manufacturing
process, demand for compressed air products is generally correlated to
manufacturing capacity utilization rates and the rate of change of
industrial equipment production. Over longer time periods, demand also
follows the economic growth patterns indicated by the rates of change in the
Gross Domestic Product. These indicators have been relatively weak in both
2003 and 2002 but improved in the second half of 2003. As a result, orders
for compressed air products are anticipated to improve gradually in 2004 as
the U.S. industrial economy recovers.
Demand for pump products, which are primarily petroleum related, has
historically corresponded to market conditions and expectations for oil and
natural gas prices. Orders for pump products were $72.9 million in 2003, an
increase of $18.8 million (35%) compared to $54.1 million in 2002. Order
backlog for the Pump Products segment was $9.7 million at December 31, 2003,
compared to $6.6 million as of December 31, 2002, representing a 47%
increase. The increase in orders and backlog is primarily due to increased
demand for well stimulation pumps and petroleum pump parts. Future increases
in demand for these products will likely be dependent upon rig counts and
oil and natural gas prices, which the Company cannot predict.
YEAR ENDED DECEMBER 31, 2002, COMPARED WITH
YEAR ENDED DECEMBER 31, 2001
REVENUES
Revenues declined slightly to $418.2 million in 2002, compared to
$419.8 million in 2001. Excluding incremental revenue from acquisitions
completed since August 2001, which added $54.1 million to revenues in 2002,
revenues decreased $55.7 million as compared to 2001. Revenues outside the
United States, as a percentage of total revenues, increased to 37% in 2002,
compared to 30% in 2001.
S-31
This increase is primarily due to the Belliss & Morcom acquisition, which
strengthened the Company's presence in Europe and Asia.
Revenues in the Compressed Air Products segment increased $42.0 million
(14%) in 2002 to $350.0 million, compared to $308.0 million in 2001. This
increase is primarily due to acquisitions ($54.1 million), changes in
currency exchange rates ($4.5 million) and price increases ($3.1 million).
Excluding these favorable factors, revenues declined $19.7 million (6%) due
to softness in the U.S. and European industrial markets, which weakened
demand for compressors and blowers.
Revenues in the Pump Products segment declined $43.6 million (39%) to
$68.1 million in 2002, compared to $111.7 million in 2001. This decline
resulted from depressed demand for petroleum pump products, due to reduced
rig counts, which began negatively impacting order rates in the second half
of 2001. Changes in revenues related to price increases were not
significant.
COSTS AND EXPENSES
Gross margin in 2002 increased $3.0 million (2%) to $128.5 million,
from $125.5 million in 2001. Gross margin percentage increased to 30.7% in
2002 from 29.9% in 2001, primarily due to an overall favorable sales mix
change (including a lower proportion of Pump Product segment sales, which
generate lower gross margins than the Compressed Air Products segment). The
incremental impact of acquisitions, lower warranty expense in the Compressed
Air Products segment and ongoing cost reduction projects, including
acquisition integration efforts, also contributed to this increase. In 2002,
gross margin was enhanced $0.4 million as a result of the liquidation of
LIFO inventory layers, compared to $0.5 million in 2001.
Depreciation and amortization decreased 20% to $14.1 million in 2002,
compared to $17.6 million in 2001. This decrease was due to the adoption of
the Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 142, effective January 1, 2002, which
eliminated goodwill amortization of $4.4 million. This decrease was
partially offset by the amortization of intangible assets (other than
goodwill) related to the 2001 acquisitions.
Selling and administrative expenses increased in 2002 by 14% to $79.4
million from $69.7 million in 2001 due to acquisitions and unfavorable
foreign currency exchange rates. Excluding acquisitions ($10.6 million) and
currency exchange rate effects ($0.9 million), selling and administrative
expenses decreased approximately 3% in 2002, due to cost reduction efforts,
including acquisition integration, which were partially offset by higher
fringe benefit costs (medical, pension and other postretirement benefits).
As a percentage of revenues, selling and administrative expenses were 19.0%
in 2002, compared to 16.6% in 2001. The increase in this ratio was
attributable to the decline in revenues excluding acquisitions. Acquisitions
also contributed to this increase as they currently have higher selling and
administrative expenses as a percentage of revenues than the Company's
previously existing operations.
Compressed Air Products' operating earnings increased $7.6 million
(34%) to $29.8 million, compared to $22.2 million in 2001. This increase was
primarily attributable to the incremental impact of acquisitions, the
cessation of goodwill amortization, reduced warranty expense and ongoing
cost reduction efforts. These positive factors were partially offset by the
negative impact of decreased leverage of the segment's fixed and semi-fixed
costs over a lower revenue base (excluding acquisitions) and higher fringe
benefit costs. As a percentage of revenues, operating earnings increased to
8.5% in 2002, compared to 7.2% (8.4% excluding goodwill amortization) in
2001, as a result of the factors noted above.
Operating earnings for the Pump Products segment decreased $10.9
million to $5.2 million in 2002, a 68% decrease from $16.1 million in 2001,
primarily due to the decrease in revenues. As a percentage of revenues,
operating earnings for this segment decreased to 7.6% in 2002, compared to
14.4% (15.1% excluding goodwill amortization) in 2001. This decrease was
primarily attributable to the negative
S-32
impact of decreased leverage of the segment's fixed and semi-fixed costs
over a lower revenue base. The cessation of goodwill amortization partially
offset this negative factor.
Interest expense decreased $0.4 million (6%) to $6.4 million for 2002,
compared to $6.8 million in 2001, as lower average interest rates were
partially offset by higher average borrowings (due to businesses acquired in
2001). The average interest rate for 2002 was 4.4%, compared to 5.4% for
2001. See Note 9 to the Consolidated Financial Statements for further
information on the Company's borrowing arrangements.
In 2001, other income, net included approximately $2.1 million from
litigation settlement proceeds and $0.5 million from interest income related
to finalization of an income tax settlement with the Internal Revenue
Service. Excluding the impact of these non-recurring items, the majority of
the decline in other income was due to currency transaction losses recorded
in 2002, generated from U.S. dollar denominated monetary assets of foreign
subsidiaries.
INCOME
Income before income taxes decreased $5.9 million (17%) to $28.8
million in 2002 from $34.7 million in 2001. This decrease was primarily the
result of decreased leverage of fixed costs over a lower revenue base
(excluding acquisitions) for both segments and the non-recurring gains
included in 2001 other income mentioned above. These factors were partially
offset by the cessation of goodwill amortization.
The provision for income taxes decreased by $3.5 million to $9.2
million in 2002 compared to $12.7 million in 2001, as a result of lower
income before taxes and a lower overall effective tax rate. The Company's
effective tax rate was 32.0% in 2002, compared to 36.5% in 2001. This
decrease was primarily attributable to the cessation of non-deductible
goodwill amortization. A higher proportion of Extraterritorial Income
Exclusion (EIE) benefit from U.S. export sales relative to pretax income and
a higher proportion of income derived from lower taxed non-U.S.
jurisdictions also contributed to this decline.
Net income decreased $2.4 million (11%) to $19.6 million ($1.22 diluted
earnings per share) in 2002, compared to $22.0 million ($1.40 diluted
earnings per share) in 2001. In both 2002 and 2001, net income included $0.3
million in after-tax LIFO income ($0.02 diluted earnings per share). The
decrease in net income was primarily attributable to the same factors that
resulted in decreased income before taxes noted above.
--------------
LIQUIDITY AND CAPITAL RESOURCES
OPERATING WORKING CAPITAL
During 2003, operating working capital (defined as receivables plus
inventories, less accounts payable and accrued liabilities) decreased $3.6
million as reductions in inventory and increases in accounts payable and
accrued liabilities were partially offset by higher receivables. These
changes were a result of the increased activity levels in the fourth quarter
of 2003 (revenues and cost of sales increased 12% compared to the fourth
quarter of 2002) combined with improved management of inventory and
collection of accounts receivable. Inventory turnover improved to 4.9 at
December 31, 2003, compared to 4.2 at December 31, 2002. Days sales
outstanding improved to 63 days at December 31, 2003, compared to 65 days at
December 31, 2002.
CASH FLOWS
During 2003, the Company generated cash flows from operations totaling
$46.3 million, a decrease of $6.2 million (12%) compared to 2002. This
decrease was primarily the result of a less favorable change
S-33
in operating working capital, partially offset by higher net income in 2003.
During 2003, the Company made principal payments of $59.5 million and
borrowed $122.0 million under its credit facilities. Borrowings included
$92.0 million during the fourth quarter of 2003, which was used to
demonstrate the Company's ability to finance and complete the acquisition of
Syltone. See Note 16 to the Consolidated Financial Statements for additional
information regarding the Syltone acquisition. The effect of exchange rate
changes on cash and cash equivalents was $10.7 million in 2003 compared to
$2.6 in 2002. This increase is due to a significant strengthening of the
euro and British pound against the U.S. dollar during 2003, combined with
the fact that the Company had significant British pound denominated cash and
cash equivalents during the fourth quarter of 2003 to fund the Syltone
acquisition, as noted above. The cash flows provided by operating and
financing activities and used in investing activities, combined with the
effect of exchange rate changes, resulted in a net cash increase of $107.1
million during 2003.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital projects designed to increase operating efficiency and
flexibility, expand production capacity and increase product quality
resulted in expenditures of $12.0 million in 2003, compared to $13.6 million
in 2002. This decrease was primarily due to the timing of capital projects.
Commitments for capital expenditures at December 31, 2003 totaled $10.4
million. Capital expenditures related to environmental projects have not
been significant in the past and are not expected to be significant in the
foreseeable future.
In October 1998, Gardner Denver's Board of Directors authorized the
repurchase of up to 1,600,000 shares of the Company's common stock to be
used for general corporate purposes. Approximately 200,000 shares remain
available for repurchase under this program. The Company has also
established a Stock Repurchase Program for its executive officers to provide
a means for them to sell Gardner Denver common stock and obtain sufficient
funds to meet income tax obligations which arise from the exercise or
vesting of incentive stock options, restricted stock or performance shares.
The Gardner Denver Board has authorized up to 400,000 shares for repurchase
under this program, and of this amount, approximately 200,000 shares remain
available for repurchase. During 2003, no shares were repurchased under
these repurchase programs. As of December 31, 2003, a total of 1,572,542
shares have been repurchased at a cost of $22.8 million under both
repurchase programs. In 2003, the Company also acquired 5,509 shares of its
common stock, valued at $0.1 million, which were tendered for the exercise
of stock options.
LIQUIDITY
On March 6, 2002, the Company amended and restated its Revolving Line
of Credit Agreement (the "Credit Line"), increasing the aggregate borrowing
capacity to $150 million and extending the maturity date to March 6, 2005.
Subject to approval by lenders holding more than 75% of the debt, the
Company may request up to two, one-year extensions. The Credit Line requires
no principal payments during the term of the agreement and is due upon final
maturity. On December 31, 2003, the Credit Line had an outstanding balance
of $114.0 million, leaving $36.0 million available for future use or for
letters of credit.
The amended and restated agreement also provided for an additional $50
million Term Loan. Proceeds from the Term Loan were used to retire debt
outstanding under an Interim Credit Agreement. The five-year Term Loan
requires principal payments of $2.5 million in years one and two, and $15
million in years three through five. Other terms and conditions of the Term
Loan are similar to those of the Credit Line.
The Company's borrowing arrangements are generally unsecured and permit
certain investments and dividend payments. There are no material
restrictions on the Company as a result of its credit arrangements, other
than customary covenants regarding certain earnings, liquidity and capital
ratios.
On September 24, 2003, the Company filed with the Securities and
Exchange Commission ("SEC") a shelf registration statement regarding $150
million of its securities. The registration statement has since
S-34
been declared effective by the SEC and allows the Company to complete one or
more offerings of its common stock, preferred stock, debt securities or
warrants. The Company intends to use the net proceeds from any offering for
acquisitions, capital expenditures, repayment of borrowings, working capital
and other general corporate purposes.
Management currently expects the Company's cash flows in 2004 to be
sufficient to fund its scheduled debt service and provide required resources
for working capital and capital investments.
CONTRACTUAL OBLIGATIONS
At December 31, 2003, certain of the Company's contractual obligations,
including estimated payments due by period, are as follows (dollars in
thousands):
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------
LESS THAN 1 MORE THAN 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
-------------- -------------- -------------- -------------- --------------
Long-term debt .......... $ 182,631 $ 16,875 $ 154,000 $ 3,750 $ 8,006
Operating leases ........ 17,409 3,469 4,932 2,861 6,147
Purchase obligations .... 35,258 35,210 48 -- --
-------------- -------------- -------------- -------------- --------------
Total ................... $ 235,298 $ 55,554 $ 158,980 $ 6,611 $ 14,153
============== ============== ============== ============== ==============
Purchase obligations consist primarily of inventory purchases made in
the normal course of business to meet operational requirements. The above
table does not include $57.1 million of other non-current liabilities
recorded in the balance sheet, which primarily consists of pension and other
postretirement liabilities, because the timing of payments related to such
liabilities is uncertain.
MARKET RISK
The Company is exposed to market risk related to changes in interest
rates as well as European and other foreign currency exchange rates, and
selectively uses derivative financial instruments, including forwards and
swaps, to manage these risks. The Company does not hold derivatives for
trading purposes. The value of market-risk sensitive derivatives and other
financial instruments is subject to change as a result of movements in
market rates and prices. Sensitivity analysis is one technique used to
evaluate these impacts. Based on a hypothetical ten percent change in
interest rates or ten percent weakening in the U.S. dollar across relevant
foreign currencies, principally the euro and British pound, the potential
losses in future earnings, fair value and cash flows are not material to the
Company.
CONTINGENCIES
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. Due to
the bankruptcies of several asbestos manufacturers and other primary
defendants, the Company has been named as a defendant in an increasing
number of asbestos personal injury lawsuits. The Company has also been named
as a defendant in an increasing number of silicosis personal injury
lawsuits. The plaintiffs in these suits allege exposure to asbestos or
silica from multiple sources, and typically the Company is one of
approximately 25 or more named defendants. In the Company's experience, the
substantial majority of the plaintiffs are not physically impaired with a
disease attributable to the alleged exposure.
Predecessors to the Company manufactured, distributed and sold the
products allegedly at issue in the pending asbestos and silicosis litigation
lawsuits. The Company has potential responsibility for certain contingent
liabilities with respect to these products, namely: (a) air compressors
which used asbestos containing components manufactured and supplied by third
parties; and (b) portable air compressors used in sandblasting operations as
a component of sandblasting equipment manufactured and sold by others. The
sandblasting equipment is alleged to have caused the silicosis disease
plaintiffs claim in these cases.
S-35
Neither the Company, nor its predecessors, ever mined, manufactured,
mixed, produced or distributed asbestos fiber. The asbestos containing
components used in the products at issue were completely encapsulated in a
protective non-asbestos binder and enclosed within the subject products.
Furthermore, the Company has never manufactured or distributed portable air
compressors.
The Company has entered into a series of cost sharing agreements with
multiple insurance companies to secure coverage for asbestos and silicosis
lawsuits. The Company also believes some of the potential liabilities
regarding these lawsuits are covered by indemnity agreements with other
parties. The Company's uninsured settlement payments for past asbestos and
silicosis lawsuits have been immaterial.
The Company believes that the pending, and future, asbestos and
silicosis lawsuits will not, in the aggregate, have a material adverse
effect on its consolidated financial position, results of operations or
liquidity, based on: the Company's anticipated insurance and indemnification
rights to address the risks of such matters; the limited potential asbestos
exposure from the components described above; the Company's experience that
the substantial majority of plaintiffs are not impaired with a disease
attributable to alleged exposure to asbestos or silica; various potential
defenses available to the Company with respect to such matters; and the
Company's prior disposition of comparable matters. However, due to the
inherent uncertainties of litigation and because future developments could
cause a different outcome, there can be no assurance that the resolution of
pending or future lawsuits, whether by judgment, settlement or dismissal,
will not have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
The Company has also been identified as a potentially responsible party
with respect to several sites designated for environmental cleanup under
various state and federal laws. The Company does not own any of these sites.
The Company does not believe that the future potential costs related to
these sites will have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
NEW ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123." SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, the statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The Company has adopted SFAS No. 148 and included the
required disclosures in Note 1 to the Consolidated Financial Statements.
In December 2002, the Emerging Issues Task Force issued EITF 00-21,
"Revenue Arrangements with Multiple Deliverables." This issue addresses
certain aspects of the accounting by a vendor for arrangements under which
it will perform multiple revenue-generating activities. In some
arrangements, the different revenue-generating activities (deliverables) are
sufficiently separable, and there exists sufficient evidence of their fair
values to separately account for some or all of the deliverables. This issue
addresses when and, if so, how an arrangement involving multiple
deliverables should be divided into separate units of accounting. This issue
does not change otherwise applicable revenue recognition criteria. This
issue is applicable for revenue arrangements beginning in the third quarter
of 2003. The Company has adopted the provisions of EITF 00-21, which did not
have a material impact on its financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities," an interpretation of Accounting Research
Bulletin No. 51, which addresses consolidation by business enterprises of
variable interest entities. This interpretation requires existing
unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the interest entities do not effectively disperse
risks among the parties involved. This interpretation applies to variable
interest entities created
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after January 31, 2003. It applies in the first fiscal year or interim
period beginning after June 15, 2003, to variable interest entities in which
an enterprise holds a variable interest that it acquired before February 1,
2003. The Company has no variable interest entities and has adopted this
interpretation which did not have a material impact on its financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity."
SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The Company has
adopted this statement which did not have a material impact on its financial
statements.
In December 2003, the FASB issued SFAS No. 132 (revised), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This
statement requires additional disclosures about plan assets, benefit
obligations, cash flows, benefit costs and other relevant information. In
addition to expanded annual disclosures, the statement also requires
disclosures of various elements of pension and other postretirement benefit
costs on an interim basis. The Company has adopted SFAS No.132 (revised) and
included the required disclosures in Note 7 to the Consolidated Financial
Statements.
CRITICAL ACCOUNTING POLICIES
Management has evaluated the accounting policies used in the
preparation of the Company's financial statements and related notes and
believes those policies to be reasonable and appropriate. Certain of these
accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating
financial estimates. By their nature, these judgments are subject to an
inherent degree of uncertainty. These judgments are based on historical
experience, trends in the industry, information provided by customers and
information available from other outside sources, as appropriate. The most
significant areas involving management judgments and estimates are described
below. Management believes that the amounts recorded in the Company's
financial statements related to these areas are based on their best
judgments and estimates, although actual results could differ materially
under different assumptions or conditions.
INVENTORIES
Inventories, which consist of materials, labor and manufacturing
overhead, are carried at the lower of cost or market value. As of December
31, 2003, $40.4 million (63%) of the Company's inventory is accounted for on
a first-in, first-out (FIFO) basis with the remaining $23.9 million (37%)
accounted for on a last-in, first-out (LIFO) basis. Management regularly
reviews inventory for obsolescence to determine whether a write-down is
necessary. Various factors are considered in making this determination,
including recent sales history and predicted trends, industry market
conditions and general economic conditions.
GOODWILL AND OTHER INTANGIBLES
The Company has adopted SFAS No. 142 "Goodwill and Other Intangible
Assets." Under the provisions of this standard, intangible assets deemed to
have indefinite lives and goodwill are not subject to amortization. All
other intangible assets are amortized over their estimated useful lives.
Goodwill and other intangible assets not subject to amortization are tested
for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. This testing
requires comparison of carrying values to fair values, and when appropriate,
the carrying value of impaired assets is reduced to fair value. During the
second quarter of 2003, the Company completed its annual impairment test and
determined that no impairment existed. While management believes that its
estimates of fair value are reasonable, different assumptions regarding such
factors as product volumes, selling price changes, labor and material cost
changes, interest rates and productivity could affect such valuations.
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PRODUCT WARRANTY
The Company's product warranty liability is calculated based primarily
upon historical warranty claims experience. Management also factors into the
product warranty accrual any specific warranty issues identified during the
period which are expected to impact future periods and may not be consistent
with historical claims experience. Product warranty accruals are reviewed
regularly by management and adjusted from time to time when actual warranty
claims experience differs from that estimated.
PENSION AND OTHER POSTRETIREMENT BENEFITS
Pension and other postretirement benefit obligations and expense (or
income) are dependent on assumptions used in calculating such amounts. These
assumptions include discount rate, rate of compensation increases, expected
rates of return on plan assets and expected health care trend rates. In
accordance with accounting principles generally accepted in the United
States, actual results that differ from the assumptions are accumulated and
amortized over future periods. While management believes that the
assumptions are appropriate, differences in actual experience or changes in
assumptions may affect the Company's pension and other postretirement
benefit obligations and future expense (or income). In addition, due to the
significant declines in the financial markets during the past few years, the
fair value of the plan assets of certain of the Company's funded defined
benefit pension plans was less than their accumulated benefit obligation at
December 31, 2003. As a result, the Company has recorded a cumulative
reduction to stockholders' equity (accumulated other comprehensive income)
in the amount of $5.2 million (after tax) as of December 31, 2003. This
non-cash reduction in stockholders' equity did not impact the Company's
compliance with its existing debt covenants and could be reversed in future
periods if a combination of factors, including interest rate increases,
improved investment results and contributions, cause the pension plans to
return to or exceed fully funded status. However, depending upon the
performance of the equity and bond markets in 2004 and beyond, the Company
could also be required to record additional charges to stockholders' equity
in the future. Due to the market trends of the past few years (i.e., lower
interest rates and asset returns and increasing health care costs) and lower
amortization gains from prior service costs, pension and other
postretirement benefit expense is expected to increase by approximately $1.2
million in 2004 (excluding the incremental expense associated with the
Syltone acquisition).
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OUR INDUSTRY
Our Compressed Air Product segment competes in a worldwide market for
compressed air products and services which we estimate to be in excess of $5
billion per year in sales. Our Pump Product segment competes in a worldwide
market for pump products which we estimate to be in excess of $22 billion
per year in sales. Our reciprocating pumps compete for approximately $2
billion of that market. Products in both of these markets are sold to a
diverse group of customers across a wide range of industries.
Almost all manufacturing plants and industrial facilities, as well as
many service industries, utilize air compressors and/or blowers. Our largest
customers for compressor products are durable and non-durable goods
manufacturers; process industries (petroleum, primary metals,
pharmaceutical, food and paper); manufacturers of carpet cleaning equipment,
pneumatic conveying equipment, and dry and liquid bulk transports;
wastewater treatment facilities; and automotive service centers and niche
applications such as PET bottle blowing, breathing air equipment and
compressed natural gas. Typical applications for our pumps include oil
transfer, salt water disposal, ammine pumping for gas processing,
repressurizing, enhanced oil recovery, hydraulic power and other liquid
transfer applications.
Compressed air and pump products are best characterized as mature, with
evolutionary technological advances. Technological advances in compressed
air products include development of oil-free air compressors, increased
product efficiency, reduction of noise levels and advanced control systems
to upgrade the flexibility and precision of regulating pressure and
capacity. Emerging compressed air market niches result from new technologies
in plastics extrusion, oil and natural gas well drilling, field gas
gathering, mobile and stationary vacuum applications, utility and fiber
optic installation and environmental impact minimization, as well as other
factors. Technological advances in pump products include development of
larger horsepower and lighter weight pumps.
Given the wide variety of end-users who use compressed air and pump
products, strong distribution channels are critical. Products are sold
through independent distributors, sales representatives, company stores, and
directly to OEMs, engineering firms and end-users. Competitors within our
industry use various combinations of distribution channels to reach
customers.
Competition in our markets is generally robust and is based on product
quality, performance, price and availability. The relative importance of
each of these factors varies depending on the specific type of product.
Given the potential for equipment failures to cause expensive operational
disruption, our customers generally view quality and reliability as critical
factors in their equipment purchasing decision. The required frequency of
maintenance is highly variable based on the type of equipment and
application.
Although there are a few large manufacturers of compressed air
products, the marketplace for these products remains highly fragmented due
to the wide variety of product technologies, applications and selling
channels. Our principal competitors in sales of compressed air products
include Ingersoll-Rand, Sullair (owned by United Technologies Corporation),
Atlas Copco, Quincy Compressor (owned by En Pro Industries), CompAir and
Roots. The marketplace for pumps, although dominated by a few multinational
manufacturers with a broad product offering, is still highly fragmented, as
the ten largest pump manufacturers account for only approximately 40% of
annual sales. Because we are currently focused on pumps used in oil and
natural gas production, well servicing and well drilling, we do not
typically compete directly with the major full-line manufacturers. Our
principal competitors in sales of petroleum pump products include
National-Oilwell and SPM Flow Control, Inc. Our principal competitors in
sales of water jetting systems include NLB Corp., WOMA Apparatebau GmbH and
Hammelmann Maschinenfabrik GmbH.
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OUR BUSINESS
Other than under "- Recent Developments," the following discussion of
our business does not reflect our acquisition of Syltone in January 2004.
Gardner Denver designs, manufactures and markets compressed air
products and pump products. We believe we are one of the leading
manufacturers of highly engineered stationary air compressors and blowers
for industrial applications in the United States. Stationary air compressors
are used in manufacturing, process applications and materials handling, and
to power air tools and equipment. Blowers are used primarily in pneumatic
conveying, wastewater aeration and engineered vacuum systems. We also
believe that we are one of the leading manufacturers of reciprocating pumps
used in oil and natural gas well drilling, servicing and production and in
water jetting systems.
For the year ended December 31, 2003, we had revenues of $439.5
million, of which approximately 84% were derived from sales of compressed
air products while approximately 16% were from sales of pump products.
Approximately 58% of our total revenues for the year ended December 31, 2003
were derived from sales in the United States and approximately 42% were from
sales to customers in various countries outside the United States. Of the
total non-U.S. sales, 52% were to Europe, 21% to Asia, 15% to Canada, 9% to
Latin America and 3% to other regions.
COMPRESSED AIR PRODUCTS SEGMENT
In the Compressed Air Products segment, we design, manufacture, market
and service the following products and related aftermarket parts for
industrial and commercial applications: rotary screw, reciprocating, sliding
vane and centrifugal compressors, positive displacement and centrifugal
blowers. Our sales of compressed air products for the year ended December
31, 2003 were $369.0 million, of which approximately 57% were to customers
in the United States.
Compressors are used to increase the pressure of gas, including air, by
mechanically decreasing its volume. Our reciprocating compressors range from
0.5 to 1,500 horsepower and are sold under the Gardner Denver, Champion,
Commandair and Belliss & Morcom trademarks. Our rotary screw compressors
range from 5 to 680 horsepower and are sold under the Gardner Denver,
Electra-Screw, Electra-Saver, Enduro, RotorChamp, Twistair, Tamrotor, and
Tempest trademarks. Our centrifugal compressors range from 400 to 1,500
horsepower and are sold under the GD Turbo name.
Blowers are used to produce a high volume of air at low pressure and to
produce vacuum. Positive displacement blowers provide a constant volume of
airflow at varying levels of pressure. Centrifugal blowers produce a
constant level of pressure and varying volumes of airflow. Our positive
displacement blowers range from 0 to 36 pounds per square inch gauge (PSIG)
pressure and 0-28"of mercury (Hg) vacuum and 0 to 43,000 cubic feet per
minute (CFM) and are sold under the trademarks Sutorbilt, DuroFlow,
CycloBlower and TurboTron. Our multistage centrifugal blowers are sold under
the trademarks Lamson and Hoffman and range from 0.5 to 25 PSIG pressure and
0-18"Hg vacuum and 100 to 50,000 CFM. Our rotary sliding vane compressors
and vacuum pumps range from 0 to 150 PSIG and 0 to 3,000 CFM and are sold
under the trademark Wittig. Our engineered vacuum systems are used in
industrial cleaning and maintenance and are sold under the Invincible and
Cat Vac trademarks.
Almost all domestic manufacturing plants and industrial facilities, as
well as many service industries, utilize air compressors or blowers. The
largest customers for our compressor products are durable and non-durable
goods manufacturers; process industries (petroleum, primary metals,
pharmaceutical, food and paper); OEMs; manufacturers of carpet cleaning
equipment, pneumatic conveying equipment, and dry and liquid bulk
transports; wastewater treatment facilities; and automotive service centers
and niche applications such as PET bottle blowing, breathing air equipment
and compressed natural gas. Manufacturers of machinery and related equipment
use stationary compressors for automated systems, controls, materials
handling and special machinery requirements. The petroleum, primary metals,
pharmaceutical, food and paper industries require compressed air for
process, instrumentation and
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control, packaging and pneumatic conveying. Blowers are instrumental to
local utilities for aeration in treating industrial and municipal waste.
Blowers are also used in service industries, for example, residential carpet
cleaning to vacuum moisture from carpets during the shampooing and cleaning
process. Blowers and rotary vane compressors are used on trucks to vacuum
leaves and debris from street sewers and to unload liquid and dry bulk and
powder materials such as cement, grain and plastic pellets. Additionally,
blowers are used in numerous chemical process applications.
PUMP PRODUCTS SEGMENT
We design, manufacture, market and service a diverse group of pumps,
water jetting systems and related aftermarket parts used in oil and natural
gas well drilling, servicing and production and in industrial cleaning and
maintenance. Sales of our pump products for the year ended December 31, 2003
were $70.5 million, of which approximately 64% were to customers in the
United States.
Positive displacement reciprocating pumps are marketed under the
Gardner Denver, Geoquip, Ajax and OPI trademarks. Typical applications of
Gardner Denver pumps in oil and natural gas production include oil transfer,
water flooding, salt water disposal, pipeline testing, ammine pumping for
gas processing, re-pressurizing, enhanced oil recovery, hydraulic power and
other liquid transfer applications. Our production pumps range from 16 to
600 horsepower and consist of horizontal and vertical designed pumps. We
market one of the most complete product lines of well servicing pumps. Well
servicing operations include general workover service, completions (bringing
wells into production after drilling), and plugging and abandonment of
wells. Our well servicing products consist of high pressure plunger pumps
ranging from 165 to 400 horsepower. We also manufacture intermittent duty
triplex and quintuplex plunger pumps ranging from 250 to 3,000 horsepower
for well cementing and stimulation, including reservoir fracturing or
acidizing. Duplex pumps, ranging from 16 to 135 horsepower, are produced for
shallow drilling, which includes water well drilling, seismic drilling and
mineral exploration. Continuous duty triplex mud pumps for oil and natural
gas drilling rigs range from 275 to 2,000 horsepower. A small portion of
Gardner Denver and Ajax pumps are sold for use in industrial applications.
Our water jetting pumps and systems are used in industrial cleaning and
maintenance and are sold under the Partek, Liqua-Blaster and American Water
Blaster trademarks. Applications in this market segment include runway and
shiphull cleaning, concrete demolition and metal surface preparation.
CUSTOMERS AND CUSTOMER SERVICE
We sell our products through independent distributors and sales
representatives and directly to OEMs, engineering firms and end-users. We
have been able to establish strong customer relationships with several key
OEMs and exclusive supply arrangements with many of our distributors. We use
a direct sales force to service OEM and engineering firm accounts because
these customers typically require higher levels of technical assistance,
more coordinated shipment scheduling and more complex product service than
customers of our less specialized products. As a majority of our products
are marketed through independent distribution, we are committed to
developing and supporting our distribution network of over 1,000
distributors and representatives. We have a distribution center in Memphis,
Tennessee that stocks parts, accessories, blowers and small compressor
products in order to provide adequate and timely availability. We also
provide our distributors with sales and product literature, technical
assistance and training programs, advertising and sales promotions,
order-entry and tracking systems and an annual restocking program.
Furthermore, we participate in major trade shows and have a telemarketing
department to generate sales leads and support the distributors' sales
staffs.
Our distributors maintain an inventory of complete units and parts and
provide aftermarket service to end-users. There are several hundred field
service representatives for Gardner Denver products in the distributor
network. Our service personnel and product engineers provide the
distributors' service representatives with technical assistance and field
training, particularly with respect to installation and
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repair of equipment. We also provide aftermarket support through our
remanufacturing facilities in Indianapolis, Indiana; Fort Worth, Texas; and
Mayfield, Kentucky. The Indianapolis operation remanufactures and repairs
air ends for rotary screw compressors, blowers and reciprocating
compressors. The Fort Worth facility repairs and remanufactures well
servicing pumps, while the Mayfield operation provides aftermarket parts and
repairs for centrifugal compressors. Outside the United States, we market
our products through a network of sales representatives, as well as
distributors and direct sales persons. We operate blower packaging
operations in the U.K., Germany and France, and operate compressor
manufacturing and packaging facilities in Finland, the U.K. and Canada.
RESEARCH AND DEVELOPMENT
Compressed air and pump products are best characterized as mature, with
evolutionary technological advances. Technological trends in compressed air
products include development of oil-free air compressors, increased product
efficiency, reduction of noise levels and advanced control systems to
upgrade the flexibility and precision of regulating pressure and capacity.
Emerging compressed air market niches result from new technologies in
plastics extrusion, oil and natural gas well drilling, field gas gathering,
mobile and stationary vacuum applications, utility and fiber optic
installation and environmental impact minimization, as well as other
factors. Trends in pump products include development of larger horsepower
and lighter weight pumps.
We actively engage in a continuing research and development program.
The Gardner Denver research and development centers are dedicated to various
activities, including new product development, product performance
improvement and new product applications.
Our products are designed to satisfy the safety and performance
standards set by various industry groups and testing laboratories. Care is
exercised throughout the manufacturing and final testing process to ensure
that products conform to industry, government and customer specifications.
Expenditures for research and development were $2.8 million in 2003,
$2.4 million in 2002, and $2.5 million in 2001.
MANUFACTURING
In general, our manufacturing processes involve machining castings and
forgings which are assembled into finished components. These components are
sold as finished products or packaged with purchased components into
complete systems. We operate 18 manufacturing facilities that utilize a
broad variety of processes. At our manufacturing locations, we maintain
advanced manufacturing, quality assurance and testing equipment geared to
the specific products that we manufacture, and use extensive process
automation in our manufacturing operations. Most of our manufacturing
facilities utilize computer aided numerical control tools and manufacturing
techniques that concentrate the equipment necessary to produce similar
products in one area of the plant (cell manufacturing). One operator using
cell manufacturing can monitor and operate several machines, as well as
assemble and test products made by such machines, thereby improving
operating efficiency and product quality while reducing the amount of
work-in-process and finished product inventories.
We have representatives on the American Petroleum Institute's working
committee and we have relationships with standard enforcement organizations
such as Underwriters Laboratories, Det Norske Veritas and the Canadian
Standard Association. We maintain ISO 9001-2000 certification on the quality
systems at a majority of our manufacturing and design locations.
RAW MATERIALS
The primary raw materials used by Gardner Denver are cast iron and
steel. Such materials are generally available from a number of suppliers. We
do not currently have long-term contracts with our suppliers of raw
materials, but we believe that our sources of raw materials are reliable and
adequate for our needs. We utilize single sources of supply for certain iron
castings and other selected components. A
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disruption in deliveries from a given supplier could therefore have an
adverse effect on our ability to meet our commitments to customers.
Nevertheless, we believe that we have appropriately balanced this risk
against the cost of sustaining a greater number of suppliers. Moreover, we
have sought, and will continue to seek, cost reductions in our purchases of
materials and supplies by consolidating purchases, pursuing alternate
sources of supply and using online bidding competitions among potential
suppliers.
BACKLOG
Our backlog was approximately $58.4 million at December 31, 2003 as
compared to approximately $65.3 million at December 31, 2002. Backlog
consists of orders believed to be firm for which a customer purchase order
has been received or communicated. Since orders may be rescheduled or
canceled, backlog does not necessarily reflect future sales levels.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
We believe that the success of our business depends more on the
technical competence, creativity and marketing abilities of our employees
than on any individual patent, trademark or copyright. Nevertheless, as part
of our ongoing research, development and manufacturing activities, we have a
policy of seeking to protect our proprietary products, product enhancements
and processes with appropriate intellectual property protections.
In the aggregate, patents and trademarks are of considerable importance
to the manufacturing and marketing of many of our products. However, we do
not consider any single patent or trademark, or group of patents or
trademarks, to be material to our business as a whole, except for the
Gardner Denver trademark. Other important trademarks we use include
DuroFlow, Sutorbilt, CycloBlower, Wittig, Lamson, Tamrotor, OPI, Champion,
Geoquip, Belliss & Morcom and Hoffman. Joy is a registered trademark of Joy
Technologies, Inc. We have the right to use the Joy trademark on aftermarket
parts until November 2027. Our right to use this trademark on air
compressors expired in November 1995. Pursuant to trademark license
agreements, Cooper Industries has rights to use the Gardner Denver trademark
for certain power tools and we have rights to use the Ajax trademark for
petroleum pump products. We have registered our trademarks in the countries
where it is deemed necessary.
We also rely upon trade secret protection for our confidential and
proprietary information. We routinely enter into confidentiality agreements
with our employees. There can be no assurance, however, that others will not
independently obtain similar information and techniques or otherwise gain
access to our trade secrets or that we can effectively protect our trade
secrets.
EMPLOYEES
At December 31, 2003, we had approximately 1,900 full-time employees,
of which approximately 650, including most of the employees in Finland,
Germany and the U.K., were represented by labor unions. We believe that our
current relations with employees are satisfactory.
ENVIRONMENTAL MATTERS
We are subject to numerous federal, state, local and foreign laws and
regulations relating to the storage, handling, emission, disposal and
discharge of materials into the environment. We believe that our existing
environmental control procedures are adequate and we have no current plans
for substantial capital expenditures in this area. We have an environmental
policy that confirms our commitment to a clean environment and to compliance
with environmental laws. We have an active environmental management program
aimed at compliance with existing environmental regulations and developing
methods to eliminate or significantly reduce the generation of pollutants in
the manufacturing processes.
We have been identified as a potentially responsible party ("PRP") with
respect to several sites designated for cleanup under federal "Superfund" or
similar state laws, which impose liability for cleanup of certain waste
sites and for related natural resource damages. Persons potentially liable
for such costs and damages generally include the site owner or operator and
persons that disposed or arranged for the
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disposal of hazardous substances found at those sites. Although these laws
impose joint and several liability, in application, the PRPs typically
allocate the investigation and cleanup costs based upon the volume of waste
contributed by each PRP. Based on currently available information, Gardner
Denver was only a small contributor to a substantial majority of these waste
sites, and we have, or are attempting to negotiate, de minimis settlements
for their cleanup. The cleanup of the remaining sites is substantially
complete and our future obligations entail a share of the sites' ongoing
operating and maintenance expense.
We have an accrued liability on our balance sheet to the extent costs
are known or can be estimated for our remaining financial obligations for
these matters. Based upon consideration of currently available information,
we do not anticipate any materially adverse effect on our results of
operations, financial condition, liquidity or competitive position as a
result of compliance with federal, state, local or foreign environmental
laws or regulations or cleanup costs relating to the sites discussed above.
RECENT DEVELOPMENTS
On January 2, 2004, we effectively acquired all of the outstanding
shares of Syltone plc ("Syltone"), previously a publicly traded company
listed on the London Stock Exchange. The purchase price of (pounds)61.2
million (approximately $109.2 million) including assumed bank debt (net of
cash acquired) was paid in the form of cash ((pounds)43.1 million), new loan
notes ((pounds)5.2 million) and the assumption of Syltone's existing bank
debt, net of cash ((pounds)12.9 million). Syltone is headquartered in
Bradford, U.K. and manufactures products in the U.K., Germany, France,
Canada, Denmark and the U.S. Syltone also operates fitting shops around the
world, which assemble its manufactured components and other parts on
commercial vehicles and provides aftermarket support.
Syltone's principal activity is the design, manufacture, sale and
service of equipment for the international transportation and fluid transfer
industries. Syltone is one of the world's largest manufacturers of equipment
used for handling dry bulk or liquid product on commercial vehicles and
loading arms for rail, truck and marine applications. Syltone generated
revenues and operating profit (in accordance with accounting principles
generally accepted in the U.K.) of (pounds)84.4 million and (pounds)6.3
million, respectively (approximately $151.1 million and $11.3 million,
respectively as calculated using the December 31, 2003 exchange rate of
$1.79/(pounds)) for the twelve months ended September 30, 2003.
Syltone's largest markets are Europe and North America, which represent
approximately 67% and 20% of its revenues, respectively. Of the total sales
to Europe, approximately 38% are to the U.K., 18% to France, 11% to Germany
and 33% to other European countries. Approximately 70% of Syltone's revenues
are generated through transportation-related activities while the remaining
30% stem from fluid transfer-related activities.
SYLTONE'S TRANSPORTATION-RELATED ACTIVITIES
Syltone's transportation-related activities include the design and
manufacture of equipment for handling dry bulk or liquid product on
commercial vehicles, access platforms, axles and gearboxes for commercial
and military applications, power take-offs and valves. This part of
Syltone's business serves tank truck carriers and highway and utility
applications.
Syltone designs and installs loading and unloading systems, which often
include blowers, compressors, pumps, valves and filters, to serve the tank
truck sector. The product being handled by the tank trucks can be in a
liquid, dry or gaseous state, thereby dictating the system required.
Carriers of petroleum-based products and other fuels, which are potentially
dangerous and polluting products, are highly regulated by various
governmental authorities around the world. Syltone provides these carriers
with bottom loading vapor recovery systems and other ancillary and safety
equipment.
Highway and utility applications include vans and trucks fitted with
access platforms and systems, which include compressors, generators,
hydraulics and pumps to drive a wide range of equipment.
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Typical uses for such systems include road demolition equipment, tire
removal, electrical tools and lighting, hydraulic hand tools and
high-pressure water jetting pumps. The access platforms are hydraulically
powered and are typically used for overhead service applications. The
diverse range of customers for these products include local government
authorities, utility companies (electricity, water, gas, telecommunications)
and tire and road service providers.
Syltone's transportation-related products are sold under the Drum, Emco
Wheaton, Perolo, Priestman, Sam System, Webster and AirDrive names. Primary
competitors serving the tank truck market include GHH (owned by
Ingersoll-Rand), Civacon and Blackmer Mouvex (both owned by Dover
Corporation) and Sening. Mellow Flowtrans, Winton Engineering and Versalift
are the primary competitors serving highway and utility applications.
SYLTONE'S FLUID TRANSFER-RELATED ACTIVITIES
Syltone's fluid transfer-related activities include the design and
manufacture of arms, swivel joints and related systems for loading and
offloading liquids from ships, railcars and road vehicles, as well as
dry-break couplers and valves. These loading arms and systems are used in
distribution and marine applications. This part of Syltone's business serves
a variety of markets including the petroleum, chemical, food, liquefied gas
and marine industries and the military.
Syltone's fluid transfer products are sold primarily under the Emco
Wheaton and Perolo names. Competitors in this sector include OPW Engineered
Systems (owned by Dover Corporation) and Kanon in distribution applications;
and FMC Technologies and Schwelm Verladetechnik GmbH (SVT) in both marine
and distribution applications.
SYLTONE'S CUSTOMER SERVICE
One of Syltone's strengths is its global sales, service and vehicle
fitting facility network. Syltone currently has sales offices in fifteen
countries, which are reinforced by an expanding network of distributors and
agents. Syltone also has 14 vehicle fitting facilities in 11 countries
worldwide.
Syltone has a highly skilled workforce. In-house engineering can
customize a system installation and offer preventive maintenance, repairs,
refurbishment, upgrades and spare parts for all equipment to optimize
product lifecycle cost. Many of Syltone's products operate in critical
health and safety environments and therefore changes in legislation
frequently drive requirements for product enhancements and innovations.
The acquisition of Syltone strengthens our position, particularly in
Europe, as the leading global provider of bulk handling solutions for the
commercial transportation industry. Syltone's emphasis on systems-oriented
handling solutions expands our product offering and manufacturing
capabilities and provides incremental growth opportunities. In addition,
Syltone's installation and aftermarket capabilities are expected to
strengthen our distribution and service networks. Through the acquisition of
Syltone, Gardner Denver expands its product lines to include loading arms.
We view loading arms as an attractive market segment given its stability in
developed regions where product demand is driven primarily by replacement
activity, and its growth potential in emerging economies that are expanding
their transportation infrastructure.
S-45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is information regarding our executive officers and
directors as of March 10, 2004.
NAME AGE OFFICE
---- --- ------
Ross J. Centanni .................................... 58 Chairman, President and Chief Executive Officer
Michael S. Carney ................................... 46 Vice President and General Manager, Blower Division
Helen W. Cornell .................................... 45 Vice President and General Manager, Fluid Transfer
Division and Operations Support
Tracy D. Pagliara ................................... 41 Vice President, Administration, General Counsel and
Secretary
Philip R. Roth ...................................... 53 Vice President, Finance and Chief Financial Officer
J. Dennis Shull ..................................... 55 Vice President and General Manager, Compressor
Division
Richard C. Steber ................................... 53 Vice President and General Manager, Pump Division
Donald G. Barger, Jr. ............................... 61 Director
Frank J. Hansen ..................................... 62 Director
Raymond R. Hipp ..................................... 61 Director
Thomas M. McKenna ................................... 66 Director
Diane K. Schumacher ................................. 50 Director
Richard L. Thompson ................................. 64 Director
ROSS J. CENTANNI, age 58, has been President and Chief Executive
Officer and a director of Gardner Denver since its incorporation in November
1993. He has been Chairman of Gardner Denver's Board of Directors since
November 1998. Prior to Gardner Denver's spin-off from Cooper Industries,
Inc. ("Cooper") in April 1994, he was Vice President and General Manager of
Gardner Denver's predecessor, the Gardner-Denver Industrial Machinery
Division, where he also served as Director of Marketing from August 1985 to
June 1990. He has a B.S. degree in industrial technology and an M.B.A.
degree from Louisiana State University. Mr. Centanni is a director of
Esterline Technologies, a publicly held manufacturer of components for
avionics, propulsion and guidance systems, and Denman Services, Inc., a
privately held supplier of medical products. He is also a member of the
Petroleum Equipment Suppliers Association Board of Directors and a member of
the Executive Committee of the International Compressed Air and Allied
Machinery Committee.
MICHAEL S. CARNEY, age 46, joined the Company as Vice President and
General Manager, Gardner Denver Blower Division in November 2001. Prior to
joining Gardner Denver, Mr. Carney worked for Woods Equipment Company from
1995 to May 2001. The last position he held with Woods was Vice President,
Construction Business. From 1979 to 1995, Mr. Carney worked for General
Electric Company in various management positions. Mr. Carney has a B.S.M.E.
degree from the University of Notre Dame, an M.S.E.E. degree from the
University of Cincinnati, and an M.S.I.A. degree from Purdue University.
HELEN W. CORNELL, age 45, was appointed Vice President and General
Manager, Fluid Transfer Division and Operations Support of Gardner Denver in
March 2004. She previously served as Vice President, Strategic Planning and
Operations Support from August 2001 until her promotion. She served as Vice
President, Compressor Operations for the Compressor and Pump Division from
April 2000 until August 2001. From November 1993 until accepting her
operations role, Ms. Cornell held positions of increasing responsibility as
the Corporate Secretary and Treasurer of the Company, serving in the role of
S-46
Vice President, Corporate Secretary and Treasurer from April 1996 until
April 2000. She holds a B.S. degree in accounting from the University of
Kentucky and an M.B.A. from Vanderbilt University. She is a Certified Public
Accountant and a Certified Management Accountant.
TRACY D. PAGLIARA, age 41, was appointed Vice President,
Administration, General Counsel and Secretary of Gardner Denver in March
2004. He previously served as Vice President, General Counsel and Secretary
from August 2000 until his promotion. Prior to joining Gardner Denver, Mr.
Pagliara held positions of increasing responsibility in the legal
departments of Verizon Communications/GTE Corporation from August 1996 to
August 2000 and Kellwood Company from May 1993 to August 1996, ultimately
serving in the role of Assistant General Counsel for each company. Mr.
Pagliara, a Certified Public Accountant, has a B.S. degree in accounting and
a J.D. degree from the University of Illinois.
PHILIP R. ROTH, age 53, joined the Company as Vice President, Finance
and Chief Financial Officer in May 1996. Prior to joining Gardner Denver,
Mr. Roth was employed by Emerson Electric Co. for fifteen years, most
recently as the Vice President, Finance and Chief Financial Officer of the
Wiegand Industrial Division. Mr. Roth, a Certified Public Accountant,
received his B.S. degree in business administration from the University of
Missouri and an M.B.A. from the Olin School of Business at Washington
University.
J. DENNIS SHULL, age 55, has been the Vice President and General
Manager, Gardner Denver Compressor Division since January 2002. He
previously served the Company as Vice President and General Manager, Gardner
Denver Compressor and Pump Division since its organization in August 1997.
Prior to August 1997, he served as Vice President, Sales and Marketing since
the Company's incorporation in November 1993. From August 1990 until
November 1993, Mr. Shull was the Director of Marketing for the Division. Mr.
Shull has a B.S. degree in business from Northeast Missouri State University
and an M.A. in business from Webster University.
RICHARD C. STEBER, age 53, joined the Company as Vice President and
General Manager of the Gardner Denver Pump Division in January 2002. Prior
to joining Gardner Denver, he was employed by Goulds Pumps, a division of
ITT Industries, for twenty-five years, most recently as the President and
General Manager for Europe, Middle East, and Africa. He previously held
positions of Vice President for both the sales and marketing organizations
at Goulds Pumps, with domestic and international responsibility. Mr. Steber
has a B.S. degree in engineering from the State University of New York
College of Environmental Science and Forestry at Syracuse University.
DONALD G. BARGER, JR., age 61, has been a director of Gardner Denver
since its spin-off from Cooper in April 1994. Mr. Barger is the Senior Vice
President and Chief Financial Officer of Yellow Roadway Corporation, a
publicly held company specializing in the transportation of goods and
materials. He joined the predecessor company, Yellow Corporation ("Yellow")
in December 2002 in the same capacity. Prior to joining Yellow, he served as
Vice President and Chief Financial Officer of Hillenbrand Industries Inc.
("Hillenbrand"), a publicly held company serving healthcare and funeral
services, from March 1998 until December 2000. Mr. Barger was also Vice
President, Chief Financial Officer of Worthington Industries, Inc., a
publicly held manufacturer of metal and plastic products and processed steel
products, from September 1993 until joining Hillenbrand. Mr. Barger has a
B.S. degree from the United States Naval Academy and an M.B.A. from the
University of Pennsylvania, Wharton School of Business. Mr. Barger is a
director of the Quanex Corporation.
FRANK J. HANSEN, age 62, has been a director of Gardner Denver since
June 1997. Mr. Hansen was the President and Chief Executive Officer of IDEX
Corporation, a publicly held manufacturer of proprietary fluid handling and
industrial products, from April 1999 until his retirement in April 2000. He
was President and Chief Operating Officer from January 1998 to April 1999
and Senior Vice President and Chief Operating Officer from July 1994 until
January 1998. Mr. Hansen has a B.S. degree in business administration from
Portland State University.
S-47
RAYMOND R. HIPP, age 61, has been a director of Gardner Denver since
November 1998. Since July 2002, Mr. Hipp has served as a strategic
alternative and merger and acquisition consultant. Mr. Hipp served as
Chairman, President and CEO and a Director of Alternative Resources
Corporation, a provider of information technology staffing and component
outsourcing, a position he held from July 1998 until his retirement in June
2002. From August 1996 until May 1998, Mr. Hipp was the Chief Executive
Officer of ITI Marketing Services, a provider of telemarketing services. Mr.
Hipp has a B.S. degree from Southeast Missouri State University.
THOMAS M. MCKENNA, age 66, has been a director of Gardner Denver since
its spin-off from Cooper in April 1994. Mr. McKenna served as the President
of United Sugars Corporation, a marketing cooperative which is one of the
nation's largest sugar marketers to both the industrial and retail markets,
from December 1998 until his retirement in December 2002. He was President
and Chief Executive Officer of Moorman Manufacturing Company, a privately
held manufacturer of agricultural supplies, from August 1993 until January
1998. Mr. McKenna has a B.A. degree from St. Mary's College and an M.B.A.
from Loyola University.
DIANE K. SCHUMACHER, age 50, has been a director of Gardner Denver
since August 2000. Ms. Schumacher has served as Senior Vice President,
General Counsel and Secretary of Cooper from 1995 to 2003 and presently
serves as Senior Vice President, General Counsel and Chief Compliance
Officer. Ms. Schumacher holds a B.A. degree in economics from Southern
Illinois University and a J.D. degree from DePaul University College of Law.
She has also completed the Harvard Advanced Management Program and serves as
a director of the American Arbitration Association and is a member of the
Executive Committee. Ms. Schumacher is a member of the External Advisory
Board for Southern Illinois University College of Business Administration.
RICHARD L. THOMPSON, age 64, was elected to the Gardner Denver Board of
Directors in November 1998. Since 1995, Mr. Thompson has served as a Group
President and Executive Office Member of Caterpillar Inc. ("Caterpillar"), a
publicly held manufacturer of construction machinery and equipment. He
earned a B.S. in electrical engineering and an M.B.A. from Stanford
University and has completed the Caterpillar Advanced Management Program.
Mr. Thompson is a Director of the National Association of Manufacturers in
Washington, D.C. and also presently serves on the Boards of Directors of
Lennox International, Inc. and Proctor Community Hospital.
DESCRIPTION OF CAPITAL STOCK
Information about our capital stock appears under "Description of Our
Capital Stock" in the accompanying prospectus.
S-48
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
March 23, 2004, the underwriters named below, acting through their
representative, Bear, Stearns & Co. Inc., have severally agreed with us,
subject to the terms and conditions of the Underwriting Agreement, to
purchase from us the number of shares of common stock set forth below
opposite their respective names.
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
Bear, Stearns & Co. Inc. ............................................................... 1,500,000
Robert W. Baird & Co. Incorporated...................................................... 675,000
McDonald Investments Inc., A Keycorp Company ........................................... 675,000
Morgan Joseph & Co. Inc................................................................. 150,000
----------------
Total ......................................................................... 3,000,000
================
The Underwriting Agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of our common
stock offered by this prospectus supplement are subject to approval by their
counsel of legal matters and to other conditions set forth in the
Underwriting Agreement. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock offered hereby, other than
those shares covered by the over-allotment option described below, if any
are purchased.
Bear, Stearns & Co. Inc. has advised us that the underwriters propose
to initially offer shares of our common stock to the public at the public
offering price set forth on the cover page of this prospectus supplement and
to certain dealers at that price less a concession not in excess of $0.78 per
share, of which $0.10 may be reallowed to other dealers. After this offering,
the public offering price, concession and other terms of the offering may be
changed by Bear, Stearns & Co. Inc. No such change shall change the amount
of proceeds to be received by us as set forth on the cover page of this
prospectus supplement. The shares of our common stock are offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
We have granted to the underwriters an option, exercisable within 30
days after the date of the prospectus supplement, to purchase from time to
time up to an aggregate of 450,000 shares of common stock to cover
over-allotments, if any, at the public offering price less underwriting
discounts and commissions. If the underwriters exercise their over-allotment
option to purchase any of the 450,000 additional shares, each underwriter,
subject to certain conditions, will become obligated to purchase its
pro-rata portion of these additional shares based on the underwriter's
percentage underwriting commitment in the offering as indicated in the
preceding table. If purchased, these additional shares will be sold by the
underwriters on the same terms as those on which the shares offered hereby
are being sold. We will be obligated, pursuant to the over-allotment option,
to sell shares to the underwriters to the extent the over-allotment option
is exercised. The underwriters may exercise the over-allotment option only
to cover over-allotments made in connection with the sale of the shares of
common stock offered in this offering.
S-49
The following table shows the public offering price, underwriting
discounts and commissions and proceeds, before expenses, to us. Such amounts
are shown assuming both no exercise and full exercise of the underwriters'
over-allotment option to purchase additional shares.
TOTAL
-------------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
---------------- ----------------- ----------------
Public offering price................................... $ 24.500 $ 73,500,000 $ 84,525,000
Underwriting discount................................... 1.286 3,858,000 4,436,700
Proceeds to Gardner Denver ............................. 23.214 69,642,000 80,088,300
We estimate expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above,
will be approximately $360,000.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or to
contribute to payments that the underwriters may be required to make in
respect of those liabilities.
Each of our executive officers and directors will agree, subject to
specified exceptions, not to:
o offer to sell, contract to sell, or otherwise sell, dispose of,
loan, pledge or grant any rights with respect to any shares or any
options or warrants to purchase any shares, or any securities
convertible into or exchangeable for shares owned as of the date of
this prospectus supplement or thereafter acquired directly by those
holders or with respect to which they have the power of
disposition, or
o enter into any swap or other arrangement that transfers all or a
portion of the economic consequences associated with the ownership
of any shares (regardless of whether any of these transactions are
to be settled by the delivery of shares, or such other securities,
in cash or otherwise)
for a period of 90 days after the date of this prospectus supplement without
the prior written consent of Bear, Stearns & Co. Inc. This restriction
terminates after the close of trading of the common stock on the 90th day
after the date of this prospectus supplement. However, Bear, Stearns & Co.
Inc. may, in its sole discretion and at any time or from time to time before
the termination of the 90-day period, without notice, release all or any
portion of the securities subject to lock-up agreements. There are no
existing agreements between the representative and any of our stockholders
who will execute a lock-up agreement, providing consent to the sale of
shares prior to the expiration of the lock-up period.
In addition, we have agreed that, subject to certain exceptions, during
the lock-up period we will not, without the prior written consent of Bear,
Stearns & Co. Inc., consent to the disposition of any shares held by
stockholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of,
any shares, any options or warrants to purchase any shares or any securities
convertible into, exercisable for or exchangeable for common stock other
than our sale of shares in this offering, the issuance of our shares upon
the exercise of outstanding options or warrants, and the issuance of options
or shares under existing stock option and incentive plans.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common
stock offered by this prospectus supplement in any jurisdiction when action
for that purpose is required. The shares of common stock offered by this
prospectus supplement may not be offered or sold, directly or indirectly,
nor may this prospectus supplement or any other offering material or
advertisements in connection with the offer and sale of any such shares be
distributed or published in any jurisdiction, except under circumstances
that will result in compliance with the applicable rules and regulations of
that jurisdiction. Persons into whose possession this prospectus supplement
comes are advised to inform themselves about and to observe any restrictions
relating to the
S-50
offering and the distribution of this prospectus supplement. This prospectus
supplement does not constitute an offer to sell or a solicitation of an
offer to buy any shares of common stock offered by this prospectus
supplement in any jurisdiction in which such an offer or a solicitation is
unlawful.
OUR SHARES ARE TRADED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL
"GDI."
A prospectus supplement in electronic format may be made available on
the Internet sites or through other online services maintained by one or
more of the underwriters of this offering, or by their affiliates. In those
cases, prospective investors may view offering terms online and, depending
upon the particular underwriter, prospective investors may be allowed to
place orders online. The underwriters may agree with us to allocate a
specific number of shares for sale to online brokerage account holders. Any
such allocation for online distributions will be made by the underwriters on
the same basis as other allocations. Other than the prospectus supplement in
electronic format, the information on any underwriter's web site and any
information contained in any other web site maintained by an underwriter is
not part of the prospectus supplement or the registration statement of which
this prospectus supplement forms a part, has not been approved and/or
endorsed by us or any underwriter in its capacity as underwriter and should
not be relied upon by investors.
Bear, Stearns & Co. Inc. has advised us that, pursuant to Regulation M
under the Securities Exchange Act, some participants in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the shares of common stock at
a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the
price of the shares of common stock. A "syndicate covering transaction" is
the bid for or purchase of shares of common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting
the representatives to reclaim the selling concession otherwise accruing to
an underwriter or syndicate member in connection with this offering if the
shares of common stock originally sold by such underwriter or syndicate
member are purchased by the representatives in a syndicate covering
transaction and have therefore not been effectively placed by such
underwriter or syndicate member. The representative has advised us that such
transactions may be effected on the New York Stock Exchange or otherwise
and, if commenced, may be discontinued at any time.
Bear, Stearns & Co. Inc. and the other underwriters from time to time
perform investment banking and other financial services for us and our
affiliates for which they receive advisory or transaction fees, as
applicable, plus out-of-pocket expenses, of the nature and in amounts
customary in the industry for these financial services.
S-51
LEGAL MATTERS
Certain legal matters in connection with the shares of common stock
will be passed upon for us by Bryan Cave LLP, St. Louis, Missouri. Certain
legal matters will be passed upon for the underwriters by Cahill Gordon &
Reindel LLP, New York, New York.
EXPERTS
The consolidated financial statements of Gardner Denver, Inc. as of
December 31, 2003 and 2002, and for each of the years in the two-year period
ended December 31, 2003, have been included in this prospectus supplement
beginning at page F-1 in reliance upon the report of KPMG LLP, independent
accountants, and upon the authority of said firm as experts in accounting
and auditing.
Arthur Andersen LLP, our former independent auditors, audited our
consolidated financial statements as of December 31, 2001, and for the year
ended December 31, 2001, as set forth in their report. We have included in
this prospectus supplement consolidated financial statements as of December
31, 2001, and for the year ended December 31, 2001 in reliance on Arthur
Andersen's report. We have been unable to obtain, after reasonable efforts,
the written consent of Arthur Andersen to our naming it as an expert and as
having audited such consolidated financial statements, and including its
audit report in this prospectus. This limits your ability to recover damages
from Arthur Andersen under Section 11 of the Securities Act for any untrue
statements of a material fact contained in the financial statements audited
by Arthur Andersen or any omissions to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
See "Risk Factors - It is Unlikely You Would be Able to Recover Any Damages
From Our Former Independent Auditor, Arthur Andersen LLP."
On June 26, 2002, our Board of Directors, based on a recommendation of
the audit committee, dismissed Arthur Andersen as our independent public
accountants and approved the selection of KPMG to serve as our independent
public accountants for the year ending December 31, 2002.
Arthur Andersen's reports on our financial statements for the fiscal
years ended December 31, 2001 and 2000 did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.
In connection with the audits for the fiscal year ended December 31,
2001 and through June 26, 2002, there were no disagreements with Arthur
Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements,
if not resolved to the satisfaction of Arthur Andersen, would have caused
Arthur Andersen to make reference thereto in its report on our financial
statements for such years. Also, during those years, there have been no
"reportable events," as such term is used in Item 304(a)(1)(v) of Regulation
S-K.
The consolidated financial statements of Syltone plc as of March 31,
2003 and 2002, and for each of the years in the two-year period ended March
31, 2003, have been included in this prospectus supplement beginning at page
F-30 in reliance upon the report of KPMG Audit Plc, chartered accountants,
and upon the authority of said firm as experts in accounting and auditing.
S-52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
GARDNER DENVER, INC.
Independent Auditors' Reports................................................. F-2
Consolidated Statements of Operations for the years ended December
31, 2003, 2002 and 2001.................................................... F-4
Consolidated Balance Sheets as of December 31, 2003 and 2002.................. F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001........................................... F-6
Consolidated Statements of Cash Flows for the years ended December
31, 2003, 2002 and 2001.................................................... F-7
Notes to Consolidated Financial Statements.................................... F-8
SYLTONE PLC
Independent Auditors' Report.................................................. F-29
Consolidated Profit and Loss Accounts for the years ended 31 March
2003 and 2002.............................................................. F-30
Consolidated Balance Sheets as at 31 March 2003 and 2002...................... F-31
Consolidated Cash Flow Statements for the years ended 31 March 2003
and 2002................................................................... F-32
Consolidated Statements of Total Recognized Gains and Losses for the
years ended 31 March 2003 and 2002......................................... F-33
Reconciliations of Movements in Consolidated Shareholders' Funds for
the years ended 31 March 2003 and 2002..................................... F-33
Company Balance Sheets as at 31 March 2003 and 2002........................... F-34
Notes to Consolidated Financial Statements.................................... F-35
Consolidated Profit and Loss Accounts for the six month periods ended
30 September 2003 and 2002 (unaudited)..................................... F-60
Consolidated Balance Sheets at 30 September 2003 and 2002 (unaudited)......... F-61
Consolidated Cash Flow Statements for the six month periods ended 30
September 2003 and 2002 (unaudited)........................................ F-62
Reconciliations of Movements in Consolidated Shareholders' Funds for
the six month periods ended 30 September 2003 and 2002 (unaudited)......... F-63
Notes to Consolidated Financial Statements (unaudited)........................ F-64
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Gardner Denver, Inc.
We have audited the accompanying consolidated balance sheets of Gardner
Denver, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2003 and 2002, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the two-year
period ended December 31, 2003. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. The accompanying consolidated financial statements of Gardner
Denver, Inc. for the year ended December 31, 2001, were audited by other
auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements, before the addition of
the transitional disclosures detailed in Note 5, in their report dated
February 6, 2002.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gardner
Denver, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As detailed in Note 5, the December 31, 2001 consolidated financial
statements, which were audited by other auditors who have ceased
operations, include the addition of the transitional disclosures required
by Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, which was adopted by the Company in the year ending
December 31, 2002. In our opinion, the disclosures for December 31, 2001 in
Note 5 are appropriate. However, we were not engaged to audit, review, or
apply any procedures to the December 31, 2001 consolidated financial
statements of Gardner Denver, Inc. and subsidiaries other than with respect
to such disclosures and, accordingly, we do not express an opinion or any
other form of assurance on the December 31, 2001 consolidated financial
statements taken as a whole.
/s/ KPMG LLP
St. Louis, Missouri
January 30, 2004
F-2
This is a copy of a report previously issued by Arthur Andersen LLP, which
has ceased operations, and has not been reissued by Arthur Andersen LLP.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Gardner Denver, Inc.
We have audited the accompanying consolidated balance sheets of Gardner
Denver, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2001. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gardner
Denver, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
St. Louis, Missouri
February 6, 2002
(except with respect to the matter discussed in Note 9,
as to which the date is March 6, 2002)
F-3
GARDNER DENVER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------------
2003 2002 2001
-------- ------- -------
Revenues.................................................... $439,530 418,158 419,770
Costs and expenses:
Cost of sales (excluding depreciation and
amortization)........................................ 307,753 289,631 294,249
Depreciation and amortization.......................... 14,566 14,139 17,567
Selling and administrative expenses.................... 85,326 79,400 69,678
Interest expense....................................... 4,748 6,365 6,796
Other income, net...................................... (3,221) (204) (3,203)
-------- ------- -------
409,172 389,331 385,087
-------- ------- -------
Income before income taxes.................................. 30,358 28,827 34,683
Provision for income taxes.................................. 9,715 9,225 12,659
-------- ------- -------
Net income.................................................. $ 20,643 19,602 22,024
======== ======= =======
Basic earnings per share.................................... $ 1.29 1.24 1.42
======== ======= =======
Diluted earnings per share.................................. $ 1.27 1.22 1.40
======== ======= =======
The accompanying notes are an integral part of these statements.
F-4
GARDNER DENVER, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
---------------------
2003 2002
-------- -------
ASSETS
Current assets:
Cash and equivalents.................................... $132,803 25,667
Receivables (net of allowances of $4,534 in 2003 and
$5,279 in 2002)....................................... 81,345 74,490
Inventories, net........................................ 64,327 67,448
Deferred income taxes................................... 3,652 5,902
Other current assets.................................... 5,682 4,268
-------- -------
Total current assets................................ 287,809 177,775
-------- -------
Property, plant and equipment, net.......................... 75,428 76,162
Goodwill.................................................... 205,488 201,761
Other intangibles, net...................................... 10,341 9,418
Deferred income taxes....................................... 5,374 10,160
Other assets................................................ 5,293 3,454
-------- -------
Total assets.................................... $589,733 478,730
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................... $ 16,875 7,500
Accounts payable and accrued liabilities................ 84,081 76,709
-------- -------
Total current liabilities........................... 100,956 84,209
-------- -------
Long-term debt, less current maturities..................... 165,756 112,663
Postretirement benefits other than pensions................. 32,110 34,539
Other liabilities........................................... 25,006 24,396
-------- -------
Total liabilities................................... 323,828 255,807
-------- -------
Stockholders' equity:
Common stock, $0.01 par value; 50,000,000 shares
authorized; 16,117,026 and 15,942,138 shares
outstanding in 2003 and 2002, respectively............ 178 177
Capital in excess of par value.......................... 174,474 171,047
Retained earnings....................................... 102,307 81,664
Accumulated other comprehensive income (loss)........... 14,893 (4,146)
Treasury stock at cost, 1,721,862 and 1,716,353 shares
in 2003 and 2002, respectively........................ (25,947) (25,819)
-------- -------
Total stockholders' equity.......................... 265,905 222,923
-------- -------
Total liabilities and stockholders' equity...... $589,733 478,730
======== =======
The accompanying notes are an integral part of these statements.
F-5
GARDNER DENVER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
CAPITAL ACCUMULATED
IN OTHER TOTAL
COMMON EXCESS OF TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
STOCK PAR VALUE STOCK EARNINGS INCOME (LOSS) EQUITY INCOME
------ ---------- -------- -------- ------------- ------------- -------------
Balance January 1, 2001......... $170 160,343 (24,508) 40,038 (4,895) 171,148
==== ======= ======= ======= ====== =======
Stock issued for benefit plans
and options.................... 4 5,919 5,923
Treasury stock.................. (1,094) (1,094)
Net income...................... 22,024 22,024 22,024
Foreign currency translation
adjustments.................... 727 727 727
---- ------- ------- ------- ------ ------- -------
22,751
=======
Balance December 31, 2001....... $174 166,262 (25,602) 62,062 (4,168) 198,728
==== ======= ======= ======= ====== =======
Stock issued for benefit plans
and options.................... 3 4,785 4,788
Treasury stock.................. (217) (217)
Net income...................... 19,602 19,602 19,602
Foreign currency translation
adjustments.................... 8,482 8,482 8,482
Minimum pension liability
adjustments, net of tax of
$4,976......................... (8,460) (8,460) (8,460)
---- ------- ------- ------- ------ ------- -------
19,624
=======
Balance December 31, 2002....... $177 171,047 (25,819) 81,664 (4,146) 222,923
==== ======= ======= ======= ====== =======
Stock issued for benefit plans
and options.................... 1 3,427 3,428
Treasury stock.................. (128) (128)
Net income...................... 20,643 20,643 20,643
Foreign currency translation
adjustments.................... 15,734 15,734 15,734
Minimum pension liability
adjustments, net of tax of
$(1,678)....................... 3,305 3,305 3,305
---- ------- ------- ------- ------ ------- -------
39,682
=======
Balance December 31, 2003....... $178 174,474 (25,947) 102,307 14,893 265,905
==== ======= ======= ======= ====== =======
The accompanying notes are an integral part of these statements.
F-6
GARDNER DENVER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
-------- -------- -------
Cash flows from operating activities:
Net income................................................ $ 20,643 19,602 22,024
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 14,566 14,139 17,567
Unrealized foreign currency transaction gain........... (3,212) -- --
Net (gain)/loss on asset dispositions.................. (370) (20) 46
LIFO liquidation income................................ (367) (394) (502)
Stock issued for employee benefit plans................ 2,434 2,342 2,471
Deferred income taxes.................................. 5,724 2,455 615
Changes in assets and liabilities:
Receivables.......................................... (3,568) 13,321 6,105
Inventories.......................................... 7,270 11,254 1,200
Accounts payable and accrued liabilities............. 4,095 (9,313) (4,294)
Other assets and liabilities, net.................... (932) (905) (1,079)
-------- -------- -------
Net cash provided by operating activities........... 46,283 52,481 44,153
-------- -------- -------
Cash flows from investing activities:
Capital expenditures...................................... (11,950) (13,641) (11,524)
Disposals of property, plant and equipment................ 1,959 200 97
Foreign currency hedging transactions..................... -- (5) (31)
Business acquisitions, net of cash acquired............... (2,402) -- (82,907)
Other..................................................... (516) -- --
-------- -------- -------
Net cash used in investing activities............... (12,909) (13,446) (94,365)
-------- -------- -------
Cash flows from financing activities:
Principal payments on long-term debt...................... (59,532) (109,442) (90,151)
Proceeds from long-term debt.............................. 122,000 62,000 139,000
Proceeds from stock options............................... 993 2,446 3,452
Purchase of treasury stock................................ (128) (217) (1,094)
Other..................................................... (302) (754) (421)
-------- -------- -------
Net cash provided by (used in) financing
activities........................................ 63,031 (45,967) 50,786
-------- -------- -------
Effect of exchange rate changes on cash and equivalents..... 10,731 2,619 (833)
-------- -------- -------
Increase (decrease) in cash and equivalents................. 107,136 (4,313) (259)
Cash and equivalents, beginning of year..................... 25,667 29,980 30,239
-------- -------- -------
Cash and equivalents, end of year........................... $132,803 25,667 29,980
======== ======== =======
The accompanying notes are an integral part of these statements.
F-7
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements reflect the
operations of Gardner Denver, Inc. ("Gardner Denver" or the "Company") and
its subsidiaries. Certain prior year amounts have been reclassified to
conform with current year presentation.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the 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 these estimates.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign operations are
translated at the exchange rate in effect at the balance sheet date, while
revenues and expenses are translated at average rates prevailing during the
year. Translation adjustments are reported in accumulated other
comprehensive income (loss), a separate component of stockholders' equity.
REVENUE RECOGNITION
The Company recognizes product revenue when the products are shipped
and title passes to the customer and collection is reasonably assured.
Service revenue is recognized when services are performed and earned and
collection is reasonably assured.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments (valued at cost, which
approximates fair value) acquired with an original maturity of three months
or less. As of December 31, 2003, (pounds)62.4 million ($111.4 million) in
cash was deposited on account to acquire the shares of Syltone (See Note
16). These funds were restricted for such use until the acquisition was
consummated or the Company's offer to purchase such shares expired.
INVENTORIES
Inventories, which consist of materials, labor and manufacturing
overhead, are carried at the lower of cost or market value. As of December
31, 2003, $40.4 million (63%) of the Company's inventory is accounted for
on a first-in, first-out (FIFO) basis, with the remaining $23.9 million
(37%) accounted for on a last-in, first-out (LIFO) basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of
the assets: buildings - 10 to 45 years; machinery and equipment - 10 to 12
years; office furniture and equipment - 3 to 10 years; and tooling, dies,
patterns, etc. - 3 to 7 years.
F-8
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
GOODWILL AND OTHER INTANGIBLES
Effective July 1, 2001, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" applicable to business combinations completed after June
30, 2001. Effective January 1, 2002, additional provisions of SFAS No. 142,
relating to business combinations completed prior to July 1, 2001 became
effective and were adopted by the Company. Under the provisions of this
standard, intangible assets deemed to have indefinite lives and goodwill
are not subject to amortization. All other intangible assets are amortized
over their estimated useful lives, generally 5 to 15 years.
Goodwill and other intangible assets not subject to amortization are
tested for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. This testing
requires comparison of carrying values to fair values, and when
appropriate, the carrying value of impaired assets is reduced to fair
value. During the second quarter of 2003, the Company completed its annual
impairment test and determined that no impairment existed.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net undiscounted
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value, less costs to dispose.
PRODUCT WARRANTY
The Company's product warranty liability is calculated based primarily
upon historical warranty claims experience. Management also factors into
the product warranty accrual any specific warranty issues identified during
the period which are expected to impact future periods and may not be
consistent with historical claims experience. Product warranty accruals are
reviewed regularly by management and adjusted from time to time when actual
warranty claims experience differs from that estimated.
PENSION AND OTHER POSTRETIREMENT BENEFITS
Pension and other postretirement benefit obligations and expense (or
income) are dependent on assumptions used in calculating such amounts.
These assumptions include the discount rate, rate of compensation
increases, expected return on plan assets and expected healthcare trend
rates. In accordance with GAAP, actual results that differ from the
assumptions are accumulated and amortized over future periods.
INCOME TAXES
The Company has determined tax expense and other deferred tax
information based on the liability method. Deferred income taxes are
provided to reflect temporary differences between financial and tax
reporting.
RESEARCH AND DEVELOPMENT
Costs for research and development are expensed as incurred and were
$2,808, $2,398 and $2,476 for the years ended December 31, 2003, 2002 and
2001, respectively.
F-9
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
FINANCIAL INSTRUMENTS
There were no off-balance sheet derivative financial instruments as of
December 31, 2003 or 2002.
STOCK-BASED COMPENSATION
As allowed under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company measures its compensation cost of equity
instruments issued under employee compensation plans using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," and related
interpretations. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation Transition and Disclosure, an
Amendment to SFAS No. 123," to require prominent disclosures in both annual
and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. Under APB No. 25, no compensation cost was recognized for
the Company's stock option plans. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant
date for awards outstanding during 2003, 2002 and 2001 consistent with the
provisions of this Statement, the Company's net income and earnings per
share would have been as shown in the table below:
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
------- ------ ------
Net income, as reported..................................... $20,643 19,602 22,024
Less: Total stock-based employee compensation expense
determined under fair value method, net of related tax
effects................................................... (1,252) (1,274) (1,293)
------- ------ ------
Pro forma net income........................................ $19,391 18,328 20,731
======= ====== ======
Basic earnings per share, as reported....................... $ 1.29 1.24 1.42
Basic earnings per share, pro forma......................... $ 1.21 1.16 1.33
Diluted earnings per share, as reported..................... $ 1.27 1.22 1.40
Diluted earnings per share, pro forma....................... $ 1.19 1.14 1.31
Compensation costs charged against income (net of tax) for restricted
stock issued under the Company's Incentive Plan totaled $0.2 million in
2003. There were no restricted stock awards in 2002 or 2001.
COMPREHENSIVE INCOME
Items impacting the Company's comprehensive income, but not included in
net income, consist of translation adjustments, including realized and
unrealized gains and losses (net of income taxes) on the foreign currency
hedge of the Company's investment in a foreign subsidiary and additional
minimum pension liability (net of income taxes). See Note 7 for further
discussion of additional minimum pension liability adjustments.
NEW ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123." SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, the statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The Company has adopted SFAS No. 148 and included the
required disclosures above.
F-10
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
In December 2002, the Emerging Issues Task Force issued EITF 00-21,
"Revenue Arrangements with Multiple Deliverables." This issue addresses
certain aspects of the accounting by a vendor for arrangements under which
it will perform multiple revenue-generating activities. In some
arrangements, the different revenue-generating activities (deliverables)
are sufficiently separable, and there exists sufficient evidence of their
fair values to separately account for some or all of the deliverables. This
issue addresses when and, if so, how an arrangement involving multiple
deliverables should be divided into separate units of accounting. This
issue does not change otherwise applicable revenue recognition criteria.
This issue is applicable for revenue arrangements beginning in the third
quarter of 2003. The Company has adopted the provisions of EITF 00-21,
which did not have a material impact on its financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities," an interpretation of Accounting Research
Bulletin No. 51, which addresses consolidation by business enterprises of
variable interest entities. This interpretation requires existing
unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the interest entities do not effectively disperse
risks among the parties involved. This interpretation applies to variable
interest entities created after January 31, 2003. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company has no variable interest
entities and has adopted this statement, which did not have a material
impact on its financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003.
The Company has adopted this statement which did not have a material impact
on its financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This
statement requires additional disclosures about plan assets, benefit
obligations, cash flows, benefit costs and other relevant information. In
addition to expanded annual disclosures, the statement also requires
disclosures of various elements of pension and other postretirement benefit
costs on an interim basis. The Company has adopted SFAS No. 132 (revised)
and included the required disclosures in Note 7 to the Consolidated
Financial Statements.
NOTE 2: ACQUISITIONS
In August 2003, the Company paid $2.4 million to acquire certain assets
and assume certain liabilities of a small machine shop operation in Odessa,
Texas. This operation services and repairs well stimulation and drilling
pumps serving the Permian Basin and thus, its financial results were
included in the Pump Products segment from the date of acquisition. There
are no additional contingent payments or commitments related to this
acquisition. The amounts assigned to goodwill and other intangible assets
were inconsequential.
During 2001, the Company's Compressed Air Products segment completed
two acquisitions. Effective September 10, 2001, the Company acquired
certain assets and stock of Hoffman Air and Filtration Systems ("Hoffman").
Hoffman, previously headquartered in Syracuse, New York, manufactures and
distributes multistage centrifugal blowers and vacuum systems, primarily
for wastewater treatment and industrial applications. Effective September
1, 2001, the Company also acquired certain assets and stock of the
Hamworthy Belliss & Morcom compressor business ("Belliss & Morcom").
Belliss & Morcom is headquartered in Gloucester, England and manufactures
and distributes lubricated and oil-free reciprocating air compressors for a
variety of applications. The aggregate purchase price, net of cash
acquired, was approximately $83 million for these acquisitions. There are
no additional contingent payments or commitments related to these
acquisitions. The
F-11
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
purchase price of each acquisition has been allocated primarily to
receivables; inventory; property, plant and equipment; intangible assets
(other than goodwill); and accounts payable and accrued liabilities, based
on their respective fair values at the date of acquisition and resulted in
aggregate costs in excess of net assets acquired of approximately $58
million.
The following table summarizes supplemental pro forma information as if
the Hoffman and Belliss & Morcom acquisitions had been completed on January
1, 2000:
YEAR ENDED
DECEMBER 31, 2001
(UNAUDITED)
-----------------
Revenues................................... $481,285
Net income................................. 23,618
Diluted earnings per share................. $ 1.50
The unaudited pro forma information has been presented for comparative
purposes and does not purport to be indicative of the consolidated results
of operations had these transactions been completed as of the assumed date.
All acquisitions have been accounted for by the purchase method and,
accordingly, their results are included in the Company's consolidated
financial statements from the respective dates of acquisition. Under the
purchase method, the purchase price is allocated based on the fair value of
assets received and liabilities assumed as of the acquisition date.
NOTE 3: INVENTORIES
DECEMBER 31,
--------------------
2003 2002
------- ------
Raw materials, including parts and subassemblies............ $33,850 33,400
Work-in-process............................................. 7,850 9,077
Finished goods.............................................. 24,731 27,630
Perishable tooling and supplies............................. 2,429 2,456
------- ------
68,860 72,563
Excess of FIFO costs over LIFO costs........................ (4,533) (5,115)
------- ------
Inventories, net........................................ $64,327 67,448
======= ======
During 2003, 2002 and 2001, reductions in inventory quantities (net of
acquisitions) resulted in liquidations of LIFO inventory layers carried at
lower costs prevailing in prior years. The effect was to increase net
income in 2003, 2002 and 2001 by $249, $268 and $319, respectively. It is
the Company's policy to record the earnings effect of LIFO inventory
liquidations in the quarter in which a decrease for the entire year becomes
certain. In each of the years 2001 through 2003, the LIFO liquidation
income was recorded in the fourth quarter. The Company believes that FIFO
costs in the aggregate approximates replacement or current cost and thus
the excess of replacement or current cost over LIFO value was $4.5 million
as of December 31, 2003.
F-12
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
------------------------
2003 2002
--------- --------
Property, plant and equipment:
Land and land improvements............................. $ 8,710 8,189
Buildings.............................................. 41,727 41,779
Machinery and equipment................................ 114,594 107,366
Tooling, dies, patterns, etc........................... 13,884 12,759
Office furniture and equipment......................... 14,574 13,143
Other.................................................. 6,780 6,099
Construction in progress............................... 2,612 4,758
--------- --------
202,881 194,093
Accumulated depreciation................................ (127,453) (117,931)
--------- --------
Property, plant and equipment, net.................. $ 75,428 76,162
========= ========
NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed in Note 1, the Company has adopted SFAS No. 142. This
statement required, among other things, the discontinuation of goodwill
amortization. Net income and basic and diluted earnings per share for the
year ended December 31, 2001, adjusted to exclude goodwill amortization,
are as follows:
YEAR ENDED
DECEMBER 31, 2001
-----------------
Reported net income........................ $22,024
Adjustments: goodwill amortization (net of
income taxes)............................ 3,760
-------
Adjusted net income........................ $25,784
=======
Basic earnings per share:
Reported............................... $ 1.42
Adjusted............................... $ 1.66
Diluted earnings per share:
Reported............................... $ 1.40
Adjusted............................... $ 1.63
The changes in the carrying amount of goodwill attributable to each
business segment for the years ended December 31, 2002 and 2003 are as
follows:
COMPRESSED AIR PUMP
PRODUCTS PRODUCTS
-------------- --------
Balance as of January 1, 2002............................... $157,614 25,531
Adjustment due to finalization of purchase price
allocations for businesses acquired in 2001............... 16,213 --
Foreign currency translation................................ 2,403 --
-------- ------
Balance as of December 31, 2002............................. 176,230 25,531
-------- ------
Goodwill acquired during the year........................... -- 103
Foreign currency translation................................ 3,624 --
-------- ------
Balance as of December 31, 2003............................. $179,854 25,634
======== ======
F-13
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
Other intangible assets at December 31, 2003 and 2002 consisted of the
following:
DECEMBER 31, 2003 DECEMBER 31, 2002
--------------------------------- ---------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Amortized intangible assets:
Acquired technology......... $13,312 $ (8,002) 10,936 (6,853)
Other....................... 4,238 (2,264) 4,541 (2,163)
Unamortized intangible assets:
Trademarks.................. 3,057 -- 2,957 --
------- -------- ------ ------
Total other intangible
assets................. $20,607 $(10,266) 18,434 (9,016)
======= ======== ====== ======
The purchase price allocations for Hoffman and Belliss & Morcom were
finalized during the quarter ended September 30, 2002, upon completion of
valuations of the acquired, separately identifiable intangible assets
(other than goodwill). Pursuant to the valuations, the fair value of
separately identifiable assets was reduced from the Company's previous fair
value estimates with a corresponding increase in the purchase price
allocated to goodwill. The impact on amortization expense as a result of
the finalization of the purchase price allocations was insignificant.
Amortization of intangible assets was $1.4 million in 2003.
Amortization of intangible assets is anticipated to be approximately $3.5
million per year for 2004 through 2008. This amount includes an estimate
for amortization of intangible assets with finite useful lives acquired in
the Syltone acquisition. See Note 16 for further information on the Syltone
acquisition.
NOTE 6: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
DECEMBER 31,
--------------------
2003 2002
------- ------
Accounts payable - trade.................................... $39,691 35,385
Salaries, wages and related fringe benefits................. 14,661 11,831
Product warranty............................................ 6,635 7,060
Product liability, workers' compensation and other
insurance................................................. 5,046 5,127
Other....................................................... 18,048 17,306
------- ------
Total accounts payable and accrued liabilities.......... $84,081 76,709
======= ======
A reconciliation of the changes in the product warranty liability for
the years ended December 31, 2002 and 2003 is as follows:
Balance as of December 31, 2001.................... $ 7,578
Product warranty accruals.......................... 5,281
Settlements........................................ (6,126)
Other (primarily foreign currency translation)..... 327
-------
Balance as of December 31, 2002.................... 7,060
-------
Product warranty accruals.......................... 5,420
Settlements........................................ (6,171)
Other (primarily foreign currency translation)..... 326
-------
Balance as of December 31, 2003.................... $ 6,635
=======
F-14
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
NOTE 7: PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company sponsors retirement plans covering substantially all
employees. Benefits are provided to employees under defined benefit
pay-related and service-related plans, which are generally noncontributory.
Annual Company contributions to domestic retirement plans equal or exceed
the minimum funding requirements of the Employee Retirement Income Security
Act of 1974. Consistent with the practice in Germany, the retirement plans
covering the employees of the Company's Wittig operation in Germany are
unfunded and the full amount of the pension benefit obligation is included
as an accrued benefit liability on the Consolidated Balance Sheets.
With respect to the 2001 Hoffman acquisition, the accumulated benefit
obligation and plan assets related to the defined benefit plans, covering
substantially all full-time employees, were transferred to the Company
pursuant to the purchase agreement. With regard to the 2001 Belliss &
Morcom acquisition, the majority of the employees are based in the United
Kingdom and are provided retirement benefits under a contributory defined
benefit pay and service related plan. Under the Company's purchase
agreement, these employees were allowed to continue to participate in the
seller's benefit plan for a period of up to one year from the acquisition
date. Within this one-year timeframe, the Company established a similar
retirement plan arrangement allowing employees the option of transferring
their accumulated benefit. The purchase agreement also required the
transfer from the seller's plan of plan assets in excess of the transferred
accumulated benefit obligation. As of December 31, 2002, the Company had
not received this transfer and thus an estimate of this receivable was
included in the reconciliation of fair value of plan assets table presented
below. During 2003, the Company settled this receivable resulting in
adjustments to the benefit obligation and fair value of plan assets for
non-U.S. pension plans. These adjustments are included on the
"acquisitions" line in the reconciliation table below.
Due to the significant declines in the financial markets, the fair
value of the plan assets of certain of the Company's funded defined benefit
pension plans was less than their accumulated benefit obligation at
December 31, 2002. As a result, the Company recorded a non-cash charge to
stockholders' equity (accumulated other comprehensive loss) in the amount
of $8.5 million (net of income taxes of $5.0 million), in the fourth
quarter of 2002. During 2003, the financial markets and the assets of the
Company's funded benefit pension plans experienced significant gains. As a
result, the Company recorded a credit to accumulated other comprehensive
income of $3.3 million (net of income taxes of $1.7 million) to reduce its
additional minimum pension liability.
The Company also sponsors defined contribution plans. Benefits are
determined and funded annually based on terms of the plans or as stipulated
in a collective bargaining agreement. Certain of the Company's full-time
salaried and nonunion hourly employees are eligible to participate in
Company-sponsored defined contribution savings plans, which are qualified
plans under the requirements of Section 401(k) of the Internal Revenue
Code. The Company's matching contributions to the savings plans are in the
form of the Company's common stock.
The full-time salaried and hourly employees of the Company's operations
in Finland have pension benefits, which are guaranteed by the Finnish
government. Although the plans are similar to defined benefit plans, the
guarantee feature of the government causes the substance of the plans to be
defined contribution. Therefore, the discounted future liability of these
plans is not included in the liability for defined benefit plans, but the
expense for the Company's contribution is included in the pension benefit
cost for defined contribution plans.
Domestic salaried employees who retired prior to 1989, as well as
certain other employees who were near retirement and elected to receive
certain benefits, have retiree medical, prescription and life insurance
benefits. All other active salaried employees do not have postretirement
medical benefits. The hourly employees have separate plans with varying
benefit formulas. In all cases, however, currently active hourly employees,
except for certain employees who are near retirement, will not
F-15
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
receive healthcare benefits after retirement. All of the Company's
postretirement medical plans are unfunded.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") became law in the U.S. The Act
introduces a prescription drug benefit under Medicare as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to the Medicare benefit. In
accordance with FASB Staff Position FAS 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," the Company has elected to defer recognition of
the effects of the Act in any measures of its benefit obligations or costs.
Specific authoritative guidance on the accounting for the federal subsidy
is pending and that guidance, when issued, will be adopted by the Company
to the extent applicable.
The following tables provide a reconciliation of the changes in both
the pension and other postretirement plans benefit obligations and fair
value of assets over the two-year period ended December 31, 2003, and a
statement of the funded status as of December 31, 2003 and 2002:
PENSION BENEFITS
-------------------------------------------------- POSTRETIREMENT
U.S. PLANS NON-U.S. PLANS BENEFITS
---------------------- --------------------- ----------------------
2003 2002 2003 2002 2003 2002
-------- ------- -------- ------ -------- -------
RECONCILIATION OF BENEFIT OBLIGATION
Obligation at January 1................. $ 55,176 54,235 $ 26,997 3,147 $ 28,391 30,371
Service cost............................ 1,977 2,188 1,539 1,301 12 17
Interest cost........................... 3,400 3,629 1,447 1,331 1,685 1,939
Actuarial loss (gain)................... 2,133 (214) 3,640 3,237 139 (1,154)
Employee contributions.................. -- -- 415 372 -- --
Benefit payments........................ (4,668) (4,662) (928) (182) (2,563) (2,272)
Acquisitions............................ -- -- (2,667) 15,270 -- (510)
Effect of foreign currency exchange rate
changes................................ -- -- 3,458 2,521 -- --
-------- ------- -------- ------ -------- -------
Obligation at December 31............. $ 58,018 55,176 $ 33,901 26,997 $ 27,664 28,391
======== ======= ======== ====== ======== =======
RECONCILIATION OF FAIR VALUE OF PLAN
ASSETS
Fair value of plan assets at January 1.. $ 40,539 50,198 $ 18,358 --
Actual return on plan assets............ 7,304 (5,527) 3,891 (893)
Acquisitions............................ -- -- (996) 17,196
Employer contributions.................. 1,130 529 39 92
Employee contributions.................. -- 1 415 372
Benefit payments........................ (4,668) (4,662) (857) (182)
Effect of foreign currency exchange rate
changes................................ -- -- 2,209 1,773
-------- ------- -------- ------
Fair value of plan assets at
December 31.......................... $ 44,305 40,539 $ 23,059 18,358
======== ======= ======== ======
FUNDED STATUS
Funded status at December 31............ $(13,713) (14,639) $(10,842) (8,637) $(27,664) (28,391)
Unrecognized transition liability....... 9 13 -- -- -- --
Unrecognized prior-service cost......... (537) (623) -- -- (744) (1,349)
Unrecognized loss (gain)................ 8,989 11,314 6,329 6,766 (6,082) (7,180)
-------- ------- -------- ------ -------- -------
Accrued benefit liability............. $ (5,252) (3,935) $ (4,513) (1,871) $(34,490) (36,920)
======== ======= ======== ====== ======== =======
F-16
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
The total pension and other postretirement accrued benefit liability is
included in the balance sheets in the following captions:
DECEMBER 31,
----------------------
2003 2002
-------- -------
Deferred income taxes....................................... $ 3,298 4,975
Accounts payable and accrued liabilities.................... (2,380) (2,381)
Postretirement benefits other than pensions................. (32,110) (34,539)
Other liabilities........................................... (18,218) (19,241)
Accumulated other comprehensive income...................... 5,155 8,460
Total pension and other postretirement accrued benefit -------- -------
liability............................................. $(44,255) (42,726)
======== =======
The aggregate accumulated benefit obligation and fair value of plan
assets for pension plans with accumulated benefit obligations in excess of
plan assets at December 31, 2003 and 2002 are as follows:
DECEMBER 31,
----------------------------------------------
U.S. PLANS NON-U.S. PLANS
-------------------- -------------------
2003 2002 2003 2002
------- ------ ------ ------
Accumulated benefit obligation..................... $57,890 54,907 $4,874 23,061
Fair value of plan assets.......................... 44,305 40,539 -- 18,358
The following table provides the components of net periodic benefit
expense (income) for the plans for the years ended December 31, 2003, 2002
and 2001:
PENSION BENEFITS
--------------------------------------------------------- OTHER
U.S. PLANS NON-U.S. PLANS POSTRETIREMENT BENEFITS
--------------------------- -------------------------- --------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
------- ------ ------ ------- ------ ----- ------ ------ ------
Service cost............................ $ 1,977 2,188 1,989 $ 1,539 1,301 83 $ 12 17 23
Interest cost........................... 3,400 3,629 3,520 1,447 1,331 181 1,685 1,939 2,083
Expected return on plan assets.......... (3,269) (4,180) (4,441) (1,474) (1,717) -- -- -- --
Amortization of transition liability.... 5 5 4 -- 3 6 -- -- --
Amortization of prior-service cost...... (86) (86) (86) -- -- -- (606) (1,206) (1,307)
Amortization of net loss (gain)......... 421 -- 2 230 3 -- (958) (829) (1,030)
Net periodic benefit expense ------- ------ ------ ------- ------ ----- ------ ------ ------
(income)............................. 2,448 1,556 988 1,742 921 270 $ 133 (79) (231)
====== ====== ======
Defined contribution plans.............. 2,548 2,576 2,816 1,378 1,281 872
------- ------ ------ ------- ------ -----
Total retirement expense.............. $ 4,996 4,132 3,804 $ 3,120 2,202 1,142
======= ====== ====== ======= ====== =====
The following weighted average assumptions were used to determine the
benefit obligations and net periodic benefit expense (income) for pension
and other postretirement plans:
PENSION AND OTHER POSTRETIREMENT BENEFITS
-----------------------------------------------------------
U.S. PLANS NON-U.S. PLANS
-------------------------- --------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Discount rate (1)...................... 6.5% 6.8 7.3 5.5% 5.6 6.0
Rate of increase in compensation
levels (2)........................... 5.0% 5.0 5.0 3.5% 3.3 2.5
Expected long-term rate of return on
assets (2)........................... 9.0% 9.0 9.0 8.3% 8.3 N/A
(1) Net periodic benefit expense (income) is determined by the previous year's discount rate
(2) Applies only to pension plans
F-17
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
For measurement purposes, the annual rate of increase in the per capita
cost of covered healthcare benefits assumed for 2003 was 7.3% for all
participants. The rates were assumed to decrease gradually each year to a
rate of 5.5% for 2010 and remain at that level thereafter.
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the postretirement medical plans. A one-percentage
point change in assumed healthcare cost trend rates would have the
following effects:
ONE-PERCENTAGE POINT
-----------------------
INCREASE DECREASE
-------- --------
Effect on total of service and interest cost components of
net periodic other postretirement benefit cost-increase
(decrease)................................................ 7.3% (6.5%)
Effect on the postretirement benefit obligation-increase
(decrease)................................................ 7.8% (6.9%)
With respect to its U.S. funded pension plans, the Company attempts to
achieve a long-term rate of return of 9% by setting an investment policy
which targets an asset portfolio split between equity (70%) and debt (30%)
securities. Investment policy targets are further broken down by U.S. large
cap equity securities (50%), U.S. small to medium cap securities (15%),
non-U.S. equity funds (5%), U.S. investment grade debt securities (25%) and
U.S. high yield debt securities (5%).
The Company's U.S. pension plans' actual weighted-average asset
allocations at December 31, 2003 and 2002 by asset category are as follows:
2003 2002
----- ----
Equity securities...................................... 69.4% 65.4
Debt securities........................................ 28.6% 34.5
Other.................................................. 2.0% 0.1
---- ----
Total.............................................. 100% 100
==== ====
The Company currently expects to contribute approximately $4 million to
its U.S. funded pension plans in 2004 based upon current government
regulations. Although a number of bills have recently been proposed in the
U.S. Congress that could significantly affect pension funding rules, none
of the current proposals would increase the Company's expected
contributions in 2004.
NOTE 8: STOCK-BASED COMPENSATION PLANS
Under the Company's Long-Term Incentive Plan (the "Incentive Plan"),
designated employees are eligible to receive awards in the form of stock
options, stock appreciation rights, restricted stock grants or performance
shares, as determined by the Management Development and Compensation
Committee of the Board of Directors. An aggregate of 3,500,000 shares of
common stock has been authorized for issuance under the Incentive Plan.
Through December 31, 2003, the Company has granted options on 3,360,309
shares. Under the Incentive Plan, the option exercise price equals the fair
market value of the common stock on the date of grant. Under the terms of
existing awards, one-third of employee options granted become vested and
exercisable on each of the first three anniversaries of the date of grant.
The options granted to employees in 2001, 2002 and 2003 expire ten years
after the date of grant.
Pursuant to the Incentive Plan, each nonemployee director was granted
an option to purchase 4,500 shares of common stock on the day after the
2003 and 2002 annual meeting of stockholders. These options were granted at
the fair market value of the common stock on the date of grant, become
F-18
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
exercisable on the first anniversary of the date of grant (or upon
retirement, death or cessation of service due to disability, if earlier)
and expire five years after the date of grant.
The Company also has an employee stock purchase plan (the "Stock
Purchase Plan"), a qualified plan under the requirements of Section 423 of
the Internal Revenue Code, and has reserved 900,000 shares for issuance
under this plan. In November 1999, the Stock Purchase Plan was amended to
permit eligible employees to purchase shares at the lesser of 90% of the
fair market price of the common stock on either the offering date or the
exercise date. At that time, the Stock Purchase Plan was also amended to
require participants to have the purchase price of their options withheld
from their pay over a one-year period.
The exercise date for the 1999 offering was January 2, 2001, at which
time employees elected to purchase 118,136 shares at an offering price of
$10.74 per share, 90% of the fair market price on the offering date.
In November 2000, the Stock Purchase Plan was amended to permit
eligible employees to purchase shares at the lesser of 85% of the fair
market price of the common stock on either the offering date or the
exercise date. The exercise date for the 2000 offering was January 2, 2002,
at which time employees elected to purchase 68,323 shares at an offering
price of $15.36 per share, 85% of the fair market price on the offering
date.
In November 2001, the Stock Purchase Plan was offered to eligible
employees under the same provisions as the 2000 offering. The exercise date
for the 2001 offering was January 2, 2003, at which time employees elected
to purchase 46,460 shares at an offering price of $17.08 per share, 85% of
the fair market price on the exercise date.
In November 2002, the Stock Purchase Plan was offered to eligible
employees under the same provisions as the 2001 offering. The exercise date
for the 2002 offering was January 2, 2004, at which time employees elected
to purchase 94,965 shares at an offering price of $12.72 per share, 85% of
the fair market price on the offering date.
In November 2003, the Stock Purchase Plan was offered to eligible
employees under the same provisions as the 2002 offering. The exercise date
for the 2003 offering is January 3, 2005. As of December 31, 2003,
employees had enrolled to purchase 78,113 shares under the 2003 offering.
A summary of the status of the Company's Incentive Plan at December 31,
2003, 2002 and 2001, and changes during the years then ended, is presented
in the table and narrative below (underlying shares in thousands):
2003 2002 2001
---------------------- ---------------------- ----------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
Options outstanding, beginning of
year............................. 1,144 $17.56 1,106 $17.26 1,071 $16.60
Granted............................ 264 17.89 221 20.35 204 19.78
Exercised.......................... (13) 15.25 (85) 16.37 (145) 15.08
Forfeited.......................... (28) 23.20 (98) 21.45 (24) 23.75
Options outstanding, end of ----- ------ ----- ------ ----- ------
year......................... 1,367 $17.54 1,144 $17.56 1,106 $17.26
===== ====== ===== ====== ===== ======
Options exercisable, end of year... 940 $17.07 776 $16.54 690 $16.93
===== ====== ===== ====== ===== ======
F-19
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
The following table summarizes information about fixed-price stock
options outstanding at December 31, 2003 (underlying shares in thousands):
OPTIONS OUTSTANDING
--------------------------------------------- OPTIONS EXERCISABLE
WTD. AVG. ---------------------------
NUMBER REMAINING WTD. AVG. NUMBER WTD. AVG.
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/03 LIFE PRICE AT 12/31/03 PRICE
--------------------------------- ----------- ----------- --------- ----------- ---------
$ 5.00-10.00..................... 201 2.4years $ 8.74 201 $ 8.74
10.01-15.00..................... 161 5.4 12.79 161 12.79
15.01-20.00..................... 802 7.3 18.47 379 18.38
20.01-30.00..................... 203 4.3 26.36 199 26.47
The fair value of each option granted under the Incentive Plan and the
Stock Purchase Plan is estimated on the date of grant using the
Black-Scholes option pricing model. The following weighted average
assumptions were used for grants in 2003, 2002 and 2001, respectively:
risk-free interest rates of 2.4%, 3.0% and 3.9%; expected volatility of
35%, 35% and 36%; and expected lives of 3.8, 3.3 and 3.5 years. The
valuations assume no dividends are paid. The weighted average fair values
of options granted in 2003, 2002 and 2001 were $5.77, $5.84 and $6.67,
respectively.
NOTE 9: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
DECEMBER 31,
----------------------
2003 2002
-------- -------
Credit Line, due 2005 (1)................................... $114,000 44,000
Term Loan, due 2007 (2)..................................... 45,625 48,125
Unsecured Senior Note, due 2006 (3)......................... 15,000 20,000
Variable Rate Industrial Revenue Bonds, due 2018 (4)........ 8,000 8,000
Other....................................................... 6 38
-------- -------
Long-term debt including current maturities................. 182,631 120,163
Current maturities of long-term debt........................ 16,875 7,500
-------- -------
Long-term debt, less current maturities..................... $165,756 112,663
======== =======
(1) The loans under this facility may be denominated in U.S. dollars or several foreign currencies. At
December 31, 2003, the outstanding balance consisted of U.S. dollar borrowings of $114,000. The interest
rates under the facility vary and are based on prime, federal funds and/or LIBOR for the applicable
currency, and the Company's debt to adjusted income ratio. As of December 31, 2003, the rate for the
U.S. dollar loan was 2.6%, and averaged 2.5% for the year ended December 31, 2003.
(2) The interest rate varies with prime, federal funds and/or LIBOR. As of December 31, 2003, this rate was
2.2% and averaged 2.3% for the year ended December 31, 2003.
(3) The interest rate of 7.3% is fixed until maturity.
(4) The interest rate varies with market rates for tax-exempt industrial revenue bonds. As of December 31,
2003, this rate was 1.3% and averaged 1.1% for the year ended December 31, 2003.
On January 20, 1998, the Company entered into a Revolving Line of
Credit Agreement with an aggregate $125,000 borrowing capacity (the "Credit
Line") and terminated a previous agreement. On March 6, 2002, the Company
amended and restated the Credit Line, increasing the aggregate borrowing
capacity to $150,000 and extending the maturity date to March 6, 2005.
Subject to approval by lenders holding more than 75% of the debt, the
Company may request up to two, one-year extensions. The total debt balance
will be due upon final maturity. On December 31, 2003, the Credit
Line had an outstanding balance of $114,000, leaving $36,000 available for
future use or to issue as letters of credit.
F-20
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
The amended and restated agreement also provided for an additional
$50,000 Term Loan. Proceeds from the Term Loan were used to retire debt
outstanding under an interim credit agreement. The five-year Term Loan
requires principal payments of $2,500 in years one and two, and $15,000 in
years three through five. Other terms and conditions of the Term Loan are
similar to those of the Credit Line.
In September 1996, the Company obtained fixed rate financing by
entering into an unsecured senior note agreement for $35,000. This note has
a ten-year final, seven-year average maturity with principal payments that
began in 2000. The Credit Line, Term Loan and Unsecured Senior Note are
unsecured and permit certain investments and dividend payments. There are
no material restrictions on the Company as a result of these agreements,
other than customary covenants regarding certain earnings, liquidity and
capital ratios.
On April 23, 1998, the Fayette County Development Authority issued
$9,500 in industrial revenue bonds, on behalf of the Company, to finance
the cost of constructing and equipping a new manufacturing facility in
Peachtree City, Georgia. On July 2, 2001, the Company prepaid $1,500 of
principal from unused funds. The remaining principal for these industrial
revenue bonds is to be repaid in full on March 1, 2018. These industrial
revenue bonds are secured by an $8.1 million letter of credit.
Maturities of long-term debt for the five years subsequent to December
31, 2003 and thereafter, are $16,875, $134,000, $20,000, $3,750, $0 and
$8,006, respectively.
Cash paid for interest in 2003, 2002 and 2001 was $4,498, $6,263 and
$6,900, respectively.
The rentals for all operating leases were $3,818, $3,357, and $2,981 in
2003, 2002 and 2001, respectively. Future minimum rental payments for
operating leases for the five years subsequent to December 31, 2003 and
thereafter are $3,469, $2,766, $2,166, $1,566, $1,295 and $6,147,
respectively.
NOTE 10: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
At December 31, 2003 and 2002, 50,000,000 shares of $0.01 par value
common stock and 10,000,000 shares of $0.01 par value preferred stock were
authorized. Shares of common stock outstanding at December 31, 2003 and
2002 were 16,117,026 and 15,942,138, respectively. No shares of preferred
stock were issued or outstanding at December 31, 2003 or 2002. The shares
of preferred stock, which may be issued without further stockholder
approval (except as may be required by applicable law or stock exchange
rules), may be issued in one or more series, with the number of shares of
each series and the rights, preferences and limitations of each series to
be determined by the Board of Directors. The Company has a Stockholder's
Rights Plan, under which each share of Gardner Denver's outstanding common
stock has an associated preferred share purchase right. The rights are
exercisable only under certain circumstances and allow holders of such
rights to purchase common stock of Gardner Denver or an acquiring company
at a discounted price, which generally would be 50% of the respective
stock's current fair market value.
F-21
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
The following table details the calculation of basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------ ------------------------------ ------------------------------
AMT. AMT. AMT.
NET WTD. AVG. PER NET WTD. AVG. PER NET WTD. AVG. PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
------- ---------- ----- ------- ---------- ----- ------- ---------- -----
BASIC EARNINGS PER SHARE:
Income available to common
stockholders $20,643 16,060,979 $1.29 $19,602 15,854,239 $1.24 $22,024 15,552,543 $1.42
DILUTED EARNINGS PER SHARE:
Effect of dilutive securities:
Stock options granted and
outstanding -- 251,189 -- 187,356 -- 230,582
------- ---------- ----- ------- ---------- ----- ------- ---------- -----
Income available to
common stockholders and
assumed conversions $20,643 16,312,168 $1.27 $19,602 16,041,595 $1.22 $22,024 15,783,125 $1.40
======= ========== ===== ======= ========== ===== ======= ========== =====
NOTE 11: INCOME TAXES
The following table details the components of the provision for income
taxes. A portion of these income taxes will be payable within one year and
are therefore classified as current, while the remaining balance is
deferred.
YEAR ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
------ ----- ------
Income taxes:
Current:
U.S. federal............................................ $2,977 4,944 9,708
U.S. state and local.................................... 340 542 1,109
Non-U.S. ............................................... 611 1,229 1,149
------ ----- ------
Current............................................... 3,928 6,715 11,966
------ ----- ------
Deferred:
U.S. federal............................................ 4,753 2,253 622
U.S. state and local.................................... 543 257 71
Non-U.S. ............................................... 491 -- --
------ ----- ------
Deferred.............................................. 5,787 2,510 693
------ ----- ------
Provision for income taxes.......................... $9,715 9,225 12,659
====== ===== ======
F-22
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
The following table reconciles the statutory U.S. federal corporate
income tax rate to the Company's effective tax rate (as a percentage of the
Company's income before income taxes):
YEAR ENDED DECEMBER 31,
--------------------------
2003 2002 2001
---- ---- ----
U.S. federal income tax..................................... 35.0% 35.0 35.0
Changes in the tax rate resulting from:
State and local income taxes............................ 2.6 2.5 3.1
Nondeductible goodwill.................................. -- -- 3.5
Export benefit.......................................... (3.0) (2.8) (2.3)
Other, net.............................................. (2.6) (2.7) (2.8)
---- ---- ----
Effective income tax rate............................. 32.0% 32.0 36.5
==== ==== ====
YEAR ENDED
DECEMBER 31,
----------------------
2003 2002
-------- -------
Components of deferred tax balances:
Deferred tax assets:
Reserves and accruals................................... $ 14,506 15,722
Postretirement benefits other than pensions............. 13,446 14,394
Other................................................... 3,014 1,156
-------- -------
Total deferred tax assets............................. 30,966 31,272
-------- -------
Deferred tax liabilities:
LIFO inventory.......................................... (3,493) (3,051)
Plant and equipment..................................... (7,763) (6,318)
Intangibles............................................. (7,698) (4,530)
Other................................................... (2,986) (1,311)
-------- -------
Total deferred tax liabilities........................ (21,940) (15,210)
-------- -------
Net deferred tax assets............................... $ 9,026 16,062
======== =======
For U.S. income tax purposes, the Foreign Sales Corporation (FSC) has
been replaced by the Extraterritorial Income Exclusion (EIE) on the
Company's U.S. export sales for 2002 and beyond. Consistent with the FSC,
the EIE lowers the effective tax rate on income from U.S. export sales.
Income before income taxes of non-U.S. operations for 2003, 2002 and
2001 was $6,445, $6,611 and $5,963, respectively.
U.S. deferred income taxes are not provided on certain undistributed
earnings of non-U.S. subsidiaries (approximately $28 million at December
31, 2003) because the Company intends to reinvest such earnings
indefinitely or distribute them only when available foreign tax credits
could significantly reduce the amount of U.S. taxes due on such
distributions.
Cash paid for income taxes in 2003, 2002 and 2001 was $5,220, $6,512
and $13,814, respectively.
NOTE 12: OFF-BALANCE SHEET RISK, CONCENTRATIONS OF CREDIT RISK AND FAIR
VALUE OF FINANCIAL INSTRUMENTS
OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
There were no off-balance sheet derivative financial instruments as of
December 31, 2003 and 2002.
F-23
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
Concentrations of credit risk with respect to trade receivables are
limited due to the wide variety of customers and industries to which the
Company's products are sold, as well as their dispersion across many
different geographic areas. As a result, the Company does not consider
itself to have any significant concentrations of credit risk as of December
31, 2003.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and
equivalents, trade receivables, trade payables and debt instruments. The
book values of these instruments are not materially different from their
respective fair values.
NOTE 13: CONTINGENCIES
The Company is a party to various legal proceedings, lawsuits and
administrative actions, which are of an ordinary or routine nature. Due to
the bankruptcies of several asbestos manufacturers and other primary
defendants, the Company has been named as a defendant in an increasing
number of asbestos personal injury lawsuits. The Company has also been
named as a defendant in an increasing number of silicosis personal injury
lawsuits. The plaintiffs in these suits allege exposure to asbestos or
silica from multiple sources, and typically the Company is one of
approximately 25 or more named defendants. In the Company's experience, the
substantial majority of the plaintiffs are not impaired with a disease
attributable to the alleged exposure.
Predecessors to the Company manufactured, distributed and sold the
products allegedly at issue in the pending asbestos and silicosis
litigation lawsuits. The Company has potential responsibility for certain
contingent liabilities with respect to these products, namely: (a) air
compressors which used asbestos containing components manufactured and
supplied by third parties; and (b) portable air compressors used in
sandblasting operations as a component of sandblasting equipment
manufactured and sold by others. The sandblasting equipment is alleged to
have caused the silicosis disease plaintiffs claim in these cases.
Neither the Company, nor its predecessors, ever mined, manufactured,
mixed, produced or distributed asbestos fiber. The asbestos containing
components used in the products at issue were completely encapsulated in a
protective non-asbestos binder and enclosed within the subject products.
Furthermore, the Company has never manufactured or distributed portable air
compressors.
The Company has entered into a series of cost sharing agreements with
multiple insurance companies to secure coverage for asbestos and silicosis
lawsuits. The Company also believes some of the potential liabilities
regarding these lawsuits are covered by indemnity agreements with other
parties. The Company's uninsured settlement payments for past asbestos and
silicosis lawsuits have been immaterial.
The Company believes that the pending, and future, asbestos and
silicosis lawsuits will not, in the aggregate, have a material adverse
effect on its consolidated financial position, results of operations or
liquidity, based on: the Company's anticipated insurance and
indemnification rights to address the risks of such matters; the limited
potential asbestos exposure from the components described above; the
Company's experience that the substantial majority of plaintiffs are not
impaired with a disease attributable to alleged exposure to asbestos or
silica; various potential defenses available to the Company with respect to
such matters; and the Company's prior disposition of comparable matters.
However, due to inherent uncertainties of litigation and because future
developments could cause a different outcome, there can be no assurance
that the resolution of pending or future lawsuits, whether by judgment,
settlement or dismissal, will not have a material adverse effect on its
consolidated financial position, results of operations or liquidity.
The Company has also been identified as a potentially responsible party
with respect to several sites designated for environmental cleanup under
various state and federal laws. The Company does
F-24
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
not own any of these sites. The Company does not believe that the future
potential costs related to these sites will have a material adverse effect
on its consolidated financial position, results of operations or liquidity.
NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2003 QUARTER ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,(3)
--------- -------- --------- -----------
Revenues..................................... $101,491 109,388 112,061 116,590
Gross margin (1)............................. 30,717 33,237 33,863 33,960
Net income (2)............................... 3,520 5,346 5,277 6,500
Basic earnings per share..................... $ 0.22 0.33 0.33 0.40
Diluted earnings per share................... $ 0.22 0.33 0.32 0.40
2002 QUARTER ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,(3)
--------- -------- --------- -----------
Revenues..................................... $106,609 104,854 102,791 103,904
Gross margin (1)............................. 32,007 33,565 32,530 30,425
Net income................................... 4,578 5,524 4,829 4,671
Basic earnings per share..................... $ 0.29 0.35 0.30 0.29
Diluted earnings per share................... $ 0.29 0.34 0.30 0.29
(1) Gross margin equals revenues less cost of sales.
(2) Includes $2,184 from an unrealized currency transaction gain and $1,946 in charges related to
profitability improvement programs in the quarter ended December 31.
(3) Includes an increase in net income in 2003 and 2002 of $249 and $268, respectively, related to LIFO
inventory liquidations.
NOTE 15: SEGMENT INFORMATION
The Company is organized based on the products and services it offers.
Under this organizational structure, the Company has three operating
divisions: Compressor, Blower and Pump. These divisions comprise two
reportable segments, Compressed Air Products and Pump Products. The
Compressor and Blower Divisions are aggregated into one reportable segment
(Compressed Air Products) since the long-term financial performance of
these businesses are affected by similar economic conditions, coupled with
the similar nature of their products, manufacturing processes and other
business characteristics.
In the Compressed Air Products segment, the Company designs,
manufactures, markets and services the following products and related
aftermarket parts for industrial and commercial applications: rotary screw,
reciprocating, sliding vane and centrifugal air compressors; and positive
displacement and centrifugal blowers.
The markets served are primarily in the United States, but a growing
portion of revenue is from exports and expanding European operations.
The Pump Products segment designs, manufactures, markets and services a
diverse group of pumps, water jetting systems and related aftermarket
products used in oil and natural gas production, well servicing and
drilling and industrial cleaning and maintenance.
The accounting policies of the segments are the same as those described
in Note 1. The Company evaluates the performance of its segments based on
income before interest expense, other income, net and income taxes. Certain
assets attributable to corporate activity are not allocated to the
segments.
F-25
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
Unallocated assets consist of cash and equivalents and deferred tax assets.
Intersegment sales and transfers are not significant.
REVENUES OPERATING EARNINGS(1) IDENTIFIABLE ASSETS
---------------------------------- ------------------------------- ---------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------------- ------------------------------- ---------------------
2003 2002 2001 2003 2002 2001 2003 2002
-------- ------- ------- ------- ------ ------ -------- -------
Compressed Air Products..... $369,023 350,036 308,028 $27,792 29,795 22,176 $375,376 368,761
Pump Products............... 70,507 68,122 111,742 4,093 5,193 16,100 72,528 68,240
-------- ------- ------- ------- ------ ------ -------- -------
Total................... $439,530 418,158 419,770 31,885 34,988 38,276 447,904 437,001
======== ======= =======
Interest expense............ (4,748) (6,365) (6,796)
Other income, net........... 3,221 204 3,203
Income before income ------- ------ ------
taxes................. $30,358 28,827 34,683
General corporate........... ======= ====== ====== 141,829 41,729
-------- -------
Total assets................ $589,733 478,730
======== =======
(1) As a result of adopting SFAS No. 142, periodic goodwill amortization ceased effective January 1, 2002
(See Notes 1 and 5). For comparability purposes, operating earnings by segment for the year ended
December 31, 2001 excluding goodwill amortization were as follows:
Compressed Air Products..................................... $25,796
Pump Products............................................... 16,860
-------
Total................................................... $42,656
=======
YEAR ENDED DECEMBER 31,
------------------------------------
2003 2002 2001
-------- ------- -------
Income from reductions of inventory quantities resulting in
liquidations of LIFO inventory layers, included in
operating earnings above:
Compressed Air Products................................... $ 316 161 459
Pump Products............................................. 50 233 43
-------- ------- -------
Total................................................... $ 366 394 502
======== ======= =======
Depreciation and amortization, included in operating
earnings above:
Compressed Air Products................................... $ 11,739 11,517 14,281
Pump Products............................................. 2,827 2,622 3,286
-------- ------- -------
Total................................................... $ 14,566 14,139 17,567
======== ======= =======
Capital expenditures:
Compressed Air Products................................... $ 8,864 9,856 8,856
Pump Products............................................. 3,086 3,785 2,668
-------- ------- -------
Total................................................... $ 11,950 13,641 11,524
======== ======= =======
Revenues outside the United States were comprised of sales
to unaffiliated companies in:
Europe.................................................... $ 97,198 85,735 65,511
Asia...................................................... 39,963 25,999 14,048
Canada.................................................... 26,972 18,597 24,315
Latin America............................................. 17,401 17,773 18,186
Other..................................................... 4,404 5,518 5,844
-------- ------- -------
Total................................................... $185,938 153,622 127,904
======== ======= =======
F-26
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
DECEMBER 31,
--------------------
2003 2002
------- ------
Property, plant and equipment by geographic area are as
follows:
United States............................................. $58,581 61,372
Europe.................................................... 16,686 14,672
Other..................................................... 161 118
------- ------
Total................................................... $75,428 76,162
======= ======
NOTE 16: SUBSEQUENT EVENT
On January 2, 2004, the Company effectively acquired Syltone plc
("Syltone"), previously a publicly traded company listed on the London
Stock Exchange. The purchase price of (pounds)61.2 million (approximately
$109.2 million) including assumed bank debt (net of cash acquired) was paid
in the form of cash ((pounds)43.1 million), new loan notes ((pounds)5.2
million) and the assumption of Syltone's existing bank debt, net of cash
((pounds)12.9 million). The cash portion of the purchase price was funded
from the Company's existing revolving credit line and cash reserves. The
loan notes are unsecured and bear interest payable every six months, in
arrears, at a rate per annum of one-half of one percent below the British
pound based London Interbank Offered Rate for six-month deposits. The loan
notes are redeemable at par at the option of the loan noteholder, in whole
or in part, on any interest payment date falling on or after December 31,
2004. If at any time the aggregate nominal amount of all loan notes
outstanding is (pounds)0.5 million or less, the Company has the right to
redeem all of the outstanding loan notes. Any loan notes outstanding on
June 30, 2009 will be redeemed in full, together with interest on that day.
Syltone, headquartered in Bradford, United Kingdom ("U.K."), is one of
the world's largest manufacturers of equipment used for loading and
unloading liquid and dry bulk products on commercial transportation
vehicles. This equipment includes compressors, blowers and other ancillary
products that are complementary to the Company's product line. Syltone is
also one of the world's largest manufacturers of fluid transfer equipment
(including loading arms, swivel joints, couplers and valves) used to load
and unload ships, tank trucks and rail cars. Syltone generated revenues and
operating profit (in accordance with accounting principles generally
accepted in the U.K.) of (pounds)84.4 million and (pounds)6.3 million,
respectively (approximately $151.1 million and $11.3 million, respectively
as calculated using the December 31, 2003 exchange rate of $1.79/(pounds))
for the twelve months ended September 30, 2003. Syltone's largest markets
are Europe and North America, which represent approximately 67% and 20% of
its revenues, respectively. Of the total sales to Europe, approximately 38%
are to the U.K., 18% to France, 11% to Germany and 33% to other European
countries. Approximately 70% of Syltone's revenues are generated through
transportation-related activities while the remaining 30% are derived from
fluid transfer-related activities.
This acquisition will be accounted for by the purchase method and
accordingly, its results will be included in the Company's consolidated
financial statements from the date of acquisition. The aggregate purchase
price (including direct acquisition costs) has been allocated primarily to
receivables ($34,400); inventory ($21,900); property, plant and equipment
($36,000); intangible assets ($80,000); accounts payable and accrued
liabilities ($34,900); bank debt, net ($23,000); net deferred income tax
liabilities ($3,600) and other long-term liabilities ($21,000), based on
their estimated fair values at the date of acquisition. This allocation
reflects the Company's preliminary estimates of the purchase price
allocation and is subject to change upon completion of appraisals in 2004.
Further, other assets and liabilities may be identified to which a portion
of the purchase price will be allocated. A detailed analysis also has not
yet been performed to identify and measure any adjustments that may be
necessary to conform Syltone's accounting policies with the Company's
accounting policies.
F-27
GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR
AMOUNTS DESCRIBED IN MILLIONS)
The following table summarizes the preliminary fair values of the
intangible assets acquired in the Syltone acquisition:
Amortized intangible assets:
Customer lists and relationships........................ $19,500
Other................................................... 2,600
Unamortized intangible assets:
Goodwill................................................ 49,000
Trademarks.............................................. 8,900
-------
Total intangible assets............................. $80,000
=======
The preliminary weighted average amortization period for customer lists
and relationships and other amortized intangible assets is 20 years and 5
years, respectively.
The total amount of goodwill that is expected to be deductible for tax
purposes is not anticipated to be significant given the stock nature of the
acquisition. The assignment of goodwill to reporting segments has not been
finalized.
F-28
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Syltone plc
We have audited the accompanying consolidated balance sheets of Syltone
plc and subsidiaries as at 31 March 2003 and 31 March 2002, the related
consolidated profit and loss accounts, cash flow statements, statements
of total recognized gains and losses and reconciliations of movements in
shareholders' funds for each of the years in the two year period ended
31 March 2003. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 aforementioned consolidated financial statements
present fairly, in all material respects, the financial position of
Syltone plc and subsidiaries as at 31 March 2003 and 31 March 2002 and
the results of their operations and their cash flows for each of the
years in the two year period ended 31 March 2003 in conformity with
generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally
accepted in the United States of America. The nature of the significant
differences are summarized in Note 29 to the financial statements.
/s/ KPMG Audit Plc
Chartered Accountants 16 January 2004
Registered Auditor
Leeds
England
F-29
SYLTONE PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
FOR THE YEAR ENDED 31 MARCH
2003 2002
----------------------------- -----------------------------
NOTE (POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
---- ----------- ----------- ----------- -----------
TURNOVER 2 78,798 75,464
OPERATING COSTS 3 (72,982) (70,777)
------- --------
OPERATING PROFIT 6
-----------------------------------------------
Before exceptional items 5,816 5,327
Reorganisation costs -- (640)
----- -----
-----------------------------------------------
PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND
TAXATION 5,816 4,687
Net interest payable and other similar charges 7 (1,013) (1,179)
------- --------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 4,803 3,508
Taxation 8 (1,781) (1,494)
------- --------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION 3,022 2,014
Minority interests--equity -- (19)
------- --------
PROFIT ATTRIBUTABLE TO ORDINARY SHAREHOLDERS 3,022 1,995
Ordinary dividends 9 (1,835) (1,835)
------- --------
RETAINED PROFIT FOR THE YEAR 23 1,187 160
======= ========
EARNINGS PER SHARE 10 12.10p 7.99p
======= ========
DILUTED EARNINGS PER SHARE 10 12.06p 7.96p
======= ========
DIVIDENDS PER SHARE 9 7.35p 7.35p
======= ========
The accounts are prepared on an unmodified historic cost basis.
The notes referred to form part of these accounts.
F-30
SYLTONE PLC
CONSOLIDATED BALANCE SHEETS
AS AT 31 MARCH
2003 2002
NOTE (POUNDS)000 (POUNDS)000
---- ----------- -----------
FIXED ASSETS
Intangible assets 11 2,587 2,753
Tangible assets 12 17,259 18,080
Investments 13 604 606
------- -------
20,450 21,439
CURRENT ASSETS
Stocks 14 11,509 12,851
Debtors 15 19,281 18,698
Cash at bank and in hand 4,434 2,487
------- -------
35,224 34,036
CREDITORS
Amounts falling due within one year:
Borrowings 16 (2,409) (3,027)
Other creditors 18 (17,921) (16,975)
------- -------
(20,330) (20,002)
------- -------
NET CURRENT ASSETS 14,894 14,034
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES 35,344 35,473
CREDITORS
Amounts falling due after more than one year
Borrowings 16 (12,990) (13,916)
Other creditors 18 (321) (541)
------- -------
(13,311) (14,457)
PROVISIONS FOR LIABILITIES AND CHARGES 19 (1,522) (1,015)
DEFERRED INCOME: capital expenditure grants (1) (16)
------- -------
NET ASSETS 20,510 19,985
CAPITAL AND RESERVES
Called up equity share capital 20 6,378 6,378
Share premium account 21 9,275 9,275
Merger reserve 22 1,197 1,197
Profit and loss account 23 3,374 2,817
------- -------
SHAREHOLDERS' FUNDS-EQUITY 20,224 19,667
MINORITY INTERESTS-EQUITY 286 318
------- -------
20,510 19,985
======= =======
The notes referred to form part of these accounts.
F-31
SYLTONE PLC
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEAR ENDED 31 MARCH
2003 2002
----------------------------- ----------------------------
NOTE (POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
---- ----------- ----------- ----------- -----------
CASH INFLOW FROM OPERATING ACTIVITIES 24 9,475 6,217
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE:
Bank interest paid (1,069) (1,564)
Bank interest received 193 406
Finance lease interest paid (27) (25)
------ ------ ------ ------
(903) (1,183)
TAXATION:
United Kingdom corporation tax paid (391) (478)
Overseas taxes paid (791) (1,100)
------ ------ ------ ------
(1,182) (1,578)
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENTS:
Purchase of tangible assets (1,271) (2,329)
Purchase of intangible assets (117) (336)
Sale of fixed asset investment 2 --
Sale of tangible assets 205 207
------ ------ ------ ------
(1,181) (2,458)
ACQUISITIONS AND DISPOSALS:
Sale of subsidiary undertakings 24 115 2,886
Acquisition of minority holdings in subsidiaries -- (7)
------ ------ ------ ------
115 2,879
EQUITY DIVIDENDS PAID:
Dividends paid to shareholders (1,835) (1,835)
------ ------
CASH INFLOW BEFORE FINANCING 4,489 2,042
FINANCING:
Repayments of medium and long term loans (1,405) (1,583)
Finance lease capital repayments (228) (222)
------ ------ ------
(1,633) (1,805)
------ ------
INCREASE IN CASH IN THE YEAR 2,856 237
====== ======
Additional cash flow information is given in note 24.
The notes referred to form part of these accounts.
F-32
SYLTONE PLC
CONSOLIDATED STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEAR ENDED 31 MARCH
2003 2002
(POUNDS)000 (POUNDS)000
----------- -----------
Profit attributable to ordinary shareholders 3,022 1,995
Currency translation differences on foreign currency net investments (630) 84
----- -----
Total recognised gains and losses relating to the year 2,392 2,079
===== =====
RECONCILIATIONS OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS' FUNDS
FOR THE YEAR ENDED 31 MARCH
2003 2002
(POUNDS)000 (POUNDS)000
----------- -----------
Profit attributable to ordinary shareholders 3,022 1,995
Dividends (1,835) (1,835)
------ ------
Retained profit for the year 1,187 160
Other recognised gains and losses as shown above (630) 84
------ ------
Net addition to shareholders' funds 557 244
Opening shareholders' funds 19,667 19,423
------ ------
Closing shareholders' funds 20,224 19,667
====== ======
F-33
SYLTONE PLC
COMPANY BALANCE SHEETS
AS AT 31 MARCH
2003 2002
NOTE (POUNDS)000 (POUNDS)000
---- ----------- -----------
FIXED ASSETS
Tangible assets 12 1,808 1,845
Investments 13 9,895 9,897
------- -------
11,703 11,742
CURRENT ASSETS
Debtors 15 28,435 28,835
Cash at bank and in hand 3,314 4,203
------- -------
31,749 33,038
CREDITORS
Amounts falling due within one year:
Borrowings 16 (5,195) (6,370)
Other creditors 18 (2,651) (1,409)
------- -------
(7,846) (7,779)
------- -------
NET CURRENT ASSETS 23,903 25,259
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES 35,606 37,001
CREDITORS
Amounts falling due after more than one year:
Borrowings 16 (12,572) (13,473)
Other creditors 18 -- (270)
------- -------
(12,572) (13,743)
------- -------
PROVISIONS FOR LIABILITIES AND CHARGES 19 (569) (373)
DEFERRED INCOME: capital expenditure grants -- (11)
------- -------
NET ASSETS 22,465 22,874
------- -------
CAPITAL AND RESERVES
Called up equity share capital 20 6,378 6,378
Share premium account 21 9,275 9,275
Merger reserve 22 1,197 1,197
Profit and loss account 23 5,615 6,024
------- -------
SHAREHOLDERS' FUNDS-EQUITY 22,465 22,874
======= =======
The notes referred to form part of these accounts.
F-34
SYLTONE PLC
NOTES
(FORMING PART OF THE FINANCIAL STATEMENTS)
1 ACCOUNTING POLICIES
BASIS OF ACCOUNTS
The accounts are prepared under the historical cost convention, in
accordance with applicable accounting standards. The following principal
accounting policies have been applied consistently in dealing with items
which are considered material in relation to the Group's accounts. The
Group has adopted FRS 18 'Accounting policies' in these accounts.
BASIS OF CONSOLIDATION
The consolidated profit and loss account includes the results of
undertakings acquired or disposed of during the year from the date of
their acquisition or up to the date of their disposal. The consolidated
balance sheet includes the assets and liabilities of the Company and its
subsidiaries at the end of the financial year. In accordance with the
requirements of Financial Reporting Standard No 2: Accounting for
Subsidiary Undertakings, the accounts of companies, which due to local
restrictions, cannot be owned by Syltone, but are nevertheless subject
entirely to Syltone's control, are consolidated as if those companies
are legally owned by Syltone.
Under section 230(4) of the Companis Act 1985 the company is exempt
from the requirement to present its own profit and loss account.
FOREIGN CURRENCY
Transactions in foreign currencies are recorded at the rate of
exchange at the date of transaction or, if hedged forward, at the rate
of exchange under the related forward currency contract.
Assets, liabilities and trading results of overseas operations are
translated into sterling at the rates of exchange ruling at the balance
sheet date. Differences arising on the translation of the Group's net
investment in overseas operations are dealt with as movements in
reserves net of differences on related currency borrowings. All other
differences are taken to the profit and loss account.
FINANCIAL INSTRUMENTS
The Group uses derivative financial instruments to manage its
exposures to fluctuations in interest and foreign currency exchange
rates. Receipts and payments on interest rate instruments are recognised
on an accruals basis over the life of the instrument. Gains and losses
on transactional foreign currency hedges are recognised in the profit
and loss account on the maturity of the underlying transaction. Gains
and losses on translational hedges of foreign currency denominated net
investments are taken to reserves. Gains and losses on hedging
instruments that are cancelled due to the termination of the underlying
exposure are recognised in the profit and loss account at the time of
termination.
GOODWILL AND INTANGIBLE FIXED ASSETS
Purchased goodwill (representing the excess of the fair value of the
consideration given and associated costs over the fair value of the
separable net assets acquired) arising on consolidation in respect of
acquisitions before 1 April 1998, when Financial Reporting Standard No
10 was adopted, was written off to reserves in the year of acquisition.
When a subsequent disposal occurs any related goodwill previously
written off or credited to reserves is written back through the profit
and loss account as part of the profit or loss on disposal.
Purchased goodwill arising on consolidation in respect of
acquisitions since 1 April 1998 is capitalised in the year of
acquisition and amortised on a systematic basis over its estimated
useful
F-35
SYLTONE PLC
NOTES (CONTINUED)
economic life up to a maximum of 20 years. The carrying value of
goodwill is reviewed as necessary for impairment and written down if
impairment is identified.
On the subsequent disposal of a business acquired since 1 April
1998, the profit or loss on disposal is calculated after charging the
unamortised amount of any related goodwill.
Intellectual property rights and patents are valued at cost on
acquisition and are amortised in equal annual amounts over their
estimated useful economic lives.
The accounting policy for research and development is set out below.
DEPRECIATION
Except for freehold land, depreciation is provided on a straight
line basis at rates which are calculated to write off the cost of each
asset over its useful life in equal annual instalments.
The useful lives of assets are:
Freehold and long leasehold buildings up to 50 years
Short leasehold buildings over the residue of the lease
Plant and equipment 4 to 10 years
Computers 3 to 7 years
Motor vehicles 4 years
LEASED ASSETS
Rentals payable under operating leases are charged to the profit and
loss account as incurred. Assets obtained under finance leases are
included in fixed assets and the related obligations to pay future
rentals are included in creditors. Interest on finance leases is charged
to the profit and loss account over the period of the lease.
STOCKS
Stocks are valued at the lower of cost and net realisable value.
Cost includes an appropriate allocation of production overheads.
LONG TERM CONTRACTS
The amount of profit attributable to the stage of completion of a
long term contract is recognised when the outcome of the contract can be
foreseen with reasonable certainty. Turnover for such contracts is
stated at the cost appropriate to their stage of completion plus
attributable profits, less amounts recognised in previous years.
Provision is made for any losses as soon as they are foreseen.
Contract work in progress is stated at costs incurred, less those
transferred to the profit and loss account, after deducting foreseeable
losses and payments on account not matched with turnover.
Amounts recoverable on contracts are included in debtors and
represent turnover recognised in excess of payments on account.
DEVELOPMENT GRANTS
Grants relating to fixed assets are treated as deferred credits and
are transferred to revenue in equal amounts over the useful life of the
asset. Grants relating to revenue costs are credited to the profit and
loss account in the period in which costs are incurred.
RESEARCH AND DEVELOPMENT
Development costs are capitalised when a clear, commercially viable
future for that development is confirmed and are amortised over the
first three years following their commercial launch.
F-36
SYLTONE PLC
NOTES (CONTINUED)
All other expenditure on research and development is written off as
incurred.
TURNOVER
Turnover represents the amounts (excluding value added tax) derived
from the provision of goods and services to customers. Turnover is
recognised at the point of despatch of goods. The only exception is Emco
Wheaton GmbH where, on certain major contracts, turnover is recognised
at the point of signing off completion certificates. This company also
has long term contracts, which follow the accounting policy outlined
above. Revenue from service contracts is recognised on an accruals
basis.
RENTAL INCOME
Rental income receivable is recognised on an accruals basis.
DEFERRED TAXATION
The charge for taxation is based on the profit for the year and
takes into account taxation deferred because of timing differences
between the treatment of certain items for taxation and accounting
purposes. In accordance with Financial Reporting Standard No 19,
deferred tax is provided, without discounting, in full. Full recognition
is made of the deferred tax arising on any pension cost provision and
asset made in accordance with Statement of Standard Accounting Practice
No 24.
PENSION COSTS
The expected cost of pensions in respect of the Group's defined
benefit pension schemes is charged to the profit and loss account so as
to spread the cost of pensions over the service lives of employees.
Variations from the regular cost are spread over the expected service
lives of current employees in the schemes. Differences between the
amounts charged in the profit and loss account and payments made to the
schemes are carried forward as assets or liabilities in the balance
sheet. Pension costs are assessed in accordance with the advice of
independent and qualified actuaries.
Regarding the Group's UK defined contribution pension scheme the
amount charged to the profit and loss account represents the
contributions payable to the scheme in respect of the accounting period.
The assets of the scheme are held separately from those of the Group in
an independently administered fund.
2 TURNOVER AND TRADING PROFIT
Turnover arises wholly from the principal activities of the Group
and is analysed by geographical destination as:
2003 2002
(POUNDS)000 (POUNDS)000
----------- -----------
United Kingdom 21,556 24,207
France 10,777 8,305
Germany 6,773 5,756
Other European countries 13,362 10,753
North America 15,340 14,952
Other 10,990 11,491
------ ------
78,798 75,464
====== ======
The profit of the Group arises wholly from the principal activities
of the constituent companies.
In the opinion of the Directors, disclosure in further detail of the
analysis of turnover, profit and net assets would be seriously
prejudicial to the interests of the Group.
F-37
SYLTONE PLC
NOTES (CONTINUED)
3 OPERATING COSTS
2003 2002
NOTE (POUNDS)000 (POUNDS)000
------ ----------- -----------
Raw materials and consumables 31,829 32,242
Change in stocks of finished goods and work in progress 1,476 (9)
Other external charges 10,923 10,965
Staff costs 4, 5 26,201 24,946
Depreciation and other amounts written off tangible and intangible
fixed assets 11, 12 2,605 2,710
------ ------
TRADING COSTS 73,034 70,854
Other operating income (52) (77)
------ ------
OPERATING COSTS 6 72,982 70,777
====== ======
4 REMUNERATION OF DIRECTORS
The remuneration of directors who have served during the year is set
out below.
PERFORMANCE 2003 2002
SALARY AND FEES RELATED BONUS BENEFITS TOTAL TOTAL
(POUNDS) (POUNDS) (POUNDS) (POUNDS) (POUNDS)
--------------- ------------- -------- -------- --------
PJ Andrews 105,000 -- -- 105,000 100,000
TJ Murch 114,330 32,590 7,019 153,939 --
A Hartley 97,022 29,361 10,993 137,376 98,642
DL Speirs 62,500 9,079 -- 71,579 102,903
R Templeton 21,166 -- -- 21,166 15,000
JC Barnsley 20,415 -- -- 20,415 --
------- ------ ------ -------- -------
420,433 71,030 18,012 509,475 316,545
======= ====== ====== ======== =======
5 STAFF COSTS
2003 2002
(POUNDS)000 (POUNDS)000
----------- -----------
Aggregate employment costs:
Wages and salaries.......................................... 21,630 20,594
Social security costs....................................... 3,206 2,927
Other pension costs (see also note 26)...................... 1,365 1,425
------ ------
26,201 24,946
====== ======
NUMBER NUMBER
------ ------
Average numbers employed geographically:
United Kingdom 377 392
France 102 124
Germany 160 149
Other European countries 72 78
North America 97 99
Other 32 33
--- ---
840 875
=== ===
F-38
SYLTONE PLC
NOTES (CONTINUED)
6 OPERATING PROFIT
2003 2002
(POUNDS)000 (POUNDS)000
----------- -----------
Operating profit is stated after charging/(crediting):
Research and development expenditure 1,786 1,565
Payments under operating leases:
Plant and equipment 349 136
Other leases 746 882
Auditors' and their associates' remuneration - audit services 203 204
- further assurance services 35 86
- tax advisory services 109 95
Property rentals receivable (52) (66)
Asset disposal gains (55) (66)
Reorganisation costs -- 640
The reorganisation costs incurred in the comparative period relate
to the exceptional costs incurred in restructuring the Group following
the July 2000 strategic review and primarily comprise redundancy and
early retirement costs.
7 NET INTEREST PAYABLE AND SIMILAR CHARGES
2003 2002
(POUNDS)000 (POUNDS)000
----------- -----------
On bank loans and overdrafts 1,164 1,567
On finance leases 27 25
----- -----
1,191 1,592
Interest receivable (178) (413)
----- -----
1,013 1,179
===== =====
F-39
SYLTONE PLC
NOTES (CONTINUED)
8 TAXATION ON PROFIT ON ORDINARY ACTIVITIES
2003 2002
(POUNDS)000 (POUNDS)000
----------- -----------
Current tax:
Corporation tax on profits of the period:
UK 403 509
Overseas 737 587
Adjustments in respect of previous periods:
UK 33 (37)
Overseas (29) (99)
Unrelieved ACT -- 105
Double tax relief -- (134)
----- -----
Total current tax 1,144 931
----- -----
Deferred tax:
Origination and reversal of timing differences
Prior year 53 (24)
Current year 584 587
----- -----
Total deferred tax 637 563
----- -----
Tax on profit on ordinary activities 1,781 1,494
===== =====
FACTORS AFFECTING THE CURRENT TAX CHARGE FOR THE PERIOD
2003 2002
(POUNDS)000 (POUNDS)000
----------- -----------
Profit on ordinary activities before tax 4,803 3,508
===== =====
Profit on ordinary activities multiplied by standard rate
of corporation tax (30%) 1,441 1,052
Effects of:
Expenses not deductible for tax purposes 47 95
Losses not recognised 72 204
Deferred tax movement (584) (587)
Adjustment to tax charge in respect of previous periods 16 (136)
Overseas tax rates in excess of UK 152 198
Unrelieved ACT -- 105
----- -----
Current tax charge for the period 1,144 931
===== =====
F-40
SYLTONE PLC
NOTES (CONTINUED)
9 ORDINARY DIVIDENDS
2003 2002
(POUNDS)000 (POUNDS)000
----------- -----------
Interim paid for 2003-2.25p per share 562 562
Final proposed for 2003-5.10p per share 1,273 1,273
----- -----
1,835 1,835
===== =====
10 EARNINGS PER SHARE
The calculation of earnings per share is based on the profit
attributable to ordinary shareholders of (pounds)3,022,000 (2002:
(pounds)1,995,000) and on 24,969,464 (2002: 24,969,464) shares of 25p
each, being the weighted average number of ordinary shares in issue
during the year ended 31 March 2003, excluding those shares held in the
Employee Benefit Trust upon which all dividend rights have been waived
(see note 28).
The diluted earnings per share is based on the same profit
attributable to ordinary shareholders and on 25,065,343 (2002:
25,068,140) shares of 25p each. Of the 1,332,250 (2002: 1,056,642)
weighted average number of options outstanding under the various option
schemes, 669,138 (2002: 229,783) are dilutive, resulting in 95,879
(2002: 98,676) shares of 25p each deemed issued for (pounds)nil
consideration.
11 INTANGIBLE FIXED ASSETS
INTELLECTUAL
GOODWILL ON PROPERTY DEVELOPMENT
ACQUISITION RIGHTS PATENTS COSTS TOTAL
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ------------ ----------- ----------- -----------
GROUP
COST
At start of year 2,554 338 44 336 3,272
Additions -- -- -- 117 117
Exchange adjustments -- -- (1) 4 3
----- --- -- --- -----
At end of year 2,554 338 43 457 3,392
===== === == === =====
AMORTISATION
At start of year 330 138 3 48 519
Charge for year 128 15 2 140 285
Exchange adjustments -- -- -- 1 1
----- --- -- --- -----
At end of year 458 153 5 189 805
===== === == === =====
NET BOOK VALUE
AT 31 MARCH 2003 2,096 185 38 268 2,587
----- --- -- --- -----
At 31 March 2002 2,224 200 41 288 2,753
===== === == === =====
F-41
SYLTONE PLC
NOTES (CONTINUED)
12 TANGIBLE FIXED ASSETS
SHORT
LONG LEASEHOLD PLANT,
FREEHOLD LEASEHOLD PROPERTY EQUIPMENT
PROPERTY PROPERTY ALTERATIONS & VEHICLES TOTAL
GROUP (POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
------------------------------------ ----------- ----------- ----------- ----------- -----------
COST
At start of year 11,285 339 1,376 26,964 39,964
Additions 44 50 6 1,270 1,370
Disposals (5) -- (4) (1,792) (1,801)
Exchange adjustments 399 -- 3 398 800
------ --- ----- ------ ------
At end of year 11,723 389 1,381 26,840 40,333
====== === ===== ====== ======
DEPRECIATION
At start of year 1,867 120 235 19,662 21,884
Charge for year 211 9 62 2,038 2,320
Disposals -- -- (4) (1,635) (1,639)
Exchange adjustments 157 -- 3 349 509
------ --- ----- ------ ------
At end of year 2,235 129 296 20,414 23,074
====== === ===== ====== ======
NET BOOK VALUE
AT 31 MARCH 2003 9,488 260 1,085 6,426 17,259
====== === ===== ====== ======
At 31 March 2002 9,418 219 1,141 7,302 18,080
====== === ===== ====== ======
COMPANY
COST
At start of year 87 140 -- 2,115 2,342
Additions -- 50 -- 284 334
Disposals -- -- -- (110) (110)
------ --- ----- ------ ------
At end of year 87 190 -- 2,289 2,566
====== === ===== ====== ======
DEPRECIATION
At start of year -- 69 -- 428 497
Charge for year -- 5 -- 329 334
Disposals -- -- -- (73) (73)
------ --- ----- ------ ------
At end of year -- 74 -- 684 758
====== === ===== ====== ======
NET BOOK VALUE
AT 31 MARCH 2003 87 116 -- 1,605 1,808
====== === ===== ====== ======
At 31 March 2002 87 71 -- 1,687 1,845
====== === ===== ====== ======
At 31 March 2003 and 2002 no Group freehold property was rented to
third parties.
F-42
SYLTONE PLC
NOTES (CONTINUED)
Plant, equipment, and vehicles include assets which are the subject
of finance leases and are analysed as:
GROUP COMPANY
----------------------------- -----------------------------
2003 2002 2003 2002
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ----------- ----------- -----------
Cost.................................................... 510 487 453 453
Accumulated depreciation................................ (33) (26) (29) (5)
--- --- --- ---
Net book value.......................................... 477 461 424 448
--- --- --- ---
Depreciation in year.................................... 27 14 24 5
=== === === ===
Capital expenditure commitments at the year end were:
GROUP COMPANY
----------------------------- -----------------------------
2003 2002 2003 2002
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ----------- ----------- -----------
Contracted for but not provided......................... 242 24 -- --
=== == == ==
13 INVESTMENTS
INVESTMENTS IN OWN SHARES HELD
SUBSIDIARY IN EMPLOYEE OTHER
UNDERTAKINGS BENEFIT TRUST INVESTMENTS TOTAL
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
-------------- --------------- ----------- -----------
GROUP
At start of year -- 604 2 606
Disposals -- -- (2) (2)
----- --- -- -----
At end of year -- 604 -- 604
===== === == =====
COMPANY
At start of year 9,291 604 2 9,897
Disposals -- -- (2) (2)
----- --- -- -----
At end of year 9,291 604 -- 9,895
===== === == =====
Investments are stated at cost. Investments in subsidiary
undertakings are shown after deduction of provisions amounting to
(pounds)68,000 (2002: (pounds)68,000).
Ordinary shares in Syltone plc held in the Employee Benefit Trust
have been included in the Group consolidated balance sheet as
investments as required by Urgent Issues Task Force No. 13 (see note
28).
14 STOCKS
GROUP COMPANY
----------------------------- -----------------------------
2003 2002 2003 2002
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ----------- ----------- -----------
Raw materials and consumables 3,205 3,398 -- --
Work in progress 1,415 1,742 -- --
Finished goods for resale 6,889 7,711 -- --
------ ------ -- --
11,509 12,851 -- --
====== ====== == ==
F-43
SYLTONE PLC
NOTES (CONTINUED)
15 DEBTORS
GROUP COMPANY
----------------------------- -----------------------------
2003 2002 2003 2002
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ----------- ----------- -----------
Amounts falling due within one year:
Trade debtors 15,905 15,871 69 88
Other debtors 308 446 67 145
Taxation recoverable 430 405 4 272
Prepayments and accrued income 1,260 1,063 334 406
Amounts owed by subsidiary undertakings -- -- 26,399 26,840
------ ------ ------ ------
17,903 17,785 26,873 27,751
Amounts falling due after one year:
Other debtors 35 56 34 49
Deferred tax asset (note 19) -- 7 -- --
Pension prepayment (note 19) 1,343 850 1,528 1,035
------ ------ ------ ------
1,378 913 1,562 1,084
------ ------ ------ ------
19,281 18,698 28,435 28,835
====== ====== ====== ======
16 BORROWINGS
The maturity profiles of the Group's financial liabilities are
detailed below.
GROUP COMPANY
----------------------------- -----------------------------
2003 2002 2003 2002
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ----------- ----------- -----------
Due on demand or within one year:
Bank overdrafts and loans--secured 2,165 2,796 4,970 6,145
Finance leases--secured 244 231 225 225
------ ------ ------ ------
2,409 3,027 5,195 6,370
====== ====== ====== ======
Due after one year:
Bank overdrafts and loans--secured 12,957 13,691 12,572 13,248
Finance leases--secured 33 225 -- 225
------ ------ ------ ------
12,990 13,916 12,572 13,473
====== ====== ====== ======
Amounts due after one year are repayable:
Between one and two years 1,710 1,811 1,593 1,720
Between two and five years 11,163 11,950 10,979 11,753
More than five years 117 155 -- --
------ ------ ------ ------
12,990 13,916 12,572 13,473
====== ====== ====== ======
F-44
SYLTONE PLC
NOTES (CONTINUED)
GROUP COMPANY
----------------------------- -----------------------------
2003 2002 2003 2002
NOTE (POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
------ ----------- ----------- ----------- -----------
The principal bank loans included above are:
CURRENCY AMOUNT
-------------------------- ----------
US Dollar 118,556 (i) 75 126 -- --
2,919,000 (ii) 1,847 2,050 1,847 2,050
2,481,830 (iii) 1,570 2,050 1,564 2,050
---------- ------ ------ ------ ------
5,519,386 3,492 4,226 3,411 4,100
---------- ------ ------ ------ ------
Euro -- 78 -- --
340,335 (iv) 235 229 -- --
234,060 (v) 162 169 -- --
-- 22 -- --
4,099,125 (vi) 2,830 2,954 2,830 2,954
3,432,938 (vi) 2,370 2,474 2,370 2,474
4,018,750 (vii) 2,774 2,462 2,774 2,462
1,615,500 (vii) 1,115 991 1,115 991
2,412,000 (vii) 1,665 1,477 1,665 1,477
---------- ------ ------ ------ ------
16,152,708 (viii) 11,151 10,856 10,754 10,358
---------- ------ ------ ------ ------
TOTAL 14,643 15,082 14,165 14,458
====== ====== ====== ======
Note:
(i) Repayable in equal monthly instalments to 2005. Interest is fixed
at 2.00%.
(ii) Repayable 31 March 2005 with a fixed interest rate of 3.18% plus
margin.
(iii) Repayable in equal quarterly instalments to 31 March 2007 with a
fixed interest rate of 3.48% plus margin.
(iv) Repayable in equal quarterly instalments to 2013. Interest is
fixed at 6.25% to 1 January 2006.
(v) Repayable in equal monthly instalments to February 2008. Interest
is fixed at 4.27%.
(vi) Repayable in equal quarterly instalments to 31 March 2007.
(vii) Repayable 31 March 2005.
(viii) Included within the Euro loan total is EUR 7,089,000 amortising
quarterly with a fixed interest rate at 4.075% plus margin to 31
March 2007, with the balance at Euro LIBOR.
Securities comprise a pledge over the Company's shareholding in
Syltone Industries plc and fixed and floating charges over certain of
the Group's overseas assets together with certain intra-group
guarantees.
The undrawn committed borrowing facilities available to the Group in
respect of which all conditions precedent had been met, were:
2003 2002
(POUNDS)000 (POUNDS)000
----------- -----------
Expiring in one year or less 7,260 5,965
Expiring in more than one year but not more than five years 500 500
----- -----
7,760 6,465
===== =====
F-45
SYLTONE PLC
NOTES (CONTINUED)
17 INTEREST RATE RISK PROFILE
The following interest rate and currency profiles of the Group's
financial (liabilities)/assets are after taking into account interest
rate swaps entered into by the Group.
WEIGHTED
AVERAGE
WEIGHTED PERIOD FOR
FLOATING FIXED AVERAGE WHICH THE
TOTAL RATE RATE INTEREST RATE RATE IS FIXED
(POUNDS)000 (POUNDS)000 (POUNDS)000 % YEARS
------- -------- ------ ------------- -------------
2003
Financial liabilities:
Sterling.......................... (225) -- (225) 4.12 1.00
US Dollar......................... (3,492) (6) (3,486) 3.35 2.89
Euro currencies................... (11,547) (6,031) (5,516) 4.17 3.78
Japanese Yen...................... -- -- -- -- --
Other............................. (135) (135) -- -- --
------- ------- ------ ---- ----
(15,399) (6,172) (9,227) 3.86 3.38
------- ------- ------ ---- ----
Financial assets:
Sterling.......................... 3,726 3,726 -- -- --
US Dollar......................... (1,470) (1,470) -- -- --
Euro currencies................... 1,243 1,243 -- -- --
Japanese Yen...................... (371) (371) -- -- --
Other............................. 1,306 1,306 -- -- --
------- ------- ------ ---- ----
4,434 4,434 -- -- --
------- ------- ------ ---- ----
Net financial liabilities......... (10,965) (1,738) (9,227) 3.86 3.38
======= ======= ====== ==== ====
2002
Financial liabilities:
Sterling.......................... 2,549 2,999 (450) 4.12 2.00
US Dollar......................... (4,730) (2,557) (2,173) 5.19 0.82
Euro currencies................... (14,979) (10,538) (4,441) 4.85 0.92
Japanese Yen...................... 375 817 (442) 1.70 0.56
Other............................. (158) (158) -- -- --
------- ------- ------ ---- ----
(16,943) (9,437) (7,506) 4.72 0.94
------- ------- ------ ---- ----
Financial assets:
Sterling.......................... 11 11 -- -- --
US Dollar......................... 291 291 -- -- --
Euro currencies................... 1,554 1,554 -- -- --
Japanese Yen...................... 65 65 -- -- --
Other............................. 566 566 -- -- --
------- ------- ------ ---- ----
2,487 2,487 -- -- --
------- ------- ------ ---- ----
Net financial liabilities......... (14,456) (6,950) (7,506) 4.72 0.94
======= ======= ====== ==== ====
The floating rate financial liabilities include bank loans typically
based on the relevant currency 3 month LIBOR and overdrafts typically
based on the relevant currency central bank base rates.
The financial assets disclosure includes overdrafts which are part
of a Group cash offset facility.
F-46
SYLTONE PLC
NOTES (CONTINUED)
As permitted by Financial Reporting Standard No. 13 short term
debtors and creditors have been excluded from the disclosures other than
the currency exposure given in note 25.
18 OTHER CREDITORS
GROUP COMPANY
----------------------------- -----------------------------
2003 2002 2003 2002
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ----------- ----------- -----------
Amounts falling due within one year:
Trade creditors 7,974 8,260 267 443
Taxation 351 297 35 --
Social security 646 556 236 233
Accruals 3,520 3,083 648 566
Other creditors 3,582 3,506 656 73
Payments on account 575 -- -- --
Proposed dividend 1,273 1,273 809 94
------ ------ ----- -----
17,921 16,975 2,651 1,409
====== ====== ===== =====
Amounts falling due after one year:
Accruals 53 301 -- 247
Other creditors 268 240 -- 23
------ ------ ----- -----
321 541 -- 270
====== ====== ===== =====
19 PROVISIONS FOR LIABILITIES AND CHARGES
GROUP COMPANY
---------------------------------------- ----------------------------------------
DEFERRED DEFERRED
PENSION TAX TOTAL PENSION TAX TOTAL
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ----------- ----------- ----------- ----------- -----------
At start of year.............. 165 (7) 158 (1,035) 373 (662)
Payments...................... (500) -- (500) (189) -- (189)
Exchange adjustments.......... 129 (62) 67 -- -- --
Charged/(credited) in year.... (183) 637 454 (304) 196 (108)
------ --- ------ ------ --- ------
At end of year................ (389) 568 179 (1,528) 569 (959)
====== === ====== ====== === ======
Analysed as:
Debtors falling due after one
year (note 15).............. (1,343) -- (1,343) (1,528) -- (1,528)
Provisions for liabilities and
charges..................... 954 568 1,522 -- 569 569
------ --- ------ ------ --- ------
(389) 568 179 (1,528) 569 (959)
====== === ====== ====== === ======
The pension asset of (pounds)389,000 relates primarily to the
prepayment on the two UK defined benefit pension schemes less the fully
provided cost, as calculated under Statement of Standard Accounting
Practice No. 24, of the unfunded element of the Emco Wheaton GmbH scheme
(see also note 26).
F-47
SYLTONE PLC
NOTES (CONTINUED)
The deferred tax liability/(asset) comprises:
GROUP COMPANY
----------------------------- -----------------------------
2003 2002 2003 2002
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ----------- ----------- -----------
Accelerated capital allowances 794 757 96 40
Pension costs 368 219 473 333
Other timing differences (594) (983) -- --
---- ---- --- ---
568 (7) 569 373
==== ==== === ===
20 EQUITY SHARE CAPITAL
2002 2003 2003 2002
NUMBER NUMBER (POUNDS)000 (POUNDS)000
---------- ---------- ----------- -----------
Ordinary shares of 25p each
32,000,000 32,000,000 Authorised................................... 8,000 8,000
---------- ---------- ----- -----
Allotted, called up and fully paid
25,511,055 25,511,055 At start of year and end of year............. 6,378 6,378
========== ========== ===== =====
SHARE OPTIONS 2003 2002
EXECUTIVE SHARE OPTION AND EMPLOYEE SAYE SCHEMES NUMBER NUMBER
------------------------------------------------ --------- --------
At start of year............................................ 515,051 606,430
Adjustment to opening balance............................... (23,072) 63,921
New uncovered options granted in year....................... 806,667 --
Uncovered options lapsed in year............................ (175,517) (155,300)
--------- --------
At end of year.............................................. 1,123,129 515,051
========= ========
Options granted under these schemes are exercisable at various dates
up to 26 September 2012 at prices ranging from 86.50p to 167.00p per
share.
Options granted under the Employee SAYE Scheme are included in the
above figures where not covered by shares held in the Employee Benefit
Trust (see note 28).
21 SHARE PREMIUM ACCOUNT
GROUP COMPANY
2003 2003
(POUNDS)000 (POUNDS)000
----------- -----------
At start and end of year.................................... 9,275 9,275
===== =====
22 MERGER RESERVE
GROUP COMPANY
2003 2003
(POUNDS)000 (POUNDS)000
----------- -----------
At start and end of year.................................... 1,197 1,197
===== =====
The merger reserve arose as a result of the issue of shares to fund
the 100% acquisition of equity in Priestman Equipment Limited, at 31
July 1999.
F-48
SYLTONE PLC
NOTES (CONTINUED)
23 PROFIT AND LOSS ACCOUNT
GROUP COMPANY
2003 2003
(POUNDS)000 (POUNDS)000
----------- -----------
At start of year............................................ 2,817 6,024
Retained profit/(loss) for the year......................... 1,187 (409)
Exchange movements.......................................... (630) --
----- -----
At end of year.............................................. 3,374 5,615
===== =====
Included in Group reserves are non-distributable legal and capital
reserves in certain overseas subsidiaries amounting to (pounds)172,000
(2002: (pounds)153,000).
As permitted by section 230 Companies Act 1985, the profit and loss
account of the Company is not produced herein. Of the consolidated
profit attributable to ordinary shareholders for the financial year,
(pounds)1,422,000 (2002: (pounds)605,000) has been dealt within the
accounts of the parent company.
At 31 March 2003, the cumulative goodwill written off to reserves on
acquisitions made prior to 1 April 1998 amounted to (pounds)12,248,000
(2002: (pounds)12,248,000).
24 CONSOLIDATED CASH FLOW STATEMENT
2003 2002
(POUNDS)000 (POUNDS)000
RECONCILIATION OF OPERATING PROFIT TO CASH FLOW FROM OPERATING ACTIVITIES ----------- -----------
Operating profit.................................................. 5,816 4,687
Depreciation and amortisation charges............................. 2,605 2,710
Provisions (decrease)/increase.................................... (183) 158
Stock decrease.................................................... 1,589 131
Debtors decrease.................................................. 560 991
Creditors decrease................................................ (165) (1,331)
Capital grants amortised.......................................... (16) (9)
Exchange (gains)/losses........................................... (176) 31
Asset disposal/(gains)............................................ (55) (66)
Pension payments.................................................. (500) (1,085)
----- ------
Net cash inflow from operating activities......................... 9,475 6,217
===== ======
ACQUISITIONS AND DISPOSALS
The proceeds on the sale of subsidiary undertakings relate to the
sale of subsidiary undertakings which were completed in the year ended
31 March 2001.
F-49
SYLTONE PLC
NOTES (CONTINUED)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET 2003 2002
BORROWINGS (POUNDS)000 (POUNDS)000
----------- -----------
Increase in cash in year.................................... 2,856 237
Cash outflow from net decrease in borrowings and repayment
of finance leases......................................... 1,633 1,805
------- -------
Change in net borrowings resulting from cash flows.......... 4,489 2,042
New finance leases.......................................... (56) (656)
Termination of finance leases............................... 9 --
Exchange adjustments........................................ (951) 150
------- -------
Movement in net borrowings in year.......................... 3,491 1,536
Net borrowings at start of year............................. (14,456) (15,992)
------- -------
Net borrowings at end of year............................... (10,965) (14,456)
======= =======
ANALYSIS OF NET BORROWINGS
BALANCE AT OTHER BALANCE
START EXCHANGE CASH NON-CASH AT END
OF YEAR MOVEMENT FLOW CHANGES OF YEAR
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ----------- ----------- ----------- -----------
Cash at bank and in hand 2,487 146 1,801 -- 4,434
Overdrafts (1,484) (51) 1,055 -- (480)
Borrowings due within one year (1,311) (1,009) 1,405 (770) (1,685)
Borrowings due after one year (13,691) (36) -- 770 (12,957)
Finance leases due within one year (232) (1) 228 (239) (244)
Finance leases due after one year (225) -- -- 192 (33)
------- ------ ----- ---- -------
(14,456) (951) 4,489 (47) (10,965)
======= ====== ===== ==== =======
25 FINANCIAL INSTRUMENTS
Shown below are the Group's currency exposures. These exposures
comprise the monetary assets and monetary liabilities of the Group that
are not denominated in the functional currency of the subsidiary company
or operating unit concerned. It is these exposures, which fluctuate
throughout the
F-50
SYLTONE PLC
NOTES (CONTINUED)
year, that give rise to the net currency gains and losses recognised in
the profit and loss account. The amounts shown take into account the
effect of hedging instruments used to manage these exposures.
NET FOREIGN CURRENCY MONETARY ASSETS/(LIABILITIES)
--------------------------------------------------------------------------
EURO
STERLING US DOLLAR CURRENCIES OTHER TOTAL
FUNCTIONAL CURRENCY OF SUBSIDIARY OR OPERATING UNIT (POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
--------------------------------------------------- ----------- ----------- ----------- ----------- -----------
2003
Sterling -- (139) 397 (152) 106
US Dollar -- -- (162) -- (162)
Euro currencies (474) (27) -- -- (501)
Other (204) 94 113 (25) (22)
------ ------ ------ ------ ------
Total (678) (72) 348 (177) (579)
====== ====== ====== ====== ======
2002
Sterling -- (4,103) (3,414) 1,756 (5,761)
US Dollar -- -- (245) -- (245)
Euro currencies (777) 83 -- 37 (657)
Other (581) (298) 34 (6) (851)
------ ------ ------ ------ ------
Total (1,358) (4,318) (3,625) 1,787 (7,514)
====== ====== ====== ====== ======
FAIR VALUES OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Set out below is a comparison by category of book and fair values of
the Group's financial assets and liabilities as at the year end.
2003 2002
----------------------------- -----------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ----------- ----------- -----------
Primary financial instruments held or issued to
finance the Group's operations:
Short term financial liabilities and current
portion of medium term borrowings (2,409) (2,409) (3,027) (3,027)
Medium term borrowings (12,990) (12,990) (13,916) (13,916)
Financial assets 4,434 4,434 2,487 2,487
Derivative financial instruments held to manage
the interest rate and currency profile:
Interest rate swaps -- (294) -- (157)
Forward foreign currency contracts -- (210) -- 12
The fair values of the primary financial instruments have been taken
as the book values.
The fair values of the interest rate swaps have been determined by
discounting the forecast future cash flows to net present values.
The fair values of the forward foreign currency contracts have been
taken from the spot rate of exchange at the year end.
It should be remembered in the context of the above disclosures and
calculations of "fair value" that it is Group policy only to use
derivative financial instruments to cover underlying exposures that
arise in the normal course of the Group's stated commercial activities.
Accordingly, such instruments are held to maturity and no purely
speculative trading is undertaken.
F-51
SYLTONE PLC
NOTES (CONTINUED)
GAINS AND LOSSES ON HEDGES
Unrecognised gains/(losses) on instruments used for hedging, and the
movements therein, are as follows:
TOTAL NET
GAINS LOSSES GAINS/(LOSSES)
(POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ----------- --------------
Unrecognised gains and losses on hedges on 1 April 2002. 12 -- 12
Gains and losses arising in previous years that were recognised in
the year (12) -- (12)
--- ---- ----
Gains and losses arising before 1 April 2002 that were not
recognised in the year -- -- --
Gains and losses arising in the year that were not recognised in the
year 6 (216) (210)
--- ---- ----
Unrecognised gains and losses on hedges at 31 March 2003 6 (216) (210)
=== ==== ====
Of which:
Gains and losses expected to be recognised in the next financial
year 6 (216) (210)
Gains and losses expected to be recognised after the next financial
year -- -- --
As permitted by Financial Reporting Standard No. 13 short term
debtors and creditors have been excluded from the disclosures other than
the currency exposure given above.
26 COMMITMENTS
PENSIONS
The Group operates a number of pension plans throughout the world
devised in accordance with local conditions and practices. Materially,
however, the Group operates three principal defined benefit schemes; two
funded pension schemes in the UK provide benefits based on final
pensionable earnings with the assets of the schemes held in separate
trustee administered funds and a further partially funded pension scheme
in Germany, the full SSAP 24 liability for which is held on the balance
sheet of the subsidiary company Emco Wheaton GmbH. Over recent years
separate payments have been made, as described below, to fully fund part
of this scheme with the consequent reduction in the provision on the
balance sheet to the level required to cover the remaining unfunded
element.
Contributions to the schemes are charged to the profit and loss
account so as to spread the cost of pensions over employees' working
lives with the Group. The contributions are determined by independent
qualified actuaries on the basis of triennial valuations for the two UK
schemes and of an annual valuation for the German scheme.
The two UK defined benefit schemes were both closed to new members
with effect from 1 January 2002. After this date new UK employees become
eligible to join a new defined contribution pension scheme, the Group's
contributions to which are charged to the profit and loss account as
they are incurred.
The Syltone Group Retirement Benefits Scheme
The latest actuarial valuation of the scheme took place as at 30
June 2001. The projected unit method of funding was adopted. For the
purposes of these accounts, the funding position was assessed as at 31
March 2001, the start of the financial year preceding the valuation. The
main assumptions adopted in this assessment were that long-term
investment returns would exceed pensionable earnings
F-52
SYLTONE PLC
NOTES (CONTINUED)
increases by 3.35% per annum compound. It was assumed that pensions in
payment would increase at a rate of 2.4% per annum compound. As at 31
March 2001, the market value of the assets of the scheme was
(pounds)21,328,000 which was sufficient to cover approximately 81% of
the benefits that have accrued to members; after allowing for expected
future increases in pensionable earnings.
As at 30 June 2001, that was a deficiency of (pounds)1,354,000
relative to accrued benefits with statutory revaluation when measured
using the prescribed method and assumptions under the Minimum Funding
Requirement (MFR). Part of this deficiency ((pounds)139,400) was made
good on 9 April 2002 under the Debt on Employer legislation. The
remainder will be made good by 5 June 2013 as part of the continuing
contribution rate reflected by the Schedule of Contributions; certified
by the Scheme Actuary on 6 June 2003.
During the financial year, contributions made by the Group to this
Scheme amounted to (pounds)1,347,000 (2002: (pounds)1,830,000).
Emco Wheaton UK Limited 1976 Pension Scheme
The latest actuarial assessment of the scheme took place as at 1
October 2000. The method of valuation and actuarial basis were broadly
as for the Syltone scheme described above. At 1 October 2000 the value
of the assets of the scheme was sufficient to cover approximately 175%
of the benefits that had accrued to members, after allowing for expected
future increases in pensionable earnings. The Emco Wheaton UK Limited
1976 Pension Scheme has enjoyed a contribution holiday throughout the
financial year.
Emco Wheaton GmbH Pension Scheme
An actuarial valuation of the scheme took place as at 31 March 2003
using the same method of valuation as for the Syltone and Emco Wheaton
UK schemes above. The main assumptions adopted differed slightly being,
in the actuary's opinion, more in line with the German economic
environment. Assumptions used were interest returns of 5.5% per annum,
pensionable earnings to increase by 2.5% per annum and pensions in
payment to increase at 1.5% per annum compound. On this basis the full
SSAP 24 liability for this scheme was provided in the accounts of Emco
Wheaton GmbH.
A new pension scheme has been agreed with the Works Council at Emco
Wheaton GmbH. This scheme, like the UK schemes, will be fully funded
with the assets held in a separate fund. By 31 March 2002 payments had
been made into the new scheme to transfer all pensioners and active
members between the ages of 30 and 55. It is planned that the remaining
active members under 30 will be transferred once they reach 30 and are
eligible for the new scheme. As a consequence of German pension
legislation active members over 55 years of age and deferred members
must remain in the old scheme until retirement. When the last of the
personnel satisfying this criterion retires the old unfunded scheme will
be extinguished. It is planned that this gradual shift of the members
from the old to the new scheme will enable Emco Wheaton GmbH's pension
costs to remain constant.
The Group pensions charge for the period in respect of these schemes
and retirement indemnities in France was (pounds)975,000 (2002:
(pounds)1,064,000). This is inclusive of (pounds)141,000 (2002:
(pounds)136,000) in respect of the amortisation of experience surpluses
that are being recognised over 15 years, the average expected remaining
service lifetime of the active members. A prepayment of
(pounds)1,343,000 (2002: (pounds)850,000) is included in the
consolidated balance sheet; this being the excess of the actual
contributions paid over the accumulated pension cost of the two UK
defined benefit pension schemes. In respect of Group pension commitments
outside the UK a provision of (pounds)954,471 (2002: (pounds)1,015,198)
is included in the consolidated balance sheet, this being the excess of
the accumulated pension cost over the actual contributions paid. Of this
amount (euro)1,288,607 ((pounds)899,553) (2002: (euro)1,570,232
((pounds)961,975)) relates to the remaining unfunded element of the Emco
Wheaton GmbH Pension Scheme.
In respect of the Group's defined contribution pension scheme the
pension cost charge for the period represents contributions payable by
the Group to the scheme and amounted to (pounds)8,000 (2002:
F-53
SYLTONE PLC
NOTES (CONTINUED)
(pounds)nil). There were no outstanding or prepaid contributions
at either the beginning or end of the financial year.
GROUP COMPANY
----------------------------- -----------------------------
2003 2002 2003 2002
(POUNDS)000 (POUNDS)000 (POUNDS)000 (POUNDS)000
----------- ----------- ----------- -----------
OTHER COMMITMENTS
Operating lease payments for the year ending 31 March 2002
Property leases terminating:
Within one year 219 159 42 22
In two to five years 210 319 -- 49
In more than five years 297 273 -- --
--- --- -- --
726 751 42 71
=== === == ==
Equipment rentals on leases terminating:
Within one year 54 39 -- --
In two to five years 353 157 81 65
In more than five years 14 12 -- --
--- --- -- --
421 208 81 65
=== === == ==
GUARANTEES AND CONTINGENT LIABILITIES
The Company guarantees certain subsidiary company borrowings, which
at 31 March 2003 amounted to (pounds)167,000 (2002: (pounds)357,000).
Certain subsidiary companies have entered into various contractual
performance bonds and associated guarantees which at 31 March 2003
amounted to (pounds)1,120,000 (2002: (pounds)1,012,000).
The Company has a contingent liability under a Value Added Tax Group
Election for the Value Added Tax liabilities of certain UK subsidiary
companies which at 31 March 2003 amounted to (pounds)268,000 (2002:
(pounds)514,000).
27 PENSION COST FRS 17 DISCLOSURE NOTE
Whilst the Group continues to account for pension costs in
accordance with SSAP 24, under the new pension accounting standard FRS
17 the following second year transitional disclosures are required.
As detailed in note 26 above the Group operates three principal
defined benefit schemes. The valuation of liabilities for the two UK
schemes included below have been derived by projecting forward the
position from the latest valuation to 31 March 2003. The latest
valuation of the German Scheme is at 31 March 2003. The assumptions used
by the actuaries are the best estimates chosen from a range of possible
actuarial assumptions which, due to the timescales covered, may not
necessarily be borne out in practice. The major assumptions used by the
actuaries were:
2003 2002
---- ----
Rate of increase in pensionable earnings 3.50% 3.75%
Rate of increase of pensions in payment 2.50% 2.75%
Rate of increase in deferred pensions 2.50% 2.75%
Discount rate 5.40% 6.25%
Inflation assumption 2.50% 2.75%
The FRS 17 fair value of the schemes' assets is their market value
at 31 March 2003. As the assets are not intended to be realised in the
short term this fair value may be subject to significant change
F-54
SYLTONE PLC
NOTES (CONTINUED)
before they are realised. The FRS 17 present value of the schemes' actuarial
liabilities is derived from discounting cash flow projections over very long
periods and is thus inherently uncertain.
The assets in the scheme and the expected rate of return and the
actuarial valuation of the schemes' liabilities were:
AT 31 MARCH 2003 AT 31 MARCH 2002
(POUNDS)000 (POUNDS)000
---------------- ----------------
Equities 7.60% 13,121 8.25% 17,447
Gilts and Bonds 4.70% 4,754 5.50% 5,129
With profits and insurance policies -- 7,101 -- 5,745
---- ------- ---- -------
Fair value of the schemes' assets 24,976 28,321
Present value of the schemes' actuarial
liabilities (39,595) (33,408)
------- -------
Net deficit in the schemes (14,619) (5,087)
Related deferred tax asset 4,451 1,591
------- -------
Net pension liability (10,168) (3,496)
======= =======
If FRS 17 had been fully adopted in the financial statements the
pension costs for the defined benefit schemes would have been:
ANALYSIS OF THE AMOUNT CHARGED TO OPERATING PROFIT
2003
(POUNDS)000
-----------
Service cost 937
------
Total operating charge 937
======
ANALYSIS OF NET RETURN ON PENSION SCHEME
Expected return on pension scheme assets 2,104
Interest on pension liabilities (2,093)
------
Net return 11
======
ANALYSIS OF AMOUNT RECOGNISED IN STATEMENT OF TOTAL RECOGNISED GAINS AND
LOSSES (STRGL)
2003
(POUNDS)000
-----------
Actual return less expected return on assets (5,960)
Experience gains and losses on liabilities 136
Changes in assumptions (4,274)
-------
Net loss recognised (10,098)
=======
F-55
SYLTONE PLC
NOTES (CONTINUED)
MOVEMENT IN DEFICIT DURING THE YEAR
2003
(POUNDS)000
-----------
Deficit in scheme at beginning of year 5,087
Movement in year:
Exchange adjustments 165
Current service cost 937
Contributions (1,657)
Net interest cost (11)
Actuarial loss 10,098
------
Deficit in scheme at end of year 14,619
======
HISTORY OF EXPERIENCE GAINS AND LOSSES
2003
(POUNDS)000
-----------
Difference between expected and actual return on scheme assets:
Amount (5,960)
Percentage of scheme assets (24)%
Experience gains and losses on scheme liabilities:
Amount 136
Percentage of scheme liabilities 0%
Total amount recognised in statement of total recognised gains and losses:
Amount (10,098)
Percentage of scheme liabilities (26)%
28 EMPLOYEE BENEFIT TRUST AND LONG TERM SHARE INCENTIVE PLANT TRUST
During the year the Company contributed (pounds)8,100 (2002:
(pounds)8,100) towards the operating costs of the Employee Benefit
Trust. The Trust has waived all rights to participate by way of its
holding in the ordinary shares of Syltone plc, in any dividend that may
be declared by the Company. The dividend waived in the current year
amounts to (pounds)40,000 (2002: (pounds)40,000).
During 1999 and 2000 shares in respect of the Long Term Share
Incentive Plan (LTIP) were transferred to the Trustees of the Plan.
Dividends are paid to the beneficial owners of those shares.
F-56
SYLTONE PLC
NOTES (CONTINUED)
The outstanding options to purchase shares from the Trustees of the
Employee Benefit Trust and the maximum number of shares which can be
awarded under the LTIP are:
2003 2002
------------------------- --------------------------
MAXIMUM MAXIMUM
NUMBER OF NUMBER NUMBER OF NUMBER
EMPLOYEES OF SHARES EMPLOYEES OF SHARES
--------- --------- --------- ----------
Fourth grant-February 1997 at 159.17p
per share -- -- 55 62,440
-- ------- -- -------
Fifth grant-February 1998 at 125.50p per share 56 73,915 58 75,453
-- ------- -- -------
1999 LTIP -- -- 3 151,650
-- ------- -- -------
2000 LTIP 5 232,550 7 413,610
-- ------- -- -------
Total outstanding at 31 March 2003 306,465 703,153
======= =======
At 31 March 2003 the Trustees of the Employee Benefit Trust held
541,591 (2002: 541,591) ordinary shares in Syltone plc. As required by
Urgent Issue Task Force No. 13 these shares are included as investments
in the Group consolidated balance sheet as at 31 March 2003 at a cost of
(pounds)604,000 (2002: (pounds)604,000) and the Trust's borrowings,
which are guaranteed by the Company, of (pounds)nil (2002: (pounds)nil)
and cash in hand (pounds)nil (2002: (pounds)nil) have been included in
the Group's borrowings due within one year and cash at bank and in hand
respectively.
29 SIGNIFICANT DIFFERENCES BETWEEN UK AND US GAAP
The financial statements are prepared in accordance with UK GAAP,
which differ in certain significant respects from those generally
accepted in the United States of America ("US GAAP"). The significant
differences applicable to the Group are described below:
GOODWILL
Under UK GAAP, purchased goodwill (representing the excess of the
fair value of the consideration given and associated costs over the fair
value of the separable net assets acquired) arising on consolidation in
respect of acquisitions before 1 April 1998, when Financial Reporting
Standard No 10 was adopted, was written off to reserves in the year of
acquisition. When a subsequent disposal occurs any related goodwill
previously written off or credited to reserves is written back through
the profit and loss account as part of the profit or loss on disposal.
Purchased goodwill arising on consolidation in respect of
acquisitions since 1 April 1998 is capitalised in the year of
acquisition and amortised on a systematic basis over its estimated
useful economic life up to a maximum of 20 years. The carrying value of
goodwill is reviewed as necessary for impairment and written down if
impairment is identified.
Under US GAAP, through 31 March 2002, goodwill arising in respect of
acquisitions initiated before 30 June 2001 was capitalised and amortised
over its estimated useful life of 20 years. Upon full adoption of SFAS
142 'Goodwill and Other Intangible Assets' on 1 April 2002 goodwill
ceased to be amortised. Goodwill arising in respect of acquisitions
initiated after 30 June 2001 is not amortised.
In accordance with SFAS 142 goodwill is no longer amortised, but is
tested for impairment at least annually at the reporting unit level by
applying a two-step fair-value-based test.
RESEARCH AND DEVELOPMENT COSTS
Under UK GAAP research and development costs are capitalised when a
clear, commercially viable future for that development is confirmed and
are, under the Group's accounting policy
F-57
SYLTONE PLC
NOTES (CONTINUED)
amortised over the first three years following their commercial launch.
All other expenditure on research and development is written off as
incurred.
Under US GAAP, such costs are written off to the profit and loss
account when incurred.
PENSIONS AND OTHER POST EMPLOYMENT BENEFITS
There are differences in the method of valuation required under UK
and US GAAP for valuing assets and liabilities of defined benefit
pension plans. US GAAP is generally more prescriptive in respect of
actuarial assumptions and the allocation of costs to accounting periods.
In addition, under US GAAP, a minimum pension liability is recognised in
certain circumstances when there is a deficit of plan assets relative to
the accumulated benefits obligation.
DERIVATIVE INSTRUMENTS
The Group uses derivative financial instruments to manage its
exposures to fluctuations in interest and foreign currency exchange
rates. Under UK GAAP, gains and losses on transactional foreign currency
hedges are recognised in the profit and loss account on the maturity of
the underlying transaction. Gains and losses on translational hedges of
foreign currency denominated net investments are taken to reserves.
Under US GAAP, all derivatives are carried at fair value at the balance
sheet date. Gains and losses arising from changes in the fair value of
derivatives, which do not qualify for US GAAP hedge accounting
treatment, are taken to the profit and loss account.
ORDINARY DIVIDENDS
Under UK GAAP, proposed dividends on ordinary shares, as recommended
by the directors, are deducted from shareholders' equity and shown as a
liability in the balance sheet at the end of the period to which they
relate. Under US GAAP, such dividends are only deducted from
shareholders' equity at the date of declaration of the dividend.
DEFERRED TAXATION
Under UK GAAP, the charge for taxation is based on the profit for
the year and takes into account taxation deferred because of timing
differences between the treatment of certain items for taxation and
accounting purposes. Deferred taxes are provided in full, without
discounting. In accordance with US GAAP, income taxes are accounted for
under the asset and liability method. Deferred tax assets and
liabilities are recognised for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. To the extent the
likelihood of realising a deferred tax asset is not considered to be
more likely than not, a valuation allowance is provided.
Under UK GAAP deferred taxes are provided based on tax rates and
laws that have been enacted, or substantively enacted. Under US GAAP,
deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognised in income in the period that includes the enactment date.
FOREIGN CURRENCY TRANSLATION
Under UK GAAP, trading results of overseas operations are translated
into sterling at the rates of exchange ruling at the balance sheet date.
Under US GAAP, trading results of overseas operations are translated
into sterling at the rates of exchange ruling at a weighted average
rate.
F-58
SYLTONE PLC
NOTES (CONTINUED)
EMPLOYEE TRUST
Under UK GAAP, shares of the Company held by the Employee Trust are
accounted for as fixed asset investments. Under US GAAP, shares of the
Company are accounted for as treasury stock within shareholders' equity.
STOCK BASED COMPENSATION
The Group has issued share options which were granted at fair value
(market value) which are exercisable if certain performance criteria are
achieved. Under UK GAAP, such options are accounted for using the
intrinsic value method, with the difference between the fair value of
shares at grant date and the exercise price charged to the profit and
loss over the period until the shares first vest. Grants under the
Company's SAYE schemes are exempt from this accounting methodology.
Under US GAAP, share options which are exerciseable if certain
performance criteria are achieved are accounted for as variable awards
and compensation cost is calculated at the end of each reporting period
by reference to the market price of the shares that are considered
likely to vest and recognised over the vesting period.
F-59
SYLTONE PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS (UNAUDITED)
FOR THE SIX MONTH PERIOD ENDED 30 SEPTEMBER
HALF YEAR TO HALF YEAR TO
30 SEPTEMBER 30 SEPTEMBER
2003 2002
NOTE (POUNDS)'000 (POUNDS)'000
---- ------------ ------------
TURNOVER................................................. 3
UK....................................................... 10,712 10,770
Overseas................................................. 31,957 26,346
------ ------
42,669 37,116
====== ======
OPERATING PROFIT......................................... 2,403 1,871
Interest-net............................................. (355) (536)
------ ------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION............ 2,048 1,335
Taxation-UK.............................................. (327) (124)
-Overseas......................................... (431) (398)
------ ------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION............. 1,290 813
Minority interests-Equity................................ -- (4)
------ ------
PROFIT ATTRIBUTABLE TO ORDINARY SHAREHOLDERS............. 1,290 809
Ordinary dividend paid and proposed...................... (9) (562)
------ ------
RETAINED PROFIT FOR THE FINANCIAL PERIOD................. 1,281 247
====== ======
EARNINGS PER SHARE....................................... 4 5.16p 3.24p
DILUTED EARNINGS PER SHARE............................... 4 5.10p 3.22p
Interim dividend per share............................... 0.00p 2.25p
(POUNDS)'000 (POUNDS)'000
------------ ------------
Depreciation............................................. 1,115 1,225
Fixed assets acquired.................................... 981 466
Research & development expenditure....................... 826 764
F-60
SYLTONE PLC
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AT 30 SEPTEMBER
AT 30 AT 30
SEPTEMBER SEPTEMBER
2003 2002
NOTE (POUNDS)'000 (POUNDS)'000
---- ------------ ------------
FIXED ASSETS
Intangible assets........................................... 3,161 2,613
Tangible assets............................................. 17,043 17,019
Investments................................................. 403 604
------- -------
20,607 20,236
CURRENT ASSETS
Stock....................................................... 5 12,161 11,832
Debtors..................................................... 6 19,046 18,248
Cash at bank and in hand.................................... 4,674 2,901
------- -------
35,881 32,981
------- -------
CREDITORS: amounts falling due within one year.............. 7
Borrowings.................................................. (2,903) (2,885)
Other creditors............................................. (17,924) (16,502)
------- -------
(20,827) (19,387)
NET CURRENT ASSETS.......................................... 15,054 13,594
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 35,661 33,830
------- -------
CREDITORS: amounts falling due after more than one year
-borrowings............................................. (12,241) (12,987)
-other creditors........................................ (269) (262)
PROVISIONS FOR LIABILITIES AND CHARGES...................... (1,593) (955)
DEFERRED INCOME--CAPITAL EXPENDITURE GRANTS................. -- (16)
------- -------
NET ASSETS.................................................. 21,558 19,610
======= =======
SHAREHOLDERS' FUNDS--EQUITY................................. 21,588 19,318
MINORITY INTERESTS--EQUITY.................................. -- 292
------- -------
21,588 19,610
======= =======
F-61
SYLTONE PLC
CONSOLIDATED CASH FLOW STATEMENTS (UNAUDITED)
FOR THE SIX MONTH PERIOD ENDED 30 SEPTEMBER
HALF YEAR TO HALF YEAR TO
30 SEPTEMBER 30 SEPTEMBER
2003 2002
(POUNDS)'000 (POUNDS)'000
------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES......................... 3,610 2,778
RETURN ON INVESTMENTS AND SERVICING OF FINANCE.............. (393) (405)
TAXATION.................................................... (612) (415)
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT................ (685) (546)
Acquisitions and disposals.................................. (1,286) 73
Equity dividends paid....................................... -- --
------ -----
CASH INFLOW BEFORE MANAGEMENT OF LIQUID RESOURCES AND
FINANCING................................................. 634 1,485
FINANCING................................................... (977) (592)
------ -----
(Decrease)/Increase in cash in the period................... (343) 893
====== =====
F-62
SYLTONE PLC
RECONCILIATIONS OF MOVEMENTS IN CONSOLIDATED SHAREHOLDER'S FUNDS
(UNAUDITED)
FOR THE SIX MONTH PERIOD ENDED 30 SEPTEMBER
2003 2002
(POUNDS)'000 (POUNDS)'000
------------ ------------
Consolidated shareholder's funds at 31 March................ 20,224 19,667
(Loss)/profit for the period................................ 1,281 247
Currency translation differences on foreign currency net
investments............................................... 53 (596)
------ ------
CONSOLIDATED SHAREHOLDER'S FUNDS AT 30 SEPTEMBER............ 21,558 19,318
====== ======
F-63
SYLTONE PLC
NOTES (UNAUDITED)
(FORMING PART OF THE FINANCIAL STATEMENTS)
1 BASIS OF PREPARATION
These condensed consolidated interim financial statements are
unaudited; however, in the opinion of the management of the company, all
adjustments necessary for a fair presentation have been made. Operating
results for the six month period ended September 30, 2003 are not
necessarily indicative of the results expected for the full year.
The unaudited condensed interim financial statements have been
prepared in accordance with the basis of preparation of the Company's
consolidated financial statements for the year ended March 31, 2003 and
should be read in conjunction with such consolidated financial
statements for the year ended March 31, 2003.
2 ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENT
The accounting policies adopted by the Company have not changed
since the Company's financial statements for the year ended March 31,
2003.
3 SEGMENTAL ANALYSIS
HALF YEAR TO HALF YEAR TO
30 SEPTEMBER 30 SEPTEMBER
2003 2002
(POUNDS)'000 (POUNDS)'000
------------ ------------
UK.......................................................... 10,712 10,770
France...................................................... 5,216 4,774
Germany..................................................... 3,203 3,252
Other European.............................................. 9,436 4,910
North America............................................... 7,990 7,291
Other....................................................... 6,112 6,119
------ ------
Total....................................................... 42,669 37,116
====== ======
4 EARNINGS PER SHARE
The calculation of earnings per share is based on the profit
attributable to ordinary shareholders of (pounds)1,290,334 and on
25,025,881 shares of 25p each, being the weighted average number of
ordinary shares in issue during the half year ended 30 September 2003,
excluding those shares held in the Employee Benefit Trust upon which all
dividend rights have been waived.
The diluted earnings per share is based on the same profit
attributable to ordinary shareholders and on 25,287,049 shares of 25p
each. Of the 1,846,447 weighted average number of options outstanding
under the various option schemes 1,269,094 are dilutive, resulting in
261,167 shares of 25p each deemed issued for nil consideration.
F-64
SYLTONE PLC
NOTES (CONTINUED)
5 STOCK
2003 2002
(POUNDS)'000 (POUNDS)'000
------------ ------------
Work in progress............................................ 1,745 1,626
Raw materials and consumables............................... 3,362 3,341
Finished goods.............................................. 7,054 6,865
------ ------
12,161 11,832
====== ======
6 DEBTORS
2003 2002
(POUNDS)'000 (POUNDS)'000
------------ ------------
Amounts falling due within one year:
Trade debtors............................................... 15,221 15,194
Other debtors............................................... 2,262 1,720
Prepayments and accrued income.............................. 1,563 1,334
------ ------
19,046 18,248
====== ======
7 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
2003 2002
------------------------------- -------------------------------
(POUNDS)'000 (POUNDS)'000 (POUNDS)'000 (POUNDS)'000
------------ ------------ ------------ ------------
Borrowings 2,903 2,885
Trade creditors 8,616 7,007
Other creditors including taxation and social security:
Corporation tax 329 119
Other taxation and social security 590 568
Other creditors 3,325 3,547
----- -----
4,244 4,234
Accruals and deferred income 3,782 3,426
Proposed dividend 1,282 1,835
------ ------
20,827 19,387
====== ======
8 SIGNIFICANT DIFFERENCE BETWEEN UK AND US GAAP
The unaudited condensed interim financial statements are prepared in
accordance with UK GAAP, which differ in certain significant respects
from those generally accepted in the United States of America (US GAAP).
Reference can be made to the 31 March 2003 financial statements to gain
an understanding of these differences.
F-65
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[GARDNER DENVER LOGO]
$150,000,000
GARDNER DENVER, INC.
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
WARRANTS
-----------------------------
This prospectus describes securities which we may offer and sell at
various times. A more detailed description of the securities is contained in
this prospectus under "Description of Debt Securities," "Description of our
Capital Stock," and "Description of Warrants and Warrant Units."
o The securities may be our senior and senior subordinated debt
securities, shares of our preferred or common stock or warrants or
warrant units.
o The securities to be issued under this prospectus may be offered as
separate series or issuances at an aggregate initial public
offering price not to exceed $150,000,000 (or the equivalent amount
in other currencies).
We will determine the terms of each series of securities (including, as
applicable, the specific designation, aggregate principal amount, interest
rates, dividend rates, maturity, redemption provisions, ranking and other
terms) at the time of sale, and we will describe those terms in a prospectus
supplement which we will deliver together with this prospectus at the time
of the sale.
Our common stock is listed on the New York Stock Exchange and trades
under the ticker symbol "GDI." Each prospectus supplement offering any other
securities will state whether those securities are listed or will be listed
on any national securities exchange.
We may offer the securities in amounts, at prices and on terms
determined at the time of the offering. We may sell securities directly to
you or through underwriters, dealers or agents. More information about the
way we will distribute the securities is under the heading "Plan of
Distribution." Information about the underwriters, dealers or agents who
will participate in any particular sale of securities will be in the
prospectus supplement relating to that series of securities.
INVESTING IN THE SECURITIES INVOLVES RISKS. BEFORE PURCHASING THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" IN THE PROSPECTUS
SUPPLEMENT PROVIDED IN CONNECTION WITH THE OFFER AND SALE OF ANY SECURITIES.
-------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-------------------------------
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 29, 2003.
We have not authorized anyone to give any information or to make any
representations concerning the offering of the securities except that which
is in this prospectus or in the prospectus supplement which is delivered
with this prospectus, or which is referred to under "Where You Can Find More
Information." If anyone gives or makes any other information or
representation, you should not rely on it. This prospectus is not an offer
to sell or a solicitation of an offer to buy any securities other than the
securities which are referred to in the prospectus supplement. This
prospectus is not an offer to sell or a solicitation of an offer to buy
securities in any circumstances in which the offer or solicitation is
unlawful. You should not interpret the delivery of this prospectus, or any
sale of securities, as an indication that there has been no change in our
affairs since the date of this prospectus. You should also be aware that
information in this prospectus may change after this date.
TABLE OF CONTENTS
Where You Can Find More Information..............i
Forward-Looking Statements......................ii
Information About Gardner Denver.................1
Use of Proceeds..................................1
Ratio of Earnings to Fixed Charges...............2
Description of Debt Securities...................2
Description of our Capital Stock.................9
Description of Warrants and Warrant Units.......14
Plan of Distribution............................15
Legal Opinion...................................16
Experts.........................................16
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You
may read and copy any of these documents at the SEC's public reference rooms
in Washington, D.C., New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. Our SEC filings are also available to the public at the SEC's
Internet website at http://www.sec.gov. The SEC allows us to incorporate by
reference the information we file with them, which means that we can
disclose important information to you by referring you to those documents.
This prospectus is part of a registration statement we filed with the
SEC. The information incorporated by reference is considered to be part of
this prospectus, and later information that we file with the SEC will
automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the
SEC (File No. 001-13215) under Sections 13(a), 13(c), 14, or 15(d) of the
Securities Exchange Act of 1934 (other than those made pursuant to Item 9 or
Item 12 of Form 8-K or other information "furnished" to the SEC) after
September 24, 2003, the date we first filed the registration statement to
which this prospectus relates, until we sell all of the securities:
o Our Annual Report on Form 10-K for the year ended December 31,
2002.
o Our Quarterly Reports on Form 10-Q for the quarters ended March 31
and June 30, 2003.
o Our Current Report on Form 8-K dated September 17, 2003.
o The description of our preferred stock purchase rights contained in
our registration statement on Form 8-A/A1 dated August 25, 1997.
o The description of our common stock contained in our registration
statement on Form 8-A dated July 25, 1997.
You may receive a copy of any of these filings, at no cost, by writing
or calling the Investor Relations Department, Gardner Denver, Inc., 1800
Gardner Expressway, Quincy, Illinois 62301, telephone 217-222-5400. You can
also find information about the Company at our Internet website at
http://www.gardnerdenver.com.
We have filed with the SEC a registration statement to register the
securities under the Securities Act of 1933. This prospectus omits certain
information contained in the registration statement, as permitted by SEC
rules. You may obtain copies of the registration statement, including
exhibits, as noted in the first paragraph above.
i
FORWARD-LOOKING STATEMENTS
Certain statements that we include in a prospectus supplement, as
well as certain information incorporated by reference which is referred to
under the heading "Where You Can Find More Information," constitute
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995 and are made in reliance upon the safe harbor of the
Private Securities Litigation Reform Act of 1995. As a general matter,
forward-looking statements are those focused upon anticipated events or
trends and expectations and beliefs relating to matters that are not
historical in nature and are subject to uncertainties. Our Quarterly Report
for the Quarter ended June 30, 2003, which is incorporated herein by
reference, describes certain factors that could cause actual results to
differ materially from those expressed or implied by forward-looking
statements.
ii
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INFORMATION ABOUT GARDNER DENVER
We are one of the leading manufacturers of stationary air compressors
and blowers for industrial applications and of pumps used in oil and natural
gas production, well-servicing and drilling and water jetting systems. In
2002, we had revenues of approximately $418 million, of which approximately
84% were derived from sales of compressed air products while approximately
16% were from sales of pump products.
Approximately 63% of our total revenues in 2002 were derived from sales
in the United States and approximately 37% were from sales to customers in
various countries outside the United States. Of the total non-U.S. sales,
56% were to Europe, 17% to Asia, 12% to Canada, 12% to Latin America and 3%
to other regions. Over the last eight years, we completed 15 acquisitions,
growing our revenues from approximately $176 million, at the time of our
spin-off from Cooper Industries, Inc., to approximately $418 million in
2002.
Through our Compressed Air Products segment, we design, manufacture,
market and service rotary screw, reciprocating, sliding vane and centrifugal
compressors, and positive displacement and centrifugal blowers. Stationary
air compressors are used in manufacturing, process applications and
materials handling, and to power air tools and equipment. Blowers are used
primarily in pneumatic conveying, wastewater aeration and engineered vacuum
systems.
Through our Pump Products segment we design, manufacture, market and
service a diverse group of pumps, water jetting systems and related
aftermarket parts used in oil and natural gas production, well servicing and
drilling and industrial cleaning and maintenance.
We have 19 manufacturing facilities that utilize advanced
manufacturing, quality assurance and testing equipment geared to specific
products being manufactured. Most of the facilities utilize computer aided
numerical control tools and manufacturing techniques that concentrate the
equipment necessary to produce similar products in one area of the plant
(cell manufacturing).
We sell our products through independent distributors and sales
representatives and directly to original equipment manufacturer's (OEM's),
engineering firms and end users. A direct sales force is used to service OEM
and engineering firm accounts because these typically require more technical
assistance, shipment scheduling and product service.
Our executive offices are located at 1800 Gardner Expressway, Quincy,
Illinois 62301 and our telephone number is 217-222-5400.
You can obtain additional information about us in the reports and other
documents incorporated by reference in this prospectus. See "Where You Can
Find More Information."
USE OF PROCEEDS
Except as we may indicate otherwise in the prospectus supplement which
accompanies this prospectus, we intend to use the proceeds of the securities
for acquisitions, capital expenditures, repayment of borrowings, working
capital and other general corporate purposes. Before we use the proceeds for
these purposes, we may invest them in short-term investments. If we decide
to use the proceeds from a particular offering of securities for a specific
purpose, we will describe that purpose in the related prospectus supplement.
1
RATIO OF EARNINGS TO FIXED CHARGES
The following table shows the ratio of our earnings to fixed charges
for the periods indicated. We have computed these ratios by dividing
earnings available for fixed charges (income before income taxes plus fixed
charges) by fixed charges (interest expense plus that portion of rental
expenses deemed to represent interest).
FOR THE NINE MONTHS FOR THE YEAR ENDED
ENDED ------------------------------------------------------
SEPTEMBER 30, 2003 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------
Ratio of earnings to fixed charges 5.8 4.9 5.5 4.5 5.3 11.5
DESCRIPTION OF DEBT SECURITIES
This section describes some of the general terms of the debt
securities. The prospectus supplement describes the particular terms of any
debt securities we are offering. The prospectus supplement also indicates
the extent, if any, to which these general provisions may not apply to the
debt securities being offered. The debt securities will be either senior
debt securities or senior subordinated debt securities. If you would like
more information on these provisions, you may review the indentures which
appear as exhibits to the registration statement we have filed with the SEC.
See "Where You Can Find More Information."
We will issue the senior debt securities and the senior subordinated
debt securities under two separate indentures between us and BNY Midwest
Trust Company, as trustee. We are summarizing certain important provisions
of the debt securities and these indentures. This is not a complete
description of the important terms. You should refer to the specific terms
of each indenture for a complete statement of the terms of the indentures
and the debt securities issuable thereunder. When we use capitalized terms
which we do not define here, those terms have the meanings given in the
indentures.
GENERAL
The indentures do not limit the amount of debt securities that we may
issue under the indentures, nor do they limit other debt that we may issue.
The debt securities will be our unsecured general obligations. The senior
debt securities will rank pari passu with all of our other unsecured and
unsubordinated obligations. The senior subordinated debt securities will be
unsecured and will be subordinate and junior in priority of payment to some
of our other indebtedness to the extent described in the related prospectus
supplement. None of our subsidiaries will have any obligation to guarantee
or otherwise pay amounts due under the securities. We may issue senior debt
securities and senior subordinated debt securities at various times in
different series, each of which may have different terms. If we so indicate
in the prospectus supplement for any series, we may treat a subsequent
offering of debt securities as a part of the same series as that series.
The prospectus supplement relating to the particular series of debt
securities we are offering includes the following information concerning
those debt securities:
o The title of the debt securities.
o The total principal amount of the series of debt securities, and
whether we may treat a subsequent offering of debt securities as a
part of the same series as that series.
o Whether the debt securities are senior debt securities or senior
subordinated debt securities and the terms of subordination, if
applicable.
o The date on which the principal and interest will be paid, any
rights we may have to extend the maturity of the debt securities
and any rights the holders may have to require payment of the debt
securities at any time.
2
o The interest rate on the debt securities. We may specify a fixed
rate or a variable rate, or a rate to be determined under
procedures we will describe in the prospectus supplement, and the
interest rate may be subject to adjustment.
o The date or dates from which interest will accrete or accrue, the
dates on which we will pay interest on the debt securities and the
regular record dates for determining the holders who are entitled
to receive the interest payments.
o Where payments on the debt securities will be made, if it is other
than the office mentioned under "Payments on Debt Securities;
Transfers" below.
o If applicable, the prices at which we may redeem all or a part of
the debt securities and the time periods during which we may make
the redemptions at our option or at your option. The redemptions
may be made under a sinking fund or otherwise.
o Any obligation we may have to redeem, purchase or repay any of the
debt securities under a sinking fund or otherwise or at the option
of the holder, and the prices, time periods and other terms which
would apply.
o The terms, if any, on which the debt securities may be convertible
into or exchangeable for common stock or other of our securities.
Such conversion may be mandatory, at the option of the holder, or
at our option, and the number any type of our securities to be
received by the holders on such conversion may be subject to
adjustment.
o Any additional or different events of default or covenants that
will apply to the debt securities.
o The amounts we would be required to pay if the maturity of the debt
securities is accelerated, if it is less than the principal amount.
o If we will make payments on the debt securities in any currency
other than U.S. dollars, the currencies in which we will make the
payments.
o If applicable, the terms under which we or a holder may elect that
payments on the debt securities be made in a currency other than
U.S. dollars.
o If amounts payable on the debt securities may be determined by a
currency or other index, information on how the payments will be
determined.
o The amount of discount or premium with which such debt securities
will be issued.
o Any other special terms that may apply to the debt securities.
PAYMENTS ON DEBT SECURITIES; TRANSFERS
We will make payments on the debt securities to the persons in whose
names the securities are registered at the close of business on the record
date for the interest payments. As explained under "Book-Entry Debt
Securities" below, the Depository Trust Company or its nominee will be the
initial registered holder unless the prospectus supplement provides
otherwise.
Unless we indicate otherwise in the prospectus supplement, we will make
payments on the debt securities at the trustee's office, which is now
located at 2 North LaSalle Street, Suite 1020, Chicago, Illinois. Transfers
of debt securities can be made at the same offices.
FORM AND DENOMINATIONS
Unless we otherwise indicate in the prospectus supplement:
o We will issue the debt securities of each series only in registered
form without coupons in denominations of $1,000 and any integral
multiple thereof.
o We will not charge any fee to register any transfer or exchange of
the debt securities, except for taxes or other governmental
charges, if any.
3
CERTAIN RESTRICTIONS
Creation of Secured Indebtedness
Under the senior indenture, we and our Restricted Subsidiaries (defined
below) may not create, assume, guarantee or permit to exist any indebtedness
for borrowed money which is secured by a pledge of, or a mortgage or lien
on, any Principal Plants (defined below) or on any of our Restricted
Subsidiaries' capital stock, unless we also provide equal and ratable
security for the senior debt securities. A "Restricted Subsidiary" is a
subsidiary which owns or operates a Principal Plant, unless it is
incorporated or has its principal place of business outside the United
States, and any other subsidiary which we elect to treat as a Restricted
Subsidiary. A "Principal Plant" is any of our production facilities, but
does not include a facility which our Board of Directors determines shall
not be treated as a Principal Plant, as long as all such plants which are
determined not to be Principal Plants, taken together, are not of material
importance to our and our subsidiaries total business. Our Board of
Directors may change any such designation of a facility as a Principal Plant
or as excluded from the category of Principal Plant at varying times,
subject to the limit described in the preceding sentence.
The restriction described in the preceding paragraph does not apply to:
o purchase money liens, including liens for indebtedness incurred in
connection with the acquisition or construction of a Principal
Plant (so long as we incur the indebtedness within 180 days after
the acquisition or completion of construction of such Principal
Plant),
o liens existing on property when we acquire it,
o liens on property of a Restricted Subsidiary when it becomes a
Restricted Subsidiary,
o liens to secure the cost of development or construction of
property, or improvements of property, and which are released or
satisfied within 180 days after completion of the development or
construction,
o liens in connection with the acquisition or construction of
Principal Plants or additions thereto financed by tax-exempt
securities,
o liens securing indebtedness to us or a wholly-owned Restricted
Subsidiary by a Restricted Subsidiary,
o liens existing at the date of the senior indenture,
o liens on property of a corporation existing at the time such
corporation is merged with or consolidated with us or a Restricted
Subsidiary, or at the time we or a Restricted Subsidiary acquires
all or substantially all of the properties of such corporation,
o liens in favor of the United States government or any U.S. state
government incurred in connection with financing the acquisition or
construction of properties pursuant to a statute or a contract with
any such governmental body, or
o extensions, renewals or replacements of the liens referred to
above.
There is an additional exception described below under "Basket Amount."
Sale-Leaseback Financings
Under the senior indenture, neither we nor any Restricted Subsidiary
may enter into any sale and leaseback transaction involving a Principal
Plant, except a sale by us to a Restricted Subsidiary or a sale by a
Restricted Subsidiary to us or another Restricted Subsidiary or a lease not
exceeding three years, by the end of which we intend to discontinue use of
the property, unless:
o the net proceeds of the sale are at least equal to the fair market
value of the property, and
4
o within 180 days of the transfer we repay Funded Debt (defined
below) and/or make expenditures for the expansion, construction or
acquisition of a Principal Plant at least equal to the net proceeds
of the sale.
There is an additional exception described below under "Basket
Amount."
Basket Amount
In addition to the exceptions described above under "Creation of
Secured Indebtedness" and "Sale-Leaseback Financings," the senior indenture
allows additional secured indebtedness and additional sale-leaseback
financings as long as the total of the additional indebtedness and the fair
market value of the property transferred in the additional sale-leaseback
financings when added to the permitted Funded Debt described below, does not
exceed 10% of our consolidated total assets.
Limitation on Funded Debt of Restricted Subsidiaries
Under the senior indenture, we may not permit any Restricted Subsidiary
to create, assume or incur any Funded Debt other than:
o Funded Debt secured by a mortgage, pledge or lien which is
permitted under the provisions described above under "Creation of
Secured Indebtedness,"
o Funded Debt owed to us or any wholly-owned Restricted Subsidiary,
o Funded Debt of a corporation existing at the time it becomes a
Restricted Subsidiary,
o Funded Debt created in connection with, or with a view to,
compliance with the requirements of any program, law, statute or
regulation of any federal, state or local governmental authority
and applicable to the Restricted Subsidiary and providing financial
or tax benefits to the Restricted Subsidiary which are not
available directly to us, or not available on as favorable terms,
o guarantees existing at the date of the senior indenture, and
o other Funded Debt which, when added to outstanding secured debt and
sale-leaseback financings permitted under the provision described
under "Basket Amount" above, does not exceed 10% of our
consolidated total assets.
"Funded Debt" means indebtedness for money borrowed and indebtedness
represented by notes, debentures and other similar evidences of
indebtedness, including purchase money indebtedness, having a maturity of
more than twelve months from the date of determination or having a maturity
of less than twelve months but by its terms being renewable or extendible
beyond twelve months at our option, subject only to conditions which we are
then capable of fulfilling, and guarantees of similar indebtedness of
others, except that Funded Debt does not include:
o Any indebtedness of a person held in treasury by that person,
o Any indebtedness with respect to which sufficient money has been
deposited or set aside in trust to pay the indebtedness, or
o Certain contingent obligations in respect of indebtedness of other
persons, such as keep-well, maintenance of working capital or
earnings or similar agreements.
Merger
We may not consolidate with or merge into any other corporation or
transfer or lease our properties and assets substantially as an entirety
unless certain conditions are met, including the assumption of the
securities by any successor corporation.
MODIFICATION OR AMENDMENT OF THE INDENTURE
We may modify and amend either indenture if the holders of a majority
in principal amount of the applicable outstanding debt securities give their
consent, except that no supplemental indenture may
5
reduce the principal amount of or interest or premium payable on any debt
security, change the maturity date or dates of principal, the interest
payment dates or other terms of payment, or reduce the percentage of holders
necessary to approve a modification or amendment of the indenture, without
the consent of each holder of such outstanding debt securities affected by
the supplemental indenture.
We and the Trustee may amend an indenture without the holders' consent
for certain specified purposes, including any change which is not otherwise
inconsistent with the indenture and which does not materially adversely
affect the holders' interests.
DEFEASANCE
The indentures include provisions allowing defeasance of the debt
securities of any series. In order to defease debt securities, we would
deposit with the trustee or another trustee money or securities which are
direct obligations of or guaranteed by the United States of America
sufficient to make all payments on those debt securities. If we make a
defeasance deposit with respect to your debt securities, we may elect
either:
o to be discharged from all our obligations on your debt securities,
except for our obligations to register transfers and exchanges, to
replace temporary or mutilated, destroyed, lost or stolen debt
securities, to maintain an office or agency in respect of the debt
securities and to hold monies for payment in trust; or
o to be released from the restrictions described above relating to
liens, sale-leaseback transactions, Funded Debt of Restricted
Subsidiaries and certain other restrictions and obligations
contained in the indentures (specifically not including, however,
our obligation to pay the principal of or interest on any debt
securities).
To establish the trust, we must deliver to the Trustee an opinion of
our counsel that the holders of the debt securities will not recognize gain
or loss for Federal income tax purposes as a result of the defeasance and
will be subject to Federal income tax on the same amount, in the same manner
and at the same times as would have been the case if the defeasance had not
occurred.
EVENTS OF DEFAULT, NOTICE AND WAIVER
An event of default in respect of any series of debt securities means:
o default for 30 days in any payment of interest;
o default in payment of principal or premium when due;
o default in payment of any sinking fund amount in accordance with
the terms of such debt security;
o default in performance of or breach of any covenant in the
indenture which applies to the series which continues for 60 days
after notice to us by the Trustee or by the holders of 25% in
principal amount of the outstanding debt securities of the affected
series;
o default in our payment of indebtedness which we have incurred or
guaranteed exceeding $30 million or acceleration of the maturity
such indebtedness exceeding $30 million;
o certain events of bankruptcy, insolvency and reorganization; and
o any other events which are designated as Events of Default in
respect of that series.
If an event of default occurs and is continuing (other than with
respect to certain events of bankruptcy, insolvency or similar Event of
Default) in respect of one or more series of debt securities, either the
Trustee or the holders of 25% in principal amount of the outstanding debt
securities of such series may declare the principal of and accrued interest,
if any, on all securities of that series to be due
6
and payable. If a bankruptcy, insolvency or similar Event of Default occurs
with respect to us, all outstanding debt securities will be due and payable
without notice or any other action on the part of the trustee or any holder.
Within 60 days after a default in respect of any series of debt
securities, the Trustee must give to the holders of the debt securities of
that series notice of all uncured and unwaived defaults by us known to it.
However, except in the case of default in payment, the Trustee may withhold
the notice if it in good faith determines that it is in the interest of the
holders. The term "default" means, for this purpose, the occurrence of any
event that, upon notice or lapse of time, would be an Event of Default.
Before the Trustee is required to exercise rights under the indentures
at the request of holders, it is entitled to be indemnified by the holders,
subject to its duty, during an Event of Default, to act with the required
standard of care.
Subject to the Trustee's duty during a default to act with the required
standard of care, the Trustee has the right to be indemnified by the holders
of debt securities issued under the indentures before proceeding to exercise
any right or power under the indenture at the request of the holders. The
holders of a majority in principal amount of the outstanding securities of
any series (voting as a single class) may direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred upon the Trustee in respect of the
securities of that series.
The holders of a majority in principal amount of the outstanding
securities of any series affected by a default (voting as a single class)
may, on behalf of the holders of all such securities, waive the default
except a default in payment of the principal of or premium, if any, or
interest on any security. The holders of a majority in principal amount of
outstanding securities of all series entitled to the benefits thereof
(voting as a single class) may waive compliance with certain covenants under
the indenture. We will furnish to the Trustee, annually, a statement as to
the fulfillment by us of our obligations under the indentures.
REGARDING THE TRUSTEE
BNY Midwest Trust Company is the Trustee under both of the indentures.
Its affiliate, the Bank of New York, is a party to our credit agreement
under which it has committed to lend us up to $18.75 million, and it may
provide other banking services to us. In addition, the Bank of New York is a
lender on a term loan of approximately $5.86 million to us pursuant to the
Amended and Restated Credit Agreement, dated as of March 6, 2002, among us,
Bank One, NA, U.S. Bank National Association, the Bank of New York and other
parties.
GOVERNING LAW
The indentures and the debt securities will be governed by and
construed in accordance with the internal laws of the State of New York.
BOOK-ENTRY DEBT SECURITIES
The prospectus supplement will indicate whether we are issuing the
related debt securities as book-entry securities. Book-entry securities of a
series will be issued in the form of one or more global notes that will be
deposited with the Depository Trust Company, New York, New York, and will
evidence all of the debt securities of that series. This means that we will
not issue certificates to each holder. We will issue one or more global
securities to DTC, which will keep a computerized record of its participants
(for example, your broker) whose clients have purchased the debt securities.
The participant will then keep a record of its clients who own the debt
securities. Unless it is exchanged in whole or in part for a security
evidenced by individual certificates, a global security may not be
transferred, except that DTC, its nominees and their successors may transfer
a global security as a whole to one another. Beneficial interests in global
securities will be shown on, and transfers of beneficial interests in global
notes will be made only through, records maintained by DTC and its
participants. Each person owning a beneficial
7
interest in a global security must rely on the procedures of DTC and, if the
person is not a participant, on the procedures of the participant through
which the person owns its interest to exercise any rights of a holder of
debt securities under the applicable Indenture.
We will make payments on each series of book-entry debt securities to
DTC or its nominee, as the sole registered owner and holder of the global
security. Neither we nor the Trustee nor any of their agents will be
responsible or liable for any aspect of DTC's records relating to or
payments made on account of beneficial ownership interests in a global
security or for maintaining, supervising or reviewing any of DTC's records
relating to the beneficial ownership interests.
DTC has informed us that, when it receives any payment on a global
security, it will immediately, on its book-entry registration and transfer
system, credit the accounts of participants with payments in amounts
proportionate to their beneficial interests in the global security as shown
on DTC's records. Payments by participants to you, as an owner of a
beneficial interest in the global security, will be governed by standing
instructions and customary practices (as is now the case with securities
held for customer accounts registered in "street name") and will be the sole
responsibility of the participants.
A global security representing a series will be exchanged for
certificated debt securities of that series if (a) DTC notifies us that it
is unwilling or unable to continue as Depositary or if DTC ceases to be a
clearing agency registered under the Securities Exchange Act of 1934 and we
don't appoint a successor within 90 days or (b) we decide that the global
security shall be exchangeable. If that occurs, we will issue debt
securities of that series in certificated form in exchange for the global
security. An owner of a beneficial interest in the global security then will
be entitled to physical delivery of a certificate for debt securities of the
series equal in principal amount to that beneficial interest and to have
those debt securities registered in its name. We would issue the
certificates for the debt securities in denominations of $1,000 or any
larger amount that is an integral multiple thereof, and we would issue them
in registered form only, without coupons.
DTC has advised us that it is a limited-purpose trust company organized
under the New York Banking Law, a "banking organization" within the meaning
of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered under the Securities Exchange Act
of 1934 Act. DTC was created to hold the securities of its participants and
to facilitate the clearance and settlement of securities transactions among
its participants through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of
securities certificates. DTC's participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations, some of whom (and/or their representatives) own DTC. Access
to DTC's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
The rules applicable to DTC and its participants are on file with the SEC.
No fees or costs of DTC will be charged to you.
8
DESCRIPTION OF OUR CAPITAL STOCK
Our certificate of incorporation authorizes the issuance of up to
50,000,000 shares of common stock, par value $.01 per share, and 10,000,000
shares of preferred stock, par value $.0l per share, of which we have
designated 500,000 shares as Series A Junior Participating Preferred Stock
in connection with our shareholder rights plan discussed below. See "Rights
Agreement - Series A Junior Participating Preferred Stock." As of September
19, 2003, there were 16,090,289 shares of common stock outstanding, and no
shares of preferred stock were outstanding.
The following summary is not complete and is qualified by reference to
the applicable provisions of Delaware law and our certificate of
incorporation, by-laws and the rights agreement dated as of January 18,
1995, between Gardner Denver, Inc., formerly known as Gardner Denver
Machinery Inc., and National City Bank, successor to First Chicago Trust
Company of New York, as rights agent. This is not a complete description of
the important terms of Delaware law, our certificate of incorporation,
by-laws or the rights agreement. If you would like more information on the
provisions of our certificate of incorporation, by-laws or the rights
agreement, you may review our certificate of incorporation, our by-laws and
our rights agreement, each of which is incorporated by reference as an
exhibit to the registration statement we have filed with the SEC. See "Where
You Can Find More Information."
COMMON STOCK
The holders of our common stock are entitled to one vote for each share
they own on all matters voted on by our stockholders. The common stock does
not have cumulative voting rights. Subject to any preferential or other
rights of any outstanding series of preferred stock that may be designated
by our Board of Directors, the holders of common stock will be entitled to
such dividends as may be declared by our Board, and upon liquidation will be
entitled to receive their pro rata portion of our assets available for
distribution to the holders of common stock. All of the outstanding shares
of common stock are fully paid and nonassessable. Holders of common stock
have no preemptive rights to purchase or subscribe for any stock or other
securities and there are no conversion rights or redemption or sinking fund
provisions with respect to our common stock. The transfer agent and
registrar for our common stock is National City Bank.
PREFERRED STOCK
Our Board of Directors has the authority to issue the preferred stock
in one or more series and to fix certain of the rights, preferences,
privileges and restrictions applicable to such series, including the annual
dividend rate, the time of payment for dividends, whether such dividends
shall be cumulative or non-cumulative, and the date or dates from which any
cumulative dividends will begin to accrue, redemption terms (including
sinking fund provisions), redemption price or prices, liquidation
preferences, the extent of the voting powers, if any, and conversion rights.
In connection with the adoption of a shareholder rights plan, we have
designated 500,000 shares of preferred stock as Series A Junior
Participating Preferred Stock. See "Rights Agreement - Series A Junior
Participating Preferred Stock." The prospectus supplement will describe the
specific terms of any preferred stock we are offering.
9
CERTAIN PROVISIONS OF DELAWARE LAW, OUR CERTIFICATE OF INCORPORATION AND BY-LAWS
General.
Delaware law, our certificate of incorporation and our by-laws contain
provisions that could make it more difficult for someone to acquire control
of us by means of a tender offer, open market purchases, a proxy contest or
otherwise.
Classified Board of Directors; Removal of Directors.
Our by-laws provide that we shall have at least three and not more than
nine directors, with the exact numbers of directors to be determined from
time to time by a majority of our entire Board of Directors. We now have
seven directors. The directors are divided into three classes, as nearly
equal in number as is possible, serving staggered three-year terms. With a
classified Board of Directors, at least two annual meetings of stockholders,
instead of one, is generally required to effect a change in a majority of
the Board's members. As a result, the classification of the Board may
discourage proxy contests for the election of directors, unsolicited tender
offers or purchases of a substantial block of the common stock because it
could prevent an acquiror from obtaining control of the Board of Directors
in a relatively short period of time. In addition, pursuant to Delaware law
and our certificate of incorporation, a director or the entire board of
directors may be removed only for cause and only by the affirmative vote of
holders of at least a majority of the outstanding shares of common stock
entitled to vote. As a result, a classified Board of Directors delays
stockholders who disagree with the policies of the Board of Directors from
replacing directors, unless they can demonstrate that the directors should
be removed for cause and obtain the requisite vote.
Filling Vacancies on the Board.
Our by-laws provide that, subject to the rights of holders of any
shares of preferred stock, vacancies on the Board of Directors may be filled
only by a majority of the Board of Directors then in office, even if less
than a quorum, or by the sole remaining director. Accordingly, the Board
could temporarily prevent any stockholder from obtaining majority
representation on the Board of Directors by enlarging the Board of Directors
and filling the new directorships with its own nominees.
No Stockholder Action by Written Consent; Special Meetings.
Stockholder action can be taken only at an annual or special meeting of
stockholders. Stockholder action by written consent in lieu of a meeting is
prohibited. The special meetings of stockholders may be called only by the
President or Secretary upon the request of a majority of the entire Board of
Directors or upon the request, in writing, of stockholders owning a majority
of the issued capital stock entitled to vote at such meeting. Business
conducted at any special meeting is limited to the purposes specified in the
written notice of the meeting. The provision prohibiting stockholder action
by written consent may delay consideration of a stockholder proposal until
the next annual meeting (unless a special meeting is called). These
provisions prevent the holders of a majority of the voting power of the
outstanding shares of stock entitled to vote generally in the election of
directors from using the written consent procedure to take stockholder
action and from taking action by consent without giving all the stockholders
entitled to vote on a proposed action the opportunity to participate.
Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals.
Our by-laws establish an advance notice procedure with regard to the
nomination, other than by or at the direction of the Board of Directors, of
candidates for directors and with regard to business to be brought before an
annual or special meeting of stockholders. The nomination procedure provides
that, subject to any rights of holders of preferred stock, only persons who
are nominated by or at the direction of the Board of Directors or by a
stockholder who has given timely written notice to the Secretary prior to
the meeting at which directors are to be elected will be eligible for
election as directors. The business procedure provides that at an annual or
special meeting only such business may be conducted as has been
10
specified in the notice of meeting, brought before the meeting by or at the
direction of the Board of Directors or by a stockholder who has given timely
written notice to our Secretary of such stockholder's intention to bring
such business before the meeting. If the officer presiding at a meeting
determines that a person was not nominated in accordance with the nomination
procedure, the nomination shall be disregarded. If the presiding officer
determines that business was not brought before the meeting in accordance
with the business procedure, the business will not be transacted. Although
the by-laws do not give the Board any power to approve or disapprove
stockholder nominations for the election of directors or proposals for
action, they may have the effect of precluding a contest for the election of
directors or the consideration of stockholder proposals if the proper
procedures are not followed, and of discouraging or deterring a third party
from conducting a solicitation of proxies to elect its own slate of
directors or to approve its proposal without regard to whether consideration
of such nominees or proposals might be harmful or beneficial to us and our
stockholders.
Delaware Anti-Takeover Law.
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. Section 203, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any "business combination"
with any "interested stockholder" for a period of three years following the
date that such stockholder became an interested stockholder unless:
o prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
o upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding those shares owned by persons who are directors and also
officers, and employee stock plans in which employee participants
do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange
offer; or
o on or subsequent to such date, the business combination is approved
by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the
affirmative vote of at least two-thirds of the outstanding voting
stock that is not owned by the interested stockholder.
In general, Section 203 defines "business combination" to include
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the
assets or stock of the corporation or its majority-owned subsidiaries and
transactions which increase an interested stockholder's percentage ownership
of stock. In general, Section 203 defines an "interested stockholder" as any
entity or person beneficially owning 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with or
controlling or controlled by such entity or person.
Amendment of Certain Certificate of Incorporation and By-Law Provisions.
Under Delaware law, stockholders have the right to adopt, amend or
repeal the by-laws of a corporation. In addition, if the certificate of
incorporation so provides, the by-laws may be amended by the Board of
Directors. Our certificate of incorporation provides that our by-laws may be
amended by the affirmative vote of the Board of Directors.
The by-laws provide that the stockholders may amend the by-laws by an
affirmative vote of the majority entitled to vote, provided, however, the
affirmative vote of the holders of at least 80% of our outstanding shares
entitled to vote is required to amend provisions relating to special
meetings, number, election and term of the Board of Directors, and amending
the by-laws. Provisions set forth in our
11
certificate of incorporation relating to the removal of directors and the
prohibition of stockholder action without a meeting may be amended only by
the affirmative vote of the holders of at least 80% of our outstanding
shares.
RIGHTS AGREEMENT
Under our shareholder rights plan, we authorized the issuance of one
preferred stock purchase right for each outstanding share of common stock.
The rights agreement between the Company and National City Bank, successor
to First Chicago Trust Company of New York, as rights agent, contains the
terms of the shareholder rights plan. The summary description of the rights
agreement and the Series A Junior Preferred Stock set forth below does not
purport to be complete and is qualified in its entirety by reference to the
rights agreement and the certificate of designation for the Series A Junior
Preferred Stock, which are incorporated by reference into this registration
statement.
Exercisability of Rights.
Under the Rights Agreement, each share of our common stock carries with
it an associated right. When exercisable, each right entitles the registered
holder to purchase from us one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.0l, at a purchase price of $60
per one-one hundredth of a share, subject to certain adjustments. For a
description of the terms of the Series A Junior Participating Preferred
Stock. See "- Series A Junior Participating Preferred Stock."
The rights will not become exercisable until the earlier of: (i) 10
business days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire beneficial ownership of 20% or more of the
outstanding shares of common stock (the "Stock Acquisition Date"), or (ii)
10 business days (or such later date as the Board of Directors shall
determine) following the commencement of a tender or exchange offer that
would result in a person or group beneficially owning 20% or more of such
outstanding shares of common stock (the "Tender Offer Date") (the earlier of
the dates described in (i) and (ii) is referred to as a "Distribution
Date"). The rights will expire at the close of business on January 31, 2005,
unless earlier redeemed by us as described below.
Until a right is exercised, the holder of the right will have no rights
as a stockholder, including the right to vote or to receive dividends.
"Flip In" Feature.
In the event (i) we are the surviving corporation in a merger or other
business combination with an Acquiring Person (or any associate or affiliate
thereof) and its common stock remains outstanding and unchanged, (ii) any
person becomes the beneficial owner of 20% or more of the then outstanding
shares of our common stock (except pursuant to (A) certain consolidations or
mergers involving us or sales or transfers of the combined assets or earning
power of us and our subsidiaries or (B) an offer for all of the outstanding
shares of common stock at a price and upon terms and conditions determined
by a majority of the Continuing Directors (as defined below) to be in our
and our stockholders best interest), or (iii) there occurs a
reclassification of securities, a recapitalization or any of certain
business combinations or other transactions (other than certain
consolidations and mergers involving us and sales or transfers of the
combined assets or earning power of us and our subsidiaries) involving us or
any of our subsidiaries which has the effect of increasing by more than 1%
the proportionate share of any class of our outstanding equity securities or
any of our subsidiaries beneficially owned by an Acquiring Person (or any
associate or affiliate there), each holder of a right (other than an
Acquiring Person, certain related parties and transferees) will thereafter
have the right to receive, upon exercise, common stock (or, in certain
circumstances, cash, property or other securities) having a value equal to
two times the exercise price of the right. Following the occurrence of any
of the events set forth in this paragraph, all rights that are, or (under
certain circumstances specified in the rights agreement) were, beneficially
owned by any Acquiring Person will be null and void. For purposes of the
rights agreement, the term "Continuing
12
Director" means any member of our Board of Directors who was a member of our
Board of Directors prior to the date of the rights agreement and any person
who is subsequently elected to our Board of Directors if such person is
recommended or approved by a majority of the Continuing Directors, but shall
not include an Acquiring Person, or an affiliate or associate of an
Acquiring Person, or any representative of the foregoing entities.
"Flip Over" Feature
If at any time following the Stock Acquisition Date:
o We are acquired in a merger or business combination transaction in
which we are not the surviving corporation;
o We are the surviving corporation in a consolidation or merger
pursuant to which all or part of the outstanding shares of common
stock are changed into or exchanged for stock or other securities
of any other person or cash or any other property; or
o more than 50% of the combined assets or earning power of our and
our subsidiaries is sold or transferred (in each case other than
certain consolidations with, mergers with and into, or sales of
assets or earning power by or to our subsidiaries as specified in
the rights agreement),
each holder of a right shall thereafter have the right to receive, upon
exercise thereof, common stock of the acquiring company having a value equal
to two times the exercise price of the right.
In order to prevent dilution, the purchase price payable, the number
and kind of shares covered by each right and the number of rights
outstanding are subject to adjustment from time to time in accordance with
the terms of the rights agreement.
Redemption of Rights
Generally, at any time until 10 business days following the Stock
Acquisition Date, we may redeem the rights in whole, but not in part, at a
price of $.0l per right (payable in cash, shares of common stock or other
consideration deemed appropriate by the Board of Directors). Immediately
upon the action of the Board of Directors ordering redemption of the rights,
the rights will terminate and the only right of the holders of rights will
be to receive the $.0l redemption price.
Series A Junior Participating Preferred Stock
Each share of Series A Junior Participating Preferred Stock purchased
upon exercise of the rights will be entitled to a minimum preferential
quarterly dividend payment equal to the greater of (i) $2.50 per share, and
(ii) 100 times the dividend, if any, declared per share of common stock. In
the event of liquidation, the holders of the Series A Junior Participating
Preferred Stock will be entitled to a minimum preferential liquidation
payment equal to 100 times the par value per share plus an amount equal to
accrued and unpaid dividends and distributions to the date of such payment.
Each share of Series A Junior Participating Preferred Stock will have 100
votes and, except as otherwise provided in the certificate of incorporation
or applicable law, will vote together with the common stock. In the event of
any merger, consolidation or other transaction in which shares of common
stock are exchanged, each share of Series A Junior Participating Preferred
Stock will be entitled to receive 100 times the amount per share of common
stock received in such merger, consolidation or other transaction. These
rights are protected by customary anti-dilution provisions. The shares of
Series A Junior Participating Preferred Stock will, if issued, be junior to
any other series of preferred stock authorized and issued by us, unless the
terms of the series provide otherwise. Because of the nature of the Series A
Junior Participating Preferred Stock's dividend, liquidation and voting
rights, the value of one one-hundredth of a share of Series A Junior
Participating Preferred Stock purchasable upon the exercise of each right
should approximate the value of one share of common stock.
13
INDEMNIFICATION AGREEMENTS AND INSURANCE
We maintain insurance on behalf of any person who is or was our
director, officer, employee or agent, or is or was our director or officer
serving at our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against certain claims asserted against him or her and
liabilities incurred by him or her in any such capacity, or arising out of
his or her status as such, whether or not we would have the power or the
obligation to indemnify him against such liability under the provisions of
our certificate of incorporation and by-laws.
We have entered into indemnification agreements with each of our
executive officers and directors. The indemnification agreements require us
to indemnify the officers and directors to the fullest extent permitted by
law and to advance to the executive officers and directors all related
expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. We must also indemnify and advance all
expenses incurred by executive officers and directors seeking to enforce
their rights under the indemnification agreements, and cover executive
officers and directors under our directors' and officers' liability
insurance. Although the form of indemnification agreement offers
substantially the same scope of coverage afforded by provisions in our
certificate of incorporation and by-laws, it provides greater assurance to
directors and officers that indemnification will be available, because, as a
contract, it cannot be modified unilaterally in the future by the Board of
Directors or by the stockholders to eliminate the rights it provides. Such
unilateral action is possible with respect to the relevant provisions of the
by-laws, at least as to prospective elimination of such rights.
DESCRIPTION OF WARRANTS AND WARRANT UNITS
We may issue warrants, including warrants to purchase debt securities,
common stock or preferred stock or any combination of the foregoing.
Warrants may be issued independently or as part of a unit with any other
securities and may be attached to or separate from the underlying
securities. The warrants will be issued under warrant agreements to be
entered into between us and a bank or trust company, as warrant agent, as
detailed in the prospectus supplement relating to warrants being offered.
A prospectus supplement relating to any warrants being offered will
include specific terms relating to the offering, including a description of
any other securities sold together with the warrants. Such terms will
include:
o the title of the warrants;
o the aggregate number of the warrants;
o the price or prices at which the warrants will be issued;
o the currencies in which the price or prices of the warrants may be
payable;
o the designation, amount, and terms of the debt securities, common
stock or preferred stock purchasable upon exercise of the warrants
and procedures by which those numbers may be adjusted;
o the designation and terms of the other offered securities, if any,
with which the warrants are issued and the number of the warrants
issued with each security;
o if applicable, the date on and after which the warrants and the
offered securities purchasable upon exercise of the warrants will
be separately transferable;
o the price or prices at which the offered securities purchasable
upon exercise of the warrants may be purchased;
o the date on which the right to exercise the warrants shall commence
and the date on which the right shall expire;
o the minimum or maximum amount of the warrants that may be exercised
at any one time;
14
o any terms relating to the modification of the warrants, including
adjustments in the exercise price;
o information with respect to book-entry procedures, if any;
o a discussion of any material federal income tax considerations; and
o any other material terms of the warrants, including terms,
procedures, and limitations relating to the transferability,
exchange, exercise or redemption of the warrants.
The applicable prospectus supplement will describe the specific terms
of any warrant units.
The descriptions of the warrant agreements in this prospectus and in
any prospectus supplement are summaries of the applicable provisions of the
applicable agreements. These descriptions do not restate those agreements in
their entirety and do not contain all of the information that you may find
useful. We urge you to read the applicable agreements because they, and not
the summaries, define your rights as holders of the warrants or any warrant
units. For more information, please review the form of the relevant
agreements, which will be filed with the SEC promptly after the offering of
the warrants or warrant units and will be available as described in the
heading "Where You Can Find More Information" above.
PLAN OF DISTRIBUTION
We may sell the securities to or through one or more underwriters or
dealers, and also may sell the securities directly to other purchasers or
through agents. These firms may also act as our agents in the sale of the
securities. Only underwriters named in the prospectus supplement will be
considered as underwriters of the securities offered by the prospectus
supplement.
We may distribute the securities at different times in one or more
transactions. We may sell the securities at fixed prices, which may change,
at market prices prevailing at the time of sale, at prices related to the
prevailing market prices or at negotiated prices.
In connection with the sale of the securities, underwriters may receive
compensation from us or from purchasers of the securities in the form of
discounts, concessions or commissions. Underwriters, dealers and agents that
participate in the distribution of the securities may be deemed to be
underwriters. Discounts or commissions they receive and any profit on their
resale of the securities may be considered underwriting discounts and
commissions under the Securities Act of 1933. We will identify any
underwriter or agent, and we will describe any compensation, in the
prospectus supplement.
We may agree to indemnify underwriters, dealers and agents who
participate in the distribution of the securities against certain
liabilities, including liabilities under the Securities Act of 1933.
We may authorize dealers or other persons who act as our agents to
solicit offers by certain institutions to purchase the securities from us
under contracts which provide for payment and delivery on a future date. We
may enter into these contracts with commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and others. If we enter into these agreements concerning any
series of securities, we will indicate that in the prospectus supplement.
In connection with an offering of the securities, underwriters may
engage in transactions that stabilize, maintain or otherwise affect the
price of the securities. Specifically, underwriters may over-allot in
connection with the offering, creating a syndicate short position in the
securities for their own account. In addition, underwriters may bid for, and
purchase, securities in the open market to cover short positions or to
stabilize the price of the securities. Finally, underwriters may reclaim
selling concessions allowed for distributing the securities in the offering
if the underwriters repurchase previously distributed securities in
transactions to cover short positions, in stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the market
price of the securities above independent market levels. Underwriters are
not required to engage in any of these activities and may end any of these
activities at any time.
15
Each series of securities (other than our common stock) offered will be
a new issue of securities and will have no established trading market. The
securities (other than our common stock) may or may not be listed on a
national securities exchange. No assurance can be given as to the liquidity
of or the existence of trading markets for any securities offered (other
than with respect to our common stock).
LEGAL OPINION
Bryan Cave LLP, St. Louis, Missouri, as our counsel, will opine upon
the legality of the securities.
EXPERTS
The consolidated financial statements and schedule of Gardner Denver,
Inc. as of December 31, 2002 and for the year ended December 31, 2002, have
been incorporated by reference herein in reliance upon the report of KPMG
LLP, independent accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing. The audit
report covering the December 31, 2002 consolidated financial statements
refers to the adoption of Statement of Accounting Financial Standards No.
142, "Goodwill and Other Intangible Assets," in the year ending December 31,
2002.
Arthur Andersen LLP, our former independent auditors, have audited the
consolidated financial statements and schedule of Gardner Denver, Inc. as of
December 31, 2001 and 2000, and for the years ended December 31, 2001 and
2000, as set forth in their report. We have incorporated by reference our
consolidated financial statements and schedule in this prospectus and
elsewhere in the registration statement from our Annual Report on Form 10-K
for the fiscal year ended December 31, 2002 in reliance on Arthur Andersen
LLP's report.
On August 31, 2002, Arthur Andersen ceased practicing before the SEC.
We have been unable to obtain, after reasonable efforts, the written consent
of Arthur Andersen LLP to our naming it as an expert and as having audited
such consolidated financial statements, and including its audit report in
this prospectus. The cessation of Arthur Andersen's practice and the absence
of such written consent from Arthur Andersen may limit your ability to
recover damages from Arthur Andersen LLP under Section 11 of the Securities
Act for any untrue statements of a material fact contained in the financial
statements audited by Arthur Andersen LLP or any omissions to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading.
On June 26, 2002, our Board of Directors, based on a recommendation of
the Audit and Finance Committee, dismissed Arthur Andersen LLP as our
independent public accountants and approved the selection of KPMG LLP to
serve as our independent public accountants for the year ending December 31,
2002.
Arthur Andersen LLP's reports on our financial statements for the past
two years did not contain an adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting
principles.
In connection with the audits for the fiscal years ended December 31,
2001 and 2000 and through June 26, 2002, there were no disagreements with
Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen LLP,
would have caused Arthur Andersen LLP to make reference thereto in its
report on our financial statements for such years. Also, during those years,
there have been no "reportable events," as such term is used in Item
304(a)(1)(v) of Regulation S-K.
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=============================================================================
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus
supplement and accompanying prospectus. You must not rely on any
unauthorized information or representations. This prospectus supplement and
accompanying prospectus is an offer to sell only the shares offered hereby,
but only under circumstances and in jurisdictions where it is lawful to do
so. The information contained in this prospectus supplement and accompanying
prospectus is current only as of its date.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Forward-Looking Statements.......................S-ii
Market and Industry Data .......................S-iii
Prospectus Supplement Summary.....................S-1
Risk Factors.....................................S-10
Use of Proceeds..................................S-15
Price Range of Common Stock......................S-16
Dividend Policy..................................S-16
Capitalization...................................S-17
Unaudited Pro Forma Consolidated Financial
Statements......................................S-18
Selected Consolidated Financial Information......S-25
Management's Discussion and Analysis of
Financial Condition and Results of Operations...S-27
Our Industry.....................................S-39
Our Business.....................................S-40
Management.......................................S-46
Description of Capital Stock.....................S-48
Underwriting.....................................S-49
Legal Matters....................................S-52
Experts..........................................S-52
Index to Consolidated Financial Statements........F-1
PROSPECTUS
Where You Can Find More Information.................i
Forward-Looking Statements.........................ii
Information about Gardner Denver....................1
Use of Proceeds.....................................1
Ratio of Earnings to Fixed Charges..................2
Description of Debt Securities......................2
Description of Our Capital Stock....................9
Description of Warrants and Warrant Units..........14
Plan of Distribution...............................15
Legal Opinion......................................16
Experts............................................16
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3,000,000 SHARES
[GARDNER DENVER LOGO]
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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MARCH 23, 2004
BEAR, STEARNS & CO. INC.
ROBERT W. BAIRD & CO.
MCDONALD INVESTMENTS INC.
MORGAN JOSEPH & CO. INC.
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APPENDIX
Page S-1 and S-6 contain pie charts. The information contained in the
graph is presented in a tabular format immediately following the graph.