MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations;2002 vs.2001 The following discussion contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding forward-looking statements, see "Forward-looking Statements" in the Company’s Form 10-K. The Company experienced a net loss for 2002 of $4,706,000, or $.24 per diluted share, a decrease of $6,698,000, compared to net income of $1,992,000, or $.10 per diluted share in 2001. The weighted average number of common shares outstanding at December 31, 2002 was 19,658,032 compared to 19,753,226 at December 31, 2001. Net sales for 2002 were $480,590,000, an increase of $24,751,000, or 5.4%, compared to net sales of $455,839,000 in 2001. Domestic sales increased from $364,428,000 in 2001 to $401,284,000 in 2002, an increase of $36,856,000, or 10.1%. Domestic sales are generated primarily from equipment purchases made by customers for use in con- struction for privately funded infrastructure development and public sector spending on infrastructure develop- ment. Public sector spending at the federal, state and local levels is driven in large part by federal spending under the six-year federal-aid highway program, the Transportation Equity Act for the 21st Century (”TEA-21”) enacted in June 1998. TEA-21 authorized the appropriation of $217 billion in federal aid for road, highway and bridge construction, repair and improvement and other federal highway and transit projects for federal fiscal years October 1, 1998 through September 30, 2003. During 2002, domestic sales continued to be impacted by a general economic slowdown throughout the year. Sales increased in the asphalt group and the aggre- gate group. In the asphalt group, parts sales, international sales, used equipment and Systems jobs sales increased. Systems sales were the primary reason for the sales increase. International sales decreased $12,105,000, or 13.2% in 2002, to $79,306,000, compared to 2001 international sales of $91,411,000. Sales declined by $10,740,000 in Central America. This decrease affected all seg- ments except asphalt. The second largest decrease was in Europe with a decline in all segments totaling $6,830,000. In Central America, this change is primarily the result of one large Systems job for approximately $8,769,000 in 2001. In Europe, the primary declines are in systems, mobile paving equipment and under- ground drilling equipment. Parts sales increased from $93,493,000 in 2001 to $99,791,000 in 2002, an increase of $6,298,000, or 6.7%. All segments focused heavily on parts sales and achieved an increase. Due to the sluggish economy, cus- tomer equipment is being repaired instead of replaced. Gross profit decreased to $83,931,000, or 17.5% of net sales in 2002, compared to $90,924,000, or 20.0% of net sales in 2001. A lack of utilization of capacity, decreased sales volumes (except aggregate and asphalt), competitive price pressure, cost overruns on Systems jobs that were completed in 2002 and write down of used equipment resulted in a reduction in gross profits in 2002 compared to 2001 for all segments except aggregate. In 2002, selling, general and administrative expenses increased to $72,407,000, or 15.1% of net sales, from $71,691,000, or 15.7% of net sales in 2001. Increased bank fees related to the Company’s credit facility totaled $750,000, while approximately $963,000 of the increase in 2002 was due to the Con-Expo exhibition, a trade show, which is held every three years. Reduced legal and other expenses in selling, general and administra- tive expenses partially offset these items. Research and development expenses increased by $183,000, or 2.5%, from $7,448,000 in 2001 to $7,631,000 in 2002. In spite of the slow economic conditions, the Company continued to enhance their current products with innovative features that benefit the customer. Product improvement and development continued in an efficient manner. Interest expense for 2002 increased to $10,474,000 from $9,367,000, or 2.2% of net sales, from 2.1% of net sales for 2001. The increase in dollars related primarily to interest rate increases required by lenders as a result of covenant violations during this year. For 2002, the Company had a net income tax benefit of $2,511,000, or 35.2% of the pre-tax loss, compared to an income tax expense of $1,481,000, or 41.2% of the 2001 pre-tax income. The permanent non-tax deductible items decreased the taxable loss in 2002 and increased the taxable loss in 2001. The backlog at December 31, 2002 was $60,698,000, compared to $70,061,000 at December 31, 2001 (restated to reflect the addition of the Case New Holland trencher line). The backlog for asphalt group orders, aggregate orders and underground group orders decreased while backlog for mobile equipment increased. The Company is unable to determine whether this backlog effect was experienced by the industry as a whole.