From the 1997 Annual Report

Dear Shareholders, Customers, and Employees:

I am pleased to report that Finning International Inc. produced record results in 1997 for the fourth consecutive year. Revenue increased 24% to $2.3 billion and net income improved 18% to $104 million. The Company’s return on shareholders’ equity was 16.2% in 1997—the third year in a row the Company earned a return above its 15% target.

This strong performance could not have been achieved without the commitment of our Finning employees around the world. By applying their expertise to individual customer needs they are consistently providing the best solutions—made possible by the fact that finning sells and services the best equipment in its class, namely Caterpillar. Reliability, productivity and quality of design, manufacture and support are the key ingredients in Caterpillar’s record of success.

Finning’s record performance in 1997 can also be credited to our corporate strategy. We remained committed to our core business while stepping further out on the international stage. Earlier this decade, the Company embarked on a plan that would see Finning increase its diversification outside of Western Canada. In 1993, we acquired the Caterpillar dealership in Chile at a time when that economy was beginning to accelerate. On October 1, 1997, we completed the acquisition of H. Leverton Limited, the other Cat dealership in Britain, making our Finning (UK) Ltd. operation the sole British Cat dealership. Management is currently integrating the best practices of those two companies to create a stronger and more efficient dealership. The equipment industry in Britain remains highly competitive but we are expecting steady improvement in Finning (UK)’s market share and operating margins over the next three to four years.

Because of our diversification, Finning now generates more than half of its revenue from activities outside of Canada. We serve an expanded customer base spread over three continents and operating in unique industries and separate economies. This diversification reduces our exposure to market cyclicality in any one sector of an economy, allowing our Company to focus on building long-term value. For example, even though the coastal forestry industry in British Columbia experienced weakness in 1997, double digit growth in Alberta and Chile allowed us to achieve record results.

To further our international diversification, we are also committing more people and more resources to our Universal Machinery Services division ("UMS"), previously called International Sales. UMS sells used equipment and used parts to end-users and other dealers around the world. In the last five years, the division as tripled its sales to $100 million in 1997 and is now expanding its marketing efforts in the areas of pipeline equipment and cranes.

While diversification has been a key to Finning’s successful growth, so too has been the forward looking and expansive product introduction program of Caterpillar. Since 1992, Caterpillar has introduced more than 244 new or improved products and this past year Cat completed a series of acquisitions and joint ventures to further expand its product line. In the agriculture sector, Cat has joined hands with German-based Claas KgaA to introduce a new line of Lexion combine harvesters that will be available in North America in 1999. Caterpillar also acquired Skogsjan AB and Perkins Engines (a division of LucasVarity pls) to expand their forest and power systems lines, respectively. In the second quarter of 1998, Cat will launch its new series of compact construction equipment at an industry trade show in Germany. The commitment to product leadership by Caterpillar provides Finning with expanded opportunities to sell and service new and existing equipment in all dealer territories.

While Finning has grown in size significantly and enhanced its strategic position over the past decade, it is clear that we cannot stand still in a changing business environment. We must be ever vigilant to the opportunities and threats that are sure to appear in tomorrow’s markets. competition remains tough in each of our dealer territories and we are making the necessary internal changes to stay one step ahead. We recognize that our success in the past has been due to our ability to control costs and reposition our resources to best serve our customers. And we are continuing this approach. In our British operations, substantial relocation and restructuring efforts are underway as Finning (UK) and H. Leverton are being combined to maximize productivity. And in Canada, we have made the decision to relocate 220 positions from our Canadian head office on Great Northern Way in Vancouver to our renovated three-storey office building in Edmonton, Alberta. Edmonton, centrally located to our oil, gas, mining and agricultural customers, is also the gateway to the Northwest Territories which offers a promising future in the mining sector, especially diamonds. Finning (Canada) must be close to its customers in Alberta and the Northwest Territories where expansion opportunities in all key sectors will be the biggest source of our Canadian growth in the next decade. To provide state-of-the-art service support for customers in the Lower Mainland, a new $15 million branch facility is under construction in Surrey, B.C.

In our continuing efforts to improve efficiency and customer service, Finning made a significant corporate-wide commitment to upgrading its information systems in 1997. Both Finning (Canada) and Finning (UK) successfully launched version 2.0 of the Dealer Business System (DBS) in the third quarter of 1997. DBS is customized software that improves support services for Finning’s customers, and links the Company’s database with Finning’s operating units, the Caterpillar network and other Cat dealers worldwide. Finning Chile will be upgraded from an earlier version of DBS in the fourth quarter of 1998.

Finning also continues to benefit from the business acumen and informed governance of its Board of Directors. In this regard, the Board appointed two additional members in 1997—Jim Dinning of Calgary, Alberta, and Timothy Howden of Marlow, England. We look forward to the valued contribution of these two members.

Looking forward, Finning’s performance will continue to improve as each of the operating units capitalizes on its unrealized potential. Now that Finning (UK) is the national Caterpillar dealer in Britain, there is an opportunity to begin growing our market share in that territory and improving cost competitiveness over time. In Chile, increasing activity in construction and infrastructure projects will offset the decline in the growth rate of mining expected in that territory in 1998. And in Canada, continued activity in the petroleum industry, expansion of the oil sands, and new diamond mining projects in the Northwest Territories provide on-going growth opportunities.

By focusing on core strengths which enhance our "customer solutions" to business, the Company will continue to build long-term value. Through the dedication and commitment of all our employees, we will continue to be the leaders in the markets that we serve.

Sincerely,

(signed)

James F. Shepard
Chairman and Chief Executive Officer