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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: October 31, 1999 Commission file number: 0-25066
OWOSSO CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2756709
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
The Triad Building, 2200 Renaissance Boulevard, Suite 150,
King of Prussia, PA 19406
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (610) 275-4500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On January 21, 2000, the aggregate market value of the Registrant's Common
Stock, $.01 par value, held by nonaffiliates of the Registrant was approximately
$7,900,000.
On January 21, 2000, 5,829,642 shares of the Registrant's Common Stock, $.01 par
value, were outstanding.
Documents Incorporated By Reference
Portions of the Registrant's Proxy Statement to be filed with the Commission in
connection with the Annual Meeting of Shareholders scheduled to be held on March
15, 2000 are incorporated by reference into Part III of this Form 10-K.
Part I
Item 1. Business
Owosso Corporation (the "Company"), incorporated in Pennsylvania in
March 1994, designs, manufactures and distributes engineered component products,
primarily motors and heat exchange coils. The Company has four operating
segments: Motors, Coils, Trailers and Agricultural Equipment, and Other. The
Motors segment manufactures fractional and integral horsepower motors and
include Stature Electric, Inc. ("Stature"), Motor Products - Owosso Corporation
("Motor Products"), and Motor Products - Ohio ("MP-Ohio"). Significant markets
for the Company's motors include commercial products and equipment, healthcare
and recreation. The products are sold throughout North America and in Europe,
primarily to original equipment manufacturers who use them in their end
products.
The Coils segment manufactures heat exchange coils and consists of
Astro Air Coils, Inc. ("Astro Air"), acquired in April 1998, Snowmax, Inc.
("Snowmax"), and Astro Air UK, Ltd. ("Astro UK"). Astro UK, which began
production of heat exchange coils at a new facility located in Birmingham,
England in March 1999, is a joint venture with the Company's largest customer,
Bergstrom, Inc. The joint venture, which is owned 90% by the Company, supplies
heat exchange coils primarily to Bergstrom's facility in Birmingham. Significant
markets for the Company's coils include non-automotive transportation,
refrigeration and commercial and residential HVAC. The products are sold
throughout North America and in Europe, primarily to original equipment
manufacturers who use them in their end products.
The Company also manufactures all-aluminum trailers, primarily horse
and livestock trailers, through its Sooner Trailer Manufacturing Company
("Sooner Trailer"). Sooner Trailer sells its products through a dealer network
located throughout the United States and Canada and is included in the Company's
Trailers and Agricultural Equipment segment. Also included in this segment,
through the dates of their sales, are the agricultural equipment companies,
Great Bend Manufacturing Company ("Great Bend"), DewEze Manufacturing, Inc.
("DewEze"), and Parker Industries ("Parker"). During 1998, the Company initiated
the disposition of its agricultural equipment businesses in order to focus its
resources on expanding the Company's motor and coil companies. The sales of
Great Bend and DewEze were completed in 1998, while the sale of Parker was
completed in March 1999.
The Company's Other segment includes Dura-Bond Bearing Company
("Dura-Bond"), and M.H. Rhodes, Inc. ("Rhodes"). Dura-Bond manufactures
replacement camshaft bearings, valve seats and shims for the automotive
after-market, selling its products to engine rebuilders, primarily through
distributors. Rhodes, which was acquired in June 1998, manufactures timers and
subfractional horsepower motors for use in commercial applications. The Company
consolidated the operations of its former Cramer subsidiary, previously located
in Old Saybrook, Connecticut, into the Rhodes manufacturing facility. Rhodes
sells its products primarily to original equipment manufacturers who use them in
their end products.
The Company obtains raw materials, component parts and supplies from a
variety of sources, generally from more than one supplier. In certain cases,
where it has an impact on improving quality control or cost control, the Company
obtains raw materials and component parts from sole source suppliers. The
Company anticipates it will have no significant problems with respect to sources
or availability of the raw materials or component parts essential to the conduct
of its business.
No material portion of the Company's business in any segment is
seasonal.
2
The Company's Motors, Trailers and Agricultural Equipment, and Other
segments are not dependent upon a single customer. Sales from the Coils segment
are concentrated among a small number of customers. In 1999, sales to the three
largest customers represented approximately 55% of total Coils sales.
The Company's backlog of unfilled orders as of December 26, 1999 and
December 22, 1998 was as follows:
December 26, December 22,
1999 1998
------------ -------------
(In thousands)
Motors $ 21,165 $ 22,399
Coils 8,708 8,607
Trailers and Agricultural Equipment 2,856 4,024
Other 3,380 3,561
-------- --------
Total $ 36,109 $ 38,591
-------- --------
The Company expects to fill substantially all of the December 26, 1999
backlog by the end of fiscal 2000.
The Company's businesses are highly competitive. Competition is based
primarily on design and application engineering capabilities and product
reliability and quality, as well as price.
The Company has approximately 1,750 employees, of which approximately
125 employees at its Owosso, Michigan facility are represented by a labor union,
the International Union, United Automobile, Aerospace and Agricultural Implement
Workers of America, Local 743, under a four-year collective bargaining agreement
which expires in 2001. In addition, approximately 90 employees at the Company's
Avon, Connecticut facility are represented by a labor union, the International
Association of Machinists, under a two-year collective bargaining agreement
which expires in September 2001. The Company believes that its relationship with
its employees is good.
The Company is subject to federal, state and local environmental
regulations with respect to its operations. The Company believes that it is
operating in substantial compliance with applicable environmental regulations.
Manufacturing and other operations at the Company's various facilities may
result and may have resulted in the discharge and release of hazardous
substances and wastes from time to time. The Company routinely responds to such
incidents as deemed appropriate pursuant to applicable federal, state and local
environmental regulations.
The Company's manufacturing operations involve the storage, use,
handling and disposal of various hazardous substances and wastes. Under various
federal, state and local environmental laws, ordinances and regulations, a
current or previous owner of real property may be liable for the costs of
removal or remediation of certain hazardous or toxic substances on, in, under or
discharged from such property. The operation and subsequent removal of
underground storage tanks, which are or were located on several of the Company's
properties, are also regulated by federal, state and local environmental laws,
ordinances and regulations. The Company is also subject to the federal
Occupational Safety and Health Act and similar state statutes. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Environmental Matters."
The Company currently maintains product liability insurance coverage of
$1.0 million per occurrence and $2.0 million in aggregate annual coverage, and
an umbrella policy for an additional $20.0 million of blanket liability
protection per occurrence. There can be no assurance that such insurance will be
sufficient to cover potential product liability claims or that the Company will
be able to maintain such insurance or obtain product liability insurance in the
future at a reasonable cost.
3
Executive Officers of the Company
The executive officers of the Company are:
Name Age Position
George B. Lemmon, Jr.................38 President, Chief Executive
Officer, and Director
Harry Holiday, III...................43 Executive Vice President
and Chief Operating Officer
John M. Morrash......................45 Executive Vice President -
Finance, Chief
Financial Officer,
Treasurer and Secretary
Brian D. Tidwell.....................38 Vice President of Operations
Steve R. Shubert.....................37 Chief Information Officer
George B. Lemmon, Jr. became President of the Company in May 1996, and
has served as Chief Executive Officer of the Company since August 1995 and as a
director of the Company since March 1994.
Harry Holiday, III joined the Company as its Executive Vice President
and Chief Operating Officer in November 1996. Prior to joining the Company, Mr.
Holiday served as Vice President of Operations at two subsidiaries of Emerson
Electric Co. where he had worked since 1992.
John M. Morrash joined the Company as its Executive Vice President -
Finance, Chief Financial Officer, Treasurer and Secretary in June 1999. Prior to
joining the Company, Mr. Morrash served as Vice President, Treasurer and
Assistant Secretary of SPS Technologies, Inc., a position he held since July
1995.
Brian D. Tidwell became President of the Company's Coils segment in
November 1999. He continues to serve as the Company's Vice President of
Operations, a position he has held since June 1996. Mr. Tidwell has worked for
the Company since 1987 in various managerial and technical capacities.
Steve R. Shubert joined the Company as its Chief Information Officer in
December 1998. Prior to joining the Company, Mr. Shubert served as the Chief
Information Officer of American Sunroof Company, where he had worked since 1996.
From 1994 until 1996, he served as the Director of Information Systems at the
E.L. Weigand division of Emerson Electric Co.
4
Item 2. Properties
The following table sets forth information relating to the Company's
manufacturing facilities. Unless otherwise indicated, the Company owns these
manufacturing facilities.
Total Square Manufacturing
Business Segment Location Footage Square Footage
- ------------------------------------- ------------------------------------------- ---------------- -------------------
Motors: Watertown, New York (1) 112,000 107,800
Owosso, Michigan 86,900 67,400
Barberton, Ohio (2) 29,700 27,400
Coils: Jacksonville, Texas (3) 133,000 123,000
Kilgore, Texas (4) 90,000 86,600
Birmingham, England (5) 15,000 14,500
Trailers and Agricultural
Equipment: Duncan, Oklahoma (6) 122,000 112,300
Other: Avon, Connecticut 92,000 82,000
Carson City, Nevada (7) 75,100 59,600
- -------------
(1) This facility is subject to a mortgage securing a $5.5 million industrial
revenue bond financing.
(2) The lease for this facility expires in 2000 and provides for annual rental
payments of approximately $83,000.
(3) The lease for this facility expires in 2001 and provides for annual rental
payments of approximately $250,000.
(4) This facility is subject to a $323,000 mortgage.
(5) The lease for this facility expires in 2002 and provides for annual rental
payments of approximately $110,000.
(6) This facility is subject to a $719,000 mortgage.
(7) This facility is subject to a mortgage securing a $5.0 million industrial
revenue bond financing.
The Company leases its principal offices, located in King of Prussia,
Pennsylvania, which consist of approximately 12,700 square feet of office space.
The lease, which expires in September 2006, requires annual rental payments of
approximately $305,000 plus taxes and certain other charges. The Company
believes that its machinery, plants and offices are in satisfactory operating
condition and are adequate for the Company's current needs.
Item 3. Legal Proceedings
As discussed in Item 7 under "Environmental Matters," the Company is a
party to various legal proceedings concerning environmental regulations. In
addition, the Company is a party to various lawsuits arising in the ordinary
course of business, none of which is expected to be material with respect to the
business assets or continuing operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is listed on the Nasdaq National Market
under the symbol "OWOS". The following table sets forth, for the fiscal quarters
indicated, the high and low sales prices per share for the Company's common
stock, as reported on the Nasdaq National Market.
High Low
---- ---
Fiscal year ended October 31, 1999:
First Quarter $ 5 5/8 $ 4
Second Quarter $ 5 5/8 $ 3 9/16
Third Quarter $ 6 $ 4 5/8
Fourth Quarter $ 6 $ 3 5/8
Fiscal year ended October 25, 1998:
First Quarter $ 7 15/16 $ 7 1/2
Second Quarter $ 8 3/16 $ 7 1/4
Third Quarter $ 7 9/16 $ 5 3/4
Fourth Quarter $ 6 15/16 $ 4 7/8
As of January 10, 1999, there were approximately 120 holders of record
of the Company's common stock and an estimated number of beneficial owners of
the common stock of approximately 700.
In June 1999, the Company changed its quarterly dividend rate to $0.06
per share, from the $0.09 per share amount previously paid. The Company expects
to pay its quarterly dividend at the new rate for the foreseeable future.
However, there can be no assurances that future dividends will be paid. The
payment and rate of future dividends are subject to the discretion of the Board
of Directors and will depend upon the Company's earnings, financial condition,
capital requirements, and other factors.
6
Item 6. Selected Financial Data
The information set forth below, which has been derived from the
audited consolidated financial statements of the Company, should be read in
conjunction with the Consolidated Financial Statements and notes thereto and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Year Ended
---------------------------------------------------------------
Oct. 31, Oct. 25, Oct. 26, Oct. 27, Oct. 29,
1999(1) 1998(2) 1997 1996 1995(3)
---------- -------- --------- -------- --------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Net sales $170,121 $159,968 $143,061 $128,216 $108,001
Cost of products sold 138,131 125,419 109,867 98,948 77,629
------- ------- ------- ------ ------
Gross profit 31,990 34,549 33,194 29,268 30,372
Selling, general and administrative expenses 24,436 26,464 24,599 23,266 17,603
Restructuring charge -- 909 -- -- --
--------- ------- ------- -------- --------
Income from operations 7,554 7,176 8,595 6,002 12,769
Interest expense 5,060 4,912 4,143 4,081 2,876
Gain on sale of business -- 2,775 -- -- --
Write-down of net assets held for sale -- (1,635) -- -- --
Other income 493 98 199 202 390
--- -- --- --- ---
Income before income taxes 2,987 3,502 4,651 2,123 10,283
Income tax expense 1,210 2,800 2,100 1,275 3,900
----- ----- ----- ----- -----
Net income 1,777 702 2,551 848 6,383
Dividends and accretion on preferred stock (1,095) (1,070) (1,047) (1,025) --
------- ------- ------- ------- ------
Net income (loss) available to common
stockholders $682 ($368) $1,504 ($177) $6,383
==== ====== ====== ====== ======
Basic and diluted income (loss) per
common share $0.12 ($0.06) $0.26 ($0.03) $ 1.09
Weighted average number of common
shares outstanding (basic) 5,826 5,813 5,809 5,839 5,865
7
Year Ended
------------------------------------------------------------
Oct. 31, Oct. 25, Oct. 26, Oct. 27, Oct. 29,
1999(1) 1998(2) 1997 1996 1995(3)
-------- ---------- --------- -------- ----------
(in thousands)
OTHER DATA:
Capital expenditures $5,677 $9,573 $5,335 $4,346 $4,437
Depreciation and amortization 7,766 7,115 6,200 6,298 4,213
EBITDA (4) 15,320 14,291 14,795 12,300 16,982
Oct. 31, Oct. 25, Oct. 26, Oct. 27, Oct. 29,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital $16,911 $19,651 $24,611 $20,385 $20,564
Total assets 116,690 125,206 111,681 107,895 108,719
Total short-term and long-term obligations 55,480 68,524 54,848 53,814 52,799
Stockholders' equity 33,984 34,643 36,730 37,020 39,570
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes the results of operations of Parker through its disposition on
March 5, 1999. Fiscal 1999 included 53 weeks, while the other years
presented included 52 weeks.
(2) Includes the results of operations of Great Bend and DewEze through
their dates of disposition, April 26, 1998 and July 24, 1998,
respectively. Also includes the results of operations of Astro Air and
M.H. Rhodes from their dates of acquisition, April 26, 1998 and June
30, 1998, respectively.
(3) Includes the results of operations of Great Bend from May 1, 1995, the
date of its acquisition. Excludes the results of operations of Stature,
which was acquired as of October 29, 1995.
(4) EBITDA represents income before income taxes, interest expense, other
income and expense and depreciation and amortization expenses. EBITDA
has been presented because the Company believes it is commonly used in
this or a similar format by investors to analyze and compare operating
performance and to determine a company's ability to service and/or
incur debt. However, EBITDA should not be considered in isolation or as
a substitute for net income, cash flow from operations or any other
measure of income or cash flow that is prepared in accordance with
generally accepted accounting principles, or as a measure of a
company's profitability or liquidity. EBITDA, as presented, may not be
comparable to other similarly titled measures of other companies. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements,
including the Consolidated Statements of Cash Flows, and the related
notes thereto included elsewhere herein.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Owosso Corporation (the "Company") designs, manufactures and distributes
engineered component products, primarily motors and heat exchange coils. The
Company has four operating segments: Motors, Coils, Trailers and Agricultural
Equipment, and Other. The Motors segment manufactures fractional and integral
horsepower motors and includes Stature Electric, Inc. ("Stature"), Motor
Products - Owosso Corporation ("Motor Products"), and Motor Products - Ohio
("MP-Ohio"). Significant markets for the Company's motors include commercial
products and equipment, healthcare and recreation. Products of the Motors
segment are sold throughout North America and in Europe, primarily to original
equipment manufacturers which use them in their end products.
The Coils segment manufactures heat exchange coils and includes Astro Air Coils,
Inc. ("Astro Air"), which was acquired in April 1998, Snowmax, Inc. ("Snowmax"),
and Astro Air UK, Limited ("Astro UK"). Astro UK, which began production of heat
exchange coils at a new 15,000 square foot facility located in Birmingham,
England in March 1999, is a joint venture with the Company's largest customer,
Bergstrom, Inc. The joint venture, which is owned 90% by the Company, supplies
heat exchange coils primarily to Bergstrom's facility in Birmingham. Significant
markets for the Company's coils include non-automotive transportation,
refrigeration and commercial and residential HVAC. The products are sold
throughout North America and in Europe, primarily to original equipment
manufacturers who use them in their end products.
The Company also manufactures all-aluminum trailers, primarily horse and
livestock trailers, through its Sooner Trailer Manufacturing Company ("Sooner
Trailer"). Sooner Trailer sells its products through a dealer network located
throughout the United States and Canada and is included in the Company's
Trailers and Agricultural Equipment segment. Also included in this segment,
through the dates of their sales, are Great Bend Manufacturing Company ("Great
Bend"), DewEze Manufacturing, Inc. ("DewEze") and Parker Industries ("Parker")
(collectively the "Agricultural Equipment Companies").
The Company's Other segment includes Dura-Bond Bearing Company ("Dura-Bond") and
M.H. Rhodes, Inc. ("Rhodes"). Dura-Bond manufactures replacement camshaft
bearings, valve seats and shims for the automotive after-market. Rhodes, which
was acquired in June 1998, manufactures timers and subfractional horsepower
motors for use in commercial applications. The Company consolidated the
operations of its former Cramer subsidiary, previously located in Old Saybrook,
Connecticut, into the Rhodes manufacturing facility. In connection with the
consolidation, the Company recorded, in fiscal 1998, a $909,000 restructuring
charge, consisting principally of lease termination costs and employee severance
and termination benefits, and incurred an additional $929,000 in other
merger-related expenses.
During 1998, the Company initiated the disposition of its Agricultural Equipment
Companies including Great Bend, DewEze and Parker in order to focus its
resources on expanding the Company's motor and coil companies. The Company
completed the sale of Great Bend to Allied Products Corporation, effective April
26, 1998. The Company completed the sale of DewEze to Harper Industries, Inc., a
company formed by the president of the subsidiary, on July 24, 1998.
9
The Company completed the sale of its remaining agricultural equipment company,
Parker, on March 5, 1999 to Top Air Manufacturing, Inc., of Cedar Falls, Iowa.
Proceeds from the sale included cash of $3.7 million, a non-interest bearing
note of $3.3 million, and the assumption of liabilities of $476,000. In
addition, the local development authority in Iowa acquired certain Parker fixed
assets for $750,000. In connection with the terms of the sale, the Company
recorded, in the fourth quarter of 1998, a pre-tax charge of $1.6 million to
adjust the carrying value of Parker's assets to their fair market value. No
additional pre-tax gain or loss was recorded upon completion of the sale.
However, the sale did result in a tax benefit of approximately $535,000,
recorded in 1999.
Results of Operations
The Company's fiscal year includes 52 or 53 weeks, ending on the last Sunday in
October. Fiscal year 1999 consisted of 53 weeks, while fiscal years 1998 and
1997 consisted of 52 weeks. The following table sets forth for the periods
indicated the percentage relationship that certain items in the Company's
Consolidated Statements of Operations bear to net sales.
1999 1998 1997
Net sales: 100.0% 100.0% 100.0%
Cost of products sold 81.2% 78.4% 76.8%
----- ----- -----
Gross profit 18.8% 21.6% 23.2%
Expenses:
Selling, general and administrative 14.4% 16.5% 17.2%
Restructuring charge 0.0% 0.6% 0.0%
----- ----- -----
Income from operations 4.4% 4.5% 6.0%
Interest expense 3.0% 3.1% 2.9%
Gain on sale of business 0.0% 1.7% 0.0%
Write-down of net assets held for sale 0.0% -1.0% 0.0%
Other income 0.3% 0.1% 0.2%
----- ----- -----
Income before income taxes 1.7% 2.2% 3.3%
Income tax expense 0.7% 1.8% 1.5%
----- ----- -----
Net income 1.0% 0.4% 1.8%
Dividends and accretion on preferred stock 0.6% 0.6% 0.7%
----- ----- -----
Net income (loss) available for common stockholders 0.4% -0.2% 1.1%
===== ===== =====
Selected financial results for the Company by business unit and by segment are
set forth below:
Segment and Business Unit Operating Results (in thousands)
1999 1998 1997
Net Sales:
Motors $ 63,941 $ 54,188 $ 46,865
Coils (1) 46,634 30,555 15,515
Trailers and Agricultural Equipment (2) 40,277 58,958 64,111
Other (3) 19,269 16,267 16,570
-------- -------- --------
Total Net Sales $170,121 $159,968 $143,061
======== ======== ========
Income (loss) from operations:
Motors $ 8,353 $ 7,384 $ 6,187
Coils (1) 3,114 3,571 1,558
Trailers and Agricultural Equipment (2) 1,289 3,071 4,505
Other (3) 1,410 (58) 1,180
Corporate Expenses (4) (6,612) (6,792) (4,835)
-------- -------- --------
Total Income from Operations $ 7,554 $ 7,176 $ 8,595
======== ======== ========
(1) Includes the results of Astro Air since its acquisition in April 1998.
(2) Includes, through the dates of sale, the results of Great Bend (sold April
1998), DewEze (sold July 1998), and Parker (sold March 1999).
(3) Includes the results of Rhodes from its acquisition in June 1998.
(4) Includes unallocated corporate expenses, primarily executive, information
technology, and other administrative expenses; also reflects a
restructuring charge of $909,000 in 1998.
10
Year ended October 31, 1999 compared to year ended October 25, 1998
Net sales. Net sales for 1999 increased 6.3%, to $170.1 million, as compared to
net sales of $160.0 million in 1998. These results include the effects of
disposing of the Agricultural Equipment Companies, and the acquisition of Astro
Air. Sales attributable to the Agricultural Equipment Companies were $1.0
million in 1999, as compared to $24.8 million in 1998. Sales attributable to
Astro Air included in 1999 results were $28.9 million as compared to $13.4
million in 1998. Exclusive of the effects of the acquisition of Astro Air and
the disposition of the Agricultural Equipment Companies, net sales increased
15.1% over the prior year.
Net sales from Motors increased 18.0% to $63.9 million in 1999, from $54.2
million in 1998, as a result of increased sales to existing customers and the
addition of new customers, particularly in the healthcare and recreation
markets.
Net sales from Coils increased $16.1 million, to $46.6 million in 1999 from
$30.6 million in 1998. This increase reflects a $15.5 million increase in sales
attributable to Astro Air.
Net sales from the Trailers and Agricultural Equipment segment were $40.3
million in 1999, as compared to $59.0 million in 1998. This decrease reflects
the sale of the Agricultural Equipment Companies. Sales at Sooner Trailer, the
only remaining business in this segment, increased 15.0%, or $5.1 million, to
$39.3 million as a result of higher unit volume.
Net sales from the Company's Other segment were $19.3 million in 1999, as
compared to $16.3 million in 1998. This increase was a result of the acquisition
of Rhodes in June 1998.
Gross profit. For 1999, gross profit was $32.0 million, or 18.8% of net sales,
as compared to $34.5 million, or 21.6% of net sales in the prior year. The
decrease in gross profit reflects the disposition of the Agricultural Equipment
Companies, partially offset by the inclusion of Astro Air for a full year.
Gross profit from Motors increased 10.0%, to $14.6 million, or 22.8% of net
sales, as compared to $13.2 million, or 24.4% of net sales in 1998. Although
gross profit increased over the prior year as a result of increased sales
volume, margins declined as a result of price pressures and changes in product
mix.
Gross profit from Coils was $5.5 million in 1999, or 11.8% of net sales, as
compared to $5.2 million, or 17.0% of net sales in 1998. The increase in gross
profit was attributable to the inclusion of Astro Air for a full year, partially
offset by decreased gross profit at Snowmax as a result of operating
inefficiencies and increased warranty costs. Gross profit at the Coils segment
was also adversely effected by the start-up of Astro UK in March 1999.
In the Trailers and Agricultural Equipment segment, gross profit was $6.8
million, or 16.8% of net sales, as compared to $12.1 million, or 20.6% of net
sales, in the prior year. This decrease reflects the sale of the Agricultural
Equipment Companies. Gross profit at Sooner Trailer increased to $6.7 million,
or 17.2% of net sales in 1999, from $6.1 million, or 17.8% of net sales in 1998,
as a result of increased sales volume and changes in product mix.
Gross profit from the Company's Other segment was $5.2 million in 1999, as
compared to $4.0 million in 1998. This increase was a result of the acquisition
of Rhodes in June 1998.
11
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $24.4 million, or 14.4% of net sales, as
compared to $26.5 million, or 16.5% of net sales in 1998. This decrease reflects
the disposition of the Agricultural Equipment Companies, partially offset by the
inclusion of Astro Air for a full year.
Selling, general and administrative expenses for Motors were $6.2 million, or
9.7% of net sales, as compared to $5.8 million, or 10.8% of net sales in 1998.
The increase in expense was primarily a result of increased sales and marketing
expenses.
Selling, general and administrative expenses for Coils were $2.4 million, or
5.1% of net sales, as compared to $1.6 million, or 5.4% of net sales in 1998.
The increase in expense was primarily attributable to the inclusion of Astro Air
for a full year.
In the Trailers and Agricultural Equipment segment, selling, general and
administrative expenses were $5.5 million, or 13.6% of net sales, as compared to
$9.1 million, or 15.4% of net sales, in the prior year. This decrease reflects
the sale of the Agricultural Equipment Companies.
Selling, general and administrative expenses at the Company's Other segment were
$3.7 million in 1999, as compared to $4.0 million in 1998. In the prior year,
selling, general and administrative expenses included $602,000 of expenses
related to the merger of the Company's former Cramer subsidiary into Rhodes.
Unallocated corporate expenses included in selling, general and administrative
expenses were $6.6 million, as compared to $5.9 million in 1998. This increase
includes higher medical and workers' compensation costs of approximately
$400,000, as well as, $200,000 recorded in connection with the Company's
environmental investigation of the site on which its Cramer facility was
previously located and the conduct thereon of any remedial measures that may be
required.
Income from operations. For 1999, income from operations was $7.6 million, or
4.4% of net sales, as compared to $7.2 million, or 4.5% of net sales, in 1998.
Income from operations in the prior year included a restructuring charge of
$909,000 and other merger-related expenses of $929,000, incurred in connection
with the merger of the Company's former Cramer subsidiary into Rhodes.
Income from operations for the Motors segment increased to $8.4 million, or
13.1% of net sales, in 1999, from $7.4 million, or 13.6% of net sales, in the
prior year. These results reflect increased sales volume partially offset by
decreased margins caused by price pressures and changes in product mix.
Income from operations for the Coils segment was $3.1 million, or 6.7% of net
sales, in 1999, as compared to $3.6 million, or 11.7% of net sales, in the prior
year. These results reflect the inclusion of Astro Air for a full year, offset
by decreased gross profit at Snowmax as a result of operating inefficiencies and
increased warranty costs. Income from operations at the Coils segment was also
adversely effected by the start-up of Astro UK, which generated a loss from
operations of $417,000.
The Trailers and Agricultural Equipment segment had income from operations of
$1.3 million in 1999, as compared to $3.1 million in 1998. This decrease
reflects the dispositions of the Agricultural Equipment Companies. Income from
operations for Sooner Trailer increased to $1.9 million, or 4.8% of net sales,
in 1999, from $1.4 million, or 4.1% of net sales, in 1998, primarily as a result
of increased sales volume.
12
Income from operations for the Company's Other segment was $1.4 million in 1999,
as compared to a loss of $58,000 in 1998. The prior year results included
$929,000 of merger-related costs from Cramer.
Interest expense. For 1999, interest expense was $5.1 million, as compared to
$4.9 million in 1998. This increase was primarily the result of increased
borrowings under the Company's revolving credit agreement partially offset by
decreased average interest rates.
Income tax expense. The Company's effective income tax rate was 40.5% for 1999,
as compared to an effective rate of 80.0% in the prior year period. The
effective tax rate for 1999 was favorably impacted by a deferred tax benefit
realized upon the sale of Parker. The 1998 effective tax rate was unusually high
as a result of differences between the book and tax basis of the assets of Great
Bend at the time of their sale and by a higher proportion of non-deductible
expenses, primarily non-cash amortization expenses related to acquisitions, as
compared to pretax income.
Net income (loss) available for common stockholders. Net income available for
common stockholders was $682,000, or $.12 per share, for 1999, as compared to a
net loss for common stockholders of $368,000, or $.06 per share, in the prior
year. Income available for common stockholders is calculated by subtracting
dividends on preferred stock of $750,000 for both 1999 and 1998, and by
deducting the non-cash accretion in book value of preferred stock of $345,000
and $320,000 for 1999 and 1998, respectively.
Year ended October 25, 1998 compared to year ended October 26, 1997
Net sales. Net sales for 1998 increased 11.8%, to $160.0 million, as compared to
net sales of $143.1 million in 1997. These results include both the effects of
disposing of Great Bend and DewEze, and acquiring Astro Air. Sales attributable
to Great Bend were $7.3 million in 1998 and $13.7 million in 1997. Sales
attributable to DewEze were $5.8 million in 1998 and $7.4 million in 1997. Sales
attributable to Astro Air included in 1998 results were $13.4 million. Exclusive
of the effects of Great Bend, DewEze, and Astro Air, sales increased 9.5% as
compared to the prior year.
Net sales from Motors increased 15.6% to $54.2 million, from $46.9 million in
1997, as a result of increased sales volume to existing customers and the
addition of new customers.
Net sales from Coils increased $15.0 million, to $30.6 million in 1998 from
$15.5 million in 1997. This increase reflects $13.4 million in sales
attributable to Astro Air, which was acquired at the end of the second quarter
of 1998.
Net sales from the Trailers and Agricultural Equipment segment were $59.0
million in 1998, as compared to $64.1 million in 1997. This decrease reflects
the sale of Great Bend in April 1998 and DewEze in July 1998. Sales at Sooner
Trailer, the only remaining business in this segment, increased 12.7%, or $3.8
million, to $34.1 million as a result of increased volume.
Net sales from the Company's Other segment were $16.3 million in 1998, as
compared to $16.6 million in 1997.
Gross profit. For 1998, gross profit increased 4.1%, to $34.5 million, or 21.6%
of net sales, as compared to $33.2 million, or 23.2% of net sales, in 1997.
Gross profit from Motors increased 16.8%, to $13.2 million, or 24.4% of net
sales, as compared to $11.3 million, or 24.2% of net sales in 1997. The increase
in gross profit was primarily a result of increased sales volume.
13
Gross profit from Coils was $5.2 million in 1998, or 17.0% of net sales, as
compared to $2.8 million, or 18.1% of net sales in the prior year. The increase
in gross profit was primarily attributable to the inclusion of Astro Air, as
well as increased gross profit at Snowmax as a result of increased sales,
favorable changes in product mix and lower raw material costs.
In the Trailers and Agricultural Equipment segment, gross profit was $12.1
million, or 20.6% of net sales, as compared to $14.4 million, or 22.5% of net
sales, in the prior year. This decrease reflects the sale of Great Bend and
DewEze and lower gross profit at Parker as a result of decreased sales. Gross
profit at Sooner Trailer increased to $6.1 million, or 17.8% of net sales in
1998, from $5.3 million, or 17.3% of net sales in 1997, primarily as a result of
favorable changes in product mix.
Gross profit from the Company's Other segment was $4.0 million in 1998, as
compared to $4.6 million in 1997. This decrease was primarily a result of
merger-related costs at Cramer.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $26.5 million, or 16.5% of net sales, in
1998, as compared to $24.6 million, or 17.2% of net sales, in the prior year.
Selling, general and administrative expenses for Motors were $5.8 million, or
10.8% of net sales, as compared to $5.1 million, or 11.0% of net sales in 1997.
The increase was primarily a result of increased sales and administrative costs
and increased engineering costs in response to increased sales.
Selling, general and administrative expenses for Coils were $1.6 million, or
5.4% of net sales, as compared to $1.3 million, or 8.1% of net sales in 1997.
The increase was primarily attributable to the inclusion of Astro Air.
In the Trailers and Agricultural Equipment segment, selling, general and
administrative expenses were $9.1 million, or 15.4% of net sales, as compared to
$9.9 million, or 15.5% of net sales, in the prior year. This decrease reflects
the sale of Great Bend and DewEze, partially offset by an increase in sales
personnel and increased advertising and promotional costs at Sooner Trailer.
Selling, general and administrative expenses at the Company's Other segment were
$4.0 million in 1998, as compared to $3.4 million in 1997. In 1998, selling,
general and administrative expenses included $602,000 of expenses related to the
merger of Cramer and consisted primarily of training costs, consulting costs for
enhancements to management information systems, temporary help, and the cost of
moving Cramer's facility.
For 1998, unallocated corporate expenses included in selling, general and
administrative expenses were $5.9 million, or 3.7% of net sales, as compared to
$4.8 million, or 3.4% of net sales in 1997. Corporate expenses increased
primarily as a result of higher personnel and related costs and increased
consulting and legal and professional expenses.
Restructuring charge. In connection with the merger of the Company's Cramer
subsidiary into Rhodes and the consolidation of Cramer's manufacturing into
Rhodes' manufacturing facility, the Company recorded a restructuring charge of
$909,000 in the third quarter of 1998. The restructuring charge included
$583,000 for the termination of the lease on Cramer's Old Saybrook, Connecticut
manufacturing facility, $102,000 for the write-off of inventory for discontinued
product lines, $174,000 for employee severance and termination benefits for 74
predominantly manufacturing employees, and $50,000 for the write-off of
manufacturing equipment. The amount of actual termination benefits subsequently
paid and charged against the liability and the actual number of employees
terminated did not differ significantly from the original estimates. At October
25, 1998, approximately $125,000 of accrued restructuring costs was included in
accrued expenses and accrued compensation and benefits. Such remaining
restructuring costs were paid by the end of fiscal 1999.
14
Income from operations. For the year ended October 25, 1998, income from
operations was $7.2 million, as compared to $8.6 million, in 1997. This decrease
reflects a $909,000 restructuring charge and $929,000 of merger-related expenses
incurred in connection with the Cramer merger into Rhodes, as discussed above.
Income from operations for the Motors segment increased to $7.4 million, or
13.6% of sales, in 1998, from $6.2 million, or 13.2% of net sales, in the prior
year. These results primarily reflect increased sales volume.
Income from operations for the Coils segment was $3.6 million, or 11.7% of net
sales, in 1998, as compared to $1.6 million, or 10.0% of net sales, in the prior
year. These results reflect the inclusion of Astro Air and increased sales and
improved margins at Snowmax.
The Trailers and Agricultural Equipment segment had income from operations of
$3.1 million in 1998, as compared to $4.5 million in 1997. This decrease
reflects the dispositions of Great Bend and DewEze, and reduced income at Parker
as a result of decreased sales. This decrease was partially offset by increased
income from operations at Sooner Trailer as a result of changes in product mix.
The Company's Other segment reported a loss from operations of $58,000 in 1998,
as compared to income of $1.2 million in 1997. This decrease was attributable to
the Company's Cramer facility, which experienced weak sales, reduced margins and
merger-related expenses.
Interest expense. For 1998, interest expense increased to $4.9 million, as
compared to $4.1 million in 1997, primarily as a result of increased borrowings
under the Company's revolving credit agreement.
Income tax expense. The Company's effective income tax rate was 80.0% for 1998,
as compared to 45.2% in the prior year. The effective tax rate for 1998 was
unusually high as a result of differences between the book and tax basis of the
assets of Great Bend at the time of sale and by a higher proportion of
non-deductible expenses, primarily non-cash amortization expenses related to
acquisitions, as compared to pretax income.
Net income (loss) available for common stockholders. Net loss available for
common stockholders was $368,000, or $.06 per share in 1998, as compared to net
income available for common stockholders of $1.5 million, or $.26 per share, in
the prior year. Income (loss) available for common stockholders is calculated by
subtracting dividends on preferred stock of $750,000 for both 1998 and 1997 and
by deducting the non-cash accretion in book value of preferred stock of $320,000
and $297,000 for 1998 and 1997, respectively. The 1998 results include the gain
on the sale of Great Bend and a restructuring charge and other merger-related
costs incurred in connection with the merger of Cramer into Rhodes.
Liquidity and Capital Resources
At October 31, 1999, cash and cash equivalents were $161,000. Working capital
decreased to $16.9 million at October 31, 1999 from $19.7 million at October 25,
1998. This decrease was principally a result of increased accounts payable and
accrued expenses. Net cash provided by operating activities was $13.4 million,
as compared to net cash used in operating activities of $807,000 in the prior
year. The increase in cash from operations was principally the result of changes
in inventory levels, accounts receivable, accounts payable and accrued expenses
and improved operating results.
15
Cash from investing activities included cash proceeds from the sale of Parker of
$4.4 million. Cash flows from investing activities also reflect $5.7 million for
capital expenditures for equipment, primarily in the Motors and Coils segments.
The Company currently plans to invest approximately $4.9 million in capital
expenditures during fiscal 2000. Management anticipates funding such capital
expenditures with cash from operations and proceeds from the Company's revolving
credit facility.
In connection with the acquisition of Astro Air in April 1998, the Company
entered into a five-year consulting agreement with Dacus Properties, Inc.
("DPI"), the former owner of Astro Air, under which DPI receives 3.4% of net
revenues generated by certain specified customers. For 1999, the Company
recorded $878,000 of contingent consideration under the agreement with DPI as
goodwill based upon related 1999 revenues.
As part of the sale of Parker, the Company obtained a non-interest bearing note
of $3.3 million. The note, which was discounted to $3.0 million, is payable in
monthly installments as to the extent the accounts receivable, acquired by Top
Air pursuant to the sale agreement, are collected. Payments received on the note
and applied to principal were approximately $1.9 million in fiscal 1999, and are
included in cash flows from investing activities.
Net cash used in financing activities included net repayments of $10.1 million
under the Company's $55.0 million revolving credit agreement, debt repayments of
$3.0 million, including the repayment of $1.0 million of related party debt, and
the payment of dividends of $2.0 million.
On January 22, 1999, the Company entered into a new $55.0 million revolving
credit agreement with the Company's two primary banks, expiring in December
2002. At October 31, 1999, $38.2 million was outstanding and $16.8 million was
available for additional borrowing under the agreement. Interest is payable, at
the Company's option, at either the agent bank's prime rate or a spread over the
London Interbank Offered Rate that varies with the Company's ratio of total debt
to EBITDA. The LIBOR spread was 2.5% at October 31, 1999.
The Company has interest rate swap agreements with its two banks with notional
amounts totaling $20.8 million. The Company entered into these agreements to
change the fixed/variable interest rate mix of its debt portfolio, in order to
reduce the Company's aggregate risk from movements in interest rates.
In June 1999, the Company changed its quarterly dividend rate to $0.06 per
share, from the $0.09 per share amount previously paid. The Company expects to
pay its quarterly dividend at the new rate for the foreseeable future.
Also in June 1999, the Company announced that its Board of Directors had
authorized the purchase of up to $1.0 million of the Company's stock in open
market purchases or through private transactions. Such authorization is
effective through June 2000, subject to review by the Board of Directors at its
regular meetings. Management anticipates funding such stock purchases with cash
from operations and proceeds from the Company's revolving credit facility. No
amounts were purchased in 1999.
The Company believes anticipated funds to be generated from future operations
and available credit facilities will be sufficient to meet anticipated operating
and capital needs.
16
Environmental Matters
The Company is subject to federal, state and local environmental regulations
with respect to its operations. The Company believes that it is operating in
substantial compliance with applicable environmental regulations. Manufacturing
and other operations at the Company's various facilities may result, and may
have resulted, in the discharge and release of hazardous substances and waste
from time to time. The Company routinely responds to such incidents as deemed
appropriate pursuant to applicable federal, state and local environmental
regulations.
The Company is a party to a consent decree with the State of Connecticut
pursuant to which it has agreed to complete its environmental investigation of
the site on which its Cramer facility was previously located and conduct any
remedial measures which may be required. The Company has entered into a
settlement agreement with the former operators of the site. In accordance with
the terms of the agreement, the Company received $600,000 from the former
operators, in return for a release from future obligations with respect to
environmental matters related to the site. The $600,000 received, which is
included in accrued expenses as of October 31, 1999, will be used to complete
the environmental investigation of the site and to conduct any remedial measures
which may be required. Based upon the amounts recorded as liabilities, the
Company believes that the ultimate resolution of this matter will not have a
material adverse effect on the financial results of the Company.
The Company has been named as a potentially responsible party with respect to
three hazardous substance disposal sites currently under remediation by the U.S.
Environmental Protection Agency (the "EPA") under its "Superfund" program. With
respect to all three sites, based on the minimal amount of waste alleged to have
been contributed to the sites by the Company, the Company expects to resolve the
matter through the payment of de minimis amounts.
"Year 2000" Costs
The Company did not experience any business interruptions or any other
significant issues related to the "Year 2000." The costs associated with
bringing the Company's centralized manufacturing and accounting information
system and other date-sensitive equipment into "Year 2000" compliance was not
material. In addition, the Company is not aware of any "Year 2000" disruptions
at any of its significant suppliers or large customers.
Recently Issued Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement, as amended
by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company is in
the process of analyzing the impact that SFAS No. 133 will have on its
consolidated financial position and results of operations when such statement is
adopted.
17
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
The following information is provided pursuant to the "Safe Harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Certain statements in
Management's Discussion and Analysis of this Form 10-K, including those which
express "belief," "anticipation" or "expectation" as well as other statements
which are not historical fact, are "forward-looking statements" made pursuant to
these provisions. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The Company cautions readers that the following important factors, among others,
have in the past affected and could in the future affect the Company's actual
results of operations and cause the Company's actual results to differ
materially from the results expressed in any forward-looking statements made by
or on behalf of the Company:
o The Company's results have been and can be expected to continue to be
affected by the general economic conditions in the United States and
specific economic factors influencing the manufacturing sector of the
economy. Lower demand for the Company's products can lower revenues as well
as cause underutilization of the Company's plants, leading to reduced gross
margins.
o Metal prices, particularly of aluminum, copper and steel, can affect the
Company's costs as well as demand for the Company's products and the value
of inventory held at the end of a reporting period. Lack of availability of
certain commodities could also disrupt the Company's production.
o Changes in demand that change product mix may reduce operating margins by
shifting demand toward less profitable products.
o Loss of a substantial customer or customers may affect results of
operations.
o The Company's results can be affected by engineering difficulties in
designing new products or applications for existing products to meet the
requirements of its customers.
o Obsolescence or quality problems leading to returned goods in need of
repair can affect the value of the Company's inventories and its
profitability.
o The Company has a substantial amount of floating rate debt. Increases in
short-term interest rates could be expected to increase the Company's
interest expense.
o The Company's facility in the United Kingdom subjects the Company to
various risks, which may include currency risk, risk associated with
compliance with foreign regulations, and political and economic risks.
18
o Acquisitions are an important part of the Company's growth strategy.
Acquisitions may have a dilutive effect on the Company's earnings and could
affect the Company's available credit and interest costs. Conversely, the
Company may from time to time divest of product lines or business units.
Any such divestiture may involve costs of disposition or loss on the
disposition that could reduce the Company's results.
o Although the Company is not aware of any "Year 2000" disruptions at any
significant supplier or customer, there can be no assurance that if a
disruption did occur, it would not have a material adverse effect on the
Company's operating results or financial condition.
19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company uses its revolving credit facility, industrial
revenue bonds and term loans to finance a significant portion
of its operations. These on-balance sheet financial
instruments, to the extent they provide for variable rates of
interest, expose the Company to interest rate risk resulting
from changes in London Interbank Offered Rate or the prime
rate. The Company uses off-balance sheet interest rate swap
agreements to partially hedge interest rate exposure
associated with on-balance sheet financial instruments. All of
the Company's derivative financial instrument transactions are
entered into for non-trading purposes.
To the extent that the Company's financial instruments expose
the Company to interest rate risk and market risk, they are
presented in the table below. The table presents principal
cash flows and related interest rates by year of maturity for
the Company's revolving credit facility, industrial revenue
bonds and term loans in effect at October 31, 1999. For
interest rate swaps, the table presents notional amounts and
the related reference interest rates by year of maturity. Fair
values included herein have been determined based upon (1)
rates currently available to the Company for debt with similar
terms and remaining maturities, and (2) estimates obtained
from dealers to settle interest rate swap agreements. Note 8
to the consolidated financial statements should be read in
conjunction with the table below (dollar amounts in
thousands).
Year of Maturity Fair Value
------------------------------------------------------------ Total Due at
2000 2001 2002 2003 2004 Thereafter at Maturity 10/31/1999
---- ---- ---- ---- ---- ---------- ----------- ----------
Debt:
Fixed rate $3,576 $2,171 $949 $ 858 $ 593 $3,730 $11,877 $11,877
Average interest rate 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Variable rate $ 303 $ 300 $300 $38,450 $ 600 $3,650 $43,603 $43,603
Average interest rate 7.6% 7.6% 7.6% 7.6% 3.5% 3.5%
Interest rate swap agreements:
Variable to fixed swaps $ - $ - $ - $15,000 $5,750 $ - $20,750 $ (285)
Average pay rate 7.1% 4.2%
Average receive rate 5.2% 3.3%
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and
supplemental schedules appear at pages F-1 through F-24, as
set forth in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
20
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors, appearing under the caption "Election
of Directors" in the Company's Proxy Statement (the "Proxy Statement") to be
filed with the Securities and Exchange Commission in connection with the Annual
Meeting of Shareholders scheduled to be held on March 22, 2000, information
concerning executive officers, appearing under the caption "Item 1. Business -
Executive Officers of the Company" in Part I of this Form 10-K, and information
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement are incorporated herein by reference in response to this
Item 10.
Item 11. Executive Compensation
The information contained in the section titled "Executive
Compensation" in the Proxy Statement, with respect to executive compensation,
and the information contained in the section entitled "Director Compensation"
with respect to director compensation, are incorporated herein by reference in
response to this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the section titled "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement, with respect
to security ownership of certain beneficial owners and management, is
incorporated herein by reference in response to this Item 12.
Item 13. Certain Relationships and Related Transactions
The information contained in the section titled "Certain Relationships
and Transactions" of the Proxy Statement, with respect to certain relationships
and related transactions, is incorporated herein by reference in response to
this Item 13.
21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The financial statements listed in the accompanying Table of Contents
to Consolidated Financial Statements are filed as part of this Form
10-K, commencing on page F-1.
(a)(2) Schedules
The following consolidated financial statement schedule of the Company
is filed as part of this Form 10-K:
Schedule II - Valuation and Qualifying Accounts
(a)(3) Exhibits
The exhibits are listed in the index to Exhibits appearing below.
(b) No reports were filed on Form 8-K during the last quarter of fiscal
1999.
(c) Exhibits
Exhibit No. Description
- ----------- -----------
* 3.1 Articles of Incorporation of the Company (Exhibit 3.1 to
the Company's Form S-1 Registration Statement, No. 33-76964
(the "1994 Registration Statement")).
* 3.2 By-Laws of the Company, as amended June 5, 1997 (Exhibit
3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 27, 1997).
* 3.3 Designations of the Class A Convertible Preferred Stock of
Owosso Corporation (Exhibit 4.1 to the Company's Current Report
on Form 8-K dated October 31, 1995 (the "October 31, 1995 Form
8-K")).
*10.1 1994 Stock Option Plan (Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the year ended October 30, 1994 (the
"1994 Form 10-K ")).#
*10.2 MIS Agreement dated October 31, 1994 by and between Owosso
Corporation and The Owosso Company (Exhibit 10.2 to the 1994
Form 10-K).
*10.3 Loan Agreement between Director of the State of Nevada
Department of Commerce as Issuer and The Landover Company D/B/A
Dura-Bond Bearing Company, dated August 1, 1988 regarding the
issuance of Series 1988-A Industrial Development Revenue Bonds
(Exhibit 10.5 to the 1994 Registration Statement).
*10.4 Offering Statement regarding the Gregg County Development
Corporation, Inc. Revenue Bonds, issued to Greer & Snow Coil
Manufacturers, Inc., dated May 17, 1984 (Exhibit 10-8 to the
1994 Registration Statement).
*10.5 Management Services Agreement, by and between Snowmax,
Incorporated, and The Owosso Company, dated July 31, 1989
(Exhibit 10.33 to the 1994 Registration Statement).
*10.6 Extension agreement among Owosso Corporation, Richard R. Carr
and I. Wistar Morris, III, dated September 27, 1994 (Exhibit
2.7 to the 1994 Registration Statement).
22
*10.7 Promissory Note of Snowmax, Incorporated, dated April 7, 1992,
issued to Longview Bank and Trust Company, in the amount of
$1,000,000 (Exhibit 10.39 to the 1994 Registration Statement).
*10.8 Deed of Trust, dated April 7, 1992, on property of Snowmax,
Incorporated located in Upshur County, Texas (Exhibit 10.40 to
the 1994 Registration Statement).
*10.9 Deed of Trust, dated April 7, 1992, on property of Snowmax,
Incorporated located in Gregg County, Texas (Exhibit 10.41 to
the 1994 Registration Statement).
*10.10 Lender's Subordination Agreement, dated April 7, 1992, among
Longview Bank and Trust Company, Snowcoil, Inc. and Snowmax,
Incorporated (Exhibit 10.42 to the 1994 Registration
Statement).
*10.11 Lease, dated March 21, 1995, between Motor Products - Ohio
Corporation and William Berhard Realty Company (Exhibit 10.44
to the 1995 Form 10-K).
*10.12 Confidentiality and Non-Solicitation Agreement between the
Company and Eugene P. Lynch, dated October 31, 1994 (Exhibit
10.45 to the 1994 Form 10-K).
*10.13 Confidentiality and Non-Solicitation Agreement between the
Company and Ellen D. Harvey, dated October 31, 1994 (Exhibit
10.46 to the 1994 Form 10-K).
*10.14 Confidentiality and Non-Solicitation Agreement between the
Company and George B. Lemmon, Sr., dated October 31, 1994
(Exhibit 10.47 to the 1994 Form 10-K).
*10.15 Confidentiality and Non-Solicitation Agreement between the
Company and George B. Lemmon, Jr., dated October 31, 1994
(Exhibit 10.48 to the 1994 Form 10-K).
*10.16 Confidentiality and Non-Solicitation Agreement between the
Company and John R. Reese, dated October 31, 1994 (Exhibit
10.51 to the 1994 Form 10-K).
*10.17 Stock Purchase Agreement among Owosso Corporation, Richard R.
Carr and I. Wistar Morris, III, dated March 24, 1994 (Exhibit
2.2 to the 1994 Form 10-K).
*10.18 The Owosso Group, Plan of Reorganization dated March 25, 1994
(Exhibit 2.1 to the 1994 Registration Statement).
*10.19 Amendment No. 1 to The Owosso Group Plan of Reorganization
dated September 26, 1994 (Exhibit 2.8 to the 1994 Registration
Statement).
*10.20 Stock Purchase Agreement dated September 9, 1994 by and among
Owosso Corporation, Sooner Trailer Manufacturing Co., Michael
S. Bernhardt, Billy J. Bernhardt, Viola M. Bernhardt, Michael
S. and Cynthia L. Bernhardt Charitable Remainder Unitrust U/T/A
8/15/94, Billy J. and Viola M. Bernhardt Charitable Remainder
Unitrust U/T/A 8/15/94, Steven J. Bernhardt Trust U/T/A 8/15/94
and Cynthia L. Bernhardt Trust U/T/A 8/15/94 (Exhibit 2.9 to
the 1994 Registration Statement).
*10.21 Letter Agreement by and among Owosso Corporation, The Owosso
Company and Sooner Trailer Manufacturing Co. dated October 25,
1994 (Exhibit 2.10 to the 1994 Form 10-K).
*10.22 Agreement and Plan of Merger dated October 25, 1995 by and
among Owosso Corporation, Stature Electric, Inc. and the
stockholders of Stature Electric, Inc. (Exhibit 2.1 to the
October 31, 1995 Form 8-K).
*10.23 Consulting Agreement dated October 31, 1995 by and between
Owosso Corporation and Lowell Huntsinger (Exhibit 10.1 to the
October 31, 1995 Form 8-K).#
23
*10.24 Registration Rights Agreement dated October 31, 1995 by and
among Owosso Corporation, Lowell Huntsinger, Randall James and
Morris Felt (Exhibit 10.2 to the October 31, 1995 Form 8-K).
*10.25 Loan Agreement dated September 18, 1993 between Sooner Trailer
Manufacturing Co. and American National Bank, Duncan, Oklahoma,
and Amendment No. 1 to Loan Agreement dated December 13, 1994
between the same parties (Exhibit 10.54 to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 29,
1995).
*10.26 Separation and Confidentiality Agreement between Thomas L.
French and Owosso Corporation, dated as of June 14, 1996
(Exhibit 10.73 to the July 1996 Form 10-Q).#
*10.27 Lease Agreement by and between Owosso Corporation and
Philadelphia Freedom Partners, L.P. dated September 6, 1996
(Exhibit 10.62 to the Company's Annual Report on Form 10-K for
the year ended October 27, 1996).
*10.28 Owosso Corporation 401(K) Savings Plan (Exhibit 10.2 to the
January 25, 1998 Form 10-Q).
*10.29 Ninth Amendment to Credit Agreement by and among Owosso
Corporation, its subsidiaries, NBD Bank, PNC Bank, N.A., and
NBD Bank, as Agent, dated as of March 27, 1998. (Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 26, 1998).
#*10.30 1998 Long-Term Incentive Plan (Exhibit 4.1 to the Company's
Registration Statement on Form S-8 filed June 2, 1998,
Registration No. 333-55835).
*10.31 Asset Purchase Agreement, dated March 27, 1998, by and among
Allied Products Corporation, Great Bend Manufacturing Company,
and Owosso Corporation (Exhibit 2.1 to the Company's Current
Report on Form 8-K dated April 26, 1998).
*10.32 Asset Purchase Agreement among Owosso Corporation, Astro Air
Acquisition Corp., Astro Air, Inc., Rex Dacus and Dacus
Properties, Inc., dated April 2, 1998 (Exhibit 2.2 to the
Company's Current Report on Form 8-K dated April 26, 1998).
*10.33 Agreement and Plan of Merger among Owosso Corporation, Cramer
Company and M.H. Rhodes, Inc., dated April 3, 1998 (Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 26, 1998).
*10.34 Asset Sale and Purchase Agreement dated June 22, 1998, by and
between Harper Industries, Inc., and DewEze Manufacturing, Inc.
(Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 26, 1998).
*10.35 Amended and Restated Credit Agreement by and among Owosso
Corporation, its subsidiaries, NBD Bank, PNC Bank, N.A., and
NBD Bank, as Agent, dated as of January 22, 1999. (Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1999).
*10.36 Asset Purchase Agreement by and among Top Air Manufacturing,
Inc. and Parker Acquisition Sub, Inc., as buyers, and Owosso
Corporation and DWZM, Inc., as sellers, dated March 3, 1999
(Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended May 2, 1999).
#*10.37 Severance Agreement between the Company and John H. Wert, Jr.
dated May 12, 1999, (Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 1, 1999).
11 Computation of per share earnings.
21 Subsidiaries of the registrant.
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- --------------
* Incorporated by reference.
# Management contract or compensatory plan or arrangement.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OWOSSO CORPORATION
Date: January 25, 2000 By: /s/ George B. Lemmon, Jr.
--------------------------------------------
George B. Lemmon, Jr., President, Chief
Executive Officer, and Director
By: /s/ John M. Morrash
--------------------------------------------
John M. Morrash, Executive Vice President -
Finance, Chief Financial Officer and
Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on January 25, 2000, in the
capacities indicated:
Signature Title
/s/ John R. Reese
- -----------------------------
John R. Reese Chairman of the Board and Director
/s/ George B. Lemmon, Jr.
- -----------------------------
George B. Lemmon, Jr. President, Chief Executive Officer,
and a Director
/s/ John M. Morrash
- -----------------------------
John M. Morrash Executive Vice President - Finance,
Chief Financial Officer and
Treasurer and Secretary
/s/ Ellen D. Harvey
- -----------------------------
Ellen D. Harvey Director
/s/ Harry E. Hill
- -----------------------------
Harry E. Hill Director
/s/ Lowell P. Huntsinger
- -----------------------------
Lowell P. Huntsinger Director
/s/ Eugene P. Lynch
- -----------------------------
Eugene P. Lynch Director
/s/ James A. Ounsworth
- -----------------------------
James A. Ounsworth Director
25
OWOSSO CORPORATION
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
OCTOBER 31, 1999, OCTOBER 25, 1998, AND OCTOBER 26, 1997:
Statements of Operations F-2
Balance Sheets F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-24
FINANCIAL STATEMENT SCHEDULE II F-25
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Owosso Corporation
King of Prussia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Owosso
Corporation and subsidiaries as of October 31, 1999 and October 25, 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three fiscal years in the period ended October 31,
1999. Our audits also included the financial statement schedule listed in the
index at Item 14(a)(2). These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Owosso Corporation and subsidiaries
as of October 31, 1999 and October 25, 1998, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
October 31, 1999 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
December 9, 1999
F-1
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------
Year Ended
-----------------------------------------------
October 31, October 25, October 26,
1999 1998 1997
Net sales $170,121,000 $159,968,000 $143,061,000
Costs of products sold 138,131,000 125,419,000 109,867,000
------------ ------------ ------------
Gross profit 31,990,000 34,549,000 33,194,000
Expenses:
Selling, general and administrative 24,436,000 26,464,000 24,599,000
Restructuring charge -- 909,000 --
------------ ------------ ------------
Income from operations 7,554,000 7,176,000 8,595,000
Interest expense 5,060,000 4,912,000 4,143,000
Gain on sale of business -- 2,775,000 --
Write-down of net assets held for sale -- (1,635,000) --
Other income 493,000 98,000 199,000
------------ ------------ ------------
Income before income tax expense 2,987,000 3,502,000 4,651,000
Income tax expense 1,210,000 2,800,000 2,100,000
------------ ------------ ------------
Net income 1,777,000 702,000 2,551,000
Dividends and accretion on preferred stock (1,095,000) (1,070,000) (1,047,000)
------------ ------------ ------------
Net income (loss) available for common stockholders $ 682,000 $ (368,000) $ 1,504,000
============ ============ ============
Basic and diluted income (loss) per common share $ 0.12 $ (0.06) $ 0.26
============ ============ ============
Weighted average number of common shares outstanding:
Basic 5,826,000 5,813,000 5,809,000
============ ============ ============
Diluted 5,852,000 5,813,000 5,827,000
============ ============ ============
See notes to consolidated financial statements.
F-2
OWOSSO CORPORATION
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------------
October 31, October 25,
1999 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 161,000 $ 191,000
Receivables, net 19,999,000 17,919,000
Inventories, net 20,173,000 21,262,000
Prepaid expenses and other 1,101,000 1,283,000
Deferred taxes 1,220,000 733,000
------------- -------------
Total current assets 42,654,000 41,388,000
PROPERTY, PLANT AND EQUIPMENT, NET 35,900,000 35,915,000
GOODWILL, NET 27,057,000 28,155,000
OTHER INTANGIBLE ASSETS, NET 7,893,000 8,690,000
NET ASSETS HELD FOR SALE -- 7,619,000
RESTRICTED CASH -- 1,906,000
OTHER ASSETS 3,186,000 1,533,000
------------- -------------
TOTAL ASSETS $ 116,690,000 $ 125,206,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 13,169,000 $ 9,762,000
Accrued compensation and benefits 3,532,000 3,149,000
Accrued expenses 5,163,000 4,048,000
Related party debt 1,815,000 2,843,000
Current portion of long-term debt 2,064,000 1,935,000
------------- -------------
Total current liabilities 25,743,000 21,737,000
LONG-TERM DEBT, LESS CURRENT PORTION 51,601,000 63,746,000
POSTRETIREMENT BENEFITS 2,923,000 2,713,000
DEFERRED TAXES 2,439,000 2,367,000
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
Convertible preferred stock Class A, 5% cumulative, $.01 par value;
10,000,000 shares authorized; 1,071,428 shares issued and outstanding
(aggregate liquidation value 1999 and 1998 - $15,000,000) 14,630,000 14,285,000
Common stock, $.01 par value; authorized 15,000,000 shares; issued
5,866,000 shares 59,000 59,000
Additional paid-in capital 21,618,000 21,618,000
Accumulated other comprehensive income (3,000) --
Accumulated deficit (2,034,000) (918,000)
------------- -------------
34,270,000 35,044,000
Less treasury stock, at cost, 35,863 shares in 1999 and 50,208 shares in 1998 (286,000) (401,000)
------------- -------------
Total stockholders' equity 33,984,000 34,643,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 116,690,000 $ 125,206,000
============= =============
See notes to consolidated financial statements.
F-3
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Accumulated Retained
Preferred Common Paid-in Other Earnings Treasury
Stock Stock Capital Comprehensive (Accumulated Stock Total
Income Deficit)
BALANCE, OCTOBER 27, 1996 $ 13,668,000 $ 59,000 $ 21,612,000 $ 2,131,000 $(450,000) $ 37,020,000
Net income 2,551,000 2,551,000
Dividends (2,841,000) (2,841,000)
Accretion on convertible
preferred stock 297,000 (297,000)
------------ -------- ------------ ----------- --------- ------------
BALANCE, OCTOBER 26, 1997 13,965,000 59,000 21,612,000 1,544,000 (450,000) 36,730,000
Net income 702,000 702,000
Dividends (2,843,000) (2,843,000)
Accretion on convertible
preferred stock 320,000 (320,000)
Issuance of treasury shares (1,000) 49,000 48,000
Exercise of stock options 6,000 6,000
------------ -------- ------------ ----------- --------- ------------
BALANCE, OCTOBER 25, 1998 14,285,000 59,000 21,618,000 (918,000) (401,000) 34,643,000
Net Income 1,777,000 1,777,000
Dividends (2,498,000) (2,498,000)
Accretion on convertible
preferred stock 345,000 (345,000) --
Issuance of treasury shares (50,000) 115,000 65,000
Cumulative translation adjustment (3,000) (3,000)
------------ -------- ------------ ------- ----------- --------- ------------
BALANCE, OCTOBER 31, 1999 $ 14,630,000 $ 59,000 $ 21,618,000 $(3,000) $(2,034,000) $(286,000) $ 33,984,000
============ ======== ============ ======= =========== ========= ============
See notes to consolidated financial statements.
F-4
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Year Ended
----------------------------------------------
October 31, October 25, October 26,
1999 1998 1997
OPERATING ACTIVITIES:
Net income $ 1,777,000 $ 702,000 $ 2,551,000
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Allowance for doubtful accounts 106,000 89,000 249,000
Provision for deferred taxes (33,000) (561,000) (403,000)
Gain on sale of business -- (2,775,000) --
Write-down of net assets held for sale -- 1,635,000 --
(Gain) loss on sale of assets (7,000) 87,000 31,000
Depreciation 5,504,000 4,704,000 4,027,000
Amortization 2,262,000 2,411,000 2,173,000
Changes in assets and liabilities which provided (used) cash:
Accounts receivable (767,000) (3,286,000) (1,702,000)
Inventories 179,000 (2,419,000) (3,961,000)
Prepaid expenses and other 156,000 (138,000) 492,000
Accounts payable 3,306,000 (127,000) 2,224,000
Accrued expenses 922,000 (1,129,000) 996,000
------------ ------------ -----------
Net cash provided by (used in) operating activities 13,405,000 (807,000) 6,677,000
------------ ------------ -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,677,000) (9,573,000) (5,335,000)
Contingent consideration on acquisition (878,000) (425,000) --
Acquisition of businesses, net of cash acquired -- (10,485,000) --
Proceeds from the sale of businesses and assets 4,628,000 14,075,000 --
(Increase) decrease in other assets 3,476,000 (1,303,000) 465,000
------------ ------------ -----------
Net cash provided by (used in) investing activities 1,549,000 (7,711,000) (4,870,000)
------------ ------------ -----------
FINANCING ACTIVITIES:
Borrowings from (payments on) line of credit (10,050,000) 13,550,000 4,650,000
Proceeds from long-term debt -- 6,050,000 350,000
Payments on long-term debt (1,967,000) (8,035,000) (1,741,000)
Payments on related party debt (1,028,000) (907,000) (2,225,000)
Dividends paid (2,006,000) (2,843,000) (2,841,000)
Other 67,000 54,000 --
------------ ------------ -----------
Net cash (used in) provided by financing activities (14,984,000) 7,869,000 (1,807,000)
------------ ------------ -----------
NET DECREASE IN
CASH AND CASH EQUIVALENTS (30,000) (649,000) --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 191,000 840,000 840,000
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 161,000 $ 191,000 $ 840,000
============ ============ ===========
See notes to consolidated financial statements.
F-5
OWOSSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED OCTOBER 31, 1999, OCTOBER 25, 1998, AND OCTOBER 26, 1997
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - The consolidated financial statements represent the
consolidated financial position, results of operations and cash flows of
Owosso Corporation and its subsidiaries (the "Company"). The Company
currently operates in four business segments: Motors, Coils, Trailers and
Agricultural Equipment, and Other.
The Motors segment, which includes Stature Electric, Inc. ("Stature"),
Motor Products - Owosso Corporation ("Motor Products"), and Motor Products
Ohio Corporation ("MP-Ohio"), manufactures fractional and integral
horsepower motors. Significant markets for the Company's motors include
commercial products and equipment, healthcare and recreation. The Company
sells its motors primarily throughout North America and also in Europe.
The Coils segment manufactures heat exchange coils primarily for
non-automotive transportation, refrigeration and commercial and
residential HVAC markets. The businesses included in this segment include
Astro Air Coils, Inc. ("Astro Air"), which was acquired in April 1988,
Snowmax, Inc. ("Snowmax"), and Astro Air UK Ltd. ("Astro UK"), which began
operations in March 1999. The Company sells its coils primarily throughout
North America and also in Europe.
The Trailers and Agricultural Equipment segment includes Sooner Trailer
Manufacturing Co. ("Sooner Trailer"), which manufactures all-aluminum
trailers, primarily horse and livestock trailers. Sooner Trailer sells its
trailers through a dealer network located throughout the United States and
Canada. Also included in this segment, through the dates of their sales,
are Great Bend Manufacturing Co. ("Great Bend"), sold in April 1998,
DewEze Manufacturing, Inc. ("DewEze"), sold in July 1998, and Parker
Industries ("Parker"), sold in March 1999 (collectively the "Agricultural
Equipment Companies").
The Company's Other segment includes Dura-Bond Bearing Company
("Dura-Bond"), and M.H. Rhodes, Inc. ("Rhodes"). Dura-Bond manufactures
replacement camshaft bearings, valve seats and shims for the automotive
after-market. Rhodes, which was acquired in June 1998, manufactures timers
and subfractional horsepower motors for use in commercial applications.
Consolidation - The consolidated financial statements of the Company
include the accounts of Owosso Corporation and its majority owned
subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
Fiscal Year - The Company's fiscal year includes 52 or 53 weeks ending on
the last Sunday in October. Fiscal year 1999 consisted of 53 weeks, while
fiscal years 1998 and 1997 consisted of 52-week years.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash and
highly-liquid investments with an original maturity of three months or
less.
Inventories - Inventories of the Company are recorded at cost, which is
not in excess of market. At October 31, 1999 and October 25, 1998, cost
for 6% and 10%, respectively, of the inventories was determined on the
last-in, first-out (LIFO) basis, and the remainder on the first-in,
first-out (FIFO) basis.
F-6
Information related to the FIFO method may be useful in comparing
operating results to those of companies not on LIFO. If the FIFO method of
inventory, which approximates replacement cost, had been used by the
Company for all inventories, inventory would have been approximately
$803,000 and $820,000 higher than reported at October 31, 1999 and October
25, 1998, respectively. Additionally, net income would have decreased by
approximately $17,000 in 1999, increased by approximately $18,000 for
1998, and decreased approximately $98,000 for 1997. These amounts reflect
the combined effects, in each year, of changes in inventory quantities and
unit costs.
Property, Plant and Equipment - Items of property, plant and equipment are
stated at cost and are depreciated principally on the straight-line method
over their estimated useful lives as follows:
Land improvements 10 - 20 years
Buildings 30 years
Machinery and equipment 3 - 10 years
Interest is capitalized in connection with the construction of major
capital additions. The capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated
useful life. In 1998, $90,000 of interest cost was capitalized. No
interest was capitalized in 1999 or 1997.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates and assumptions.
Intangible Assets - Intangibles are amortized on a straight-line basis
over their estimated useful lives as follows:
Noncompetition agreements 3-6 years
Customer lists 20 years
Goodwill 20-25 years
Other 5-20 years
Asset Impairment - The Company evaluates the carrying value of long-term
assets, including goodwill and other intangible assets, based upon current
and anticipated undiscounted cash flows, and recognizes an impairment when
such estimated cash flows will be less than the carrying value of the
asset. Measurement of the amount of impairment, if any, is based upon the
difference between carrying value and fair value.
Revenue Recognition - Revenue is recognized at the time the product is
shipped. An allowance for doubtful accounts of $318,000 and $341,000 has
been recorded as of October 31, 1999 and October 25, 1998, respectively.
Stock Option Plan - SFAS No. 123, Accounting for Stock-Based Compensation,
encourages, but does not require, companies to record compensation cost
for stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, under which no compensation cost has been recognized.
F-7
Reclassifications - Certain reclassifications were made to the 1998 and
1997 consolidated financial statements to conform to 1999 classifications.
Earnings per Share - Effective for the first quarter of fiscal 1998, the
Company adopted SFAS No. 128, Earnings Per Share. In accordance with the
provisions of this statement, all prior periods presented have been
restated. Basic earnings per common share is computed by dividing net
earnings (the numerator) by the weighted average number of common shares
outstanding during each period (the denominator). The computation of
diluted earnings per common share is similar to that of basic earnings per
common share, except that the denominator is increased by the dilutive
effect of stock options outstanding, computed using the treasury stock
method.
The basic weighted average shares reconciles to diluted weighted average
shares as follows:
1999 1998 1997
Basic weighted average
common shares outstanding 5,826,000 5,813,000 5,809,000
Dilutive effect of stock options 26,000 -- 18,000
--------- --------- ---------
Diluted weighted average
common shares outstanding 5,852,000 5,813,000 5,827,000
========= ========= =========
The following table summarizes those securities that could potentially
dilute income (loss) for common stockholders per common share in the
future that were not included in determining net income (loss) available
for common stockholders per common share as the effect was antidilutive:
1999 1998 1997
Potential common shares resulting from:
Stock options 786,000 587,000 259,000
Convertible preferred stock 1,071,000 1,071,000 1,071,000
--------- --------- ---------
1,857,000 1,658,000 1,330,000
========= ========= =========
Comprehensive Income - Effective for the first quarter of fiscal 1999, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income. This statement establishes standards
for reporting and disclosure of comprehensive income and its components
(revenues, expenses, gains and losses). The Company presents comprehensive
income as a component of stockholders' equity. For 1999, total
comprehensive income was $679,000 and consisted of net earnings of
$682,000, offset by a $3,000 loss on foreign currency translation. The
Company's comprehensive income for 1998 and 1997 consisted solely of net
earnings.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board (the "FASB") issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the consolidated balance sheet and measure those
instruments at fair value. This statement, as amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company is in
the process of analyzing the impact that SFAS No. 133 will have on its
consolidated financial position and results of operations when such
statement is adopted.
F-8
2. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest in 1999, 1998, and 1997 were $5,311,000,
$4,693,000, and $4,307,000, respectively. Cash paid for income taxes was
$1,503,000, $4,077,000 and $1,717,000 for 1999, 1998 and 1997,
respectively. Dividends payable at October 31, 1999 were $492,000.
3. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
Disposition of Parker - On March 5, 1999, the Company completed the sale
of the business and substantially all of the assets of Parker to Top Air
Manufacturing, Inc. of Cedar Falls, Iowa. In connection with the sale, the
Company received cash of $3,700,000, a non-interest bearing note of $3.3
million, and the assumption of liabilities of $476,000. In addition, the
local development authority in Iowa acquired certain Parker fixed assets
for $750,000. Based upon the proposed terms of the sale, the Company
recorded, in the fourth quarter of fiscal 1998, a pre-tax charge of
$1,635,000 to adjust the carrying value of Parker's assets to their
estimated fair market value. No additional pre-tax gain or loss was
recorded upon completion of the sale. However, the sale did result in a
tax benefit of approximately $535,000 recorded in 1999.
The non-interest bearing note has been discounted to $3,000,000 and is
payable in monthly installments as to the extent the accounts receivable,
acquired by Top Air pursuant to the sale agreement, are collected. The
note is secured by such accounts receivable. The terms of the note provide
further that, irrespective of the amounts collected on such accounts
receivable, Top Air is required to pay no less than 60% of the principal
amount of the note by November 15, 1999, 85% of the principal of the note
by November 15, 2000, with the final payment of all outstanding principal
due on February 15, 2001. At October 31, 1999, $1,047,000 was outstanding
on the note and is included in other assets on the consolidated balance
sheet.
The carrying value of the net assets of Parker, which was a component of
the Company's Trailers and Agricultural Equipment segment, were included
in the consolidated balance sheet at October 25, 1998 as "Net assets held
for sale". Sales attributable to Parker were $1,004,000, $11,715,000 and
$12,697,000 for 1999, 1998 and 1997, respectively. Income (loss) from
operations, before the allocation of corporate expenses, from Parker was
($607,000), $741,000 and $1,044,000 for 1999, 1998 and 1997, respectively.
Sale of DewEze - Effective July 24, 1998, the Company sold substantially
all of the assets of DewEze to Harper Industries, Inc., a company formed
by the president of the subsidiary, for cash proceeds of approximately
$4,200,000 and a note for $700,000, plus the assumption of approximately
$600,000 in liabilities. Quarterly principal payments are due on the note
beginning January 2001 through October 2005. Interest on the note is due
quarterly at 9% per annum beginning January 1999 through October 2001, at
which time the rate increases to 12% per annum, and further increases 1%
per year thereafter through maturity of the note and is being recorded
using the effective interest method. The Company has no further
commitments or contingencies related to the sale of DewEze. Net sales
attributable to DewEze were $5,844,000 and $7,417,000 for 1998 and 1997,
respectively. Income from operations, before allocation of corporate
expenses, from DewEze was $272,000 and $752,000 for 1998 and 1997,
respectively.
Acquisition of Rhodes - Effective June 30, 1998, the Company acquired all
of the outstanding stock of M.H. Rhodes, Inc. ("Rhodes"), a publicly held
manufacturer of mechanical timers and photoelectric controls, located in
Avon, Connecticut, for $2,900,000 in cash, plus the assumption or
repayment of approximately $1,200,000 of debt. The acquisition has been
accounted for by the purchase method of accounting. The purchase price has
been allocated to the net assets acquired based on estimated fair values
at the date of acquisition. This resulted in excess of purchase price over
assets acquired of approximately $475,000, which is being amortized on a
straight-line basis over 20 years. The Company has consolidated the
operations of its Cramer subsidiary, previously located in Old Saybrook,
Connecticut, into Rhodes' manufacturing facility. See Note 12 -
Restructuring Charge.
Sale of Great Bend - Effective April 26, 1998, the Company sold
substantially all of the assets of Great Bend to Allied Products
Corporation of Chicago, Illinois, for cash proceeds of approximately
$9,900,000, plus the assumption of approximately $2,100,000 in
liabilities. The Company recorded a pre-tax gain on the sale of Great Bend
of $2,775,000 ($924,000 net of tax). Net sales attributable to Great Bend
were $7,251,000 and $13,689,000 for 1998 and 1997, respectively. Income
from operations, before allocation of corporate expenses, from Great Bend
was $670,000 and $1,466,000 for 1998 and 1997, respectively.
F-9
Acquisition of Astro Air - Effective April 26, 1998, the Company acquired
substantially all of the assets of Astro Air, Inc. ("Astro Air"), a
Jacksonville, Texas manufacturer of "fin and tube" heat transfer coils,
for $8,000,000 in cash, plus the repayment, shortly after closing, of
approximately $2,700,000 in debt. The acquisition has been accounted for
by the purchase method of accounting. The purchase price has been
allocated to the net assets acquired based on estimated fair values at the
date of acquisition. This resulted in excess of purchase price over assets
acquired of approximately $1,425,000, which is being amortized on a
straight-line basis over 20 years. In connection with the acquisition, the
Company has entered into a five-year consulting agreement with Dacus
Properties, Inc. ("DPI"), the former owner of Astro Air, under which DPI
will receive 3.4% of net revenues generated by certain specified
customers. During 1999 and 1998, the Company recorded $878,000 and
$425,000, respectively, of contingent consideration under the agreement
with DPI as goodwill based upon related revenue.
The following unaudited pro forma financial information presents the
consolidated results of operations of the Company as if the acquisitions
of Rhodes and Astro Air and the dispositions of DewEze and Great Bend had
occurred at the beginning of fiscal year 1997 after giving effect to
certain adjustments, including depreciation expense related to the fair
market write-up of machinery and equipment, amortization of intangible
assets, including goodwill, the elimination of the gain on the disposition
of Great Bend and elimination of the restructuring charge and other
merger-related costs incurred in connection with the merger of Cramer into
Rhodes, including the termination of the lease on the Cramer facility. The
disposition of Parker is not reflected in the pro forma financial
information presented below because the effect on the financial statements
is not considered to be significant. The unaudited pro forma information
is presented for comparative purposes only and does not purport to be
indicative of the results of operations of the Company had these
transactions been made at the beginning of fiscal year 1997.
1998 1997
Net sales $ 165,457,000 $ 150,630,000
Income from operations 9,126,000 8,087,000
Net income 729,000 2,241,000
Net (loss) income available for common stockholders (341,000) 1,194,000
Basic (loss) earnings per common share $ (0.06) $ 0.21
4. INVENTORIES
1999 1998
Raw materials and purchased parts $ 9,619,000 $10,039,000
Work in process 4,076,000 4,161,000
Finished goods 6,478,000 7,062,000
---------- ------------
Total $20,173,000 $21,262,000
=========== ===========
F-10
5. PROPERTY, PLANT AND EQUIPMENT
1999 1998
Land and improvements $ 1,385,000 $ 1,443,000
Buildings and improvements 17,390,000 14,928,000
Machinery and equipment 49,297,000 45,379,000
Construction in progress 1,374,000 2,525,000
----------- -----------
Total 69,446,000 64,275,000
Accumulated depreciation 33,546,000 28,360,000
----------- -----------
Property, plant and equipment, net $35,900,000 $35,915,000
=========== ===========
Depreciation expense was approximately $5,504,000, $4,704,000 and $4,027,000
for 1999, 1998 and 1997, respectively.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
1999 1998
Goodwill:
Goodwill $33,336,000 $33,003,000
Accumulated amortization 6,279,000 4,848,000
----------- -----------
Goodwill, net $27,057,000 $28,155,000
=========== ===========
Other Intangible Assets:
Noncompetition agreements $ 3,020,000 $ 3,520,000
Customer lists 8,000,000 8,000,000
Other 566,000 541,000
----------- -----------
Total 11,586,000 12,061,000
Accumulated amortization 3,693,000 3,371,000
----------- -----------
Other intangible assets, net $ 7,893,000 $ 8,690,000
=========== ===========
F-11
Amortization expense related to goodwill and other intangible assets was
approximately $2,262,000 for 1999, $2,411,000 for 1998 and $2,173,000 for
1997.
7. RELATED PARTY DEBT
Related party debt consists of promissory notes to preferred stockholders,
payable on demand, but no later than October 2005, aggregating $1,815,000 and
$2,843,000 as of October 31, 1999 and October 25, 1998, respectively.
Interest on the notes is paid quarterly at 8%.
8. LONG-TERM DEBT
1999 1998
Revolving credit agreements $38,150,000 $48,200,000
Termloans, payable in monthly installments through 2009
at variable rates from 5% to 8.5%, collateralized by
certain real property 1,675,000 2,079,000
Industrial revenue bonds, payable in varying installments
through 2018 at rates from 4.25% to 7.5%, collaterized
by certain real property, building and equipment 10,679,000 11,069,000
Subordinated promissory notes, payable in varying installments
through 2005 at rates from 7.6% to 9% 2,848,000 3,923,000
Other long-term debt 313,000 410,000
----------- -----------
Total long-term debt 53,665,000 65,681,000
Less current portion 2,064,000 1,935,000
----------- -----------
Long-term debt, net of current portion $51,601,000 $63,746,000
=========== ===========
On January 22, 1999, the Company entered into a new $55,000,000 revolving
credit facility with the Company's two primary banks, expiring in December
2002. At October 31, 1999, $38,150,000 was outstanding and $16,850,000 was
available for additional borrowing under the facility. The facility is
secured by the non-real estate assets of the Company. Interest is payable at
the Company's option, at either the bank's prime rate or a variable spread
(2.5% at October 31, 1999) over the London Interbank Offered Rate. The
average amount outstanding under the Company's revolving credit facilities in
1999 was $46,932,000 and the weighted average interest rate was 8.1%. The
agreement includes financial and other covenants, including fixed charge,
cash flow and net worth ratios and restrictions on certain asset sales,
mergers and other significant transactions. The Company was in compliance
with such covenants at October 31, 1999, and expects to be in compliance with
such covenants for the foreseeable future.
Repayment of the Industrial Revenue Bonds of certain of the subsidiaries has
been guaranteed by the Company.
Derivative Interest Rate Contracts - The Company has two interest rate swap
agreements, each with a $7,500,000 notional amount, maturing in July 2002.
The Company receives floating interest rate payments at the three month
London Interbank Offered Rate (6.19% at October 31, 1999) in exchange for the
payment of quarterly fixed interest rate payments of 7.0675% and 7.09% over
the life of the agreements. In March 1999, the Company entered into an
interest rate swap agreement with one of its banks with an initial notional
amount of $5,750,000. The agreement requires the Company to make quarterly
fixed payments on the notional amount at 4.22% through October 2003 in
exchange for receiving payments at the BMA Municipal Swap Index (3.6% at
October 31, 1999). The Company entered into these interest rate swap
agreements to change the fixed/variable interest rate mix of its debt
portfolio to reduce the Company's aggregate risk to movements in interest
rates. These agreements are accounted for using settlement accounting.
F-12
The aggregate amount of required payments on long-term debt is as follows:
Year ending October:
2000 $ 2,064,000
2001 2,471,000
2002 1,249,000
2003 39,308,000
2004 1,193,000
Thereafter 7,380,000
-----------
Total $53,665,000
===========
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments were made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
Cash and Cash Equivalents, Accounts Receivable, and Accounts Payable - The
carrying amount of these items are a reasonable estimate of their fair
value.
Short-term Debt and Long-term Debt - Rates currently available to the
Company for debt with similar terms and remaining maturities are used to
estimate the fair value for debt issues. Accordingly, the carrying amount
of debt is a reasonable estimate of its fair value.
Derivatives - The Company's interest rate swap agreements have an
aggregate notional amount of $20,750,000 and were in a liability position
of $285,000 at October 31, 1999.
10. PENSION AND POSTRETIREMENT PLANS
Pension Plans - The Company sponsors a defined contribution 401(k) plan
covering substantially all of its employees, except for Motor Products'
hourly employees, who are covered under the defined benefit pension plan
described below. Eligible employees may contribute up to 15% of their
compensation to this plan and their contributions are matched by the Company
at a rate of 50% on the first 4% of the employees' contribution. The plan
also provides for a fixed contribution of 3% of eligible employees'
compensation. Pension expense related to these plans was $1,233,000,
$1,017,000 and $891,000 for 1999, 1998 and 1997, respectively.
Motor Products has a defined benefit pension plan covering substantially all
of its hourly employees. The benefits are based on years of service, the
employee's compensation during the last three years of employment, and
accumulated employee contributions.
F-13
Effective October 31, 1999, the Company adopted SFAS No. 132, Employers
Disclosures About Pensions and Other Post-Retirement Benefits. In accordance
with SFAS No. 132, the following tables provide a reconciliation of the
change in benefit obligation, the change in plan assets and the net amount
recognized in the consolidated balance sheets.
1999 1998
Change in projected pension benefit obligation:
Projected pension benefit obligation at beginning of year $3,415,000 $3,074,000
Service cost 106,000 83,000
Interest cost 204,000 200,000
Actuarial (gain) loss (485,000) 182,000
Benefits paid (149,000) (124,000)
---------- ----------
Projected pension benefit obligation at end of year $3,091,000 $3,415,000
========== ==========
1999 1998
Change in plan assets:
Fair value of plan assets at beginning of year $3,604,000 $3,455,000
Actual return on plan assets 644,000 281,000
Employee contributions 15,000 17,000
Benefits and expenses paid (182,000) (149,000)
---------- ----------
Fair value of plan assets at end of year $4,081,000 $3,604,000
========== ==========
1999 1998
Excess of fair value of plan assets over benefit obligation 990,000 190,000
Unrecognized initial net credit (247,000) (289,000)
Unrecognized prior service cost 228,000 247,000
Unrecognized net (gain) loss (565,000) 264,000
---------- ----------
Prepaid pension asset $ 406,000 $ 412,000
========== ==========
The accumulated benefit obligation was $2,660,000 as of October 31, 1999 and
$2,896,000 as of October 25, 1998.
Components of net pension expense (credit) included in the consolidated
statements of operations for 1999, 1998 and 1997 are as follows:
1999 1998 1997
Service cost $ 106,000 $ 83,000 $ 69,000
Interest cost on projected benefit obligation 204,000 200,000 194,000
Expected return on assets (283,000) (272,000) (243,000)
Amortization of unrecognized net credit (41,000) (41,000) (41,000)
Amortization of prior service cost 19,000 19,000 13,000
--------- --------- ---------
Net pension expense (credit) $ 5,000 $ (11,000) $ (8,000)
--------- --------- ---------
F-14
Additional disclosures and assumptions:
1999 1998
Discount rate 7.25% 6.25%
Expected long-term rate of return 8.0 8.0
Salary increases 5.0 5.0
Postretirement Plan - Motor Products - Motor Products provides postretirement
medical benefits and life insurance benefits to current and former employees
who retire from Motor Products. No contributions from retirees are required
and the plan is funded on a pay-as-you-go basis. The Company recognizes the
expected cost of providing such post-retirement benefits during employees'
active service periods.
The following tables provide a reconciliation of the change in the
accumulated postretirement benefit obligation and the net amount recognized
in the consolidated balance sheets at October 31, 1999 and October 25, 1998:
1999 1998
Change in accumulated postretirement benefit obligation:
Accumulated postretirement benefit obligation, beginning of year $2,009,000 $2,126,000
Service cost 128,000 114,000
Interest cost 118,000 113,000
Actuarial gain (335,000) (296,000)
Benefits paid (47,000) (48,000)
---------- ----------
Accumulated postretirement benefit obligation, end of year $1,873,000 $2,009,000
========== ==========
1999 1998
Accumulated postretirement benefit obligation $1,873,000 $2,009,000
Unrecognized net loss from past experience different
from that assumed and from changes in assumptions (29,000) (368,000)
Prior service cost not yet recognized in net periodic
postretirement benefit cost 315,000 333,000
---------- ----------
Accrued postretirement benefit cost $2,159,000 $1,974,000
========== ==========
F-15
Net periodic postretirement benefit cost included the following components
for 1999, 1998 and 1997:
1999 1998 1997
Service cost $128,000 $114,000 $119,000
Interest cost 118,000 113,000 132,000
Amortization of prior service cost (14,000) (17,000) 16,000
-------- -------- --------
Total $232,000 $210,000 $267,000
======== ======== ========
For measurement purposes, an 8.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed. The rate was assumed to
decrease gradually to 5.2% for 2012, and remain at that level thereafter.
The healthcare cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed healthcare cost
trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of October 31, 1999 by
$426,000 and the aggregate of the service cost and interest cost components
of the net periodic postretirement benefit cost for the year then ended by
$68,000. Decreasing the assumed healthcare postretirement benefit obligation
as of October 31, 1999 by 1% decreases the accumulated postretirement
benefit obligation by $318,000 and the aggregate of the service cost and
interest cost components of the net periodic postretirement benefit cost for
the year then ended by $49,000. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 7.25% as
of October 31, 1999 and 6.25% as of October 25, 1998.
Postretirement Plan - Rhodes - Rhodes provides postretirement income,
medical benefits and life insurance benefits to certain current and former
employees who retire from Rhodes. No contributions from retirees are
required and the plan is funded on a pay-as-you-go basis. The Company
recognizes the expected cost of providing such postretirement benefits
during employees' active service periods.
The following tables provide a reconciliation of the change in the
accumulated postretirement benefit obligation and the net amount recognized
in the consolidated balance sheets at October 31, 1999 and October 25, 1998:
1999 1998
Change in accumulated postretirement benefit obligation:
Accumulated postretirement benefit obligation, beginning of year $784,000 $752,000
Interest cost 49,000 44,000
Actuarial gain (41,000) --
Benefits paid (41,000) (12,000)
-------- --------
Accumulated postretirement benefit obligation, end of year $751,000 $784,000
======== ========
Net periodic post retirement benefit cost consists of interest cost of
$49,000 for 1999 and $44,000 for 1998. The effects of assumed changes in the
healthcare cost trend by 1% are not material.
F-16
1999 1998
Accumulated postretirement benefit obligation $751,000 $784,000
Unrecognized net gain (loss) from past experience different
from that assumed and from changes in assumptions 7,000 (45,000)
-------- --------
Accrued postretirement benefit cost $758,000 $739,000
======== ========
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 6.25% for 1999 and 1998,
respectively, and the medical inflation rate was 5.5% and 4.5% for 1999 and
1998, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain production facilities and
equipment under operating leases. Operating lease expense was approximately
$1,202,000, $1,489,000 and $1,107,000 for 1999, 1998 and 1997, respectively,
net of sublease rentals and reimbursements of utilities of $63,000 and
$44,000 for 1998 and 1997, respectively. The lease on the corporate
headquarters office space expires in September 2006 with a base rent of
approximately $305,000. Future minimum rental payments under non-cancelable
operating leases are as follows:
2000 $1,066,000
2001 849,000
2002 445,000
2003 336,000
2004 322,000
Thereafter 585,000
----------
$3,603,000
==========
At October 31, 1999, outstanding letters of credit totaled approximately
$12,317,000 and primarily guarantee industrial revenue bonds.
The Company is subject to federal, state and local environmental regulations
with respect to its operations. The Company believes that it is operating in
substantial compliance with applicable environmental regulations.
Manufacturing and other operations at the Company's various facilities may
result, and may have resulted, in the discharge and release of hazardous
substances and waste from time to time. The Company routinely responds to
such incidents as deemed appropriate pursuant to applicable federal, state
and local environmental regulations.
The Company is a party to a consent decree with the State of Connecticut
pursuant to which it has agreed to complete its environmental investigation
of the site on which its Cramer facility was previously located and conduct
any remedial measures which may be required. The Company has entered into a
settlement agreement with the former operators of the site. In accordance
with the terms of the agreement, the Company received $600,000 from the
former operators, in return for a release from future obligations with
respect to environmental matters related to the site. The $600,000 received,
which is included in accrued expenses at October 31, 1999, will be used to
complete the environmental investigation of the site and to conduct any
remedial measures which may be required. Based upon the amounts recorded as
liabilities, the Company believes that the ultimate resolution of this
matter will not have a material adverse effect on the consolidated financial
results of the Company.
F-17
The Company has been named as a potentially responsible party with respect
to three hazardous substance disposal sites currently under remediation by
the U.S. Environmental Protection Agency (the "EPA") under its "Superfund"
program. With respect to all three sites, based on the minimal amount of
waste alleged to have been contributed to the sites by the Company, the
Company expects to resolve the matters through the payment of de minimis
amounts.
Sooner Trailer has arrangements with a number of financial institutions to
provide floor plan financing for its dealers, which requires it to
repurchase repossessed products from the financial institutions in the event
of a default by the financed dealer. Its obligation is typically to
repurchase the equipment at 90% of the purchase price for the first 180
days, 80% for the next 90 days and 70% for the next 90 days, after which the
obligation expires. In the event of a default by all of the financed
dealers, the Company would be required to repurchase approximately
$11,300,000 of product as of October 31, 1999. The Company does not believe
that its obligation under these repurchase agreements will have a material
adverse effect on the financial results of the Company. Sooner Trailer has
not taken possession of any significant amount of equipment pursuant to the
repurchase obligations in these contracts.
In addition to the matters reported herein, the Company is involved in
litigation dealing with numerous aspects of its business operations. The
Company believes that settlement of such litigation will not have a material
adverse effect on its consolidated financial position or results of
operations.
12. RESTRUCTURING CHARGE
In connection with the merger in 1998 of the Company's Cramer subsidiary
into Rhodes, and the consolidation of Cramer's manufacturing into Rhodes'
manufacturing facility, the Company recorded, in the third quarter of 1998,
a restructuring charge of $909,000. The restructuring charge included
$583,000 for the termination of the lease on Cramer's Old Saybrook,
Connecticut manufacturing facility, $102,000 for the write-off of inventory
for discontinued product lines, $174,000 for employee severance and
termination benefits for 74 predominantly manufacturing employees, and
$50,000 for the write-off of manufacturing equipment. The amount of actual
termination benefits subsequently paid and charged against the liability and
the actual number of employees terminated did not differ significantly from
the original estimates. At October 25, 1998, approximately $125,000 of
accrued restructuring costs was included in accrued expenses and accrued
compensation and benefits. The remaining restructuring costs were paid in
fiscal 1999.
13. INCOME TAX EXPENSE
The income tax provision consists of the following:
1999 1998 1997
Current:
Federal $ 986,000 $2,967,000 $2,400,000
State 257,000 394,000 103,000
Deferred - Federal (33,000) (561,000) (403,000)
---------- ---------- ----------
Income tax expense $1,210,000 $2,800,000 $2,100,000
========== ========== ==========
F-18
The reconciliation to the statutory federal income tax rate is as follows:
1999 1998 1997
Federal income tax provision at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit 5.5 7.2 1.4
Amortization of excess cost of net assets acquired 15.8 13.9 10.8
Effect of disposition of businesses (17.9) 18.4 --
Other 3.1 6.5 (1.0)
----- ----- -----
Provision for income taxes 40.5% 80.0% 45.2%
===== ===== =====
The components of the Company's net deferred tax assets and liabilities are
as follows:
1999 1998
Deferred tax asset:
Accruals and reserves $ 3,128,000 $ 3,347,000
Tax credits and loss carryforwards 2,166,000 900,000
Intangibles -- 971,000
Other 135,000 126,000
----------- -----------
5,429,000 5,344,000
Valuation allowance (2,060,000) (2,724,000)
----------- -----------
Total $ 3,369,000 $ 2,620,000
=========== ===========
Deferred tax liability:
Intangibles $ 2,008,000 $ 2,584,000
Pension 140,000 140,000
Property, plant and equipment 2,275,000 1,502,000
Other 165,000 28,000
----------- -----------
Total $ 4,588,000 $ 4,254,000
----------- -----------
Net deferred tax liability $(1,219,000) $(1,634,000)
=========== ===========
These amounts are included in the accompanying consolidated financial
statements as follows:
1999 1998
Current assets $ 1,220,000 $ 733,000
Long-term liabilities (2,439,000) (2,367,000)
----------- -----------
Net deferred tax liability $(1,219,000) $(1,634,000)
=========== ===========
The Company has recorded valuation allowances which management has
determined are sufficient to reduce its deferred tax assets to an amount
which is more likely than not to be realized. The Company's valuation
allowances relate primarily to intangible assets, federal and state net
operating loss carry-forwards, and other state deferred tax assets.
F-19
As a result of the acquisition of Rhodes, the Company has approximately
$1,400,000 of net operating loss carry forwards as of October 31, 1999
available to reduce the taxable income of Rhodes for federal income tax
reporting purposes and which expire between 2003 and 2011. The utilization
of these net operating losses are subject to annual limitations under
Section 382 of the Internal Revenue Code.
14. CONVERTIBLE PREFERRED STOCK
In connection with the acquisition of Stature in October 1995, the Company
issued 1,071,428 of its 10,000,000 authorized preferred shares of Class A
convertible preferred stock with a stated value of $14.00 per share. Such
preferred stock is convertible into the Company's common stock on a
one-for-one basis, at the holders' option, through October 2000, at which
time, the Company has the right, but is not obligated, to redeem, the
preferred stock for cash at its stated value of $14.00 per share. The
Company's option to redeem the preferred stock continues after October 2000,
with the redemption price increasing annually until it reaches $21.00 in
2009 for a maximum liquidation amount of $22,500,000. The Company is
accreting the value of its preferred stock to its stated value of $14.00 per
share over the period ending in October 2000, when the conversion feature of
the stock expires, using the effective interest method at a rate of 7.6%.
The preferred stock earns quarterly cash dividends as a percentage of the
stated value of $15,000,000 at a rate of 5% per annum through October 2000.
Thereafter, the dividend percentage rate increases 1% each year to its
maximum rate of 10% in November 2004 and thereafter. To the extent that the
preferred stock has not been converted by October 2000, the increasing rate
dividend will be accounted for by the accrual of amounts in excess of the
cash dividend through the consolidated statements of operations using the
effective interest method, at a rate of 8.7%. Dividends paid on the
preferred stock were $750,000 for 1999, 1998 and 1997.
The Company may not pay any common stock dividends unless all preferred
dividend requirements have been met. At October 31, 1999, there are no
accrued preferred dividends. The convertible preferred stockholders are
entitled to vote as a class to elect one member of the Board of Directors of
the Company, provided at least 40% of the originally issued Class A
preferred stock is outstanding. The convertible preferred stock has
liquidation priority over common stock. In certain circumstances, the
issuance of other classes of securities require the approval of the Class A
preferred stockholders.
15. STOCK-BASED COMPENSATION PLANS
In 1998, the Company adopted a long-term incentive plan (the "Incentive
Plan") which permits the granting of Stock Options, Stock Appreciation
Rights, Restricted Stock, Long-Term Performance Awards, Performance Shares
and Performance Units. Officers, other employees and directors of the
Company and consultants to the Company are eligible to receive awards under
the Incentive Plan. The maximum number of shares of Common Stock of the
Company that may be made the subject of awards granted under the Incentive
Plan is 500,000. Stock options granted under the Incentive Plan generally
vest over five years and are exercisable for periods up to ten years from
the date of grant at a price which equals fair value at the date of grant.
The Company also maintains a stock option plan (the "1994 Plan"), designed
to serve as an incentive for retaining valuable employees and directors. All
employees and directors of the Company are eligible to participate in the
1994 Plan. The 1994 Plan provides for the granting of options to purchase an
aggregate of up to 500,000 shares of common stock of the Company. Options
granted generally vest over five years and are exercisable for periods up to
ten years from the date of grant at a price which equals fair market value
at the date of grant.
F-20
The 1994 Plan provides for the automatic acceleration of the exercisability
of all outstanding options upon the occurrence of a change in control (as
defined) and for the cancellation of options and cash payment to the holders
of such canceled options upon the occurrence of certain events constituting
a change in control. The 1994 Plan may be amended, altered or discontinued
at any time, but no amendment, alteration or discontinuation will be made
which would impair the rights of an optionee with respect to an outstanding
stock option without the consent of the optionee.
The following schedule summarizes stock option activity and status:
Year Ended
--------------------------------------------------------------------------------
October 31, 1999 October 25, 1998 October 26, 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding,
beginning of year 587,000 $8.57 371,000 $ 9.31 334,000 $10.14
Granted 204,000 4.70 296,000 7.82 81,000 6.65
Exercised -- -- (1,000) 6.13 -- --
Cancelled (6,000) 6.13 (79,000) 9.26 (44,000) 10.70
------- ------- -------
Outstanding, end of year 785,000 $7.58 587,000 $ 8.57 371,000 $ 9.31
======= ======= =======
Exercisable, end of year 270,000 $9.50 155,000 $10.15 135,000 $10.69
======= ======= =======
The following table summarizes information about stock options outstanding
at October 31, 1999:
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Life Exercise Exercise
Range of Exercise Prices Options in Years Price Options Price
$4.16 - $5.75 204,000 9.33 $ 4.70 -- $ --
$5.88 - $8.00 381,000 7.96 $ 7.43 108,000 $ 7.09
$8.88 - $11.38 85,000 6.07 $ 9.17 53,000 $ 9.26
$12.00 115,000 5.15 $12.00 109,000 $12.00
------- -------
785,000 7.70 $ 7.58 270,000 $ 9.53
======= =======
The Company accounts for the 1994 Plan and stock options granted under the
Incentive Plan in accordance with APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for the 1994
Plan and the Incentive Plan been determined consistent with SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income and
earnings per share would have been reduced by $219,000 and $0.04 per share,
respectively for 1999, $84,000 and $0.01 per share, for 1998, $129,000 and
$0.02 per share, for 1997. Because the SFAS No. 123 method of accounting has
not been applied to options granted prior to October 30, 1995, the resulting
pro forma compensation cost may not be representative of that to be expected
in future years.
F-21
The weighted average fair value of options granted during 1999, 1998 and
1997 was $277,000, $575,000 and $252,000, respectively. The fair value of
the options granted were estimated on the date of grant using the Binomial
option-pricing model with the following assumptions for grants in 1999,
1998 and 1997: risk-free interest rate of 6.3%, 4.7%, and 6.2%,
respectively, expected volatility of 35%, 31% and 63%, respectively,
dividend yield of 5.1%, 4.6% and 5.4%, respectively, and an expected life
of six years in 1998, 1997 and 1996.
16. SEGMENT INFORMATION
As of October 31, 1999, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, Disclosure About Segments of an
Enterprise and Related Information. SFAS No. 131 requires companies to
define and report financial and descriptive information about its operating
segments. The Company is organized based upon the products and services it
offers. Under this organizational structure, the Company operates in four
business segments: Motors, Coils, Trailers and Agricultural Equipment, and
Other.
The Motors segment manufactures fractional and integral horsepower motors.
Significant markets for the Company's motors include commercial products and
equipment, healthcare and recreation.
The Coils segment manufactures heat exchange coils primarily for
non-automotive transportation, refrigeration and commercial and residential
HVAC markets. This segment includes the results of Astro Air, which was
acquired in April 1998.
The Trailers and Agricultural Equipment segment includes the Company's
Sooner Trailer subsidiary, which manufactures all-aluminum trailers,
primarily horse and livestock trailers. Sooner Trailer sells its trailers
through a dealer network located throughout the United States and Canada.
Also included in this segment, through the dates of their sales, are the
agricultural equipment companies, Great Bend (sold in April 1998), DewEze
(sold in July 1998), and Parker (sold in March 1999).
The Company's Other segment includes Dura-Bond Bearing Company
("Dura-Bond"), and M.H. Rhodes, Inc. ("Rhodes"). Dura-Bond manufactures
replacement camshaft bearings, valve seats and shims for the automotive
after-market. Rhodes manufactures timers and subfractional horsepower motors
for use in commercial applications.
The Company derives substantially all of its revenues from within the United
States. Company assets located outside of the United States are not
considered material. Information about interest expense, other income and
income taxes is not provided on a segment level. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies.
F-22
The following table includes net sales, income (loss) from operations,
capital additions, and depreciation and amortization expense for the fiscal
years ended October 1999, 1998 and 1997 and identifiable assets as of
October 1999, 1998 and 1997 for each segment:
1999 1998 1997
Identifiable assets:
Motors $ 49,115,000 $ 50,988,000 $ 44,262,000
Coils 22,969,000 21,292,000 6,594,000
Trailers and Agricultural Equipment 22,882,000 31,190,000 42,778,000
Other 20,369,000 20,964,000 16,239,000
Corporate 1,355,000 772,000 1,808,000
------------ ------------ ------------
Total identifiable assets $116,690,000 $125,206,000 $111,681,000
============ ============ ============
Net sales:
Motors $ 63,941,000 $ 54,188,000 $ 46,865,000
Coils 46,634,000 30,555,000 15,515,000
Trailers and Agricultural Equipment 40,277,000 58,958,000 64,111,000
Other 19,269,000 16,267,000 16,570,000
------------ ------------ ------------
Total net sales $170,121,000 $159,968,000 $143,061,000
============ ============ ============
Income (loss) from operations:
Motors $ 8,353,000 $ 7,384,000 $ 6,187,000
Coils 3,114,000 3,571,000 1,558,000
Trailers and Agricultural Equipment 1,289,000 3,071,000 4,505,000
Other 1,410,000 (58,000) 1,180,000
Corporate (1) (6,612,000) (6,792,000) (4,835,000)
------------ ------------ ------------
Total income from operations $ 7,554,000 $ 7,176,000 $ 8,595,000
============ ============ ============
Capital Additions:
Motors $ 3,232,000 $ 5,680,000 $ 2,463,000
Coils 1,563,000 1,133,000 326,000
Trailers and Agricultural Equipment 325,000 1,106,000 1,555,000
Other 477,000 982,000 807,000
Corporate 80,000 672,000 184,000
------------ ------------ ------------
Total capital additions $ 5,677,000 $ 9,573,000 $ 5,335,000
============ ============ ============
Depreciation and amortization expense:
Motors $ 3,420,000 $ 2,890,000 $ 2,672,000
Coils 2,009,000 1,134,000 493,000
Trailers and Agricultural Equipment 774,000 1,642,000 1,791,000
Other 1,131,000 1,005,000 985,000
Corporate 432,000 444,000 259,000
------------ ------------ ------------
Total depreciation and amortization expense $ 7,766,000 $ 7,115,000 $ 6,200,000
============ ============ ============
(1) Includes unallocated corporate expenses, primarily executive,
information technology, and other administrative expenses; also reflects a
restructuring charge of $909,000 in 1998.
F-23
17. QUARTERLY INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year Ended October 31, 1999:
-----------------------------------------
Net sales $ 38,835,000 $ 45,742,000 $ 43,910,000 $ 41,634,000
Gross profit 7,228,000 9,296,000 8,796,000 6,670,000
Income (loss) before taxes (243,000) 1,587,000 2,147,000 (504,000)
Net income (loss) (132,000) 1,299,000 1,054,000 (444,000)
Net income (loss) available
for common stockholders (403,000) 1,026,000 779,000 (720,000)
Basic and diluted earnings (loss)
per common share (0.07) 0.18 0.13 (0.12)
Year Ended October 25, 1998:
-----------------------------------------
Net sales $ 34,054,000 $ 41,868,000 $ 42,998,000 $ 41,048,000
Gross profit 7,496,000 10,224,000 8,495,000 8,334,000
Income (loss) before taxes 11,000 4,630,000 (362,000) (777,000)
Net income (loss) 6,000 1,937,000 (338,000) (903,000)
Net income (loss) available
for common stockholders (259,000) 1,670,000 (606,000) (1,173,000)
Basic and diluted earnings (loss)
per common share (0.04) 0.29 (0.10) (0.20)
The fourth quarter of 1999 included $500,000 of increased warranty costs
associated with specific product identified during the period, a $500,000
inventory adjustment recognized at year-end when a physical inventory was
completed, and a $500,000 adjustment to the Company's workers' compensation
accrual, representing an increase in the estimated costs to resolve open
claims related to previous years.
The second quarter of 1998 includes a pre-tax gain of $2,775,000 on the sale
of Great Bend.
The third quarter of 1998 includes a restructuring charge of $909,000
recorded in connection with the merger of the Company's Cramer and Rhodes
subsidiaries. The third quarter of 1998 also includes a write-off of
approximately $327,000 of inventory in connection with the merger recorded
in cost of products sold and approximately $380,000 of expenses related to
the merger recorded in selling, general and administrative expenses.
The fourth quarter of 1998 includes a pre-tax charge of $1,635,000 to adjust
the carrying value of the assets of the Company's Parker subsidiary to their
estimated fair market value in connection with its sale.
* * * * * *
F-24
Schedule II
Owosso Corporation
Valuation and Qualifying Accounts and Reserves
For the three years ended October 31, 1999
- -----------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other Deductions End of
of Period Expenses Accounts (a) (b) Period
------------- ----------- ------------ ---------- ----------
For the year ended October 31, 1999
Allowances on:
Accounts receivable $ 341,000 $ 106,000 -- $ (129,000) $ 318,000
Inventory 1,353,000 853,000 -- (777,000) 1,429,000
Accrued restructuring costs 125,000 -- -- (125,000) --
For the year ended October 25, 1998
Allowances on:
Accounts receivable $ 300,000 $ 89,000 $ 82,000 $ (130,000) $ 341,000
Inventory 616,000 1,382,000 423,000 (1,068,000) 1,353,000
Accrued restructuring costs -- 909,000 -- (784,000) 125,000
For the year ended October 26, 1997
Allowances on:
Accounts receivable $ 509,000 $ 249,000 $ -- $ (458,000) $ 300,000
Inventory 565,000 1,010,000 -- (959,000) 616,000
- --------------------------------------------------------
(a) Primarily relates to the effects of acquisitions.
(b) As to accounts receivable and inventory, primarily represents amounts
written off against related assets; as to accrued restructuring costs,
represents amounts paid.
F-25