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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 29, 2000 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. [X]
On January 26, 2001, the aggregate market value of the Registrant's Common
Stock, $.01 par value, held by nonaffiliates of the Registrant was approximately
$3,800,000.
On January 26, 2001, 5,849,939 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
22, 2001 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's results of operations
have declined significantly over the past two years, with the Company reporting
a net loss for the year ended October 29, 2000. In addition, the Company was not
in compliance with covenants under its revolving credit facility at October 29,
2000. In February 2001, the Company entered into an amendment to its revolving
credit facility, wherein the lenders agreed to forbear from exercising their
rights and remedies under the facility in connection with such non-compliance
until February 15, 2002, at which time the facility matures. In addition, as
further disclosed under Note 11 "Long-term Debt", the amendment to the revolving
credit facility modified the interest rates charged, requires reductions in the
outstanding balance during calendar 2001 and requires additional covenants to be
met. The Company's continued liquidity is dependent upon its ability to achieve
levels of revenue necessary to support the Company's cost structure, its ability
to maintain adequate financing, and its ability to generate sufficient cash
flows to meet its obligations on a timely basis. Management's plans in regard to
these matters are described in the following paragraph.
Since the second half of fiscal 2000, management of the Company has
taken a series of steps intended to stabilize and improve the operating results
of the Company, including the completion of the sales of its Dura-Bond and
Sooner Trailer subsidiaries and the sale of the timer and switch line at its
M.H. Rhodes subsidiary. In addition, management of the Company's Coils segment
was replaced, cost reductions at the corporate office were implemented and
reductions in fixed costs of the operating units were initiated, commensurate
with reductions in sales volumes. Management believes that available cash and
cash equivalents together with cash flows from operations, available borrowings
under the Company's revolving credit facility and other sources of liquidity
(including assets sales) will be sufficient to fund the Company's operating
activities, investing activities and debt maturities for fiscal 2001. In
addition, management believes that the Company will be in compliance with its
debt covenant requirements throughout fiscal 2001. However, a substantial
portion of its indebtedness, which will mature in February 2002, will require
the Company to refinance the indebtedness at that time.
The Company has four operating segments: Motors, Coils, 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 Motors segment include commercial
products and equipment, healthcare, recreation and non-automotive
transportation. 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.
2
During 1998, the Company initiated the disposition of its businesses
included in the Agricultural Equipment segment in order to focus its resources
on expanding its motor and coil companies. In 1999, the Company completed the
sales of such businesses including Great Bend Manufacturing Company ("Great
Bend"), sold in April 1998, DewEze Manufacturing, Inc. ("DewEze"), sold in July
1998, and Parker Industries ("Parker"), sold in March 1999.
During the fourth quarter of fiscal 2000, the Company adopted a plan to
dispose of Sooner Trailer Manufacturing Company ("Sooner Trailer"), which
manufactures all-aluminum trailers, primarily horse and livestock. Sooner
Trailer, the sale of which was completed in January 2001, had previously been
included in the Agricultural Equipment segment (formerly known as the Trailers
and Agricultural Equipment segment). Accordingly, the Company has reported the
results of Sooner Trailer as discontinued operations for all periods presented
in the consolidated statements of operations.
The Company's Other segment includes Dura-Bond Bearing Company
("Dura-Bond"), and M.H. Rhodes, Inc. ("Rhodes"). Dura-Bond, which manufactures
replacement camshaft bearings, valve seats and shims for the automotive
after-market, selling its products to engine rebuilders, primarily through
distributors, was sold subsequent to the balance sheet date, in November 2000.
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 during the third
and fourth quarters of fiscal 1998. The Company completed the sale of the assets
associated with the timer and switch line of Rhodes subsequent to the balance
sheet date and intends to dispose of the remaining Rhodes assets within twelve
months. 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.
A significant portion of the Company's sales are concentrated among a
small number of customers. Sales to the five largest customers represented
approximately 30%, 31% and 15% of total sales from continuing operations for
2000, 1999 and 1998, respectively. Sales to one customer of the Motors segment
represented approximately 12%, 12% and 3% of that segment's sales for 2000, 1999
and 1998, respectively. Sales to the four largest customers of the Coils segment
represented approximately 63%, 70% and 58% of that segment's sales for 2000,
1999 and 1998, respectively.
3
The Company's backlog of unfilled orders as of December 24, 2000 and
December 26, 1999 was as follows:
December 24, December 26,
2000 1999
------------ -------------
(In thousands)
Motors $ 21,125 $ 21,165
Coils 3,068 5,208
Agricultural Equipment -- --
Other 720 3,380
-------- --------
Total $ 24,913 $ 29,753
======== ========
The decrease in the backlog for the Coils segment as compared to the
prior year is primarily the result of the loss of a customer that represented
17% of sales of the Coils segment in 2000. However, in January 2001, management
of the Company was notified that it would again be a supplier to such customer.
Management expects to regain most of the former business of such customer. The
Company expects to fill substantially all of the December 24, 2000 backlog by
the end of fiscal 2001.
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 1,300 employees, of which approximately
108 are employed at its Owosso, Michigan facility and are represented by 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 28 employees at the Company's
Avon, Connecticut facility are represented by 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
4
be able to maintain such insurance or obtain product liability insurance in the
future at a reasonable cost.
Executive Officers of the Company
The executive officers of the Company are:
Name Age Position
George B. Lemmon, Jr. ............... 39 President, Chief Executive Officer, and Director
Harry Holiday, III .................. 44 Executive Vice President and Chief Operating
Officer
John M. Morrash ..................... 46 Executive Vice President - Finance, Chief
Financial Officer, Treasurer and Secretary
Kirk E. Moore ....................... 38 Corporate Controller and Assistant Treasurer
Steve R. Shubert .................... 38 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. Mr. Morrash held this position
since July 1995 and his responsibilities included the domestic and international
treasury management of the company.
Kirk E. Moore became Corporate Controller of the Company in March 2000.
Mr. Moore joined the Company in May 1997 as its Financial Controller. Prior to
joining the Company, he served as Manager of Financial Reporting at PCI
Services, Inc., a subsidiary of Cardinal Health, Inc.
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.
5
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
Other: Avon, Connecticut 92,000 82,000
Carson City, Nevada (6) 75,100 59,600
- ------------
(1) This facility is subject to a mortgage securing a $5.2 million industrial
revenue bond financing.
(2) The lease for this facility expires in 2002 and provides for annual rental
payments of approximately $90,000.
(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 $202,000 mortgage.
(5) The lease for this facility expires in 2002 and provides for annual rental
payments of approximately $110,000.
(6) This facility, which was subject to a mortgage securing a $5.0 million
industrial revenue bond financing, was sold in November 2000.
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. In 2000, the
Company entered into a sublease agreement for approximately 6,000 square feet of
its office space. Under the sublease agreement, which expires in September 2006,
the Company receives annual sublease rental payments aggregating $119,000. 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.
6
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.
Fiscal year ended October 29, 2000: High Low
------ ------
First Quarter $4.375 $2.938
Second Quarter $4.125 $2.594
Third Quarter $2.813 $1.875
Fourth Quarter $2.125 $1.375
Fiscal year ended October 31, 1999:
First Quarter $5.625 $4.000
Second Quarter $5.625 $3.563
Third Quarter $6.000 $4.625
Fourth Quarter $6.000 $3.625
As of January 10, 2001, there were approximately 121 holders of record
of the Company's common stock and an estimated number of beneficial owners of
the common stock of approximately 600.
In June 1999, the Company changed its quarterly dividend rate to $0.06
per share, from the $0.09 per share amount previously paid. Effective for the
second quarter of 2000, the Company modified certain covenants included in its
revolving credit facility. In connection with such modifications, the Company
was, and continues to be, prohibited from making common stock dividend payments
subsequent to August 28, 2000. Further modifications to the Company's revolving
credit facility in February 2001 resulted in the Company also being prohibited
from making future preferred stock dividend payments.
7
Item 6. Selected Financial Data
The information set forth below, which has been derived from the
audited consolidated financial statements of the Company, has been restated to
reflect Sooner Trailer as discontinued operations and 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. 29, Oct. 31, Oct. 25, Oct. 26, Oct. 27,
2000 1999(1) 1998(2) 1997 1996
-------- -------- -------- --------- --------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Net sales $116,864 $130,848 $125,820 $112,752 $99,477
Cost of products sold 97,908 105,601 97,349 84,206 75,025
-------- -------- -------- -------- -------
Gross profit 18,956 25,247 28,471 28,546 24,452
Selling, general and administrative 17,011 19,590 21,773 21,194 20,240
expenses
Write-down of net assets held for sale 2,800 -- 1,635
-- --
Gain on sale of business -- -- (2,775)
-- --
Restructuring charge -- -- 909 -- --
-------- -------- -------- -------- -------
Income (loss) from operations (855) 5,657 6,929 7,352 4,212
Interest expense 5,106 4,999 4,849 4,080 4,008
Other (income) expense 533 (444) (92) (177) (213)
-------- -------- -------- -------- -------
Income (loss) from continuing operations
before income taxes (6,494) 1,102 2,172 3,449 417
Income tax expense (benefit) (1,400) 370 2,087 1,458 149
-------- -------- -------- -------- -------
Income (loss) from continuing operations (5,094) 732 85 1,991 268
Discontinued Operations:
Income from discontinued operations 22 1,045 617 560 580
Loss on disposal of discontinued
Operations (8,600) -- -- --
-------- -------- -------- -------- -------
Net income (loss) (13,672) 1,777 702 2,551 848
Dividends and accretion on preferred stock (1,121) (1,095) (1,070) (1,047) (1,025)
-------- -------- -------- -------- -------
Net income (loss) available to common
Stockholders $(14,793) $682 $(368) $1,504 $(177)
======== ======== ======== ======== =======
Basic and diluted income (loss) from
continuing operations per common share $(1.06) $(0.06) $(0.17) $0.16 $(0.13)
Weighted average number of common
Shares outstanding (basic) 5,844 5,826 5,813 5,809 5,839
OTHER DATA:
Capital expenditures $2,295 $5,355 $8,971 $4,748 $3,976
Depreciation and amortization 7,144 6,993 6,102 5,360 5,273
EBITDA (3) 9,089 12,650 12,800 12,712 9,485
8
Year Ended
-------------------------------------------------------------
Oct. 29, Oct. 31, Oct. 25, Oct. 26, Oct. 27,
2000 1999 1998 1997 1996
-------- -------- -------- --------- --------
BALANCE SHEET DATA:
Total assets $85,754 $111,373 $121,476 $108,668 $105,864
Total short-term and long-term obligations 50,279 54,760 67,747 54,022 52,940
Stockholders' equity 18,432 33,984 34,643 36,730 37,020
- --------------------------------------------------------------------------------
(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) EBITDA represents income from continuing operations before income taxes,
interest expense, other income and expense, write-down of net assets held
for sale, restructuring charges, 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.
9
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's results of operations have declined significantly over the past two
years, with the Company reporting a net loss for the year ended October 29,
2000. In addition, the Company was not in compliance with covenants under its
revolving credit facility at October 29, 2000. In February 2001, the Company
entered into an amendment to its revolving credit facility, wherein the lenders
agreed to forbear from exercising their rights and remedies under the facility
in connection with such non-compliance until February 15, 2002, at which time
the facility matures. As further disclosed under Note 11 "Long-term Debt", the
amendment to the revolving credit facility also modified the interest rates
charged, requires reductions in the outstanding balance during calendar 2001 and
requires additional covenants to be met. The Company's continued liquidity is
dependent upon its ability to achieve levels of revenue necessary to support the
Company's cost structure, its ability to maintain adequate financing, and its
ability to generate sufficient cash flows to meet its obligations on a timely
basis. Management's plans in regard to these matters are described in the
following paragraph.
Since the second half of fiscal 2000, management of the Company has taken a
series of steps intended to stabilize and improve the operating results of the
Company, including the completion of the sales of its Dura-Bond and Sooner
Trailer subsidiaries and the sale of the timer and switch line at its M.H.
Rhodes subsidiary. In addition, management of the Company's Coils segment was
replaced, cost reductions at the corporate office were implemented and
reductions in fixed costs of the operating units were initiated, commensurate
with reductions in sales volumes. Management believes that available cash and
cash equivalents together with cash flows from operations, available borrowings
under the Company's revolving credit facility and other sources of liquidity
(including asset sales) will be sufficient to fund the Company's operating
activities, investing activities and debt maturities for fiscal 2001. In
addition, management believes that the Company will be in compliance with its
debt covenant requirements throughout fiscal 2001. However, a substantial
portion of its indebtedness which will mature in February 2002 will require the
Company to refinance the indebtedness at that time.
The Company has four operating segments: Motors, Coils, 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 Motors segment include commercial products and
equipment, healthcare, recreation, and non-automotive transportation. 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.
10
The Company's Agricultural Equipment segment included, through the dates of
their sales: Great Bend Manufacturing Company ("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").
During the fourth quarter of fiscal 2000, the Company adopted a plan to dispose
of Sooner Trailer Manufacturing Company ("Sooner Trailer"), which manufactures
all-aluminum trailers, primarily horse and livestock. Sooner Trailer had
previously been included in the Agricultural Equipment segment (formerly known
as the Trailers and Agricultural Equipment segment). Accordingly, the Company
has reported the results of Sooner Trailer as discontinued operations for all
periods presented in the consolidated statements of operations.
The Company's Other segment includes Dura-Bond Bearing Company ("Dura-Bond") and
M.H. Rhodes, Inc. ("Rhodes"). Dura-Bond, which manufactures replacement camshaft
bearings, valve seats and shims for the automotive after-market, was sold
subsequent to the balance sheet date. Based upon the terms of the sale, the
Company recorded, in the fourth quarter of fiscal 2000, a pretax charge of $1.2
million to adjust the carrying value of Dura-Bond's assets to their estimated
fair value. Such charge represents a reduction in goodwill and is included in
"Write-down of net assets held for sale" in the consolidated statements of
operations.
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 during the third
and fourth quarters of fiscal 1998. 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.
The Company completed the sale of the assets associated with the timer and
switch line of Rhodes subsequent to the balance sheet date and intends to
dispose of the remaining Rhodes assets within twelve months. In connection with
the sale of the timer and switch line and the anticipated sale of the remainder
of the assets of Rhodes, the Company recorded, in the fourth quarter of fiscal
2000, a pretax charge of $1.6 million to adjust the carrying value for the
Rhodes' assets to their estimated fair value, based upon an estimated sales
price of the assets. Such charge represents the write-down of goodwill of
$400,000 and the write-down of other non-current assets of $1.2 million and is
included in "Write-down of net assets held for sale" in the consolidated
statements of operations.
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 2000 and
1998 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.
2000 1999 1998
Net sales 100.0% 100.0% 100.0%
Cost of products sold 83.8% 80.7% 77.4%
------ ------ ------
Gross profit 16.2% 19.3% 22.6%
Selling, general and administrative expenses 14.5% 15.0% 17.3%
Write-down of net assets held for sale 2.4% 0.0% 1.3%
(Gain) on sale of business 0.0% 0.0% -2.2%
Restructuring charge 0.0% 0.0% 0.7%
------ ------ ------
Income (loss) from operations -0.7% 4.3% 5.5%
Interest expense 4.4% 3.8% 3.9%
Other (income) expense 0.5% -0.3% -0.1%
------ ------ ------
Income (loss) from operations before income taxes -5.6% 0.8% 1.7%
------ ------ ------
11
Selected financial results for continuing operations of the Company by segment
are set forth below:
Segment Operating Results (in thousands)
2000 1999 1998
Net sales:
Motors $ 57,696 $ 63,941 $ 54,189
Coils (1) 41,660 46,634 30,555
Agricultural equipment (2) -- 1,003 24,810
Other (3) 17,508 19,270 16,266
--------- -------- --------
Total net sales $ 116,684 $130,848 $125,820
========= ======== ========
Income (loss) from operations:
Motors $ 5,530 $ 8,353 $ 7,385
Coils (1) (234) 3,114 3,571
Agricultural equipment (2) -- (607) 2,823
Other (3) (666) 1,409 (967)
Corporate expenses (4) (5,485) (6,612) (5,883)
--------- -------- --------
Total income (loss) from operations $ (855) $ 5,657 $ 6,929
========= ======== ========
(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; also
reflects a restructuring charge of $909,000 in 1998.
(4) Includes unallocated corporate expenses, primarily salaries and benefits,
information technology, and other administrative expenses.
Year ended October 29, 2000 compared to year ended October 31, 1999
Net sales. Net sales for 2000 were $116.9 million, as compared to net sales of
$130.8 million in 1999, a decrease of 10.7%. These results include the effects
of disposing of the Agricultural Equipment Companies, sales from which were $1.0
million in 1999.
Net sales from Motors were $57.7 million in 2000, as compared to $63.9 million
in 1999, a decrease of 9.8%. This decrease reflects lower demand from the
recreational vehicle and healthcare markets. Sales to the recreational vehicle
market were adversely affected by design issues associated with a new motor
developed for this market. Although the design issues were resolved, sales to
this market remain soft as a result of general economic conditions.
Net sales from Coils decreased 10.7% to $41.7 million, compared to $46.6 million
in the prior year. This decrease was primarily a result of a softening in the
heavy truck market.
Net sales from the Company's Other segment were $17.5 million in 2000, as
compared to $19.3 million in 1999. This decrease was primarily a result of
decreased sales at Rhodes.
Income from operations. For 2000, the Company recorded a loss of $855,000 from
operations, as compared to income from operations of $5.7 million in 1999. The
current year loss includes a charge of $2.8 million for the write-down of net
assets held for sale, primarily representing the write-down of goodwill. Prior
year income from operations included a loss of $607,000 related to Parker, sold
in March 1999.
Income from operations for the Motors segment was $5.5 million, or 9.6% of net
sales, in 2000, as compared to $8.4 million, or 13.1% of net sales, in the prior
year. These results reflect decreased sales volume to the recreational vehicle
market and a softening of the healthcare market. Income from operations for the
Motors segment was also unfavorably impacted by temporary production
12
inefficiencies resulting from an overhaul of Motor Products' Owosso, Michigan
facility from batch processing to lean manufacturing during the second quarter
of 2000.
The Coils segment reported a loss from operations of $234,000, as compared to
income from operations of $3.1 million in the prior year. These results reflect
a decrease in gross profit of $2.9 million, primarily from reduced net sales as
well as manufacturing inefficiencies related, in part, to the transition to a
new manufacturing system. In addition, selling, general and administrative costs
increased $487,000, or 20.5% over the prior year. This increase was a result of
higher personnel costs associated with additional management personnel,
including approximately $192,000 related to recruiting and relocation costs, and
$200,000 for severance costs related to the replacement of top management of the
segment in the fourth quarter of 2000.
Loss from operations for the Company's Other segment was $666,000 in 2000, as
compared to income from operations of $1.4 million in the prior year. The
current year loss includes $2.8 million for the write-down of net assets held
for sale, primarily representing the write-down of goodwill. Exclusive of the
write-down, income from operations would have been $2.1 million in 2000. The
improvement over the prior year primarily reflects improved profitability,
despite decreased sales, at Rhodes.
Unallocated corporate expenses included in income from operations were $5.5
million, or 4.7% of net sales, as compared to $6.6 million, or 5.1% of net
sales, in 1999. This reflects reduced personnel, legal and consulting costs, as
compared to the prior year. In addition, unallocated corporate expenses for 2000
reflect a reduction of $260,000 in the Company's environmental liability related
to the site on which its Cramer facility was previously located. Such reduction
was the result of the Company's revision to its estimate of the cost to complete
remedial measures required at the site.
Interest expense. Interest expense increased to $5.1 million for 2000, as
compared to $5.0 million in the prior year, as a result of increased rates,
partially offset by lower average outstanding debt balances.
Other (income) expense. For 2000, other (income) expense includes a $620,000
charge recorded as a reserve against a note receivable obtained in connection
with the sale of Parker in 1999 to Top Air, which filed for Chapter 7 bankruptcy
liquidation in November 2000. Also included in other (income) expense for 2000
is a charge of $219,000 recorded as a reserve against a note receivable received
in connection with the sale of certain Rhodes assets in 1999, partially offset
by income of $100,000 representing a change in estimate on an allowance against
a note receivable. Prior year other (income) expense includes $192,000 of
interest income related to notes receivable obtained in connection with the sale
of Parker in 1999 and the sale of DewEze in 1998.
Income tax expense (benefit). The Company recorded, for 2000, an effective
income tax benefit at a rate of 21.5%, as compared to an effective tax rate of
33.5% for the prior year. The effective tax rate for 2000 was adversely affected
as a result of a higher proportion of non-deductible expenses, primarily for the
write-down of asset values and non-cash amortization expenses related to
acquisitions, as compared to pre-tax income (loss). The effective tax rate for
1999 was favorably impacted by a deferred tax benefit realized upon the sale of
Parker.
Income (loss) from discontinued operations. For 2000, the Company recorded a
loss from discontinued operations of $8.6 million (net of tax of $840,000),
reflecting a write-down of the net assets of Sooner in connection with its
anticipated sale. For 1999, income from discontinued operations was $1.0 million
(net of tax of $840,000). Revenues from discontinued operations were $43.5
million in 2000, as compared to $39.3 million in 1999.
13
Net income (loss) available for common stockholders. Net loss available for
common stockholders was $14.8 million, or $2.53 per share, in 2000, as compared
to net income available for common stockholders of $682,000, or $.12 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 2000 and 1999
and by deducting the non-cash accretion in book value of preferred stock of
$371,000 and $345,000 for 2000 and 1999, respectively.
Year ended October 31, 1999 compared to year ended October 25, 1998
Net sales. Net sales for 1999 increased 4.0%, to $130.8 million, as compared to
net sales of $125.8 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 Agricultural Equipment segment were $1.0 million in 1999, as
compared to $24.8 million in 1998. This decrease reflects the sale of the
Agricultural Equipment Companies.
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.
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. All
restructuring costs have been paid.
Income from operations. For 1999, income from operations was $5.7 million, or
4.3% of net sales, as compared to $6.9 million, or 5.5% 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. Also
included in 1998 is a pre-tax charge of $1.6 million recorded to adjust the
carrying value of Parker's assets to their fair market value, determined in
connection with Parker's sale, which was completed in 1999. In addition, 1998
included a pre-tax gain on the sale of Great Bend of $2.8 million.
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.
14
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 Agricultural Equipment segment had a loss from operations of $607,000 in
1999, as compared to income from operations of $2.8 million in 1998. Exclusive
of the write-down of the Parker assets and the gain on the sale of Great Bend,
income from operations for 1998 would have been $1.7 million. This decrease
reflects the dispositions of the Agricultural Equipment Companies.
Income from operations for the Company's Other segment was $1.4 million in 1999,
as compared to a loss of $967,000 in 1998. The prior year results included the
restructuring charge of $909,000 and $929,000 of merger-related costs from
Cramer.
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.
Interest expense. For 1999, interest expense was $5.0 million, as compared to
$4.8 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 33.5% for 1999,
as compared to an effective rate of 96.1% 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.
Income (loss) from discontinued operations. Income from discontinued operations
for 1999 was $1.0 million (net of tax of $840,000), as compared to $617,000 (net
of tax of $713,000) in 1998. Revenues from discontinued operations were $39.3
million in 1999, as compared to $34.2 million in 1998.
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.
Liquidity and Capital Resources
At October 29, 2000, cash and cash equivalents were $491,000. Working capital
was $2.1 million, as compared to $30.1 million at October 31, 1999. This
decrease reflects the classification of $25.0 million of the Company's revolving
15
credit facility as current, representing amounts to be repaid under such
facility, primarily as a result of the sale of non-core businesses shortly after
the balance sheet date. This decrease was partially offset by the
reclassification of the net assets of Dura-Bond and Rhodes to assets held for
sale, included in current assets. Net cash provided by operating activities was
$3.6 million, as compared to $13.5 million in the prior year. The decrease in
cash from operations was principally the result of decreased operating results.
Net cash used in investing activities included $2.3 million for capital
expenditures for equipment, primarily in the Motors and Coils segments. The
Company currently plans to invest approximately $3.6 million in capital
expenditures during fiscal 2001. 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 2000, the Company
recorded $787,000 of contingent consideration under the agreement with DPI as
goodwill based upon related 2000 revenues.
Cash flows from investing activities also included payments received on notes
obtained in connection with the sale of subsidiaries and applied to principal
aggregating $1.1 million.
Net cash used in financing activities included net borrowings of $3.0 million
under the Company's revolving credit agreement, debt repayments of $2.8 million,
including the repayment of $815,000 of related party debt, and the payment of
dividends of $2.2 million.
At October 29, 2000, $41.1 million was outstanding under the Company's revolving
credit facility. The Company was not in compliance with covenants contained in
its revolving credit facility at that date. In February 2001, the Company
entered into an amendment to its revolving credit facility, wherein the lenders
agreed to forbear from exercising their rights and remedies under the facility
in connection with such non-compliance until February 15, 2002, at which time
the facility matures. In addition, the amendment reduced the total amount
available for borrowings to $32.0 million. At February 9, 2001, $31.6 million
was outstanding under the facility. Borrowings under the facility that are
In-Formula (as defined) will be charged interest at the Prime Rate plus 1.5%.
Borrowings under the facility that are Out of Formula (as defined) will be
charged interest at the Prime Rate plus 2.0%. Borrowings and letters of credit
will be limited to a Borrowing Base, to consist of eligible accounts receivable
and inventory. Borrowings that equal an amount up to and including the Borrowing
Base, will be defined as In-Formula borrowings. Total borrowings less In-Formula
borrowings, will be defined as Out of Formula borrowings. The amendment requires
reductions in the available commitment of $1.0 million at June 30, 2001, $2.0
million at September 30, 2001, and $3.0 million at December 31, 2001. If the
Company is unable to reduce its outstanding commitment on any of these dates,
then for each missed reduction the otherwise-applicable interest rates for
outstanding loans will increase by 1% per annum, but failure to make the
reductions will not constitute a default. The amendment also requires additional
collateral and reporting requirements as well as the addition of a covenant
requiring minimum operating profits. The amendment also requires the suspension
of principal and interest payments on subordinated debt, with an aggregate
outstanding balance of $1.8 million as of October 29, 2000. Furthermore, the
amendment to the facility prohibits the payment of preferred or common stock
dividends.
The Company has interest rate swap agreements with its two banks with notional
amounts totaling $20.2 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.
16
Subsequent Events
Dura-Bond - On November 2, 2000, the Company completed the sale of the stock of
Dura-Bond to a joint venture formed by Melling Tool Company of Jackson,
Michigan, and Engine Power Components, Inc. of Grand Haven, Michigan (the "Joint
Venture"). The Joint Venture acquired the stock of Dura-Bond for approximately
$5.0 million, plus the assumption of debt of approximately $5.0 million. Based
upon the terms of the sale, the Company recorded, in the fourth quarter of
fiscal 2000, a pre-tax charge of $1.2 million to adjust the carrying value of
Dura-Bond's assets to their estimated realizable value. Proceeds from the sale,
net of transaction fees, were used to reduce the Company's revolving credit
facility.
Rhodes - On December 4, 2000, the Company completed the sale of the assets
associated with the timer and switch line of Rhodes to Capewell Components, LLC
of South Windsor, Connecticut for cash of $2.0 million, plus the assumption of
approximately $400,000 in liabilities. Proceeds from the sale were used to
reduce the Company's revolving credit facility and other long-term indebtedness.
The Company anticipates the disposition of the remaining assets of Rhodes within
the next twelve months. In connection with the sale of the timer and switch line
and the anticipated sale of the remainder of the assets of Rhodes, the Company
recorded, in the fourth quarter of fiscal 2000, a pre-tax charge of $1.6 million
to adjust the carrying value of Rhodes' assets to their estimated realizable
value, based on the estimated sales price of the assets.
Sooner - On January 24, 2001, the Company completed the sale of the stock of
Sooner Trailer to the McCasland Investment Group and certain members of Sooner
Trailer's management for cash of $11.5 million, subject to certain post-closing
adjustments based on changes in working capital, plus the assumption of debt of
approximately $670,000. Based upon the terms of the sale, the Company recorded,
in the fourth quarter of 2000, a pretax charge of $8.6 million to adjust the
carrying value of Sooner Trailer's assets to their estimated fair value,
representing the write-down of goodwill. Proceeds from the sale were utilized to
reduce the Company's revolving credit facility.
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. In the second quarter of 2000, the
Company revised its estimate of the cost to complete the remedial measures
required at the site. The revision to the estimate resulted in a reduction in
the liability of $260,000. 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.
17
"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 issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 was amended in June 2000 by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" ("SFAS No. 138"), which
addressed a limited number of issues causing implementation difficulties. SFAS
133, as amended, establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivative instruments as either assets or liabilities and measure them at fair
value. The accounting for changes in fair value depends upon the purpose of the
derivative instrument and whether it is designated and qualifies for hedge
accounting. To the extent derivative instruments qualify and are designated as
hedges of the variability in cash flows associated with forecasted transactions,
the effective portion of the gain or loss on such derivative instruments will
generally be reported in other comprehensive income and the ineffective portion,
if any, will be reported in net income. Such amounts recorded in accumulated
other comprehensive income will be reclassified into net income when the
forecasted transaction affects earnings. To the extent derivative instruments
qualify and are designated as hedges of changes in the fair value of an existing
asset, liability or firm commitment, the gain or loss on the hedging instrument
will be recognized currently in earnings along with changes in the fair value of
the hedged asset, liability or firm commitment attributable to the hedged risk.
The Company is required to adopt the provisions of SFAS 133 effective October
30, 2000. The Company's derivative instruments outstanding as of October 30,
2000, variable-to-fixed interest rate swaps (see Note 11), will not qualify for
hedge accounting under SFAS 133. The adoption of SFAS 133 will require the
Company to mark its interest rate swaps to market. The result will be to record
a net liability of $101,000 with an offsetting cumulative effect charge to
accumulated other comprehensive income. Such amount in accumulative other
comprehensive income will be reclassified into earnings in the same periods
during which the Company records interest expense on the debt associated with
the interest rate swaps.
In that the Company's derivative instruments outstanding do not meet the
stringent requirements for hedge accounting under SFAS 133, future earnings
could reflect greater volatility.
In November 1999, the Staff of the SEC issued Staff Accounting Bulletin ("SAB")
101, "Revenue Recognition". This SAB sets forth the Staff's position regarding
the point at which it is appropriate for a Registrant to recognize revenue. The
Staff believes that revenue is realizable and earned when all of the following
criteria are met:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or service has been rendered;
o The seller's price to the buyer is fixed or determinable; and,
o Collectibility is reasonably assured.
The Company uses the above criteria to determine whether revenue can be
recognized and, therefore, believes that the issuance of SAB 101 does not have a
material impact on these financial statements.
18
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
the "Safe Harbor" 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 have been and can be affected by engineering
difficulties in designing new products or applications for existing
products to meet the requirements of its customers.
o The Company's results can be affected by changes in manufacturing
processes and techniques.
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.
o The Company may, in the future, divest of product lines or business
units. Any such divestiture may involve costs of disposition or loss
on the disposition that could adversely affect 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
29, 2000. 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 11 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
2001 2002 2003 2004 2005 Thereafter at Maturity 10/29/00
--------- --------- -------- ------ ------ ---------- ----------- ----------
Debt:
Fixed rate $ 2,516 $ 544 $ 358 $ 264 $ 173 $ 174 $ 4,029 $ 4,029
Average interest rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Variable rate $ 25,300 $ 16,400 $ 300 $ 600 $ 600 $ 3,050 $ 46,250 $ 46,250
Average interest rate 8.5% 8.2% 4.4% 4.4% 4.4% 4.4%
Interest rate swap agreements:
Variable to fixed swaps $ -- $ 15,000 $ 5,150 $ -- $ -- $ -- $ 20,150 $ (101)
Average pay rate 7.1% 4.2%
Average receive rate 6.1% 4.0%
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and supplemental
schedules appear at pages F-1 through F-29, 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, 2001, 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
2000.
(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 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).
*10.3 Management Services Agreement, by and between Snowmax,
Incorporated, and The Owosso Company, dated July 31, 1989
(Exhibit 10.33 to the 1994 Registration Statement).
*10.4 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).
*10.5 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).
*10.6 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).
22
*10.7 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).
*10.8 Lease, dated March 21, 1995, between Motor Products - Ohio
Corporation and William Berhard Realty Company (Exhibit 10.44
to the 1995 Form 10-K).
*10.9 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).
*10.10 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).
*10.11 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).
*10.12 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).
*10.13 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).
*10.14 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).
*10.15 The Owosso Group, Plan of Reorganization dated March 25, 1994
(Exhibit 2.1 to the 1994 Registration Statement).
*10.16 Amendment No. 1 to The Owosso Group Plan of Reorganization
dated September 26, 1994 (Exhibit 2.8 to the 1994 Registration
Statement).
*10.17 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).
*10.18 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).
*10.19 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).
*10.20 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).
*10.21 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).
*10.22 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).
23
*10.23 Owosso Corporation 401(k) Savings Plan (Exhibit 10.2 to the
January 25, 1998 Form 10-Q).
*10.24 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).
#*10.25 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).
*10.26 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).
*10.27 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).
*10.28 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).
*10.29 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).
*10.30 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).
*10.31 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).
#*10.32 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).
*10.33 First Amendment to Amended and Restated Credit Agreement
(Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 30, 2000).
10.34 Stock Purchase and Redemption Agreement among Owosso
Corporation, MEPC, L.L.C., the Landover Company (d/b/a
"Dura-Bond Bearing Company"), Engine Power Components, Inc.,
and Melling Tool Co., effective as of October 29, 2000.
(Exhibit 10.2 to the Company's Current Report on Form 8-K,
dated January 24, 2001).
10.35 Asset Purchase Agreement by and between M.H. Rhodes, Inc. and
Capewell Component Company, L.L.C., dated December 1, 2000.
10.36 Stock Purchase Agreement between Sooner Investment
Manufacturing Company (purchaser) and Owosso Corporation
(seller), dated January 19, 2001. (Exhibit 10.1 to the
Company's Current Report on Form 8-K, dated January 24, 2001).
10.37 Amendment Agreement by and among Owosso Corporation, its
subsidiaries, Bank One and PNC Bank, N.A., dated February 12,
2001.
11 Computation of per share earnings.
21 Subsidiaries of the registrant.
23 Consent of Deloitte & Touche LLP
- --------------
* 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: February 12, 2001 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 February 12, 2001, in
the capacities indicated:
Signature Title
/s/ John R. Reese Chairman of the Board and Director
- -------------------------------
John R. Reese
/s/ George B. Lemmon, Jr. President, Chief Executive Officer,
- ------------------------------- and a Director
George B. Lemmon, Jr.
/s/ John M. Morrash Executive Vice President - Finance,
- ------------------------------- Chief Financial Officer and
John M. Morrash Treasurer and Secretary
/s/ Ellen D. Harvey Director
- -------------------------------
Ellen D. Harvey
/s/ Harry E. Hill Director
- -------------------------------
Harry E. Hill
/s/ Lowell P. Huntsinger Director
- -------------------------------
Lowell P. Huntsinger
/s/ Eugene P. Lynch Director
- -------------------------------
Eugene P. Lynch
/s/ James A. Ounsworth Director
- -------------------------------
James A. Ounsworth
25
OWOSSO CORPORATION
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
OCTOBER 29, 2000, OCTOBER 31, 1999, AND OCTOBER 25, 1998:
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-28
FINANCIAL STATEMENT SCHEDULE II F-29
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 29, 2000 and October 31, 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three fiscal years in the period ended October 29,
2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Owosso Corporation and subsidiaries
as of October 29, 2000 and October 31, 1999, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
October 29, 2000 in conformity with accounting principles generally accepted in
the United States of America. 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.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 12, 2001
F-1
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended
---------------------------------------------------
October 29, October 31, October 25,
2000 1999 1998
Net sales $ 116,864,000 $ 130,848,000 $ 125,820,000
Costs of products sold 97,908,000 105,601,000 97,349,000
------------- ------------- -------------
Gross profit 18,956,000 25,247,000 28,471,000
Selling, general and administrative expenses 17,011,000 19,590,000 21,773,000
Write-down of net assets held for sale 2,800,000 -- 1,635,000
Gain on sale of business -- -- (2,775,000)
Restructuring charge -- -- 909,000
------------- ------------- -------------
Income (loss) from operations (855,000) 5,657,000 6,929,000
Interest expense 5,106,000 4,999,000 4,849,000
Other (income) expense 533,000 (444,000) (92,000)
------------- ------------- -------------
Income (loss) from continuing operations before income taxes (6,494,000) 1,102,000 2,172,000
Income tax expense (benefit) (1,400,000) 370,000 2,087,000
------------- ------------- -------------
Income (loss) from continuing operations (5,094,000) 732,000 85,000
Discontinued operations:
Income from discontinued operations, net of income tax
expense of $840,000, $840,000 and $713,000 22,000 1,045,000 617,000
Loss on disposal of discontinued operations (8,600,000) -- --
------------- ------------- -------------
Net income (loss) (13,672,000) 1,777,000 702,000
Dividends and accretion on preferred stock (1,121,000) (1,095,000) (1,070,000)
------------- ------------- -------------
Net income (loss) available for common stockholders $ (14,793,000) $ 682,000 $ (368,000)
============= ============= =============
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ (1.06) $ (0.06) $ (0.17)
Income (loss) from discontinued operations (1.47) 0.18 0.11
------------- ------------- -------------
Net income (loss) per share $ (2.53) $ 0.12 $ (0.06)
============= ============= =============
Weighted average number of common shares outstanding:
Basic 5,844,000 5,826,000 5,813,000
============= ============= =============
Diluted 5,844,000 5,852,000 5,813,000
============= ============= =============
See notes to consolidated financial statements.
F-2
OWOSSO CORPORATION
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
October 29, October 31,
2000 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 491,000 $ 161,000
Receivables, net 11,973,000 18,160,000
Inventories, net 9,026,000 15,053,000
Net assets held for sale 8,664,000 --
Net assets of discontinued operations held for sale 9,449,000 15,700,000
Prepaid expenses and other 1,243,000 865,000
Deferred taxes 1,900,000 1,220,000
------------ -------------
Total current assets 42,746,000 51,159,000
PROPERTY, PLANT AND EQUIPMENT, NET 22,058,000 32,339,000
GOODWILL, NET 12,796,000 16,796,000
OTHER INTANGIBLE ASSETS, NET 6,982,000 7,893,000
OTHER ASSETS 1,172,000 3,186,000
------------ -------------
TOTAL ASSETS $ 85,754,000 $ 111,373,000
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 7,386,000 $ 9,643,000
Accrued compensation and benefits 1,807,000 2,855,000
Accrued expenses 3,590,000 4,769,000
Related party debt 1,000,000 1,815,000
Current portion of long-term debt 26,816,000 2,007,000
------------ -------------
Total current liabilities 40,599,000 21,089,000
LONG-TERM DEBT, LESS CURRENT PORTION 22,463,000 50,938,000
POSTRETIREMENT BENEFITS AND OTHER LIABILITIES 2,323,000 2,923,000
DEFERRED TAXES 1,937,000 2,439,000
COMMITMENTS AND CONTINGENCIES (Note 14)
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 2000 and 1999 - $15,000,000) 15,000,000 14,630,000
Common stock, $.01 par value; authorized 15,000,000 shares; issued
5,900,700 shares in 2000 and 5,880,200 shares in 1999 59,000 59,000
Additional paid-in capital 21,743,000 21,682,000
Accumulated other comprehensive income (142,000) (3,000)
Accumulated deficit (17,829,000) (1,985,000)
------------ -------------
18,831,000 34,383,000
Less treasury stock, at cost, 50,039 shares in 2000 and 50,058 shares in 1999 (399,000) (399,000)
------------ -------------
Total stockholders' equity 18,432,000 33,984,000
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 85,754,000 $ 111,373,000
============ =============
See notes to consolidated financial statements.
F-3
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Retained
Additional Other Earnings
Preferred Common Paid-in Comprehensive (Accumulated
Stock Stock Capital Income Deficit)
BALANCE, OCTOBER 26, 1997 $ 13,965,000 $ 59,000 $ 21,612,000 $ 1,544,000
Net income 702,000
Dividends (2,843,000)
Accretion on convertible preferred stock 320,000 (320,000)
Issuance of treasury shares (1,000)
Exercise of stock options 6,000
------------ -------- ------------ -------------
BALANCE, OCTOBER 25, 1998 14,285,000 59,000 21,618,000 (918,000)
Net income 1,777,000
Other comprehensive income:
Cumulative translation adjustment (3,000)
Total comprehensive income
Dividends (2,498,000)
Accretion on convertible preferred stock 345,000 (345,000)
Issuance of common stock 64,000 (1,000)
------------ -------- ------------ ---------- -------------
BALANCE, OCTOBER 31, 1999 14,630,000 59,000 21,682,000 (3,000) (1,985,000)
Net income (13,672,000)
Other comprehensive income:
Cumulative translation adjustment (139,000)
Total comprehensive income
Dividends (1,802,000)
Accretion on convertible preferred stock 370,000 (370,000)
Issuance of common stock 61,000
------------ -------- ------------ ---------- -------------
BALANCE, OCTOBER 29, 2000 $ 15,000,000 $ 59,000 $ 21,743,000 $ (142,000) $ (17,829,000)
============ ======== ============ ========== =============
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury
Stock Total
BALANCE, OCTOBER 26, 1997 $ (450,000) $ 36,730,000
Net income 702,000
Dividends (2,843,000)
Accretion on convertible preferred stock
Issuance of treasury shares 49,000 48,000
Exercise of stock options 6,000
---------- ------------
BALANCE, OCTOBER 25, 1998 (401,000) 34,643,000
Net income 1,777,000
Other comprehensive income:
Cumulative translation adjustment (3,000)
------------
Total comprehensive income 1,774,000
Dividends (2,498,000)
Accretion on convertible preferred stock --
Issuance of common stock 2,000 65,000
---------- ------------
BALANCE, OCTOBER 31, 1999 (399,000) 33,984,000
Net income (13,672,000)
Other comprehensive income:
Cumulative translation adjustment (139,000)
------------
Total comprehensive income (13,811,000)
Dividends (1,802,000)
Accretion on convertible preferred stock --
Issuance of common stock 61,000
---------- ------------
BALANCE, OCTOBER 29, 2000 $ (399,000) $ 18,432,000
========== ============
See notes to consolidated financial statements.
F-4
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended
--------------------------------------------------------------
October 29, October 31, October 25,
2000 1999 1998
OPERATING ACTIVITIES:
Net income (loss) $ (13,672,000) $ 1,777,000 $ 702,000
(Income) loss from discontinued operations 8,578,000 (1,045,000) (617,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Allowance for doubtful accounts 561,000 106,000 89,000
Provision for deferred taxes (1,504,000) (49,000) (430,000)
Gain on sale of business -- -- (2,775,000)
Write-down of net assets held for sale 2,800,000 -- 1,635,000
(Gain) loss on sale of assets 19,000 10,000 92,000
Depreciation 5,289,000 5,210,000 4,442,000
Amortization 1,855,000 1,783,000 1,660,000
Changes in assets and liabilities which provided (used) cash:
Accounts receivable 3,352,000 (1,266,000) (2,943,000)
Inventories 929,000 847,000 (1,805,000)
Prepaid expenses and other (591,000) 150,000 31,000
Accounts payable (1,544,000) 1,849,000 (622,000)
Accrued expenses (919,000) 749,000 (1,375,000)
------------- ------------ ------------
Net cash provided by (used in) continuing operations 5,153,000 10,121,000 (1,916,000)
Net cash provided by (used in) discontinued operati (1,536,000) 3,341,000 1,180,000
------------- ------------ ------------
Net cash provided by (used in) operating activities 3,617,000 13,462,000 (736,000)
------------- ------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,295,000) (5,355,000) (8,971,000)
Contingent consideration on acquisition (787,000) (878,000) (425,000)
Acquisition of businesses, net of cash acquired -- -- (10,485,000)
Proceeds from the sale of businesses and assets -- 4,603,000 14,075,000
(Increase) decrease in other assets 1,993,000 3,442,000 (1,375,000)
------------- ------------ ------------
Net cash provided by (used in) continuing operations (1,089,000) 1,812,000 (7,181,000)
Net cash used in discontinued operations (738,000) (321,000) (602,000)
------------- ------------ ------------
Net cash provided by (used in) investing activities (1,827,000) 1,491,000 (7,783,000)
------------- ----------- ------------
FINANCING ACTIVITIES:
Borrowings from (payments on) line of credit 2,950,000 (10,050,000) 13,550,000
Proceeds from long-term debt 580,000 -- 6,050,000
Payments on long-term debt (2,001,000) (1,907,000) (7,986,000)
Payments on related party debt (815,000) (1,028,000) (907,000)
Dividends paid (2,152,000) (2,006,000) (2,843,000)
Other 31,000 67,000 54,000
------------- ------------ ------------
Net cash (used in) provided by continuing operations (1,407,000) (14,924,000) 7,918,000
Net cash used in discontinued operations (53,000) (59,000) (48,000)
------------- ------------ ------------
Net cash provided by (used in) financing activities (1,460,000) (14,983,000) 7,870,000
------------- ------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 330,000 (30,000) (649,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 161,000 191,000 840,000
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 491,000 $ 161,000 $ 191,000
============= ============ ============
See notes to consolidated financial statements.
F-5
OWOSSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED OCTOBER 29, 2000, OCTOBER 31, 1999, AND OCTOBER 25, 1998
- --------------------------------------------------------------------------------
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 has
operated in four business segments: Motors, Coils, 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 Motors segment include
commercial products and equipment, healthcare, recreation, and
non-automotive transportation. 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 Agricultural Equipment segment included, through the dates of their
sales, 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").
During the fourth quarter of 2000, the Company adopted a plan to dispose
of Sooner Trailer Manufacturing Company ("Sooner Trailer"), which
manufactures all-aluminum trailers, primarily horse and livestock
trailers. Sooner Trailer had previously been included in the Agricultural
Equipment segment (formerly known as the Trailers and Agricultural
Equipment segment). Accordingly, for financial statement purposes, the
assets, liabilities, results of operations and cash flows of Sooner
Trailer have been segregated from those of continuing operations and are
presented in the Company's financial statements as discontinued
operations. The net assets of Sooner Trailer have been included in "Net
Assets of Discontinued Operations Held for Sale" in the consolidated
balance sheets.
The Company's Other segment includes Dura-Bond Bearing Company
("Dura-Bond"), and M.H. Rhodes, Inc. ("Rhodes"). Dura-Bond, which
manufactures replacement camshaft bearings, valve seats and shims for the
automotive after-market, was sold subsequent to the balance sheet date.
Rhodes, which was acquired in June 1998, manufactures timers and
subfractional horsepower motors for use in commercial applications. The
Company completed the sale of the assets associated with the timer and
switch line of Rhodes subsequent to the balance sheet date and intends to
dispose of the remaining Rhodes assets within twelve months. Accordingly,
the net assets of Dura-Bond and Rhodes have been included in "Net Assets
Held for Sale" in the October 29, 2000 consolidated balance sheet.
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.
F-6
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 2000 and 1998 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 29, 2000 and October 31, 1999, cost
for 12% and 13%, 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.
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
$790,000 and $803,000 higher than reported at October 29, 2000 and October
31, 1999, respectively. Additionally, income from operations would have
decreased by approximately $13,000 and $17,000 in 2000 and 1999,
respectively, and increased by approximately $18,000 for 1998. 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 2000 or 1999.
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.
F-7
Revenue Recognition - Revenue is recognized at the time the product is
shipped and title of ownership has passed. An allowance for doubtful
accounts of $604,000 and $294,000 has been recorded as of October 29, 2000
and October 31, 1999, 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.
Reclassifications - Certain reclassifications were made to the 1999 and
1998 consolidated financial statements to conform to 2000 classifications.
Earnings per Share - 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:
2000 1999 1998
Basic weighted average
Common shares outstanding 5,844,000 5,826,000 5,813,000
Dilutive effect of stock options -- 26,000 --
--------- --------- ---------
Diluted weighted average
Common shares outstanding 5,844,000 5,852,000 5,813,000
========= ========= =========
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:
2000 1999 1998
Potential common shares resulting from:
Stock options 880,000 786,000 587,000
Convertible preferred stock 1,071,000 1,071,000 1,071,000
--------- --------- ---------
1,951,000 1,857,000 1,658,000
========= ========= =========
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 2000, total
comprehensive loss was $13,811,000 and consisted of a net loss of
$13,672,000 and a $139,000 loss on foreign currency translation. For 1999,
total comprehensive income was $1,774,000 and consisted of net earnings of
$1,777,000, offset by a $3,000 loss on foreign currency translation. The
Company's comprehensive income for 1998 consisted solely of net earnings.
F-8
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 was amended in
June 2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities" ("SFAS No. 138"), which addressed a
limited number of issues causing implementation difficulties. SFAS 133, as
amended, establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivative instruments as either assets or liabilities and
measure them at fair value. The accounting for changes in fair value
depends upon the purpose of the derivative instrument and whether it is
designated and qualifies for hedge accounting. To the extent derivative
instruments qualify and are designated as hedges of the variability in
cash flows associated with forecasted transactions, the effective portion
of the gain or loss on such derivative instruments will generally be
reported in other comprehensive income and the ineffective portion, if
any, will be reported in net income. Such amounts recorded in accumulated
other comprehensive income will be reclassified into net income when the
forecasted transaction affects earnings. To the extent derivative
instruments qualify and are designated as hedges of changes in the fair
value of an existing asset, liability or firm commitment, the gain or loss
on the hedging instrument will be recognized currently in earnings along
with changes in the fair value of the hedged asset, liability or firm
commitment attributable to the hedged risk.
The Company is required to adopt the provisions of SFAS 133 effective
October 30, 2000. The Company's derivative instruments outstanding as of
October 30, 2000, variable-to-fixed interest rate swaps (see Note 11),
will not qualify for hedge accounting under SFAS 133. The adoption of SFAS
133 will require the Company to mark its interest rate swaps to market.
The result will be to record a net liability of $101,000 with an
offsetting cumulative effect charge to accumulated other comprehensive
income. Such amount in accumulative other comprehensive income will be
reclassified into earnings in the same periods during which the Company
records interest expense on the debt associated with the interest rate
swaps.
In that the Company's derivative instruments outstanding do not meet the
stringent requirements for hedge accounting under SFAS 133, future
earnings could reflect greater volatility.
In November 1999, the Staff of the SEC issued Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition". This SAB sets forth the Staff's
position regarding the point at which it is appropriate for a Registrant
to recognize revenue. The Staff believes that revenue is realizable and
earned when all of the following criteria are met:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or service has been rendered;
o The seller's price to the buyer is fixed or determinable; and,
o Collectibility is reasonably assured.
The Company uses the above criteria to determine whether revenue can be
recognized and, therefore, believes that the issuance of SAB 101 does not
have a material impact on these financial statements.
2. RESULTS OF OPERATIONS AND FINANCING
The Company's results of operations have declined significantly over the
past two years, with the Company reporting a net loss for the year ended
October 29, 2000. In addition, the Company was not in compliance with
covenants under its revolving credit facility at October 29, 2000. In
February 2001, the Company entered into an amendment to its revolving
credit facility, wherein the lenders agreed to forbear from exercising
F-9
their rights and remedies under the facility in connection with such
non-compliance until February 15, 2002, at which time the facility
matures. As further disclosed under Note 11 "Long-term Debt", the
amendment to the revolving credit facility also modified the interest
rates charged, requires reductions in the outstanding balance during
calendar 2001 and requires additional covenants to be met. The Company's
continued liquidity is dependent upon its ability to achieve levels of
revenue necessary to support the Company's cost structure, its ability to
maintain adequate financing, and its ability to generate sufficient cash
flows to meet its obligations on a timely basis. Management's plans in
regard to these matters are described in the following paragraph.
Since the second half of fiscal 2000, management of the Company has taken
a series of steps intended to stabilize and improve the operating results
of the Company, including the completion of the sales of its Dura-Bond and
Sooner Trailer subsidiaries and the sale of the timer and switch line at
its M.H. Rhodes subsidiary. In addition, management of the Company's Coils
segment was replaced, cost reductions at the corporate office were
implemented and reductions in fixed costs at the operating units were
initiated, commensurate with reductions in sales volumes. Management
believes that available cash and cash equivalents together with cash flows
from operations, available borrowings under the Company's revolving credit
facility and other sources of liquidity (including asset sales) will be
sufficient to fund the Company's operating activities, investing
activities and debt maturities for fiscal 2001. In addition, management
believes that the Company will be in compliance with its debt covenant
requirements throughout fiscal 2001. However, a substantial portion of its
indebtedness which will mature in February 2002 will require the Company
to refinance the indebtedness at that time.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest in 2000, 1999 and 1998 were $4,826,000,
$5,311,000 and $4,693,000, respectively. Cash paid for income taxes was
$1,952,000, $1,503,000 and $4,077,000 for 2000, 1999 and 1998,
respectively. Dividends payable were $142,000 and $492,000 at October 29,
2000 and October 31, 1999, respectively.
4. 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 29, 2000, $620,000 was outstanding on
the note. In November 2000, Top Air filed a Chapter 7 voluntary
liquidation in bankruptcy court. As a result, the Company has reserved the
full balance of the note.
F-10
Sales attributable to Parker were $1,004,000 and $11,715,000 for 1999 and
1998, respectively. Income (loss) from operations, before the allocation
of corporate expenses, from Parker was ($607,000) and $741,000 for 1999
and 1998, 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, which was repaid in full during 2000,
plus the assumption of approximately $600,000 in liabilities. Net sales
attributable to DewEze were $5,844,000 for 1998. Income from operations,
before allocation of corporate expenses, from DewEze was $272,000 for
1998.
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 16 -
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 for 1998. Income from operations, before allocation of
corporate expenses, from Great Bend was $670,000 for 1998.
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 2000, 1999 and 1998, the Company recorded $787,000,
$878,000 and $425,000, respectively, of contingent consideration under the
agreement with DPI as goodwill based upon related revenue.
F-11
5. INVENTORIES
2000 1999
Raw materials and purchased parts $ 3,711,000 $ 7,824,000
Work in process 3,773,000 3,462,000
Finished goods 1,542,000 3,767,000
----------- ------------
Total $ 9,026,000 $ 15,053,000
=========== ============
6. DISCONTINUED OPERATIONS
In October 2000, the Company adopted a plan to dispose of Sooner Trailer.
The Company has reported the results of Sooner Trailer as "Discontinued
Operations" for all periods presented in the consolidated financial
statements. In connection with the anticipated sale, the Company
recognized a loss of $8,600,000 in the fourth quarter of 2000 to adjust
the carrying value of Sooner Trailer's assets to their estimated fair
value based on an expected sales price. Such loss reflects the write-down
of goodwill and has been reflected as "Loss on Sale of Discontinued
Operations" in the consolidated statements of operations. Revenues from
Sooner were $43,468,000, $39,273,000 and $34,148,000 for 2000, 1999 and
1998, respectively.
For financial reporting purposes, the assets and liabilities attributable
to Sooner have been classified in the consolidated balance sheets as Net
Assets of Discontinued Operations Held for Sale and consist of the
following:
2000 1999
Current assets $ 9,812,000 $ 7,195,000
Current liabilities (4,905,000) (4,654,000)
----------- -------------
Net current assets 4,907,000 2,541,000
Net fixed assets 3,965,000 3,561,000
Other non-current assets 1,180,000 10,261,000
Non-current liabilities (603,000) (663,000)
----------- -------------
Total net assets held for sale $ 9,449,000 $ 15,700,000
=========== ============
On January 24, 2001, the Company completed the sale of the stock of Sooner
Trailer to the McCasland Investment Group and certain members of Sooner
Trailer's management for cash of $11,500,000, subject to certain
post-closing adjustments based on changes in working capital, plus the
assumption of debt of approximately $670,000.
7. NET ASSETS HELD FOR SALE
Dura-Bond - On November 2, 2000, the Company completed the sale of the
stock of Dura-Bond to a joint venture formed by Melling Tool Company of
Jackson, Michigan and Engine Power Components, Inc. of Grand Haven,
Michigan (the "Joint Venture"). The Joint Venture acquired the stock of
Dura-Bond for approximately $5,000,000, plus the assumption of debt of
approximately $5,000,000. Based upon the terms of the sale, the Company
recorded, in the fourth quarter of fiscal 2000, a pre-tax charge of
$1,200,000 to adjust the carrying value of Dura-Bond's assets to their
estimated fair value, reflecting a reduction in goodwill. Net sales
attributable to Dura-Bond were $8,184,000, $8,501,000 and $8,748,000 for
F-12
2000, 1999 and 1998, respectively. Income from operations before the
allocation of corporate expenses and the charge to adjust the carrying
value of the assets from Dura-Bond was $1,539,000, $1,272,000 and
$1,463,000 for 2000, 1999 and 1998, respectively.
Rhodes - On December 4, 2000, the Company completed the sale of the assets
associated with the timer and switch line of Rhodes to Capewell
Components, LLC of South Windsor, Connecticut for cash of approximately
$2,000,000, plus the assumption of approximately $400,000 in liabilities.
The Company anticipates the disposition of the remaining Rhodes' assets
within the next twelve months. In connection with the sale of the timer
and switch line and the anticipated sale of the remainder of the assets of
Rhodes, the Company recorded, in the fourth quarter of fiscal 2000, a
pre-tax charge of $1,600,000 to adjust the carrying value of Rhodes'
assets to their estimated fair value, based upon an estimated sales price
of the assets.
For financial reporting purposes, the assets and liabilities attributable
to Dura-Bond and Rhodes have been classified in the consolidated balance
sheet as Net Assets Held for Sale and consist of the following at October
29, 2000:
Dura-Bond Rhodes Total
Current assets $ 3,585,000 $ 3,986,000 $ 7,571,000
Current liabilities (333,000) (1,090,000) (1,423,000)
----------- ----------- -----------
Net current assets 3,252,000 2,896,000 6,148,000
Net fixed assets 4,153,000 1,770,000 5,923,000
Other non-current assets 2,414,000 35,000 2,449,000
Non-current liabilities (5,013,000) (843,000) (5,856,000)
----------- ----------- -----------
Total net assets held for sale $ 4,806,000 $ 3,858,000 $ 8,664,000
=========== =========== ===========
8. PROPERTY, PLANT AND EQUIPMENT
2000 1999
Land and improvements $ 410,000 $ 1,323,000
Buildings and improvements 7,379,000 13,767,000
Machinery and equipment 39,514,000 47,827,000
Construction in progress 1,353,000 1,366,000
------------ ------------
Total 48,656,000 64,283,000
Accumulated depreciation 26,598,000 31,944,000
------------ ------------
Property, plant and equipment, net $ 22,058,000 $ 32,339,000
============ ============
Depreciation expense from continuing operations was approximately
$5,289,000, $5,210,000 and $4,442,000 for 2000, 1999 and 1998,
respectively.
F-13
9. GOODWILL AND OTHER INTANGIBLE ASSETS
2000 1999
Goodwill:
Goodwill $ 16,444,000 $ 20,577,000
Accumulated amortization 3,648,000 3,781,000
------------ ------------
Goodwill, net $ 12,796,000 $ 16,796,000
============ ============
Other Intangible Assets:
Noncompetition agreements $ 1,900,000 $ 2,020,000
Customer lists 8,000,000 8,000,000
Other 294,000 566,000
------------ ------------
Total 10,194,000 10,586,000
Accumulated amortization 3,212,000 2,693,000
------------ ------------
Other intangible assets, net $ 6,982,000 $ 7,893,000
============ ============
Amortization expense from continuing operations related to goodwill and
other intangible assets was approximately $1,855,000, $1,783,000 and
$1,660,000 for 2000, 1999 and 1998, respectively.
10. RELATED PARTY DEBT
Related party debt consists of promissory notes to preferred stockholders,
payable on demand, but no later than October 2005, aggregating $1,000,000
and $1,815,000 as of October 29, 2000 and October 31, 1999, respectively.
Interest on the notes is paid quarterly at 8%.
11. LONG-TERM DEBT
2000 1999
Revolving credit agreements $ 41,100,000 $ 38,150,000
Term loans, payable in monthly
installments through 2009 at
variable rates from 5% to 8.5%,
collateralized by certain real
property 1,057,000 955,000
Industrial revenue bonds, payable in
varying installments through 2018 at
rates from 4.25% to 7.5%, collateralized
by certain real property, building and
equipment 5,327,000 10,679,000
Subordinated promissory notes, payable
in varying installments through 2005
at rates from 7.6% to 9% 1,775,000 2,848,000
Other long-term debt 20,000 313,000
------------ ------------
Total long-term debt 49,279,000 52,945,000
Less current portion 26,816,000 2,007,000
------------ ------------
Long-term debt, net of current portion $ 22,463,000 $ 50,938,000
============ ============
F-14
On January 22, 1999, the Company entered into a new revolving credit
facility with the Company's two primary banks, originally expiring in
December 2002. At October 29, 2000, $41,100,000 was outstanding. The
facility is secured by the non-real estate assets of the Company. The
average amount outstanding under the Company's revolving credit facility
in 2000 was $42,605,000 and the weighted average interest rate was 9.3%.
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 not in
compliance with such covenants at October 29, 2000. In February 2001, the
Company entered into an amendment to its revolving credit facility,
wherein the lenders agreed to forbear from exercising their rights and
remedies under the facility in connection with such non-compliance until
February 15, 2002, at which time the facility matures. In addition to
changing the maturity date from December 2002 to February 15, 2002, the
amendment reduced the total amount available for borrowings to $32.0
million. At February 9, 2001, $31,600,000 was outstanding under the
facility. Borrowings under the facility that are In-Formula (as defined)
will be charged interest at the Prime Rate plus 1.5%. Borrowings under the
facility that are Out of Formula (as defined) will be charged interest at
the Prime Rate plus 2.0%. Borrowings and letters of credit will be limited
to a Borrowing Base, to consist of eligible accounts receivable and
inventory. Borrowings that equal an amount up to and including the
Borrowing Base, will be defined as In-Formula borrowings. Total borrowings
less In-Formula borrowings, will be defined as Out of Formula borrowings.
The amendment requires reductions in the available commitment of
$1,000,000 at June 30, 2001, $2,000,000 at September 30, 2001, and
$3,000,000 at December 31, 2001. If the Company is unable to reduce its
outstanding commitment on any of these dates, then for each missed
reduction the otherwise-applicable interest rates for outstanding loans
will increase by 1% per annum, but failure to make the reductions will not
constitute a default. The amendment also requires additional collateral
and reporting requirements as well as the addition of a covenant requiring
minimum operating profits. The amendment also requires the suspension of
principal and interest payments on subordinated debt, with an aggregate
outstanding balance of $1,775,000 at October 29, 2000. Furthermore, the
amendment to the facility prohibits the payment of preferred or common
stock dividends.
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 (6.80% at October 29, 2000) in
exchange for the payment of quarterly fixed interest rate payments of
7.0675% and 7.09% over the life of the agreements. In addition, the
Company has an interest rate swap agreement with one of its banks with a
notional amount of $5,150,000. 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
(4.4% at October 29, 2000). 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-15
The aggregate amount of required payments on long-term debt is as follows:
Year ending October:
2001 $ 26,816,000
2002 16,944,000
2003 658,000
2004 864,000
2005 773,000
Thereafter 3,224,000
------------
Total $ 49,279,000
============
The Company has classified $25,000,000 of the revolving credit facility as
current. This represents reductions in the facility resulting from the
sales of Dura-Bond, Rhodes and Sooner Trailer and anticipated reductions
in the facility in connection with its amendment.
12. 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 $20,150,000 and were in a liability
position of $101,000 at October 29, 2000.
13. 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 union 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
$1,314,000, $1,233,000 and $1,017,000 for 2000, 1999 and 1998,
respectively.
Motor Products has a defined benefit pension plan covering substantially
all of its hourly union 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-16
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.
2000 1999
Change in projected pension benefit obligation:
Projected pension benefit obligation at beginning of year $ 3,091,000 $ 3,415,000
Service cost 84,000 106,000
Interest cost 223,000 204,000
Actuarial (gain) loss (15,000) (485,000)
Benefits paid (153,000) (149,000)
----------- -----------
Projected pension benefit obligation at end of year $ 3,230,000 $ 3,091,000
=========== ===========
2000 1999
Change in plan assets:
Fair value of plan assets at beginning of year $ 4,081,000 $ 3,604,000
Actual return on plan assets 327,000 644,000
Employee contributions 15,000 15,000
Benefits and expenses paid (197,000) (182,000)
----------- -----------
$ 4,226,000 $ 4,081,000
=========== ===========
Fair value of plan assets at end of year
2000 1999
Excess of fair value of plan assets over benefit obligation $ 996,000 $ 990,000
Unrecognized initial net credit (206,000) (247,000)
Unrecognized prior service cost 209,000 228,000
Unrecognized net (gain) loss (553,000) (565,000)
----------- -----------
Prepaid pension asset $ 446,000 $ 406,000
=========== ===========
The accumulated benefit obligation was $2,763,000 as of October 29, 2000,
$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 2000, 1999 and 1998 are as follows:
2000 1999 1998
Service cost $ 84,000 $ 106,000 $ 83,000
Interest cost on projected benefit obligation 223,000 204,000 200,000
Expected return on assets (320,000) (283,000) (272,000)
Unrecognized net (gain)/loss (5,000) -- --
Amortization of unrecognized net credit (41,000) (41,000) (41,000)
Amortization of prior service cost 19,000 19,000 19,000
--------- --------- ----------
Net pension expense (credit) $ (40,000) $ 5,000 $ (11,000)
========= ========= ==========
F-17
Additional disclosures and assumptions:
2000 1999 1998
Discount rate 7.50% 7.25% 6.25%
Expected long-term rate of return 8.0 8.0 8.0
Salary increases 5.0 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 employee's 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:
2000 1999
Change in accumulated postretirement benefit obligation:
Accumulated postretirement benefit obligation, beginning of year $ 1,873,000 $ 2,009,000
Service cost 107,000 128,000
Interest cost 124,000 118,000
Amendments 6,000 --
Actuarial gain (33,000) (335,000)
Benefits paid (53,000) (47,000)
----------- -----------
Accumulated postretirement benefit obligation, end of year $ 2,024,000 $ 1,873,000
=========== ===========
2000 1999
Accumulated postretirement benefit obligation in excess of plan assets $ 2,024,000 $ 1,873,000
Unrecognized net gain (loss) from past experience different
from that assumed and from changes in assumptions 4,000 (29,000)
Prior service cost not yet recognized in net periodic
postretirement benefit cost 291,000 315,000
----------- -----------
Accrued postretirement benefit cost $ 2,319,000 $ 2,159,000
=========== ===========
Net periodic postretirement benefit cost included the following
components:
2000 1999 1998
Service cost $ 107,000 $ 128,000 $ 114,000
Interest cost 124,000 118,000 113,000
Amortization of prior service cost (18,000) (14,000) (17,000)
--------- --------- ---------
Total $ 213,000 $ 232,000 $ 210,000
========= ========= =========
F-18
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed. The rate was assumed to
decrease gradually to 5.5% for 2007, 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 29, 2000 by
$422,000 and the aggregate of the service cost and interest cost
components of the net periodic postretirement benefit cost for the year
then ended by $61,000. Decreasing the assumed healthcare postretirement
benefit obligation as of October 29, 2000 by 1% decreases the accumulated
postretirement benefit obligation by $320,000 and the aggregate of the
service cost and interest cost components of the net periodic
postretirement benefit cost for the year then ended by $44,000. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% as of October 29, 2000, 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:
2000 1999
Change in accumulated postretirement benefit obligation:
Accumulated postretirement benefit obligation, beginning of year $ 751,000 $ 784,000
Interest cost 54,000 49,000
Actuarial gain (40,000) (41,000)
Benefits paid (64,000) (41,000)
--------- ---------
Accumulated postretirement benefit obligation, end of year $ 701,000 $ 751,000
========= =========
Net periodic post retirement benefit cost consists of interest cost of
$54,000 for 2000, $49,000 for 1999 and $44,000 for 1998. The effects of
assumed changes in the healthcare cost trend by 1% are not material.
2000 1999
Accumulated postretirement benefit obligation $ 701,000 $ 751,000
Unrecognized net gain (loss) from past experience different
from that assumed and from changes in assumptions 24,000 7,000
--------- ---------
Accrued postretirement benefit cost $ 725,000 $ 758,000
========= =========
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%, 7.25% and 6.25% for 2000, 1999
and 1998, respectively, and the medical inflation rate was 5.5% for 2000
and 1999, and 4.5% for 1998.
F-19
14. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain production facilities and
equipment under operating leases. Operating lease expense was
approximately $1,137,000, $1,084,000 and $1,393,000 for 2000, 1999 and
1998, respectively, net of sublease rentals and reimbursements of
utilities of $50,000, $63,000 and $44,000 for 2000, 1999 and 1998,
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:
2001 $ 829,000
2002 389,000
2003 234,000
2004 212,000
2005 191,000
Thereafter 171,000
-----------
$ 2,026,000
===========
The above minimum lease payments are net of anticipated sublease income of
$119,000 in each of the years 2001 through 2005, and $109,000 thereafter.
At October 29, 2000, outstanding letters of credit totaled approximately
$13,142,000 and primarily guarantee industrial revenue bonds. In
connection with the sale of Dura-Bond subsequent to the balance sheet
date, outstanding letters of credit decreased by $5,088,000.
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. In the
second quarter of 2000, the Company revised its estimate of the cost to
complete the remedial measures required at the site. The revision to the
estimate resulted in a reduction in the liability of $260,000. 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.
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.
F-20
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
$12,365,000 of product as of October 29, 2000. 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 or
incurred any losses pursuant to the repurchase obligations in these
contracts. In connection with the sale of Sooner Trailer in January 2001,
the Company is no longer obligated under 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.
15. MAJOR CUSTOMERS
A significant portion of the Company's sales are concentrated among a
small number of customers. Sales to the five largest customers represented
approximately 30%, 31%, and 15% of total sales from continuing operations
for 2000, 1999 and 1998, respectively. Sales to one customer of the Motors
segment represented approximately 12%, 12% and 3% of that segment's sales
for 2000, 1999 and 1998, respectively. Sales to the four largest customers
of the Coils segment represented approximately 63%, 70% and 58% of that
segment's sales for 2000, 1999 and 1998, respectively.
16. 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. All restructuring
costs have been paid.
17. INCOME TAX EXPENSE
The income tax provision consists of the following:
2000 1999 1998
Current:
Federal $ (115,000) $ 162,000 $ 2,123,000
State 219,000 257,000 394,000
Deferred - Federal (1,361,000) (49,000) (430,000)
Deferred - State (143,000) -- --
------------ --------- -----------
Income tax expense (benefit) $ (1,400,000) $ 370,000 $ 2,087,000
============ ========= ===========
F-21
A reconciliation of the income tax provision as presented in the
consolidated statements of operations is as follows:
2000 1999 1998
Income tax expense (benefit) from continuing operations $ (1,400,000) $ 370,000 $ 2,087,000
Income tax expense from discontinued operations 840,000 840,000 713,000
------------ ----------- -----------
Total income tax expense (benefit) $ (560,000) $ 1,210,000 $ 2,800,000
============ =========== ===========
The reconciliation of the statutory federal income tax rate and the
effective rate, for continuing operations, is as follows:
2000 1999 1998
Federal income tax provision at statutory rate (34.0)% 34.0% 34.0%
State income taxes, net of federal income tax benefit 0.9 15.4 12.0
Amortization of excess cost of net assets acquired 4.8 27.9 14.6
Effect of disposition of businesses 6.8 (48.6) 29.7
Other -- 4.8 5.8
------- ------- -------
Effective tax rate, continuing operations (21.5)% 33.5% 96.1%
======= ======= =======
The difference between the statutory federal rate and the reported amount
of income tax expense attributable to discontinued operations is primarily
due to non-deductible goodwill and the valuation allowance.
The components of the Company's net deferred tax assets and liabilities
are as follows:
2000 1999
Deferred tax asset:
Accruals and reserves $ 4,540,000 $ 3,128,000
Tax credits and loss carryforwards 3,143,000 2,166,000
Other 148,000 135,000
----------- -----------
Total gross deferred tax assets 7,831,000 5,429,000
Valuation allowance (3,524,000) (2,060,000)
----------- -----------
Net deferred tax assets $ 4,307,000 $ 3,369,000
=========== ===========
Deferred tax liability:
Intangibles $ 1,781,000 $ 2,008,000
Pension 150,000 140,000
Property, plant and equipment 2,413,000 2,275,000
Other -- 165,000
----------- -----------
Total gross deferred tax liabilities $ 4,344,000 $ 4,588,000
----------- -----------
Net deferred tax liability $ (37,000) $(1,219,000)
=========== ===========
F-22
These amounts are included in the accompanying consolidated financial
statements as follows:
2000 1999
Current deferred tax assets $ 1,900,000 $ 1,220,000
Non-current deferred tax liabilities (1,937,000) (2,439,000)
----------- -----------
Net deferred tax liability $ (37,000) $(1,219,000)
=========== ===========
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. As a
result of the decision to dispose of Sooner, the Company recognized an
increase in the valuation allowance of $345,000.
As a result of the acquisition of Rhodes, the Company has approximately
$2,349,000 of net operating loss carry forwards as of October 29, 2000
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.
18. 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. Neither
the option to convert the preferred stock into the Company's common stock,
nor the Company's right to redeem the preferred stock, has been exercised.
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 has accreted 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 2000, 1999 and
1998.
The Company may not pay any common stock dividends unless all preferred
dividend requirements have been met. At October 29, 2000, 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
F-23
issuance of other classes of securities require the approval of the Class
A preferred stockholders. In connection with the amendment to the
Company's revolving credit facility in February 2001, the Company is
prohibited from making future preferred stock dividend payments.
19. 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.
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 29, 2000 October 31, 1999 October 25, 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding,
beginning of year 785,000 $ 7.58 587,000 $ 8.57 371,000 $ 9.31
Granted 259,000 2.23 204,000 4.70 296,000 7.82
Exercised -- -- -- -- (1,000) 6.13
Cancelled (164,000) 8.44 (6,000) 6.13 (79,000) 9.26
------- ------- -------
Outstanding, end of year 880,000 $ 5.84 785,000 $ 7.58 587,000 $ 8.57
======= ======= =======
Exercisable, end of year 324,000 $ 8.31 270,000 $ 9.50 155,000 $ 10.15
======= ======= =======
F-24
The following table summarizes information about stock options outstanding
at October 29, 2000:
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
$1.44 140,000 9.97 $ 1.44 -- $ --
$3.16 114,000 9.13 $ 3.16 -- $ --
$4.16 - $5.75 185,000 8.34 $ 4.73 37,000 $ 4.73
$5.88 - $8.00 302,000 6.92 $ 7.39 161,000 $ 7.21
$8.88 - $11.38 70,000 5.06 $ 9.24 58,000 $ 9.31
$12.00 69,000 4.07 $ 12.00 68,000 $ 12.00
------- -------
880,000 7.62 $ 5.84 324,000 $ 8.31
======= =======
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 $274,000 and $0.05 per
share, respectively for 2000, $219,000 and $0.04 per share, respectively
for 1999, and $84,000 and $0.01 per share, for 1998. 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.
The weighted average fair value of options granted during 2000, 1999, and
1998 was $246,000, $277,000 and $575,000, 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 2000,
1999 and 1998: risk-free interest rate of 5.02%, 6.3%, and 4.7%,
respectively, expected volatility of 40%, 35% and 31%, respectively,
dividend yield of 0.0%, 5.1% and 4.6%, respectively, and an expected life
of six years in 2000, 1999 and 1998.
F-25
20. 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, 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 Agricultural Equipment segment included, through the dates of their
sales, Great Bend (sold in April 1998), DewEze (sold in July 1998), and
Parker (sold in March 1999).
During the fourth quarter of fiscal 2000, the Company adopted a plan to
dispose of Sooner Trailer Manufacturing Company ("Sooner Trailer"), which
manufacturers all-aluminum trailers, primarily horse and livestock
trailers. Sooner Trailer had previously been included in the Agricultural
Equipment segment (formerly known as the Trailers and Agricultural
Equipment segment). Accordingly, the Company has reported the results of
Sooner Trailer as discontinued operations for all periods presented in the
consolidated statements of operations. The net assets of Sooner Trailer
are included as Assets of Discontinued Operations for purposes of
disclosure of identifiable assets.
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-26
The following table reflects, from continuing operations, net sales,
income (loss) from operations, capital additions, and depreciation and
amortization expense for the fiscal years ended October 2000, 1999 and
1998 and identifiable assets as of October 2000, 1999 and 1998 for each
segment:
2000 1999 1998
Identifiable assets:
Motors $ 44,483,000 $ 49,115,000 $ 50,988,000
Coils 20,433,000 22,969,000 21,292,000
Agricultural equipment -- 1,773,000 9,867,000
Other 9,137,000 20,370,000 20,964,000
Assets of discontinued operations 9,449,000 15,700,000 17,463,000
Corporate 2,252,000 1,446,000 902,000
------------- ------------- -------------
Total identifiable assets $ 85,754,000 $ 111,373,000 $ 121,476,000
============= ============= =============
Net sales:
Motors $ 57,696,000 $ 63,941,000 $ 54,189,000
Coils 41,660,000 46,634,000 30,555,000
Agricultural Equipment -- 1,003,000 24,810,000
Other 17,508,000 19,270,000 16,266,000
------------- ------------- -------------
Total net sales $ 116,864,000 $ 130,848,000 $ 125,820,000
============= ============= =============
Income (loss) from operations:
Motors $ 5,530,000 $ 8,353,000 $ 7,385,000
Coils (234,000) 3,114,000 3,571,000
Agricultural Equipment -- (607,000) 2,823,000
Other (1) (666,000) 1,409,000 (967,000)
Corporate (2) (5,485,000) (6,612,000) (5,883,000)
------------- ------------- -------------
Total income (loss) from operations $ (855,000) $ 5,657,000 $ 6,929,000
============= ============= =============
Capital Additions:
Motors $ 810,000 $ 3,232,000 $ 5,680,000
Coils 1,073,000 1,563,000 1,133,000
Agricultural Equipment -- 4,000 504,000
Other 245,000 477,000 982,000
Corporate 167,000 79,000 672,000
------------- ------------- -------------
Total capital additions $ 2,295,000 $ 5,355,000 $ 8,971,000
============= ============= =============
Depreciation and amortization expense:
Motors $ 3,543,000 $ 3,420,000 $ 2,890,000
Coils 2,119,000 2,009,000 1,134,000
Agricultural Equipment -- -- 625,000
Other 1,141,000 1,131,000 1,005,000
Corporate 341,000 433,000 448,000
------------- ------------- -------------
Total depreciation and amortization expense $ 7,144,000 $ 6,993,000 $ 6,102,000
============= ============= =============
(1) Includes write-down of net assets held for sale of $2,800,000 in 2000; a
restructuring charge of $909,000 in 1998.
(2) Includes unallocated corporate expenses, primarily salaries and benefits,
information technology, and other administrative expenses.
F-27
21. QUARTERLY INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Year Ended October 29, 2000:
--------------------------------------------------
Net sales $ 28,710,000 $ 32,475,000 $ 29,608,000 $ 26,071,000
Gross profit 5,000,000 5,583,000 5,505,000 2,868,000
Income (loss) from continuing operations (460,000) 174,000 194,000 (5,002,000)
Income (loss) from discontinued operations 188,000 389,000 2,000 (9,157,000)
Net income (loss) (272,000) 563,000 196,000 (14,159,000)
Net income (loss) available
for common stockholders (550,000) 284,000 (85,000) (14,442,000)
Basic and diluted earnings (loss) per common share:
Continuing operations (0.12) (0.02) (0.01) (0.90)
Discontinued operations 0.03 0.07 -- (1.57)
Year Ended October 31, 1999:
--------------------------------------------------
Net sales $ 31,458,000 $ 34,694,000 $ 33,064,000 $ 31,632,000
Gross profit 5,880,000 7,351,000 6,842,000 5,174,000
Income (loss) from continuing operations (194,000) 925,000 460,000 (459,000)
Income (loss) from discontinued operations 63,000 375,000 593,000 14,000
Net income (loss) available
for common stockholders (403,000) 1,026,000 779,000 (720,000)
Basic and diluted earnings (loss)
per common share
Continuing operations (0.08) 0.11 0.03 (0.12)
Discontinued operations 0.01 0.07 0.10 --
The above information has been restated to reflect the results of Sooner
Trailer as discontinued operations.
Income (loss) from continuing operations for the fourth quarter of 2000
included $2,800,000 for the write-down of assets held for sale, $839,000
for the write-off of uncollectible notes receivable, $400,000 for
severance costs and a $400,000 adjustment to the Company's workers
compensation accrual, representing an increase in the estimated costs to
resolve open claims related to previous years.
Income (loss) from discontinued operations for the fourth quarter of 2000
included $8,600,000 for the write-down of assets held for sale.
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.
******
F-28
Schedule II
Owosso Corporation
Valuation and Qualifying Accounts and Reserves
For the three years ended October 29, 2000
- --------------------------------------------------------------------------------
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 29, 2000
Allowances on:
Accounts receivable $ 294,000 $ 512,000 $ (127,000) $ (75,000) $ 604,000
Inventory 1,328,000 1,127,000 (352,000) (386,000) 1,717,000
For the year ended October 31, 1999
Allowances on:
Accounts receivable $ 341,000 $ 106,000 (24,000) $ (129,000) $ 294,000
Inventory 1,353,000 853,000 (101,000) (777,000) 1,328,000
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
- --------------------------
(a) For 2000 and 1999, reflects reclassification to Net Assets Held for Sale;
for 1998, 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-29