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UNITED STATES
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 27, 2002 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)
22543 Fisher Road, PO Box 6660, Watertown, New York 13601
---------------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (315) 782-5910
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]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X].
The aggregate market value of the voting common stock held by non-affiliates of
the registrant was approximately $1,750,000 as of April 26, 2002 (based upon the
closing price for shares of the registrant's common stock as reported on The
Nasdaq SmallCap Market for April 26, 2002, the last business day of the
registrant's most recently completed second fiscal quarter).
As of January 7, 2003, 5,824,306 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 April
3, 2003 are incorporated by reference into Part III of this Form 10-K.
PART I
Item 1. Business.
As of July 30, 2002, Owosso Corporation (the "Company") had one operating
subsidiary, Stature Electric, Inc. ("Stature"), representing the Company's
historical "Motors segment." Stature is a custom designer and manufacturer of
motors and gear motors, including AC, DC, and Universal. Established in 1974 in
Watertown, New York, Stature is a progressive company, which emphasizes a
partnership approach in all aspects of its business. Significant markets for
Stature include commercial products and equipment, healthcare, recreation and
non-automotive transportation. Stature's component products are sold throughout
North America and in Europe, primarily to original equipment manufacturers who
use them in their end products.
In 1998, the Company formulated a long-term plan to concentrate on value-added
components for industry. In connection with its implementation of that plan, the
Company began a series of divestitures beginning with the sale of the four
businesses comprising its historical Agricultural Equipment segment. The sale of
the last of those businesses was completed in January 2001 with the divestiture
of Sooner Trailer Manufacturing Company ("Sooner Trailer"). During that time,
however, the Company experienced a significant down-turn in its operating
results and at the end of fiscal 2000 was out of compliance with covenants under
its bank credit facility.
Throughout fiscal 2001, the Company remained out of compliance with financial
covenants, including maintenance of minimum operating profit, under its bank
credit facility. As a result, the Company and its lenders entered into a series
of amendments to the facility during fiscal 2001 and 2002, and in each case the
Company's lenders agreed to forebear from exercising their rights and remedies
under the facility. In order to meet the lenders' requirements for reduced
outstanding balances and to secure the lenders' agreement to forebear, the
Company engaged in a series of divestitures of its operating subsidiaries,
concluding with the sale of its Motor Products subsidiaries, Motor Products
Owosso Corporation and Motor Products Ohio Corporation in July of 2002. As
disclosed under Note 11 "Long-term Debt," the amendments to the bank credit
facility modified the interest rates charged, called for reductions in the
outstanding balance during calendar 2001 and 2002, added additional reporting
requirements, suspended payments of principal and interest on subordinated debt,
prohibited the payment of preferred or common dividends, prohibited the purchase
of the Company's stock and added a covenant requiring the maintenance of minimum
operating profit. In December 2002, the Company entered into a further amendment
to the facility which extended the maturity date to December 31, 2003. This
amendment requires further reductions in the outstanding balance based on
expected future asset sales and cash flow generated from operations.
Management intends to dispose of or liquidate additional non-operating assets
during fiscal 2003, including real estate at the Company's former Cramer Company
("Cramer") and Snowmax Corporation subsidiaries and various notes receivable,
which arose from previous asset divestitures. Proceeds from these sales and
collections, which are expected to be between $1.5 and $2.5 million net of
taxes, and an anticipated tax refund of approximately $1.3 million will be
utilized to further reduce the Company's outstanding balance under its bank
credit facility. Management believes that, along with the sale of assets, the
tax refund, available cash and cash equivalents, cash flows from operations and
available borrowings under the Company's bank credit facility will be sufficient
to fund the Company's operating activities, investing activities and debt
maturities for fiscal 2003. In addition, management believes that the Company
will be in compliance with its bank covenant requirements throughout fiscal
2003. It is management's intent to refinance the Company's bank credit facility
prior to its maturity in December 2003. However, there can be no assurance that
management's plans will be successfully executed.
On July 30, 2002, the Company completed the sale of all of the outstanding stock
of its Motor Products subsidiaries, manufacturers of fractional and integral
horsepower motors. The purchase price paid by Hathaway Motion Control
Corporation (the "Buyer") for the outstanding stock of Motor Products consisted
of $11.5 million in cash and a promissory note in the principal amount of
$300,000, payable six months after closing. Net cash proceeds of $10.7 million
from the sale, after payment of certain transaction costs, were utilized to
reduce outstanding bank debt. As a result of this transaction, the Company
presently has only one operating subsidiary, Stature.
The Company's historical Other segment included Dura-Bond Bearing Company
("Dura-Bond") and Cramer Company ("Cramer"). Dura-Bond manufactured replacement
camshaft bearings, valve seats and shims for the automotive after-market. 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 $4.6 million, the net
assets of which included debt of approximately $5.0 million. 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 represented a reduction in goodwill
and was included in "Write-down of net assets held for sale" in the consolidated
statements of operations for fiscal 2001.
Cramer manufactured timers and subfractional horsepower motors for use in
commercial applications. On December 4, 2000, the Company completed the sale of
the assets associated with the timer and switch line of Cramer to Capewell
Components, LLC of South Windsor, Connecticut for cash of approximately $2.0
million, plus the assumption of approximately $400,000 in liabilities. As a
result of the sale, the name of the company was changed from M.H. Rhodes, Inc.
to Cramer Company. In connection with the sale of the timer and switch line and
the anticipated sale of the remainder of the operating assets (excluding the
real estate) of Cramer, the Company recorded, in the fourth quarter of fiscal
2000, a pretax charge of $1.6 million to adjust the carrying value for the
Cramer assets to their estimated fair value, based upon an estimated sales price
of the assets. Such charge represented the write-down of goodwill of $400,000
and the write-down of other non-current assets of $1.2 million and was included
in "Write-down of net assets held for sale" in the consolidated statements of
operations for fiscal 2000. On September 23, 2001, the Company sold
substantially all of the remaining operating assets (excluding the real estate)
of Cramer to the Chestnut Group of Wayne, Pennsylvania for cash proceeds of
$565,000, plus the assumption of $317,000 in liabilities. In connection with
that sale, the Company recorded a further adjustment to the carrying value of
the Cramer assets resulting in a pre-tax charge of $1.1 million, recorded in the
third fiscal quarter of 2001. The Company recorded a pretax charge of $270,000
in the fourth quarter of 2002 to adjust the carrying value for the Cramer real
estate to the estimated fair value, based upon an estimated sales price of the
assets and was included in "Write-down of net assets held for sale" in the
consolidated statements of operations for fiscal 2002.
The Company's historical Coils segment manufactured heat exchange coils and
included Astro Air Coils, Inc. ("Astro Air"), Snowmax, Inc. ("Snowmax"), and
Astro Air UK, Limited ("Astro UK"). Astro UK was a joint venture with the
Company's largest customer, Bergstrom, Inc. On May 9, 2001, the sale of
substantially all of the assets of Astro UK to ACR Heat Transfer Limited of
Norfolk, England for cash of (pound)450,000 (approximately $643,000) was
completed. Based upon the terms of the sale, the Company recorded, in the second
quarter of 2001, a pretax charge of $700,000 to adjust the carrying value of
Astro UK's assets to their estimated realizable value. No additional gain or
loss was recorded upon completion of the sale. Proceeds from the sale were
utilized to reduce the Company's bank credit facility.
2
On October 26, 2001, the Company completed the sale of the assets of the
remaining businesses in its Coils segment, Astro Air and Snowmax (together, the
"Coils Subsidiaries"). The sale of the Coils Subsidiaries was effectuated
pursuant to an Asset Purchase Agreement, dated as of October 26, 2001, by and
among the Coils Subsidiaries, Astro Air, Inc. (the "Buyer"), and Rex Dacus, the
manager of the Coils segment and the person from whom the Company acquired the
assets and operations of Astro Air Coils, Inc. in 1998. Proceeds from the sale
of $5.6 million were utilized to reduce the Company's bank credit facility. The
Buyer also assumed approximately $3.7 million of liabilities. The Company
recorded a pretax charge of $9.3 million related to this sale in the fourth
quarter of 2001. The Company recorded a charge of $520,000 net of taxes in the
fourth quarter of 2002 to adjust the carrying value for the real estate assets
to the estimated fair value, based upon an estimated sales price of the assets.
The Company has reported the results of the Coils segment as discontinued
operations for all periods presented in the consolidated statements of
operations.
On January 24, 2001, the Company completed the sale of 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. In May 2001, the Company received approximately $2.0
million related to such post-closing adjustments. In connection with the
anticipated sale, the Company recognized a loss of $8.6 million 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. No additional gain or
loss was recorded upon completion of the sale. Sooner Trailer had been included
in the Company's historical 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 was incorporated in Pennsylvania and organized as a holding company
in 1994. The holding company structure separated the administrative and
financing activities of the Company from the activities of its operating
subsidiaries.
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 is seasonal, nor was any
historical segment's seasonal.
A significant portion of the Company's sales are concentrated among a small
number of customers. Sales to the two largest customers represented
approximately 14%, 15% and 12% of total sales from continuing operations for
2002, 2001 and 2000, respectively.
The Company's backlog of unfilled orders for the historical Motors segment was
$5.5 million as of December 12, 2002, as compared to $12.3 million as of
December 23, 2001. The backlog for 2001 includes the Motor Products
subsidiaries.
The Company's business is 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 200 employees and 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 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 applicable 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
3
from such property. The Company is also subject to the federal Occupational
Safety and Health Act and similar state statutes. See Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Environmental Matters."
The Company currently maintains product liability insurance coverage of $1.0
million per occurrence and $2.0 million in aggregate annual coverage, and an
umbrella policy for an additional $20.0 million of blanket liability protection
per occurrence. There can be no assurance that such insurance will be sufficient
to cover potential product liability claims or that the Company will be able to
maintain such insurance or obtain product liability insurance in the future at a
reasonable cost.
Executive officer(s) of the registrant
The sole executive officer of the Company is:
Name Age Positions
- ---- --- ---------
George B. Lemmon, Jr. ...... 41 President, Chief Executive
Officer, and Director
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 its inception in March 1994. Mr. Lemmon has been
acting as the Company's principle accounting officer and principle financial
officer since February 2002. Prior to joining the Company, Mr. Lemmon was the
CFO of Brynavon Group, a private equity firm that contributed part of its
investment portfolio to the Company in exchange for shares during the initial
public offering of the Company in October of 1994.
Item 2. Properties.
The Company's principal executive offices and manufacturing, warehousing and
distribution facility are located at 22543 Fisher Road, Watertown, New York.
This facility consists of approximately 112,000 square feet, of which 107,800
square feet are dedicated to manufacturing, warehousing and distribution, with
the remaining portion dedicated to office space. This facility is utilized by
Stature, the Company's sole remaining business, and is subject to a mortgage
securing a $4.6 million industrial revenue bond financing.
The Company's former principal executive offices, located at 2200 Renaissance
Boulevard, King of Prussia, Pennsylvania, are still under lease. This location
consists 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 5,000 square feet of this office space.
Under the sublease agreement, which expires in September 2006, the Company
receives annual sublease rental payments aggregating $119,000. The Company is
actively seeking to sublease the remaining 7,700 square feet of space.
The Company continues to own a 92,000 square foot manufacturing facility located
in Avon, Connecticut which housed the Company's former Cramer subsidiary, and a
90,000 square foot manufacturing facility located in Kilgore, Texas, which
housed the Company's former Snowmax subsidiary. The Company is actively seeking
to sell these facilities.
4
The Company believes that its machinery, plants and offices are in satisfactory
operating condition and are adequate for the Company's current needs.
Item 3. Legal Proceedings.
As discussed in Item 7 under "Environmental Matters," the Company is a party to
various legal proceedings concerning environmental regulations. In addition, the
Company is a party to various lawsuits arising in the ordinary course of
business, none of which is expected to be material with respect to the business
assets or continuing operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock began its listing on the Nasdaq SmallCap Market under
the symbol "OWOS" in February 2001. Prior to that, the Company's common stock
was listed on the Nasdaq National Market.
During the second quarter of fiscal of 2002, the Company was notified by the
Nasdaq Stock Market that the Company's stock was to be delisted from the Nasdaq
SmallCap Market for failure to meet the SmallCap Market's criteria of continued
listing, including the $1.00 per share minimum bid price. The Company announced
it would appeal the delisting, and in the fourth quarter of fiscal 2002 the
Company received notice from the Nasdaq Stock Market that the Company had met
certain of the continued listing criteria for the SmallCap Market, and that the
Company would have an additional 180 calendar days, or until February 10, 2003,
to demonstrate compliance with the SmallCap Market's $1.00 per share minimum bid
price requirement. The Company can make no assurances that it will be able to
demonstrate compliance with the $1.00 per share minimum bid price requirement.
The following table sets forth, for the fiscal quarters indicated, the high and
low sales prices per share for the Company's common stock.
Fiscal year ended October 27, 2002: High Low
---- ---
First Quarter $0.550 $0.100
Second Quarter $0.780 $0.210
Third Quarter $0.850 $0.290
Fourth Quarter $0.805 $0.450
Fiscal year ended October 28, 2001: High Low
---- ---
First Quarter $2.000 $0.813
Second Quarter $1.953 $0.720
Third Quarter $1.250 $0.860
Fourth Quarter $1.000 $0.300
As of January 9, 2003, there were approximately 120 holders of record of the
Company's common stock and an estimated number of beneficial owners of the
common stock of approximately 450.
Effective for the second quarter of 2000, the Company modified certain covenants
included in its bank 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
bank credit facility in February 2001 resulted in the Company also being
prohibited from making future preferred stock dividend payments and from
purchasing the Company's stock.
6
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
the Coils segment and Agricultural Equipment 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."
Fiscal Year Ended
-----------------------------------------------------------
Oct. 27, Oct. 28, Oct. 29, Oct. 31, Oct. 25,
2002(4) 2001 2000 1999(1) 1998(2)
------- ---- ---- ------- -------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Net sales $36,901 $ 54,326 $ 75,204 $84,214 $95,264
Cost of products sold 31,242 43,897 59,429 65,009 72,742
------- -------- -------- ------- -------
Gross profit 5,659 10,429 15,775 19,205 22,522
Selling, general and administrative
expenses 8,224 11,183 13,240 16,305 19,229
Restructuring charge -- -- -- -- 909
Write-down of net assets held for sale 381 1,100 2,800 -- 1,635
------- -------- -------- ------- -------
Income (loss) from operations (2,946) (1,854) (265) 2,900 749
Interest expense 1,588 4,335 5,069 4,947 4,788
Gain on sale of business (6,055) -- -- -- (2,775)
Other (income) expense -- (110) 530 (444) (87)
------- -------- -------- ------- -------
Income (loss) from continuing
operations before income taxes 1,521 (6,079) (5,864) (1,603) (1,177)
Income tax expense (benefit) (4,197) (1,968) (1,082) (658) 812
------- -------- -------- ------- -------
Income (loss) from continuing operations 5,718 (4,111) (4,782) (945) (1,989)
Discontinued operations:
Income (loss) from
discontinued operations (520) (2,073) (290) 2,722 2,691
Loss on disposal of discontinued
operations -- (10,040) (8,600) -- --
Cumulative effect of accounting change -- (67) -- -- --
------- -------- -------- ------- -------
Net income (loss) 5,198 (16,291) (13,672) 1,777 702
Dividends and accretion on preferred stock (1,349) (1,316) (1,121) (1,095) (1,070)
------- -------- -------- ------- -------
Net income (loss) available to common
Shareholders $ 3,849 $(17,607) $(14,793) $ 682 $ (368)
======= ======== ======== ======= =======
Basic and diluted income (loss) available
for common shareholders from
continuing operations per share $ .75 $ (0.93) $ (1.01) $ (0.35) $ (0.53)
Weighted average number of common
shares outstanding (basic) 5,824 5,866 5,844 5,826 5,813
7
Fiscal Year Ended
-----------------------------------------------------------
Oct. 27, Oct. 28, Oct. 29, Oct. 31, Oct. 25,
2002(4) 2001 2000 1999(1) 1998(2)
------- ---- ---- ------- -------
(in thousands)
OTHER DATA:
Capital expenditures $ 132 $ 757 $1,195 $3,789 $7,838
Depreciation and amortization 3,840 3,867 5,025 4,984 4,968
EBITDA (3) 1,275 3,113 7,560 7,884 8,261
Fiscal Year Ended
-----------------------------------------------------------
Oct. 27, Oct. 28, Oct. 29, Oct. 31, Oct. 25,
2002(4) 2001 2000 1999 1998
------- ---- ---- ---- ----
BALANCE SHEET DATA:
Total assets $27,970 $46,394 $81,163 $105,345 $116,499
Total short-term and long-term obligations 13,545 29,604 49,968 54,222 67,024
Shareholders' equity 4,252 403 18,432 33,984 34,643
- --------------------------------------------------------------------------------
(1) Includes the results of operations of the Company's former Parker
Industries subsidiary 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 the Company's former
subsidiaries, Great Bend Manufacturing, Inc. and DewEze Manufacturing,
Inc., through their dates of disposition, April 26, 1998 and July 24,
1998, respectively. Also includes the results of operations of Astro
Air and Cramer 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, gain on the sale of
businesses, 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.
(4) The results include Motor Products which was sold July, 30, 2002
8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
As of July 30, 2002, Owosso Corporation (the "Company") had one operating
subsidiary, Stature Electric, Inc. ("Stature"), representing the Company's
historical "Motors segment." Stature is a custom designer and manufacturer of
motors and gear motors, including AC, DC and Universal. Established in 1974 in
Watertown, New York, Stature is a progressive company, which emphasizes a
partnership approach in all aspects of its business. Significant markets for
Stature include commercial products and equipment, healthcare, recreation and
non-automotive transportation. Stature's component products are sold throughout
North America and in Europe, primarily to original equipment manufacturers who
use them in their end products.
In 1998, Company formulated a long-term plan to concentrate on value-added
components for industry. In connection with its implementation of that plan, the
Company began a series of divestitures beginning with the sale of the four
businesses comprising its former Agricultural Equipment segment. The sale of the
last of those businesses was completed in January 2001 with the divestiture of
Sooner Trailer Manufacturing Company ("Sooner Trailer"). During that time,
however, the Company experienced a significant downturn in its operating results
and at the end of fiscal 2000 was out of compliance with covenants under its
bank credit facility.
Throughout fiscal 2001, the Company remained out of compliance with financial
covenants, including maintenance of minimum operating profit, under its bank
credit facility. As a result, the Company and its lenders entered into a series
of amendments to the facility during fiscal 2001 and 2002, and in each case the
Company's lenders agreed to forebear from exercising their rights and remedies
under the facility. In order to meet the lenders' requirements for reduced
outstanding balances and to secure the lenders' agreement to forebear, the
Company engaged in a series of divestitures of its operating subsidiaries,
concluding with the sale of its Motor Products subsidiaries, Motor Products
Owosso Corporation and Motor Products Ohio Corporation in July of 2002. As
disclosed under Note 11 "Long-term Debt," the amendments to the bank credit
facility modified the interest rates charged, called for reductions in the
outstanding balance during calendar 2001 and 2002, added additional reporting
requirements, suspended payments of principal and interest on subordinated debt,
prohibited the payment of preferred or common dividends, prohibited the purchase
of the Company's stock and added a covenant requiring the maintenance of minimum
operating profit. In December 2002, the Company entered into a further amendment
to the facility which extended the maturity date to December 31, 2003. This
amendment requires further reductions in the outstanding balance based on
expected future asset sales and cash flow generated from operations.
Management intends to dispose of or liquidate additional non-operating assets
during fiscal 2003, including real estate at the Company's former Cramer Company
("Cramer") and Snowmax Corporation subsidiaries and various notes receivable
which arose from previous asset divestitures. Proceeds from these sales and
collections, which are expected to be between $1.5 and $2.5 million net of
taxes, and an anticipated tax refund of approximately $1.3 million will be
utilized to further reduce the Company's outstanding balance under its bank
credit facility. Management believes that, along with the sale of assets, the
tax refund, available cash and cash equivalents, cash flows from operations and
available borrowings under the Company's bank credit facility will be sufficient
to fund the Company's operating activities, investing activities and debt
maturities for fiscal 2003. In addition, management believes that the Company
will be in compliance with its bank covenant requirements throughout fiscal
2003. It is management's intent to refinance the Company's bank credit facility
prior to its maturity in December 2003. However, there can be no assurance that
management's plans will be successfully executed.
9
On July 30, 2002, the Company completed the sale of all of the outstanding stock
of its Motor Products subsidiaries, manufacturers of fractional and integral
horsepower motors. The purchase price paid by Hathaway Motion Control
Corporation (the "Buyer") for the outstanding stock of Motor Products consisted
of $11.5 million in cash and a promissory note in the principal amount of
$300,000, payable six months after closing. Net cash proceeds of $10.7 million
from the sale, after payment of certain transaction costs, were utilized to
reduce outstanding bank debt. As a result of this transaction, the Company
presently has only one operating subsidiary, Stature.
The Company's historical Other segment included Dura-Bond Bearing Company
("Dura-Bond") and Cramer Company ("Cramer"). Dura-Bond manufactured replacement
camshaft bearings, valve seats and shims for the automotive after-market. 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 $4.6 million, the net
assets of which included debt of approximately $5.0 million. 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 represented a reduction in goodwill
and was included in "Write-down of net assets held for sale" in the consolidated
statements of operations for fiscal 2001.
Cramer manufactured timers and subfractional horsepower motors for use in
commercial applications. On December 4, 2000, the Company completed the sale of
the assets associated with the timer and switch line of Cramer to Capewell
Components, LLC of South Windsor, Connecticut for cash of approximately $2.0
million, plus the assumption of approximately $400,000 in liabilities. As a
result of the sale, the name of the company was changed from M.H. Rhodes, Inc.
to Cramer Company. In connection with the sale of the timer and switch line and
the anticipated sale of the remainder of the operating assets (excluding the
real estate) of Cramer, the Company recorded, in the fourth quarter of fiscal
2000, a pretax charge of $1.6 million to adjust the carrying value for the
Cramer assets to their estimated fair value, based upon an estimated sales price
of the assets. Such charge represented the write-down of goodwill of $400,000
and the write-down of other non-current assets of $1.2 million and was included
in "Write-down of net assets held for sale" in the consolidated statements of
operations for fiscal 2000. On September 23, 2001, the Company sold
substantially all of the remaining operating assets (excluding the real estate)
of Cramer to the Chestnut Group of Wayne, Pennsylvania for cash proceeds of
$565,000, plus the assumption of $317,000 in liabilities. In connection with
that sale, the Company recorded a further adjustment to the carrying value of
the Cramer assets resulting in a pre-tax charge of $1.1 million, recorded in the
third fiscal quarter of 2001. The Company recorded a pretax charge of $270,000
in the fourth quarter of 2002 to adjust the carrying value for the Cramer real
estate to the estimated fair value, based upon an estimated sales price of the
assets and was included in "Write-down of net assets held for sale" in the
consolidated statements of operations for fiscal 2002.
The Company's historical Coils segment manufactured heat exchange coils and
included Astro Air Coils, Inc. ("Astro Air"), Snowmax, Inc. ("Snowmax"), and
Astro Air UK, Limited ("Astro UK"). Astro UK was a joint venture with the
Company's largest customer, Bergstrom, Inc. On May 9, 2001, the sale of
substantially all of the assets of Astro UK to ACR Heat Transfer Limited of
Norfolk, England for cash of (pound)450,000 (approximately $643,000) was
completed. Based upon the terms of the sale, the Company recorded, in the second
quarter of 2001, a pretax charge of $700,000 to adjust the carrying value of
Astro UK's assets to their estimated realizable value. No additional gain or
loss was recorded upon completion of the sale. Proceeds from the sale were
utilized to reduce the Company's bank credit facility.
10
On October 26, 2001, the Company completed the sale of the assets of the
remaining businesses in its Coils segment, Astro Air and Snowmax (together, the
"Coils Subsidiaries"). The sale of the Coils Subsidiaries was effectuated
pursuant to an Asset Purchase Agreement, dated as of October 26, 2001, by and
among the Coils Subsidiaries, Astro Air, Inc. (the "Buyer"), and Rex Dacus, the
manager of the Coils segment and the person from whom the Company acquired the
assets and operations of Astro Air Coils, Inc. in 1998. Proceeds from the sale
of $5.6 million were utilized to reduce the Company's bank credit facility. The
Buyer also assumed approximately $3.7 million of liabilities. The Company
recorded a pretax charge of $9.3 million related to this sale in the fourth
quarter of 2001. The Company recorded a charge of $520,000 net of taxes in the
fourth quarter of 2002 to adjust the carrying value for the real estate assets
to the estimated fair value, based upon an estimated sales price of the assets.
The Company has reported the results of the Coils segment as discontinued
operations for all periods presented in the consolidated statements of
operations.
On January 24, 2001, the Company completed the sale of 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. In May 2001, the Company received approximately $2.0
million related to such post-closing adjustments. In connection with the
anticipated sale, the Company recognized a loss of $8.6 million 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. No additional gain or
loss was recorded upon completion of the sale. Sooner Trailer had been included
in the Company's historical 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.
Critical Accounting Policies
The SEC recently issued disclosure guidance for critical accounting
policies. The SEC defines critical accounting policies as those that require
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.
Our significant accounting policies are described in Note 3 to the Consolidated
Financial Statements. Not all of these significant accounting policies require
management to make difficult, subjective or complex judgments or estimates.
However, the following accounting policies could be deemed to be critical by
SEC.
Use of estimates. In preparing the Consolidated Financial Statements we
use estimates in determining the economic useful lives of our assets,
obligations under our employee benefit plans, provisions for doubtful accounts,
provisions for restructuring charges, tax valuation allowances and various other
recorded or disclosed amounts. Estimates require us to use our judgment. While
we believe that our estimates for these matters are reasonable, if the actual
amount is significantly different than the estimated amount, our assets,
liabilities or results of operations may be overstated or understated.
Contingencies. We account for contingencies in accordance with SFAS No.
5, " Accounting for Contingencies." SFAS No. 5 requires that we record estimated
loss from a loss contingency when information available prior to issuance of the
Consolidated Financial Statement indicates that it is probable that an asset has
been impaired or liability has been incurred at the date of the Consolidated
Financial Statements and the amount of the loss can be reasonable estimated.
Accounting for contingencies such as environmental, legal and income tax matters
requires us to use our judgment. While we believe that our accruals for these
matters are adequate, if the actual loss from a loss contingency is
significantly different from the estimated loss, our results of operations may
be overstated or understated.
11
Impairments of Long-Lived Assets. We record impairments losses on
long-lived assets used in used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted future cash
flows estimated to be generated by those assets are less than the carrying
amount of those assets. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the asset to future net cash flows
expected to be generated by the asset. If the asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the asset exceedes the fair value of the asset. Assets to
be disposed are reported at the lower of the carrying amount or fair value, less
cost to sell. If the actual value is significantly less than the estimated
value, our assets may be overstated.
Inventories. We record the value of inventory at the lower of cost or
market, and periodically review the book value of products and product lines to
determine if they are properly valued. We also periodically review the
composition of our inventories and seek to identify slow-moving inventories. In
connection with those reviews, we seek to identify products that may not be
properly valued and assess the ability to dispose of them at a price greater
than cost. If it is determine that the cost is less than market value, then cost
is used for inventory valuation. If a write down to current market value is
necessary, the market value cannot be greater than the net realizable value,
sometimes called the ceiling (defined as selling price less cost to complete and
dispose), and cannot be lower than net realizable value less a normal profit
margin, sometimes called the floor. If the actual value is significantly less
than the recorded value, our assets may be overstated.
Results of Operations
The Company's fiscal year includes 52 or 53 weeks, ending on the last Sunday in
October. Fiscal years 2002, 2001 and 2000 consisted of 52 weeks.
Year ended October 27, 2002 compared to year ended October 28, 2001
Net sales. Net sales for 2002 were $36.9 million, as compared to net sales of
$54.3 million in 2001, a decrease of 32.0%. Net sales from Motors, the Company's
only remaining segment decreased to $36.9 million in 2002, as compared to $51.4
million in 2001, a decrease of 28.2%. These results include the effects of the
disposition of Motor Products in July 2002, the effects of the general economic
slowdown on the Company's primary markets, particularly the heavy truck and
recreational vehicle markets, as well as the effects of increased Pacific Rim
competition in the healthcare market. These results also include the effect of
disposing of Cramer's operating assets (excluding the real estate) in 2001.
Sales attributed to Cramer were $2.9 million in 2001.
Loss from operations. For 2002, the Company recorded a loss from operations of
$2.9 million, as compared to a loss from operations of $1.9 million in 2001.
These results reflect decreased sales volumes and decreased margins caused by
price pressures and changes in product mix, as well as the under absorption of
overhead costs, partially offset by a reduction in selling, general and
administrative expenses.
The current year loss includes a charge of $381,000, as compared to $1.1 million
in 2001 for the write-down of net assets held for sale, related to the Cramer
real estate asset.
Interest expense. Interest expense decreased to $1.6 million for 2002 from $4.3
million in the prior year, primarily as a result of lower debt levels. The
current period includes a charge of $589,000 resulting from a decrease in the
fair market value of the Company's interest rate swap agreements as a result of
decreases in interest rates. This charge was recorded in accordance with SFAS
No. 133.
12
Other (income) expense. For 2001, other (income) expense primarily represents
the partial recovery of a note received in connection with the sale of certain
Cramer assets in 1999 (the "Cramer Note Receivable").
Income tax expense (benefit). The Company recorded an income tax benefit of $4.5
million for 2002 of which $4.3 million was as a result of recent changes in
federal tax laws, which allow the carryback of net operating losses for five
years. The Company recorded an income tax expense at an effective rate of 6.4%
for 2002, when excluding the $4.3 million tax benefit as compared to an
effective tax rate of 32.4% in the prior year.
Income (loss) from discontinued operations. For 2002, the Company recorded a
loss from discontinued operations, representing the remaining real estate asset
of the Coils segment, of $520,000 (net of income tax expense of $268,000). For
2001, the Company recorded a loss from discontinued operations, representing the
operations of Sooner Trailer and the Coils segment, of $12.1 million (net of
income tax expense of $514,000) on revenues of $35.6 million. The prior year
results reflect a pre-tax loss on the sale of the Coils segment of $10.0
million.
Net income (loss) available for common stockholders. Net income available for
common shareholders was $3.8 million, or $.66 per share, in 2002, as compared to
a net loss of $17.6 million, or $3.00 per share, in the prior year. Income
(loss) available for common shareholders is calculated by subtracting dividends
of preferred stock of $1.3 million for both 2002 and 2001, respectively.
Year ended October 28, 2001 compared to year ended October 29, 2000
Net sales. Net sales for 2001 were $54.3 million, as compared to net sales of
$75.2 million in 2000, a decrease of 27.8%. These results include the effects of
disposing of Dura-Bond in November 2000. Sales attributable to Dura-Bond were
$8.2 million in 2000.
Net sales from Motors were $51.4 million in 2001, as compared to 57.7 million in
2000, a decrease of 11.0%. Sales volume at the Motors segment was adversely
effected by the general economic slowdown effecting the Company's primary
markets, particularly the heavy truck and recreational vehicle markets and
increased Pacific Rim competition in the healthcare market.
Net sales from the Company's Other segment were $3.0 million in 2001, as
compared to $17.5 million in 2000. Sales attributable to Dura-Bond, which was
sold November 2, 2000, were $8.2 million in 2000. Net sales at Cramer decreased
$6.4 million, as compared to the prior year, reflecting the sale of the timer
and switch line on December 4, 2000, and the subsequent sale, on September 23,
2001, of substantially all of the remaining Cramer assets.
Income (loss) from operations. For 2001, the Company recorded a loss from
operations of $1.9 million, as compared to a loss from operations of $265,000 in
2000. The current year loss includes a charge of $1.1 million for the write-down
of net assets held for sale, related to Cramer. The prior year period includes a
$2.8 million charge for the write-down of net assets held for sale related to
both Cramer and Dura-Bond.
Income from operations for the Motors segment was $4.7 million, or 9.1% of net
sales for 2001, as compared to $5.0 million, or 8.6% of net sales in the prior
year. Despite an 11.0% decrease in sales, income from operations improved as a
percentage of net sales as a result of increased productivity attributable to
lean manufacturing processes implemented in 2000.
13
The Company's Other segment reported a loss from operations of $1.4 million in
2001, as compared to a loss of $666,000 in 2000. The current period loss
includes a charge of $1.1 million for the write-down of net assets held for sale
related to Cramer. The prior year period includes a $2.8 million charge for the
write-down of net assets held for sale related to both Cramer and Dura-Bond.
Exclusive of the write-downs, the loss from operations would have been $317,000
for 2001, as compared to income from operations of $2.1 million in 2000. This
decrease reflects the sale of Dura-Bond, which had income from operations of
$1.5 million in 2000. In addition, operating results from Cramer decreased as a
result of the sale of the timer and switch line in December 2000 and the sale of
the remaining Cramer assets in September 2001.
Unallocated corporate expenses included in income (loss) from operations were
$5.1 million, or 9.4% of net sales, as compared to $4.6 million, or 6.1% of net
sales in 2000. This increase reflects severance costs for the corporate office
staff of $650,000, increased incentive compensation of $344,000, and increased
bank service charges of $339,000, partially offset by rental income received on
the sublet of corporate office space of $119,000, reduced corporate office
employee costs of $150,000, and income of $400,000 from a vendor dispute.
Interest expense. Interest expense decreased to $4.3 million for 2001 from $5.1
million in the prior year, primarily as a result of lower debt levels. The
current period includes a charge of $598,000 resulting from a decrease in the
fair market value of the Company's interest rate swap agreements as a result of
decreases in interest rates. This charge was recorded in accordance with SFAS
No. 133.
Other (income) expense. For 2001, other (income) expense primarily represents
the partial recovery of a note received in connection with the sale of certain
Cramer assets in 1999 (the "Cramer Note Receivable"). 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 Industries ("Parker")
in 1999 to Top Air Manufacturing, Inc. ("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 the Cramer Note
Receivable, partially offset by income of $100,000 representing a change in
estimate on an allowance against a note receivable.
Income tax expense (benefit). The Company recorded an income tax benefit at an
effective rate of 32.4% for 2001, as compared to an effective tax rate of 18.6%
in the prior year. The Company's effective tax rate was adversely effected in
the prior year as a result of a higher proportion of non-deductible taxable
losses.
Income (loss) from discontinued operations. For 2001, the Company recorded a
loss from discontinued operations, representing the operations of Sooner Trailer
and the Coils segment, of $12.1 million (net of income tax expense of $514,000)
on revenues of $35.6 million. For 2000, loss from discontinued operations was
$8.9 million (net of income tax expense of $522,000) on revenues of $85.1
million. The current year results reflect a pre-tax loss on the sale of the
Coils segment of $10.0 million. The prior year reflects an $8.6 million charge
for the write-down of the net assets of Sooner in connection with its sale,
which was completed in January 2001.
Net income (loss) available for common stockholders. Net loss available for
common shareholders was $17.6 million, or $3.00 per share, in 2001, as compared
to a net loss of $14.8 million, or $2.53 per share, in the prior year. Income
(loss) available for common shareholders is calculated by subtracting dividends
of preferred stock of $1.3 million and $750,000 for 2001 and 2000, respectively,
and by deducting the non-cash accretion in book value of preferred stock of
$371,000 for 2000.
14
Liquidity and Capital Resources
At October 27, 2002, cash and cash equivalents were $524,000. The Company had
negative working capital of $5.4 million, as compared to negative working
capital of $14.4 million at October 28, 2001. This increase in working capital
reflects the sale of the Motor Products subsidiary and an income tax refund that
allowed the Company to pay down the current portion of long-term debt. Net cash
provided by operating activities of continuing operations was $5.7 million for
2002, as compared to $1.5 million in the prior year. The increase in cash from
operations was principally the result of the sale of the Motor Products
subsidiaries and better operating results.
The Company currently plans to invest approximately $250,000 in capital
expenditures during fiscal 2002. Management anticipates funding such capital
expenditures with cash from operations and proceeds from the Company's bank
credit facility.
Net cash used in financing activities included net repayments of $15.1 million
under the Company's revolving credit agreement, debt repayments of $959,000,
including the repayment of $400,000 of related party debt.
At October 27, 2002, $6.9 million was outstanding under the Company's bank
credit facility. On January 22, 1999, the Company entered into a new bank credit
facility with the Company's two primary banks, originally expiring in December
2002. The agreement included 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 bank credit facility agreement, 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 was to mature. The amendment to the bank credit facility, which was
further amended in February 2001, called for reductions in the outstanding
balance during calendar 2001 and modified the interest rates charged. The
amendment required additional collateral, effectively all the assets of the
Company, and reporting requirements, as well as the addition of a covenant
requiring minimum operating profits. The amendment also required the suspension
of principal and interest payments on subordinated debt, with an aggregate
outstanding balance of $2.1 million as of October 28, 2001. Furthermore, the
amendment to the facility prohibits the payment of preferred or common stock
dividends and prohibited the purchase of the Company's stock. Beginning in
August 2001, the Company was out of compliance with its minimum operating profit
covenant. In February 2002, the Company entered into a further amendment to the
facility, which extended the maturity date to December 31, 2002. That amendment
called for further reductions in the outstanding balance based on expected
future asset sales, increases the interest rate charged and requires minimum
EBITDA. See Item 7. "General" section. In December 2002, the Company entered
into a further amendment to the facility, which extends the maturity date to
December 31, 2003. This amendment calls for further reductions in outstanding
balance based on expected future asset sales and cash flow generated from
operations and requires minimum EBITDA. Borrowings under the facility are
charged interest at the Prime Rate plus 2.75% (7.5% at October 27, 2002).
The Company has an interest rate swap agreement with its bank with a notional
amount totaling $4.9 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. The value
of the swap agreement at October 27, 2002 is ($110,000).
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 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.
15
In connection with the Company's divestitures of its operating businesses over
the past four years, it has agreed to indemnify buyers from and against certain
known and unknown environmental liabilities. In addition, the Company may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, in, under or discharged from it's current or previously owned real property
under applicable federal, state and local environmental laws, ordinances and
regulations.
A subsidiary of 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 Old Saybrook 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.
Recently Issued Financial Accounting Standards
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" ("SFAS No. 141") and SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting, and broadens the criteria for recording intangible assets separate
from goodwill. Recorded goodwill and intangibles will be evaluated against this
new criterion and may result in certain intangibles being subsumed into
goodwill, or alternatively, amounts initially recorded as goodwill may be
separately identified and recognized apart from goodwill. SFAS No. 142 requires
the use of a nonamortization approach to account for purchased goodwill and
certain intangibles. Under a nonamortization approach, goodwill and certain
intangibles will not be amortized into results of operations but, instead, would
be reviewed for impairment and written down and charged to results of operations
only in the periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. The provisions of each statement which
apply to goodwill and intangible assets acquired prior to June 30, 2001 are
required to be adopted for fiscal years beginning after December 15, 2001. The
Company has not yet completed its analysis of the effects of adopting these
statements on its consolidated financial position or results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). SFAS No. 144, which addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of,
supercedes SFAS No. 121 and is effective for fiscal years beginning after
December 15, 2001. The Company has not yet completed its analysis of the effects
of adopting this statement on its consolidated financial position or results of
operations.
In April 2002, the Financial Accounting Standards Board issued SFAS No.145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". This Statement rescinds FASB Statement No.
4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of
that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
16
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of Statement 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions of this
Statement related to SFAS No. 13 shall be effective for transactions occurring
after May 15, 2002. The Company has not yet completed its analysis of the
effects of adopting this statement on its consolidated financial position or
results of operation.
In June 2002, the Financial Accounting Standards Board issued SFAS No.146
"Accounting for Costs Associated with Exit or Disposal Activities". This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The Company has not yet completed its analysis of the effects
of adopting this statement on its consolidated financial position or results of
operation.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation --Transition and Disclosure, an
amendment of FASB Statement No. 123". This Statement amends FASB Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally, this Statement
amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure
about those effects in interim financial information. The transition provisions
of this statement shall be effective financial statements for fiscal years
ending after December 15, 2002. The disclosure provisions of this statement
shall be effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. The Company
has not yet completed its analysis of the effects of adopting this statement on
its consolidated financial position or results of operation.
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 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, its ability
to maintain compliance with debt covenants, and its ability to
generate sufficient cash flows to meets its obligations on a
timely basis.
17
o The Company's common stock is currently traded on the Nasdaq
SmallCap Market. For continued listing the Nasdaq SmallCap Market
requires, among other things, that listed securities maintain a
minimum bid price of not less than $1.00 per share. Nasdaq has
notified the Company that it has failed to maintain this continued
listing requirement, and will commence procedures to delist the
Company's securities from the Nasdaq SmallCap Market unless the
Company has regained compliance with this listing requirement by
February 10, 2003. If, at anytime before February 10, 2003, the
bid price of the Company's common stock closes at $1.00 per share
or more for a minimum of 10 consecutive trading days, the Company
will regain compliance with the continued listing requirements. If
delisted from the Nasdaq SmallCap Market, the Company's common
stock may be eligible for trading on the OTC Bulletin Board or on
other over-the-counter markets, although there can be no assurance
that the Company's common stock will be eligible for trading on
any alternative exchanges or markets. Among other consequences,
moving from the Nasdaq SmallCap Market, or delisting from the
Nasdaq SmallCap Market may cause a decline in the stock price,
reduced liquidity in the trading market for the common stock, and
difficulty in obtaining future financing.
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 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 influence of foreign competition from low-cost areas of the
world 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 In that the Company's outstanding derivative instruments do not
meet the stringent requirements for hedge accounting under SFAS
133, future earnings could reflect greater volatility.
18
o The Company has divested all but one of its operating businesses
over the past four years. The Company remains responsible for
certain third party liabilities in connection with these
transactions, including product liabilities, environmental
liabilities and taxes, and has obligations to indemnify the buyers
against certain matters arising out of the transactions. Although
the Company maintains general liability insurance coverage,
including coverage for errors and omissions, there can be no
assurance that such coverage will continue to be available on
reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer(s) will not
disclaim coverage as to any future claim. The successful assertion
of one or more large claims against the Company that are
uninsured, exceed available insurance coverage or result in
changes to the Company's insurance policies, including premium
increases or the imposition of a large deductible or co-insurance
requirements, could adversely affect the Company's business,
results of operations and financial condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company uses a bank 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 the
prime rate. The Company uses interest rate swap agreements to partially change
interest rate exposure associated with the Company's variable rate debt. 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 bank credit facility, industrial revenue bonds and
term loans in effect at October 27, 2002. 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. Notes 10 and 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
2003 2004 2005 2006 2007 Thereafter at Maturity 10/27/02
---- ---- ---- ---- ---- ---------- ----------- --------
Debt:
Fixed rate $ 1,451 $ 254 $ 216 $ 93 $ 81 $ - $ 2,095 $ 2,095
Average interest rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Variable rate $ 7,500 $ 600 $ 600 $ 900 $ 900 $ 950 $ 11,450 $ 11,450
Average interest rate 2.8% 2.8% 2.8% 2.8% 2.8% 2.8%
Interest rate swap agreements:
Variable to fixed swaps $ 4,550 $ - $ - $ - $ - $ - $ 4,550 $ (110)
Average pay rate 4.2%
Average receive rate 2.1%
19
Item 8. Financial Statements and Supplementary Data.
The Company's consolidated financial statements and supplemental schedules
appear at pages F-1 through F-28, 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 April 3, 2003, 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 and
Related Stockholder Matters.
The following table summarizes information about the Company's equity
compensation plans as of October 27, 2002. All outstanding awards relate to the
Company's common stock. For additional information about the Company's equity
compensation plans, see note 19 of Notes to Consolidated Financial Statements
under Item 8.
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted-average equity compensation
exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a))
- ------------------------------------ ---------------------- ---------------------- --------------------------
(a) (b) (c)
Equity Compensation plans approved 324,000 $7.74 676,000
by security holders.................
Equity compensation plans not
approved by security holders........ 0 0 0
Total ..................... 324,000 $7.74 676,000
21
The other information required under this Item is contained in the section
titled "Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive proxy statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders scheduled to be held on April
3, 2003, and 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.
Item 14. Controls and Procedures.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
(the principal executive officer, principal financial officer and principal
accounting officer), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of a date within 90 days prior to the date of filing this Annual
Report on Form 10-K (the "Evaluation Date"). Based on that evaluation, the Chief
Executive Officer concluded that, as of Evaluation Date, the disclosure controls
and procedures of the Company are effective to ensure that information required
to be disclosed by the Company in its Exchange Act reports is recorded,
processed, summarized and reported within the applicable time periods. Since the
Evaluation Date, there have been no significant changes to the Company's
internal controls or, to the Company's knowledge, in other factors that could
significantly affect these controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
22
PART IV
Item 15. 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) Reports on Form 8-K
The Company filed a report on Form 8-K, dated July 30, 2002, to report
under Item 2 that the Company had completed the sale of all of the
outstanding stock of Motor Products - Owosso Corporation, a Delaware
corporation and Motor Products - Ohio Corporation, a Delaware
corporation (together, "Motor Products"), manufacturers of fractional
and integral horsepower motors.
The Company filed a report on Form 8-K, dated July 30, 2002, to comply
with a condition imposed on the Company by the Nasdaq Listing
Qualification Panel on August 13, 2002 and to avert a delisting of the
Company's common stock from the Nasdaq SmallCap Market. The condition
required the Company to file a July 28, 2002 balance sheet with pro
forma adjustments for any significant events or transactions occurring
on or before September 11, 2002 and evidencing shareholders' equity of
at least $7,000,000. Accordingly, the Company filed a pro forma
condensed consolidated balance sheet as of July 28, 2002.
(c) Exhibits
Exhibit No Description
- --------------------------------------------------------------------------------
*2.1 Stock Purchase Agreement among Hathaway Motion Control
Corporation, Motor Products -- Owosso Corporation, Motor
Products -- Ohio Corporation, and Owosso Corporation, dated
July 8, 2002. (Exhibit 2.1 to the Company's Current Report on
Form 8-K dated July 30, 2002).
*2.2 Asset Purchase Agreement among Rex Dacus, Dacus Properties,
Inc., Astro Air Coils, Inc. and Snowmax Incorporated, dated
October 26, 2001 (Exhibit 2.1 to the Company's Current Report
on Form 8-K, dated October 26, 2001).
*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")).
23
*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 Employment Agreement between Michael Koepke and Owosso Motor
Group, Inc., dated September 30, 1996.
*10.3 Lease, dated March 21, 1995, between Motor Products - Ohio
Corporation and William Berhard Realty Company (Exhibit 10.44
to the 1995 Form 10-K).
*10.4 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).
*10.5 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).
*10.6 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).
*10.7 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).
*10.8 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).
*10.9 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).
*10.10 Lease Agreement by and between Owosso Corporation and
Philadelphia Freedom Partners, L.P. dated September 6, 1996
(Exhibit 10.62 to the Company's Annual Report on Form 10-K for
the year ended October 27, 1996).
*10.11 Owosso Corporation 401(k) Savings Plan (Exhibit 10.2 to the
January 25, 1998 Form 10-Q).
24
#*10.12 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).
*10.13 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).
*10.14 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).
*10.15 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).
*10.16 Asset Purchase Agreement by and between M.H. Rhodes, Inc. and
Capewell Component Company, L.L.C., dated December 1, 2000
(Exhibit 10.35 to the Company's Annual Report on Form 10-K for
the year ended October 29, 2000).
*10.17 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).
*10.18 Amendment Agreement by and among Owosso Corporation, its
subsidiaries, Bank One and PNC Bank, N.A., dated February 12,
2001 (Exhibit 10.37 to the Company's Annual Report on Form
10-K for the year ended October 29, 2000).
10.19 Executive Salary Continuation Agreement between Owosso
Corporation and John M. Morrash, dated August 27, 2001.
*10.20 Seventh Amendment to Amended and Restated Credit Agreement by
and among Owosso Corporation, its subsidiaries, Bank One and
PNC Bank, N.A., effective May 9, 2001 (Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
July 29, 2001).
*10.21 Tenth Amendment to Amended and Restated Credit Agreement by
and among Owosso Corporation, its subsidiaries, Bank One and
PNC Bank, N.A., effective February 8, 2002 (Exhibit 10.21 to
the Company's Annual Report on Form 10-K for the year ended
October 28, 2001).
*10.22 Eleventh Amendment to Amended and Restated Credit Agreement by
and among Owosso Corporation, its subsidiaries, Bank One and
PNC Bank, N.A., effective May 16, 2002 (Exhibit 10.22 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 28, 2002).
25
*10.23 Twelfth Amendment to Amended and Restated Credit Agreement by
and among Owosso Corporation, its subsidiaries, Bank One and
PNC Bank, N.A., effective July 8, 2002 (Exhibit 10.23 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
July 28, 2002).
*10.24 Thirteenth Amendment to Amended and Restated Credit Agreement
by and among Owosso Corporation, its subsidiaries, Bank One
and PNC Bank, N.A., effective July 30, 2002 (Exhibit 10.24 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended July 28, 2002).
10.25 Fourteenth Amendment to Amended and Restated Credit Agreement
by and among Owosso Corporation, its subsidiaries, Bank One
and PNC Bank, N.A., effective September 30, 2002.
10.26 Fifteenth Amendment to Amended and Restated Credit Agreement
by and among Owosso Corporation, its subsidiaries, Bank One
and PNC Bank, N.A., effective October 27, 2002.
10.27 Sixteenth Amendment to Amended and Restated Credit Agreement
by and among Owosso Corporation, its subsidiaries, Bank One
and PNC Bank, N.A., effective December 13, 2002.
10.28 Executive Salary Continuation Agreement between Owosso
Corporation and George B. Lemmon, Jr., dated October 1, 2001.
10.29 Executive Salary Continuation Agreement between Owosso
Corporation and Kirk E. Moore, dated August 27, 2001.
10.30 Executive Salary Continuation Agreement between Owosso
Corporation and Harry Holiday III, dated August 24, 2001.
11 Computation of per share earnings
21 Subsidiaries of the registrant.
23 Consent of Deloitte & Touche LLP
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
- ---------------
* Incorporated by reference.
# Management contract or compensatory plan or arrangement.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OWOSSO CORPORATION
Date: January 23, 2003 By: /s/ George B. Lemmon, Jr.
---------------------------------------
George B. Lemmon, Jr., President, Chief
Executive Officer (principal executive
officer, principal financial officer
and principal accounting officer)
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on January 23, 2003, in the capacities
indicated:
Signature Title
/s/ John R. Reese
- ------------------------
John R. Reese Chairman of the Board and Director
/s/ George B. Lemmon, Jr.
- ------------------------
George B. Lemmon, Jr. President, Chief Executive Officer
(principal executive officer, principal
financial officer and principal accounting
officer) and Director
/s/ Ellen D. Harvey
- ------------------------
Ellen D. Harvey Director
/s/ Harry E. Hill
- ------------------------
Harry E. Hill Director
/s/ Lowell P. Huntsinger
- ------------------------
Lowell P. Huntsinger Director
/s/ Eugene P. Lynch
- ------------------------
Eugene P. Lynch Director
/s/ James A. Ounsworth
- ------------------------
James A. Ounsworth Director
27
CERTIFICATIONS
I, George B. Lemmon, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Owosso
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-4 and 15d-4) for
the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report my conclusions about the
effectiveness of the disclosure controls and procedures based on my evaluation
as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and audit committee of registrant's board of directors (or
other persons performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this annual report whether there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 23, 2003
/s/ George B. Lemmon, Jr.
----------------------------------
George B. Lemmon, Jr.
President and Chief Executive Officer
(principal executive officer and
principal financial officer)
28
OWOSSO CORPORATION
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 27, 2002,
OCTOBER 28, 2001, AND OCTOBER 29, 2000:
Statements of Operations F-2
Balance Sheets F-3
Statements of Changes in Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-24
FINANCIAL STATEMENT SCHEDULE II F-25
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Owosso Corporation
King of Prussia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Owosso
Corporation and subsidiaries as of October 27, 2002 and October 28, 2001, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the three fiscal years in the period ended
October 27, 2002. Our audits also included the financial statement schedule
listed in the index at Item 15(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 27, 2002 and October 28, 2001, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
October 27, 2002 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.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's recurring losses from
operations, working capital deficiency, default under terms of its credit
agreement, and inability to comply with the covenants of its credit agreement
raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
December 13, 2002
F-1
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended
---------------------------------------------------
October 27, October 28, October 29,
2002 2001 2000
------------- ------------ ------------
Net sales $ 36,901,000 $ 54,326,000 $ 75,204,000
Costs of products sold 31,242,000 43,897,000 59,429,000
------------- ------------ ------------
Gross profit 5,659,000 10,429,000 15,775,000
Selling, general and administrative expenses 8,224,000 11,183,000 13,240,000
Write-down of net assets held for sale 381,000 1,100,000 2,800,000
------------- ------------ ------------
Loss from operations (2,946,000) (1,854,000) (265,000)
Interest expense 1,588,000 4,335,000 5,069,000
Gain on sale of Business (6,055,000) -- --
Other (income) expense -- (110,000) 530,000
------------- ------------ ------------
Income (loss) from continuing operations before income taxes 1,521,000 (6,079,000) (5,864,000)
Income tax benefit (4,197,000) (1,968,000) (1,082,000)
------------- ------------ ------------
Income (loss) from continuing operations 5,718,000 (4,111,000) (4,782,000)
Discontinued operations:
Loss from discontinued operations, net of income tax
benefit of $268,000, $514,000 and $522,000 (520,000) (2,073,000) (290,000)
Loss on disposal of discontinued operations -- (10,040,000) (8,600,000)
------------- ------------ ------------
Income (loss) before cumulative effect of accounting change 5,198,000 (16,224,000) (13,672,000)
Cumulative effect of accounting change (net of tax of $34,000) -- (67,000) --
------------- ------------ ------------
Net income (loss) 5,198,000 (16,291,000) (13,672,000)
Dividends and accretion on preferred stock (1,349,000) (1,316,000) (1,121,000)
------------- ------------ ------------
Net income (loss) available for common shareholders $ 3,849,000 $(17,607,000) $(14,793,000)
============= ============ ============
Basic and diluted income (loss) per common share:
Income (loss) available for common shareholders
from continuing operations $ 0.75 $ (0.93) $ (1.01)
Loss from discontinued operations (0.09) (2.06) (1.52)
Cumulative effect of accounting change, net -- (0.01) --
------------- ------------ ------------
Net income (loss) available for common shareholders per share $ 0.66 $ (3.00) $ (2.53)
============= ============ ============
Weighted average number of common shares outstanding:
Basic 5,824,000 5,866,000 5,844,000
============= ============ ============
Diluted 5,824,000 5,866,000 5,844,000
============= ============ ============
See notes to consolidated financial statements.
F-2
OWOSSO CORPORATION
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------------
October 27, October 28,
2002 2001
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 524,000 $ 200,000
Receivables, net 3,111,000 6,061,000
Inventories, net 1,906,000 4,815,000
Net assets held for sale 800,000 1,181,000
Prepaid expenses and other 690,000 1,446,000
Tax refund receivable 919,000 1,696,000
Deferred taxes 295,000 2,453,000
------------ ------------
Total current assets 8,245,000 17,852,000
PROPERTY, PLANT AND EQUIPMENT, NET 5,616,000 11,874,000
GOODWILL, NET 8,405,000 9,395,000
OTHER INTANGIBLE ASSETS, NET 5,218,000 5,614,000
NET ASSETS OF DISCONTINUED OPERATIONS HELD FOR SALE 350,000 1,078,000
OTHER ASSETS 136,000 581,000
------------ ------------
TOTAL ASSETS $ 27,970,000 $ 46,394,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 2,025,000 $ 3,350,000
Accrued compensation and benefits 537,000 1,085,000
Accrued expenses 2,085,000 3,738,000
Related party debt -- 400,000
Current portion of long-term debt 8,951,000 23,684,000
------------ ------------
Total current liabilities 13,598,000 32,257,000
LONG-TERM DEBT, LESS CURRENT PORTION 4,594,000 5,520,000
COMMON STOCK PUT OPTION 600,000 600,000
POSTRETIREMENT BENEFITS AND OTHER LIABILITIES 362,000 3,532,000
DEFERRED TAXES 1,900,000 2,766,000
ACCRUED PREFERRED STOCK DIVIDENDS 2,664,000 1,316,000
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY
Convertible preferred stock Class A, 7% in 2002 and 6% in 2001 cumulative, $.01 par
value: 10,000,000 shares authorized; 1,071,428 shares issued and outstanding
(aggregate liquidation value 2002 - $16,500,000 and 2001 - $15,750,000) 15,000,000 15,000,000
Common stock, $.01 par value; authorized 15,000,000 shares; issued
5,874,345 shares in 2002 and 5,874,345 shares in 2001 59,000 59,000
Additional paid-in capital 21,179,000 21,179,000
Accumulated deficit (31,587,000) (35,436,000)
------------ ------------
4,651,000 802,000
Less treasury stock, at cost, 50,039 shares in 2002 and 2001 (399,000) (399,000)
------------ ------------
Total stockholders' equity 4,252,000 403,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 27,970,000 $ 46,394,000
============ ============
See notes to consolidated financial statements.
F-3
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Preferred Common Paid-in Comprehensive Accumulated Treasury
Stock Stock Capital Income Deficit Stock Total
--------- -------- ---------- ------------- ---------- --------- ------
BALANCE, OCTOBER 31, 1999 14,630,000 59,000 21,682,000 (3,000) (1,985,000 (399,000) 33,984,000
Net loss (13,672,000) (13,672,000)
Other comprehensive income:
Cumulative translation adjustment (139,000) (139,000)
------------
Total comprehensive income (loss) (13,811,000)
Dividends (1,802,000) (1,802,000)
Accretion on convertible preferred
stock 370,000 (370,000) --
Issuance of common stock 61,000 61,000
------------ ------- ----------- -------- ----------- -------- ------------
BALANCE, OCTOBER 29, 2000 15,000,000 59,000 21,743,000 (142,000) (17,829,000) (399,000) 18,432,000
Net loss (16,291,000) (16,291,000)
Other comprehensive income:
Cumulative translation adjustment 142,000 142,000
Total comprehensive income (loss) (16,149,000)
Dividends (1,316,000) (1,316,000)
Exercise common stock put option (600,000) (600,000)
Issuance of common stock 36,000 36,000
------------ ------- ----------- -------- ----------- -------- ------------
BALANCE, OCTOBER 28, 2001 $15,000,000 59,000 21,109,000 $ $(35,430,000) (399,000) 403,000
------------ ------- ----------- -------- ----------- -------- ------------
Net Income 5,198,000 5,198,000
Other comprehensive income:
Total comprehensive income (loss) 5,198,000
Dividends (1,349,000) (1,349,000)
Issuance of common stock
------------ ------- ----------- -------- ----------- -------- ------------
BALANCE, OCTOBER 27, 2002 $15,000,000 59,000 21,109,000 $ - (31,507,000) (399,000) 4,252,000
------------ ------- ----------- -------- ----------- -------- ------------
See notes to consolidated financial statements.
F-4
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
--------------------------------------------
October 27, October 28, October 29,
2002 2001 2000
------------ ------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ 5,198,000 $ (16,291,000) $ (13,672,000)
Loss from discontinued operations 520,000 12,113,000 8,890,000
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Allowance for doubtful accounts (339,000) 155,000 272,000
Provision for deferred taxes 1,426,000 (238,000) (1,338,000)
Write-down of net assets held for sale 381,000 1,100,000 2,800,000
Change in net assets held for sale -- (543,000) --
Interest rate swap contracts - market value adjustment (589,000) 699,000 --
Gain on the sale of business Assets (6,055,000) -- --
Loss on sale of assets -- 4,000 1,000
Depreciation 2,454,000 2,798,000 3,700,000
Amortization 1,386,000 1,069,000 1,325,000
Changes in assets and liabilities which provided (used) cash:
Accounts receivable 341,000 1,696,000 1,918,000
Inventories 907,000 715,000 182,000
Prepaid expenses and other 1,382,000 116,000 (369,000)
Accounts payable 287,000 (1,212,000) (874,000)
Accrued expenses (1,566,000) (672,000) (860,000)
------------ ----------- -----------
Net cash provided by continuing operations 5,733,000 1,509,000 1,975,000
Net cash provided by (used in) discontinued operations -- (5,678,000) 1,797,000
------------ ----------- -----------
Net cash provided by (used in) operating activities 5,733,000 (4,169,000) 3,772,000
------------ ----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (132,000) (757,000) (1,195,000)
Proceeds from the sale of businesses and assets 10,782,000 6,575,000 --
Decrease in other assets -- 729,000 1,929,000
------------ ----------- -----------
Net cash provided by continuing operations 10,650,000 6,547,000 734,000
Net cash provided by (used in) discontinued operations -- 18,038,000 (2,599,000)
------------ ----------- -----------
Net cash provided by (used in) investing activities 10,650,000 24,585,000 (1,865,000)
FINANCING ACTIVITIES:
Borrowings from (payments on) line of credit (15,100,000) (19,100,000) 2,950,000
Proceeds from long-term debt -- -- 580,000
Payments on long-term debt (559,000) (664,000) (1,774,000)
Payments on related party debt (400,000) (600,000) (815,000)
Dividends paid -- (142,000) (2,152,000)
Other -- 38,000 (86,000)
------------ ----------- -----------
Net cash used in continuing operations (16,059,000) (20,468,000) (1,297,000)
Net cash used in discontinued operations -- (239,000) (280,000)
------------ ----------- -----------
Net cash used in financing activities (16,059,000) (20,707,000) (1,577,000)
------------ ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 324,000 (291,000) 330,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 200,000 491,000 161,000
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 524,000 $ 200,000 $ 491,000
============ =========== ===========
See notes to consolidated financial statements.
F-5
OWOSSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED OCTOBER 27, 2002, OCTOBER 28, 2001, AND OCTOBER 29, 2000
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS
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
historically operated in four business segments: Motors, Coils,
Agricultural Equipment, and Other.
As of July 2002, the Company had one operating subsidiary, Stature
Electric, Inc. ("Stature"), representing the Company's historical Motors
segment. Stature is a custom designer and manufacturer of motors and gear
motors both AC and DC, established in 1974 in Watertown, New York.
Significant markets for Stature, or 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 Company completed the sale of all of the outstanding stock of Motor
Products - Owosso Corporation and Motor Products - Ohio Corporation
(together, "Motor Products"), manufacturers of fractional and integral
horsepower motors, on July 30, 2002. Prior to that time, these entities
were included in the results of the Motors segment
The Coils segment included Astro Air Coils, Inc. ("Astro Air"), Snowmax,
Inc. ("Snowmax"), and Astro Air UK Ltd. ("Astro UK"). The assets of Astro
UK were sold May 9, 2001. The assets of Astro Air and Snowmax were sold on
October 26, 2001.
During the fourth quarter of 2000, the Company adopted a plan to dispose
of Sooner Trailer Manufacturing Company ("Sooner Trailer"), which
manufactured all-aluminum trailers, primarily horse and livestock
trailers. Sooner Trailer had been included in the Company's historical
Agricultural Equipment segment. The Company completed the sale of Sooner
Trailer on January 24, 2001.
For financial statement purposes, the assets, liabilities, results of
operations and cash flows of Sooner Trailer and the Coils segment 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 and the Coils segment have been included in "Net
Assets of Discontinued Operations Held for Sale" in the consolidated
balance sheets.
The Company's Other segment included Dura-Bond Bearing Company
("Dura-Bond"), and Cramer Company (formerly known as M.H. Rhodes, Inc.,
and hereinafter referred to as "Cramer"). Dura-Bond, which manufactured
replacement camshaft bearings, valve seats and shims for the automotive
after-market, was sold November 2, 2000. Cramer manufactured 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 Cramer on December 4, 2000, and in connection with the
sale, changed the name of the company from M.H. Rhodes, Inc. to Cramer
Company. The Company disposed of substantially all of the remaining Cramer
assets (excluding real property) in a separate transaction completed on
September 23, 2001. The net assets of Dura-Bond and Cramer have been
included in "Net Assets Held for Sale" in the consolidated balance sheets.
F-6
2. LIQUIDITY AND FINANCING
The Company has experienced a significant downturn in its operating
results over the past three years and at the end of fiscal 2000, was out
of compliance with covenants under its bank credit facility. In February
2001, the Company entered into an amendment to its bank credit facility
agreement, 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 was to
mature. In addition, as further disclosed under Note 11 "Long-term Debt,"
this amendment to the bank credit facility called for reductions in the
outstanding balance during calendar 2001 and modified the interest rates
charged. The amendment required additional collateral, effectively all of
the assets of the Company, and reporting requirements, as well as the
addition of a covenant requiring minimum operating profits. The amendment
also required the suspension of principal and interest payments on
subordinated debt, with an aggregate outstanding balance of $2.1 million
as of October 28, 2001. Furthermore, the amendment to the facility
prohibits the payment of preferred or common stock dividends and prohibits
the purchase of the Company's stock. Beginning in August 2001, the
Company was out of compliance with its minimum operating profit covenant.
In February 2002, the Company entered into a further amendment to the
facility, which extended the maturity date to December 31, 2002. That
amendment called for further reductions in the outstanding balance based
on expected future asset sales, increases the interest rate charged and
requires minimum EBITDA. In December 2002, the Company entered into a
further amendment to the facility, which extends the maturity date to
December 31, 2003. This amendment calls for further reductions in
outstanding balance based on expected future asset sales and cash flow
generated from operations and requires minimum EBITDA. Borrowings under
the facility are charged interest at the Prime Rate plus 2.75% (7.5% at
October 27, 2002).
Management intends to dispose of or liquidate additional non-operating
assets during fiscal 2003, including real estate at the Company's former
Cramer and Snowmax subsidiaries and various notes receivable which arose
from previous asset divestitures. Proceeds from these sales, which are
expected to be between $1.5 and $2.5 million net of taxes, will be
utilized to further reduce the Company's bank credit facility. Management
believes that, along with the sale of assets, available cash and cash
equivalents, cash flows from operations and available borrowings under the
Company's bank credit facility will be sufficient to fund the Company's
operating activities, investing activities and debt maturities for fiscal
2003. In addition, management believes that the Company will be in
compliance with its bank covenant requirements throughout fiscal 2003. It
is management's intent to refinance the Company's bank credit facility
prior to its maturity in December 2003. However, there can be no assurance
that management's plans will be successfully executed.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that
might result if the Company is unable to continue as a going concern. The
Company's recurring losses from operations, working capital deficiency,
default under the terms of its bank credit facility and inability to
comply with debt and other bank covenants raise substantial doubt about
the Company's ability to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The consolidated financial statements of the Company
include the accounts of Owosso Corporation and its majority owned
subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
Fiscal Year - The Company's fiscal year includes 52 or 53 weeks ending on
the last Sunday in October. Fiscal years 2002, 2001 and 2000 consisted of
52-week years.
F-7
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 27, 2002, 100% of the cost of
inventories were determined on a first-in, first-out (FIFO) basis. At
October 28, 2001, and October 29, 2000, cost for 28% and 30%,
respectively, of the inventories were determined on the last-in, first-out
(LIFO) basis, and the remainder on the 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, inventories would have been approximately
$746,000 higher than reported at October 28, 2001, and $790,000 higher
than reported at October 29, 2000. Accordingly, income from operations
would have decreased by approximately $44,000 and $13,000, in 2001 and
2000, respectively.
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
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:
Customer lists 20 years
Goodwill 20-25 years
Asset Impairment - The Company evaluates the carrying value of long-term
assets, including goodwill and other intangible assets, based upon current
and anticipated undiscounted cash flows, and recognizes an impairment when
such estimated cash flows will be less than the carrying value of the
asset. Measurement of the amount of impairment, if any, is based upon the
difference between carrying value and fair value.
Revenue Recognition - Revenue is recognized at the time the product is
shipped and title of ownership has passed. An allowance for doubtful
accounts of $49,000, $388,000 and $233,000 has been recorded as of October
27, 2002, October 28, 2001, and October 29, 2000, respectively.
Income Taxes - Deferred income taxes are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities. Deferred income tax expense (benefit) represents the change
during the reporting period in the deferred tax assets and deferred tax
liabilities, net of the effect of acquisitions and dispositions. Deferred
tax assets include tax loss and credit carry forwards and are reduced by a
valuation allowance if, based on available evidence, it is more likely
than not that some portion or all of the deferred tax asset will not be
realized.
F-8
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.
Earnings (loss) 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 diluted effect of convertible preferred stock
computed using the "if converted" method, and by the dilutive effect of
the put option on common stock, computed using the reverse-treasury stock
method.
The following table summarizes those securities that could potentially
dilute income (loss) for common shareholders per common share in the
future that were not included in determining net income (loss) available
for common shareholders per common share as the effect was antidilutive:
2002 2001 2000
Potential common shares resulting from:
Stock options and put option on common stock 399,000 835,000 955,000
Convertible preferred stock 1,071,000 1,071,000 1,071,000
--------- --------- ---------
1,470,000 1,906,000 2,026,000
========= ========= =========
Comprehensive Income - The Company presents comprehensive income (loss) as
a component of shareholders' equity. The components of comprehensive
income are as follows:
2002 2001 2000
Net income (loss) $ 5,198,000 $ (16,291,000) $ (13,672,000)
Foreign currency translation 0 142,000 (139,000)
----------- ------------- -------------
Total comprehensive income (loss) $ 5,198,000 $ (16,149,000) $ (13,811,000)
=========== ============= =============
Derivatives - In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 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 No. 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.
F-9
The Company was required to adopt the provisions of SFAS No. 133 effective
October 30, 2000. The Company's derivative instruments outstanding,
variable-to-fixed interest rate swaps, do not qualify for hedge accounting
under SFAS No. 133. The adoption of SFAS No. 133 required the Company to
mark its interest rate swaps to market. The result was to record a net
liability of $101,000 with an offsetting charge to cumulative effect of
accounting change. This amount, net of tax of $34,000, is reflected in the
consolidated statement of operations as "Cumulative effect of accounting
change."
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.
New Accounting Pronouncements - In July 2001, the Financial Accounting
Standards Board issued SFAS No. 141 "Business Combinations" ("SFAS No.
141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No.
142"). SFAS No. 141 requires business combinations initiated after June
30, 2001 to be accounted for using the purchase method of accounting, and
broadens the criteria for recording intangible assets separate from
goodwill. Recorded goodwill and intangibles will be evaluated against this
new criteria and may result in certain intangibles being subsumed into
goodwill, or alternatively, amounts initially recorded as goodwill may be
separately identified and recognized apart from goodwill. SFAS No. 142
requires the use of a nonamortization approach to account for purchased
goodwill and certain intangibles. Under a nonamortization approach,
goodwill and certain intangibles will not be amortized into results of
operations but, instead, would be reviewed for impairment and written down
and charged to results of operations only in the periods in which the
recorded value of goodwill and certain intangibles is more than its fair
value. The provisions of each statement which apply to goodwill and
intangible assets acquired prior to June 30, 2001 are required to be
adopted for fiscal years beginning after December 15, 2001. The Company
has not yet completed its analysis of the effects of adopting these
statements on its consolidated financial position or results of
operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS No. 144"). SFAS No. 144, which addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived
assets to be disposed of, supercedes SFAS No. 121 and is effective for
fiscal years beginning after December 15, 2001. The Company has not yet
completed its analysis of the effects of adopting the statement on its
consolidated financial position or results of operations.
In April 2002, the Financial Accounting Standards Board issued SFAS
No.145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." This Statement rescinds
FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of
Debt, and an amendment of that Statement, FASB Statement No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds FASB Statement No. 44, Accounting for Intangible
Assets of Motor Carriers. This Statement amends FASB Statement No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. The provisions of this Statement related to the rescission of
Statement 4 shall be applied in fiscal years beginning after May 15, 2002.
The provisions of this Statement related to SFAS No. 13 shall be effective
for transactions occurring after May 15, 2002. The Company has not yet
completed its analysis of the effects of adopting this statement on its
consolidated financial position or results of operation.
F-10
In June 2002, the Financial Accounting Standards Board issued SFAS No.146
"Accounting for Costs Associated with Exit or Disposal Activities." This
Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The Company has
not yet completed its analysis of the effects of adopting this statement
on its consolidated financial position or results of operation.
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation --Transition and Disclosure,
an amendment of FASB Statement No. 123". This Statement amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement
to require prominent disclosure about the effects on reported net income
of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends APB Opinion No. 28,
Interim Financial Reporting, to require disclosure about those effects in
interim financial information. The transition provisions of this statement
shall be effective financial statements for fiscal years ending after
December 15, 2002. The disclosure provisions of this statement shall be
effective for financial reports containing condensed financial statements
for interim periods beginning after December 15, 2002. The Company has not
yet completed its analysis of the effects of adopting this statement on
its consolidated financial position or results of operation.
4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest in 2002, 2001 and 2000 were $1,941,000,
$3,594,000 and $4,826,000, respectively. Cash paid (or received) for
income taxes was $(4,881,000), $226,000 and $1,952,000 for 2002, 2001 and
2000, respectively. Dividends payable were $2,664,000, $1,316,000 and
$142,000 at October 27, 2002, October 28, 2001 and October 29, 2000,
respectively.
5. DISPOSITIONS OF BUSINESSES
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 $4,600,000, 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 for 2000. 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 for 2000.
Cramer - On December 4, 2000, the Company completed the sale of the assets
associated with the timer and switch line of Cramer to Capewell
Components, LLC of South Windsor, Connecticut for cash of approximately
$2,000,000, plus the assumption of approximately $400,000 in liabilities.
In connection with the sale, the name of the Company was changed from M.H.
Rhodes, Inc. to Cramer Company. In connection with the sale of the timer
and switch line and the anticipated sale of the remaining assets of
Cramer, the Company recorded, in the fourth quarter of fiscal 2000, a
pre-tax charge of $1,600,000 to adjust the carrying value of Cramer's
assets to their estimated fair value, based upon an estimated sales price
of the assets. On September 23, 2001, the Company sold substantially all
of the remaining assets of Cramer to the Chestnut Group of Wayne,
Pennsylvania for cash proceeds of $565,000, plus the assumption of
$317,000 in liabilities. In connection with such sale, the Company
recorded a further adjustment to the carrying value of the Cramer assets
resulting in a pre-tax charge of $1,100,000, recorded in the third fiscal
quarter of 2001.
F-11
At October 27, 2002, Net Assets Held for Sale of $800,000 represents the
carrying value of the Cramer building, the only remaining Cramer asset.
Motor Products - On July 30, 2002, Owosso Corporation, (the "Company")
completed the sale of all of the outstanding stock of Motor Products
Owosso Corporation, and Motor Products Ohio Corporation, (together,
"Motor Products"), manufacturers of fractional and integral horsepower
motors. The purchase price paid by Hathaway Motion Control Corporation
(the "Buyer") for the outstanding stock of Motor Products consisted of
$11.5 million in cash and a promissory note in the principal amount of
$300,000, payable six months after closing. Net cash proceeds of $10.7
million from the sale, after payment of certain transaction costs, were
utilized to reduce outstanding bank debt. The Company has reported a gain
of $6,055,000 on the sale of this business in the accompanied consolidated
statements for the year ended October 27, 2002. As a result of this
transaction, the Company presently has only one operating subsidiary,
Stature.
6. DISCONTINUED OPERATIONS
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 $11,500,000, subject to certain
post-closing adjustments based on changes in working capital, plus the
assumption of debt of approximately $670,000. In May 2001, the Company
received approximately $2,000,000 related to such post-closing
adjustments. 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. No additional gain or loss was
recorded upon completion of the sale.
Coils Segment - On May 9, 2001, the Company completed the sale of
substantially all of the assets of Astro Air UK to ACR Heat Transfer,
Ltd., of Norfolk, England for cash of (pound)450,000 (approximately
$643,000). Based upon the terms of the sale, the Company recorded, in the
second quarter of 2001, a pretax charge of $700,000 to adjust the carrying
value of Astro UK's assets to their estimated realizable value. No
additional gain or loss was recorded upon completion of the sale.
On October 26, 2001, the Company completed the sale of the assets of its
Coils segment, which included Astro Air and Snowmax (together, the "Coils
Subsidiaries"). The sale of the Coils Subsidiaries was effectuated
pursuant to an Asset Purchase Agreement, dated as of October 26, 2001, by
and among the Coils Subsidiaries, Astro Air, Inc. (the "Buyer"), and Rex
Dacus, the manager of the Coils segment and the person from whom the
Company acquired the assets and operations of Astro Air Coils, Inc. in
1998. Proceeds from the sale were $5,600,000 of cash and the assumption of
approximately $3,700,000 of liabilities. The Company recorded a pretax
charge of $9,340,000 related to this sale in the fourth quarter of 2001.
Revenues from discontinued operations were $35,608,000 for 2001.
F-12
For financial reporting purposes, the assets and liabilities attributable
to Sooner and the Coils segment have been classified in the consolidated
balance sheets as Net Assets of Discontinued Operations Held for Sale. At
October 27, 2002, Net Assets of Discontinued Operations Held for Sale were
$350,000 and represent the carrying value of the Snowmax building, the
only remaining Coil segment asset.
The following unaudited pro forma financial information presents the
consolidated results of operations of the Company as if the dispositions
of Motor Products had occurred at the beginning of fiscal year 2001 and
Sooner Trailer, the Coils Segment, Cramer and Dura-Bond (see Note 5) had
occurred at the beginning of fiscal year 2001 after giving effect to
certain adjustments, including the reduction of interest expense as a
result of the utilization of the net proceeds of the sales to reduce the
Company's bank credit facility. The unaudited pro forma information is
presented for comparative purposes only and does not purport to be
indicative of the results of operations of the Company had these
transactions been made at the beginning of fiscal year 2001 and 2000.
2002 2001
Net sales $ 20,953,000 $ 26,043,000
Income (loss) from operations (2,110,000) (5,193,000)
Net Income (loss) 971,000 (5,940,000)
Net Income (loss) available for common shareholders (378,000) (7,256,000)
Basic income (loss) per common share $ 0.06 $ (1.24)
7. INVENTORIES
2002 2001
Raw materials and purchased parts $ 810,000 $ 1,858,000
Work in process 909,000 1,662,000
Finished goods 187,000 1,295,000
----------- -----------
Total $ 1,906,000 $ 4,815,000
=========== ===========
8. PROPERTY, PLANT AND EQUIPMENT
2002 2001
Land and improvements $ 112,000 $ 218,000
Buildings and improvements 3,350,000 4,543,000
Machinery and equipment 12,115,000 24,595,000
Construction in progress 53,000 1,198,000
------------ ------------
Total 15,630,000 30,554,000
Accumulated depreciation 10,014,000 18,680,000
------------ ------------
Property, plant and equipment, net $ 5,616,000 $ 11,874,000
============ ============
Depreciation expense from continuing operations was approximately
$2,454,000, $2,798,000 and $3,700,000 for 2002, 2001 and 2000,
respectively.
F-13
9. GOODWILL AND OTHER INTANGIBLE ASSETS
2002 2001
Goodwill:
Goodwill $ 12,931,000 $13,380,000
Accumulated amortization 4,526,000 3,985,000
------------ -----------
Goodwill, net $ 8,405,000 $ 9,395,000
============ ===========
Other Intangible Assets:
Customer lists $ 8,000,000 $ 8,000,000
Other 97,000 128,000
------------ -----------
Total 8,097,000 8,128,000
Accumulated amortization 2,879,000 2,514,000
------------ -----------
Other intangible assets, net $ 5,218,000 $ 5,614,000
============ ===========
Amortization expense from continuing operations related to goodwill and
other intangible assets was approximately $1,390,000, $1,069,000 and
$1,325,000 for 2002, 2001 and 2000, respectively.
10. RELATED PARTY DEBT
As of October 27, 2002 there was no related party debt. Related party debt
had consisted of a promissory note to a preferred shareholder, payable on
demand but no later than October 2005, with an outstanding balance of
$400,000 as of October 28, 2001. Interest on the note was paid quarterly
at 8%.
11. LONG-TERM DEBT
2002 2001
Revolving credit agreement $ 6,900,000 $ 22,000,000
Term loans, payable in monthly installments through 2007
at variable rates from 5% to 8.5%, collateralized by
certain real property 599,000 734,000
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 4,550,000 4,974,000
Subordinated promissory notes, payable in varying installments
through 2005 at rates from 7.6% to 11% 1,496,000 1,496,000
----------- -----------
Total long-term debt 13,545,000 29,204,000
Less current portion 8,951,000 23,684,000
----------- -----------
Long-term debt, net of current portion $ 4,594,000 $ 5,520,000
=========== ===========
F-14
On January 22, 1999, the Company entered into a new bank credit facility
with the Company's two primary banks, originally expiring in December
2002. The agreement included 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 bank credit facility
agreement, 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 was to
mature. This amendment to the bank credit facility called for reductions
in the outstanding balance during calendar 2001 and modified the interest
rates charged. The amendment required additional collateral, effectively
all of the assets of the Company, and reporting requirements, as well as
the addition of a covenant requiring minimum operating profits. The
amendment also required the suspension of principal and interest payments
on subordinated debt, with an aggregate outstanding balance of $2.1
million as of October 28, 2001. Furthermore, the amendment to the facility
prohibits the payment of preferred or common stock dividends and prohibits
the purchase of the Company's stock. Beginning in August 2001, the
Company was out of compliance with its minimum operating profit covenant.
In February 2002, the Company entered into a further amendment to the
facility, which extended the maturity date to December 31, 2002. That
amendment calls for further reductions in the outstanding balance based on
expected future asset sales, increased the interest rate charged and
requires minimum EBITDA. In December 2002, the Company entered into a
further amendment to the facility, which extends the maturity date to
December 31, 2003. This amendment calls for further reductions in
outstanding balance based on expected future asset sales and cash flow
generated from operations and requires minimum EBITDA. Borrowings under
the facility are charged interest at the Prime Rate plus 2.75% (7.5% at
October 27, 2002).
At October 27, 2002, $6,900,000 was outstanding under the Company's bank
credit facility and $1,074,000 was available for additional borrowing. The
average amount outstanding in 2002 was $17,384,000 and the weighted
average interest rate was 6.9%.
Repayment of the Industrial Revenue Bonds of Stature Electric has been
guaranteed by the Company and its subsidiaries.
Derivative Interest Rate Contracts - The Company has an interest rate swap
agreement with one of its banks with a notional amount of $4,550,000. 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 (2.09% at October 27, 2002). The
Company entered into the interest rate swap agreement to change the
fixed/variable interest rate mix of its debt portfolio to reduce the
Company's aggregate risk to movements in interest rates. Such swap
agreements do not meet the stringent requirements for hedge accounting
under SFAS No. 133. Accordingly, changes in the fair value of such
agreements are recorded in the Consolidated Statement of Operations as a
component of interest expense. The fair market value of the swap agreement
liability was $110,000 at October 27, 2002, resulting in a charge to
interest expense of $589,000.
The aggregate amount of required payments on long-term debt is as follows:
Year ending October:
2003 $ 8,951,000
2004 854,000
2005 816,000
2006 993,000
2007 981,000
Thereafter 950,000
-----------
Total $13,545,000
===========
F-15
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 $4,850,000 and were in a liability
position of $110,000 at October 27, 2002.
13. PENSION PLAN
Pension Plans - The Company sponsors a defined contribution 401(k) plan
covering substantially all of its employees. 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 this plan was $333,000, $895,000 and $1,314,000 for 2002, 2001
and 2000 respectively.
14. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain production facilities and
equipment under operating leases. Operating lease expense was
approximately $285,000, $623,000 and $880,000 for 2002, 2001 and 2000,
respectively, net of sublease rentals and reimbursements of utilities of
$119,000, $119,000 and $50,000 for 2002, 2001 and 2000, respectively. The
lease on the former 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:
Year ending October:
2003 210,000
2004 198,000
2005 186,000
2006 186,000
Thereafter --
--------
$780,000
========
The above minimum lease payments are net of anticipated sublease income of
$119,000 in each of the years 2002 through 2006. At October 27, 2002,
outstanding letters of credit totaled approximately $6,426,000 and
primarily guarantee industrial revenue bonds.
F-16
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
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.
In connection with the Company's divestitures of its operating businesses
over the past four years, it has agreed to indemnify buyers from and
against certain known and unknown environmental liabilities. In addition,
the Company may be liable for the costs of removal or remuneration of
hazardous or toxic substances on, in, under or discharged from it's
current or previously owned real property under applicable federal, state
and local environmental laws, ordinances and regulations.
A subsidiary of 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 Old Saybrook 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.
In addition to the matters reported herein, the Company is involved in
litigation dealing with certain 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 two largest customers represented
approximately 14%, 15%, and 12%, of total sales from continuing operations
for 2002, 2001 and 2000, respectively.
16. INCOME TAX EXPENSE
The income tax provision consists of the following:
2002 2001 2000
Current:
Federal $ (5,767,000) $ (1,861,000) $ 151,000
State 44,000 131,000 219,000
Deferred - Federal 1,598,000 (257,000) (1,395,000)
Deferred - State (72,000) 19,000 (57,000)
------------ ------------ ------------
Income tax benefit $ (4,197,000) $ (1,968,000) $ (1,082,000)
============ ============ ============
A reconciliation of the income tax provision as presented in the
consolidated statements of operations is as follows:
F-17
2002 2001 2000
Income tax benefit from continuing operations $(4,197,000) $(1,968,000) $(1,082,000)
Income tax expense (benefit) from discontinued operations (268,000) 514,000 522,000
----------- ----------- -----------
Total income tax expense (benefit) $(4,465,000) $(1,454,000) $ (560,000)
=========== =========== ===========
The reconciliation of the statutory federal income tax rate and the
effective rate, for continuing operations, is as follows:
2002 2001 2000
Federal income tax provision at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit (1.2) (1.7) (1.8)
Amortization of excess cost of net assets acquired 22.1 (6.1) (5.3)
Effect of disposition of businesses 0.0 0.6 (7.5)
Meal and Entertainment Expense 0.0 0.0 0.0
Change in valuation allowance (331.6) 0.0 0.0
Other 0.5 5.6 (0.8)
------ ---- ----
Effective tax rate, continuing operations (276.2)% 32.4% 18.6%
====== ==== ====
The difference between the statutory federal rate and the reported amount
of income tax expense attributable to continuing operations is primarily
due to non-deductible goodwill and change in the valuation allowance
resulting from the utilization of the capital loss carryforward and the
five year carryback of net operating losses related to the changes in tax
laws.
The components of the Company's net deferred tax assets and liabilities
are as follows:
2002 2001
Deferred tax asset:
Accruals and reserves $ 1,633,000 $ 2,432,000
Tax credits and loss carryforwards 6,690,000 7,644,000
Other 11,000 21,000
------------ ------------
Total gross deferred tax assets 8,334,000 10,097,000
Valuation allowance (6,645,000) (7,246,000)
------------ ------------
Net deferred tax assets $ 1,689,000 $ 2,851,000
============ ============
Deferred tax liability:
Intangibles $ 1,976,000 $ 2,128,000
Pension 197,000
Property, plant and equipment 1,318,000 839,000
------------ ------------
Total gross deferred tax liabilities $ 3,294,000 $ 3,164,000
------------ ------------
Net deferred tax liability $ (1,605,000) $ (313,000)
F-18
These amounts are included in the accompanying consolidated financial
statements as follows:
2002 2001
Current deferred tax assets $ 295,000 $ 2,453,000
Non-current deferred tax liabilities (1,900,000) (2,766,000)
----------- -----------
Net deferred tax liability $(1,605,000) $ (313,000)
=========== ===========
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.
The Company has approximately $2,349,000 of net operating loss carry
forwards as of October 27, 2002 for federal income tax reporting purposes
and which expire between 2007 and 2012. A portion of these net operating
losses are subject to annual utilization limitations under Section 382 of
the Internal Revenue Code. The Company also has approximately $11,800,000
of capital loss carry forwards as of October 17, 2002 for federal income
tax reporting purposes and which expire in 2006.
17. COMMON STOCK PUT OPTION
During 2001 the Company received notice from a former employee and
shareholder requesting payment of $8.00 per share for 75,000 shares of
common stock of the Company owned by him under a conditional put right
that a subsidiary of the Company had granted to such shareholder. The
shareholder in question renewed his request in late 2002. Neither the
Company nor the subsidiary of the Company that had granted the conditional
put right believes that the shareholder has a contractual right to require
the purchase of his shares at this time, principally due to a negative
covenant in the Company's bank credit facility precluding the Company and
its subsidiaries from making any payments or other distributions with
respect to the Company's common stock. The Company believes that it has
complied with all terms associated with the put right, including those
excusing performance when payment is precluded by financing documents, as
in the present case.
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 was 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 had the right, but was 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 expired, using the effective interest
method at a rate of 7.6%.
F-19
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. Since the
preferred stock was not converted by October 2000, the increasing rate
dividend is 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 accrued but not
paid on the preferred stock were $2,664,000 and $1,316,000 for 2002 and
2001, respectively. Dividends paid on the preferred stock were $750,000
for 2000.
The Company may not pay any common stock dividends unless all preferred
dividend requirements have been met. The convertible preferred
stockholders are entitled to vote as a class to elect one member of the
Board of Directors of the Company, provided at least 40% of the originally
issued Class A preferred stock is outstanding. The convertible preferred
stock has liquidation priority over common stock. In certain
circumstances, the issuance of other classes of securities require the
approval of the Class A preferred stockholders. In connection with the
amendment to the Company's bank 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 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:
F-20
Year Ended
-------------------------------------------------------------------------------
October 27, 2002 October 28, 2001 October 29, 2000
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding,
beginning of year 760,000 $ 5.16 880,000 $ 5.84 785,000 $ 7.58
Granted 0 75,000 1.03 259,000 2.23
Cancelled (436,000) 4.30 (195,000) 6.64 (164,000) 8.44
------- ------- -------
Outstanding, end of year 324,000 $ 6.33 760,000 $ 5.16 880,000 $ 5.84
======= ======= =======
Exercisable, end of year 229,000 $ 7.74 398,000 $ 7.13 324,000 $ 8.31
======= ======= =======
The following table summarizes information about stock options outstanding
at October 27, 2002:
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
$1.00 - $1.13 25,000 8.54 $ 1.05 -- $ --
$1.44 30,000 7.98 $ 1.44 6,000 $ 1.44
$3.16 20,000 7.13 $ 3.16 8,000 $ 3.16
$4.16 - $5.75 60,000 6.15 $ 4.16 36,000 $ 4.16
$5.88 - $8.00 111,000 5.03 $ 7.75 101,000 $ 7.74
$8.88 - $11.38 46,000 3.08 $ 9.21 46,000 $ 9.21
$12.00 32,000 1.99 $ 12.00 32,000 $ 12.00
------- -------
324,000 5.33 $ 6.33 229,000 $ 7.74
======= =======
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 $59,000 and $0.01 per share,
respectively for 2002, and net loss per share would have increased by
$138,000 and $0.02 per share, respectively for 2001 and $274,000 and $0.05
per share, respectively for 2000. 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 2001 and 2000
was $48,000 and $246,000, respectively. The Company did not grant options
in 2002. 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 2001 and 2000: risk-free interest rate of 4.51%
and 5.02%, respectively, expected volatility of 59% and 40%, respectively,
dividend yield of 0.0% and 0.0%, respectively, and an expected life of
five years in 2001 and 2000.
F-21
20. SEGMENT INFORMATION
The Company prepares its financial statements in accordance with 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
has historically operated in four business segments: Motors, Coils,
Agricultural Equipment, and Other.
The Motors segment, the Company's only remaining business segment, is
comprised of Stature Electric, Inc., established in 1974 in Watertown, New
York. Stature is a custom designer and manufacturer of motors and gear
motors, including AC, DC and Universal. Significant markets for Stature,
or the Motors segment, include commercial products and equipment,
healthcare, recreation and non-automotive transportation. Stature's
component products are sold throughout North America and in Europe,
primarily to original equipment manufacturers who use them in their end
products. Prior to July 30, 2002, the Motors segment also included the
operations of Motor Products - Owosso Corporation and Motor Products -
Ohio Corporation.
The Company's historical Coils segment manufactured heat exchange coils
primarily for non-automotive transportation, refrigeration and commercial
and residential HVAC markets. The businesses included in this segment were
sold during 2001. Accordingly, the Company has reported the results of
this segment as discontinued operations for all periods presented in the
consolidated statements of operations. The net assets of the Coils segment
are included as Assets of Discontinued Operations for purposes of
disclosure of identifiable assets.
During the fourth quarter of fiscal 2000, the Company adopted a plan to
dispose of Sooner Trailer, which manufactured all-aluminum trailers,
primarily horse and livestock trailers. The Company completed the sale of
Sooner Trailer on January 24, 2001. Sooner Trailer had been included in
the Company's historical Agricultural Equipment segment (formerly known as
the Trailers and Agricultural Equipment segment). 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 historical Other segment included Dura-Bond and Cramer.
Dura-Bond, which was sold on November 2, 2000, manufactured replacement
camshaft bearings, valve seats and shims for the automotive after-market.
Cramer manufactured 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 Cramer on December 4, 2000
and, in connection with the sale, changed the name of the company from
M.H. Rhodes, Inc. to Cramer Company. The Company disposed of substantially
all of the remaining Cramer assets (excluding real property) in a separate
transaction completed on September 23, 2001.
The Company derives substantially all of its revenues from within the
United States. Information about interest expense, other income and income
taxes is not provided on a segment level. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies.
F-22
The following table reflects, from continuing operations, net sales,
income (loss) from operations, capital additions, and depreciation and
amortization expense for the fiscal years ended October 2001, 2000 and
1999 and identifiable assets as of October 2001, 2000 and 1999 for each
segment:
2002 2001 2000
Identifiable assets:
Motors $ 25,376,000 $ 38,506,000 $ 44,483,000
Other 845,000 1,181,000 9,137,000
Assets of discontinued operations 350,000 1,078,000 24,659,000
Corporate 1,399,000 5,629,000 2,884,000
------------ ------------ ------------
Total identifiable assets $ 27,970,000 $ 46,394,000 $ 81,163,000
============ ============ ============
Net sales:
Motors $ 36,901,000 $ 51,356,000 $ 57,696,000
Other -- 2,970,000 17,508,000
------------ ------------ ------------
Total net sales $ 36,901,000 $ 54,326,000 $ 75,204,000
============ ============ ============
Income (loss) from operations:
Motors $ 716,000 $ 4,669,000 $ 4,978,000
Other (1) (381,000) (1,417,000) (666,000)
Corporate (2) (3,281,000) (5,106,000) (4,577,000)
------------ ------------ ------------
Total income (loss) from operations $ (2,946,000) $ (1,854,000) $ (265,000)
============ ============ ============
Capital Additions:
Motors $ 132,000 $ 695,000 $ 810,000
Other -- -- 245,000
Corporate -- 62,000 140,000
------------ ------------ ------------
Total capital additions $ 132,000 $ 757,000 $ 1,195,000
============ ============ ============
Depreciation and amortization expense:
Motors $ 3,694,000 $ 3,711,000 $ 3,543,000
Other -- -- 1,141,000
Corporate 146,000 156,000 341,000
------------ ------------ ------------
Total depreciation and amortization expense $ 3,840,000 $ 3,867,000 $ 5,025,000
============ ============ ============
(1) Includes write-down of net assets held for sale of $381,000 in 2002,
$1,100,000 in 2001 and $2,800,000 in 2000.
(2) Includes unallocated corporate expenses, primarily salaries and
benefits, information technology, and other administrative expenses.
F-23
21. QUARTERLY INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year Ended October 27, 2002
--------------------------------------------------
Net sales $ 8,993,000 $ 11,107,000 $ 11,415,000 $ 5,386,000
Gross profit 1,055,000 1,875,000 1,672,000 1,057,000
Income (loss) from continuing operations (1,555,000) 4,451,000 (1,119,000) 3,941,000
Loss from discontinued operations (520,000)
Net income (loss) (1,555,000) 4,451,000 (1,119,000) 3,421,000
Net income (loss) available for common shareholders (1,890,000) 4,115,000 (1,457,000) 3,081,000
Basic and diluted earnings (loss)
per common share:
Continuing operations (0.32) 0.70 (0.25) 0.62
Discontinued operations (0.09)
Year Ended October 28, 2001
--------------------------------------------------
Net sales $ 14,123,000 $ 14,438,000 $ 13,813,000 $ 11,952,000
Gross profit 2,577,000 2,951,000 3,064,000 1,837,000
Loss from continuing operations (1,131,000) (159,000) (1,106,000) (1,715,000)
Income (loss) from discontinued operations (690,000) (672,000) 141,000 (10,892,000)
Net loss (1,888,000) (831,000) (965,000) (12,607,000)
Net loss available for common shareholders (2,214,000) (1,159,000) (1,295,000) (12,939,000)
Basic and diluted earnings (loss)
per common share:
Continuing operations (0.25) (0.08) (0.24) (0.35)
Discontinued operations (0.12) (0.11) 0.02 (1.85)
Discontinued operations 0.05 0.12 (0.01) (1.68)
The above information has been restated to reflect the results of Sooner
Trailer and the Coils segment as discontinued operations.
Loss from continuing operations for the third quarter of 2001 included
$1,100,000 for the write-down of assets held for sale. For the fourth
quarter of 2001, loss from continuing operations included $650,000 for
severance costs incurred and expensed in the quarter. Loss from continuing
operations for the fourth quarter of 2002 included $381,000 for the
writedown of assets held for sale.
Income (loss) from discontinued operations for the fourth quarter of 2002
and 2001 included $520,000 and $9,340,000 respectively, for the write-down
of assets held for sale.
******
F-24
Schedule II
Owosso Corporation
Valuation and Qualifying Accounts and Reserves
For the three years ended October 27, 2002
- --------------------------------------------------------------------------------------------------------------------------------
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 27, 2002
Allowances on:
Accounts receivable $ 388,000 $ (56,000) $ (21,000) $ (262,000) $ 49,000
Inventory 926,000 (384,000) (307,000) 235,000
For the year ended October 28, 2001
Allowances on:
Accounts receivable $ 233,000 $ 155,000 $ -- $ -- $ 388,000
Inventory 1,162,000 62,000 -- (298,000) 926,000
For the year ended October 29, 2000
Allowances on:
Accounts receivable $ 164,000 $ 272,000 $ (127,000) $ (76,000) $ 233,000
Inventory 974,000 815,000 (352,000) (275,000) 1,162,000
--------------------------------------------------------
(a) Reflects reclassification to Net Assets Held for Sale
(b) As to accounts receivable and inventory, primarily
represents amounts written off against related assets.
F-25