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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: January 26, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period from _________________ to _________________.
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, NY 13601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 782-5910
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 a check mark whether registrant is an accelerated filer (as defined
in rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of March 8, 2003, 5,874,345 shares of the Registrant's Common Stock, $.01 par
value, were outstanding.
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OWOSSO CORPORATION
TABLE OF CONTENTS
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Page
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Statements of Operations 3
for the three months ended January 26, 2003 and
January 27, 2002 (unaudited)
Condensed Consolidated Balance Sheets at 4
January 26, 2003 and October 27, 2002 (unaudited)
Condensed Consolidated Statements of Cash Flows 5
for the three months ended January 26, 2003 and
January 27, 2002 (unaudited)
Notes to Condensed Consolidated Financial Statements 6
(unaudited)
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
2
OWOSSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
Three-Months Ended
-------------------------------
January 26, January 27,
2003 2002
Net sales $4,601,000 $ 8,993,000
Costs of products sold 3,755,000 7,938,000
---------- -----------
Gross profit 846,000 1,055,000
Selling, general and administrative expenses 928,000 2,110,000
---------- -----------
Loss from operations (82,000) (1,055,000)
Interest expense 214,000 500,000
---------- -----------
Loss before income taxes (296,000) (1,555,000)
Income tax benefit (62,000) 0
---------- -----------
Net loss (234,000) (1,555,000)
Dividends on preferred stock 341,000 335,000
---------- -----------
Net loss available for common shareholders $ (575,000) $(1,890,000)
========== ===========
Net loss per share $ (0.10) $ (0.32)
========== ===========
Basic and diluted weighted average number of common
shares outstanding 5,874,000 5,874,000
========== ===========
See notes to condensed consolidated financial statements.
3
OWOSSO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
January 26, October 27,
2003 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 94,000 $ 524,000
Receivables, net 2,430,000 3,111,000
Inventories, net 1,812,000 1,906,000
Net assets held for sale 800,000 800,000
Prepaid expenses and other 735,000 690,000
Tax refund receivable 919,000 919,000
Deferred taxes 295,000 295,000
----------- -----------
Total current assets 7,085,000 8,245,000
PROPERTY, PLANT AND EQUIPMENT, NET 5,367,000 5,616,000
GOODWILL, NET 8,405,000 8,405,000
OTHER INTANGIBLE ASSETS, NET 5,119,000 5,218,000
NET ASSETS OF DISCONTINUED OPERATIONS HELD FOR SALE 350,000 350,000
OTHER ASSETS 130,000 136,000
----------- -----------
TOTAL ASSETS $26,456,000 $27,970,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,676,000 $ 2,025,000
Accrued compensation and benefits 522,000 537,000
Accrued expenses 1,712,000 2,085,000
Current portion of long-term debt 8,498,000 8,951,000
----------- -----------
Total current liabilities 12,408,000 13,598,000
LONG-TERM DEBT, LESS CURRENT PORTION 4,531,000 4,594,000
COMMON STOCK PUT OPTION 600,000 600,000
POSTRETIREMENT BENEFITS AND OTHER LIABILITIES 335,000 362,000
DEFERRED TAXES 1,900,000 1,900,000
ACCRUED PREFERRED STOCK DIVIDENDS 3,005,000 2,664,000
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY 3,677,000 4,252,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,456,000 $27,970,000
=========== ===========
See notes to condensed consolidated financial statements.
4
OWOSSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ---------------------------------------------------------------------------------------------------
Three Months Ended
---------------------------
January 26, January 27,
2003 2002
OPERATING ACTIVITIES:
Net loss $(234,000) $(1,555,000)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 269,000 662,000
Amortization 100,000 267,000
Other 0 (107,000)
Changes in operating assets and liabilities which
provided cash 12,000 900,000
--------- -----------
Net cash provided by operating activities 147,000 167,000
--------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (21,000) (101,000)
Decrease in other assets 6,000 835,000
--------- -----------
Net cash (used in) provided by investing activities (15,000) 734,000
--------- -----------
FINANCING ACTIVITIES:
Net payments on line of credit (500,000) (350,000)
Payments on long-term debt (62,000) (66,000)
Payments on related party debt 0 (400,000)
--------- -----------
Net cash used in financing activities (562,000) (816,000)
--------- -----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (430,000) 85,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 524,000 200,000
--------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 94,000 $ 285,000
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 197,000 $ 799,000
========= ===========
Taxes refundable $ 0 $(1,553,000)
========= ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Dividends payable $ 341,000 $ 335,000
========= ===========
See notes to condensed consolidated financial statements.
5
OWOSSO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - Owosso Corporation (the "Company") has historically operated
in four business segments: Motors, Coils, Agricultural Equipment and Other.
The Company presently has 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
Financial Statements - The condensed consolidated balance sheet as of
January 26, 2003 and the condensed consolidated statements of operations
and cash flows for the three months ended January 26, 2003 and January 27,
2002 have been prepared by the Company, without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) considered necessary to present fairly the financial position,
results of operations and cash flows as of January 26, 2003 and for all
periods presented have been made. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's October 27, 2002 Annual Report on Form 10-K.
Loss per share - Basic loss per common share is computed by dividing net
loss (the numerator) by the weighted average number of common shares
outstanding during each period (the denominator). The computation of
diluted loss 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 dilutive 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.
Comprehensive loss - The Company presents accumulated other comprehensive
loss as a component of shareholders' equity. For the first quarter of 2002
and 2003, total comprehensive loss consisted solely of net loss.
6
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
adopted SFAS No. 142 on October 28, 2002. The impact in the first quarter
of 2003 of discontinuing goodwill amortization was approximately $162,000.
In accordance with SFAS No. 142, the Company has not yet completed its
transitional goodwill impairment test. The Company expects to complete this
test prior to the end of its second quarter. The impact of the adoption of
SFAS No. 142 is summarized as follows:
Three-Months Ended
----------------------------
January 26, January 27,
2003 2002
Reported Net Income $(575,000) $(1,890,000)
Add back: Goodwill amortization - 162,000
--------- -----------
Adjusted Net Income $(575,000) $(1,728,000)
========= ===========
Basic loss per share:
Reported Net Income $ (0.10) $ (0.32)
Add back: Goodwill amortization - 0.03
--------- -----------
Adjusted Net Income $ (0.10) $ (0.29)
========= ===========
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 adopted SFAS No. 144
on October 28, 2002. As a result, management of the Company has concluded
that there was no material effect on the Company's financial position,
results of operations or cash flows from the adoption of SFAS No. 144.
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 6 "Long-term Debt,"
this amendment to the bank credit facility required reductions in the
outstanding balance under the facility during calendar 2001 and modified
the interest rates charged. The amendment also required additional
collateral, effectively all of the assets of the Company, and additional
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 Company from purchasing its 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, required further reductions in the outstanding
balance under the facility, based on expected future asset sales, increased
the interest rate charged and replaced the minimum operating profit
covenant with a minimum EBITDA covenant. In December 2002, the Company
entered into a further amendment to the facility, which extends the
maturity date to December 31, 2003. This amendment requires further
reductions in the outstanding balance under the facility, based on expected
future asset sales and cash flow generated from operations, and extended
and adjusted the minimum EBITDA covenant for 2003. Borrowings under the
facility are charged interest at the Prime Rate plus 2.75% (7.0% at January
26, 2003).
7
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 that 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 $1.2 million will be
utilized to further reduce amounts outstanding under the Company's 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.
Management further believes that the Company will be unable to remain in
compliance with its bank covenant requirements throughout fiscal 2003. As a
result, management has entered into negotiations with the Company's lenders
to further modify the minimum EBITDA covenant. 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 condensed 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, potential 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. NET ASSETS OF DISCONTINUED OPERATIONS HELD FOR SALE
The Company completed the sale of Astro Air Coils, Inc. ("Astro Air"), and
Snowmax Incorporated ("Snowmax") on October 26, 2001. For financial
reporting purposes, the assets and liabilities attributable to the Coils
segment have been classified in the condensed consolidated balance sheets
as net assets of discontinued operations held for sale. At both January 26,
2003 and October 27, 2002, net assets of discontinued operations held for
sale were $350,000 and represent the estimated fair value of the Snowmax
building, the only remaining Coils segment asset.
4. NET ASSETS HELD FOR SALE
The Company's former Other segment consisted of Cramer Company ("Cramer").
The Company completed the sale of the assets associated with the timer and
switch line of Cramer on December 4, 2000. 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
intends to dispose of the remaining Cramer asset by the end of the third
quarter of 2003. For financial reporting purposes, the assets and
liabilities attributable the real estate asset has been classified in the
condensed consolidated balance sheets as net assets held for sale. At both
January 26, 2003 and October 27, 2002, net assets held for sale were
$800,000 and represent the estimated fair value of the Cramer building, the
only remaining Cramer asset.
8
5. INVENTORY
January 26, October 27,
2003 2002
Raw materials and purchased parts $ 944,000 $1,001,000
Work in process 878,000 908,000
Finished goods 246,000 231,000
---------- ----------
Total Inventory 2,068,000 2,140,000
Inventory Provision 256,000 234,000
---------- ----------
Net Inventory $1,812,000 $1,906,000
========== ==========
6. LONG-TERM DEBT
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 out of
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 required reductions in the outstanding balance
under the facility during calendar 2001 and modified the interest rates
charged. The amendment required additional collateral, effectively all of
the assets of the Company, and additional 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 Company from purchasing its 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, required
reductions in the outstanding balance under the facility, based on expected
future asset sales, increased the interest rate charged and replaced the
minimum operating profit covenant with a minimum EBITDA covenant. In
December 2002, the Company entered into a further amendment to the
facility, which extends the maturity date to December 31, 2003. This
amendment requires further reductions in the outstanding balance under the
facility based on expected future asset sales and cash flow generated from
operations and extended and adjusted the minimum EBITDA covenant for 2003.
Borrowings under the facility are charged interest at the Prime Rate plus
2.75% (7.0% at January 26, 2003).
At January 26, 2003, $6,400,000 was outstanding under the Company's bank
credit facility and $1,474,000 was available for additional borrowing.
Derivative Interest Rate Contracts - The Company has an interest rate swap
agreement with one of its banks with a notional amount of $4,850,000. 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 (1.03% at January 26, 2003). 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 condensed consolidated statements of
operations as a component of interest expense. The fair market value of the
swap agreement liability was $93,000 at January 26, 2003, resulting in a
credit to interest income of $17,000 for the quarter ended January 26,
2003. The fair market value of the swap agreement liability was $497,000 at
January 27, 2002, resulting in a credit to interest income of $202,000 for
the quarter ended January 27, 2002.
9
7. COMMITMENTS AND CONTINGENCIES
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 remediation of
hazardous or toxic substances on, in, under or discharged from its 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 and conduct any remedial measures
which may be required. Based upon the amounts recorded as liabilities, the
Company believes that the ultimate resolution of this matter will not have
a material adverse effect on the consolidated financial results of the
Company.
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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion addresses the financial condition of the Company
as of January 26, 2003 and the results of operations for the three months
ended January 26, 2003 and January 27, 2002. This discussion should be read
in conjunction with the financial statements included elsewhere herein and
the Management's Discussion and Analysis and Financial Statement sections
of the Company's Annual Report on Form 10-K to which the reader is directed
for additional information.
General
As of July 30, 2002, Owosso Corporation (the "Company") has 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 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 forbear from exercising their rights and remedies under the facility. In
order to meet the lenders' requirements for reduced outstanding balances
under the facility and to secure the lenders' agreement to forbear, 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 2002. 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 that extended the maturity date to December 31, 2003, required
further reductions in the outstanding balance under the facility, based on
expected future asset sales and cash flow generated from operations, and
adjusted the minimum EBITDA covenant.
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 that 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 $1.2
million will be utilized to further reduce amounts outstanding under the
Company's 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.
11
Management further believes that the Company will be unable to remain in
compliance with its bank covenant requirements throughout fiscal 2003. As a
result, management has entered into negotiations with the Company's lenders
to further modify the minimum EBITDA covenant. 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.
Three months ended January 26, 2003 compared to three months ended January
27, 2002
Net sales. Net sales for the first quarter of 2003 decreased 48.9%, or $4.4
million, to $4.6 million, as compared to net sales of $9.0 million in the
prior year quarter, primarily as a result of the sale of Motor Products.
Sales for the prior year quarter excluding Motor Products were $4.7
million.
Loss from operations. For the first quarter of 2003, the Company reported a
loss from operations of $82,000 as compared to a loss from operations of
$1.1 million in the prior year first quarter. These results reflect the
sale of Motor Products, a reduction in corporate expenses from the closing
of the corporate office, discontinued amortization of goodwill and a
reduction in depreciation expense. Loss from operations for the prior year
quarter excluding Motor Products was $689,000. The closing of the corporate
office resulted in a decrease in selling, general and administrative costs
from $807,000 in the first quarter of 2002, to $338,000 in the first
quarter of 2003.
Interest expense. Interest expense was $214,000 in 2003, as compared to
$500,000 in 2002. The current year quarter includes interest income of
$17,000 resulting from a decrease in the fair market value of the Company's
interest rate swap liability. The prior year quarter includes interest
income of $202,000, resulting from a decrease in the fair market value of
the Company's interest rate swap liability. These amounts were recorded in
accordance with SFAS 133. Exclusive of the effects of interest rate swap
agreements, interest expense would have been $231,000 for the first quarter
of 2003, as compared to $702,000 in the prior year quarter. Interest
expense decreased primarily as a result of lower interest rates and debt
levels.
Income tax expense (benefit). The Company recorded an income tax benefit of
$62,000 in 2003 as a result of net operating loss carry forwards and the
valuation allowance placed on such carry forwards. No income tax benefit
was recorded in 2002 because none was available.
Net loss available for common shareholders. Net loss available for common
shareholders was $575,000, or $.10 per share, in the first quarter of 2003,
as compared to a net loss of $1.9 million, or $.32 per share, in the prior
year quarter. Loss available for common shareholders is calculated by
subtracting dividends on preferred stock of $341,000 and $335,000 for 2003
and 2002, respectively. Net loss available for common shareholder excluding
Motor Products for the prior year quarter was $1.3 million or $.23 per
share.
Liquidity and Capital Resources
Cash and cash equivalents were $94,000 at January 26, 2003. The Company had
negative working capital of $5.3 million at January 26, 2003, as compared
to negative working capital of $5.4 million at October 27, 2002. Net cash
provided by operating activities of continuing operations was $147,000, as
compared to net cash provided by operating activities from continuing
operations of $167,000 in the prior year quarter.
12
Cash flows provided by investing activities from continuing operations
included $21,000 for capital expenditures for equipment. The Company
currently plans to invest approximately $230,000 during the remainder of
fiscal 2003. Management anticipates funding capital expenditures with cash
from operations and borrowings under the Company's revolving credit
facility.
Net cash used in financing activities from continuing operations included
net repayments of $500,000 under the Company's revolving credit agreement,
and debt repayments of $62,000.
At January 26, 2003, $6.4 million was outstanding under the Company's
revolving credit facility. 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. This amendment to the bank credit facility required reductions
in the outstanding balance under the facility during calendar 2001 and
modified the interest rates charged. The amendment required additional
collateral, effectively all of the assets of the Company, and additional
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 Company from purchasing its 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, required further reductions in the outstanding
balance under the facility, based on expected future asset sales, increased
the interest rate charged and replaced the minimum operating profit
covenant with a minimum EBITDA covenant. In December 2002, the Company
entered into a further amendment to the facility, which extends the
maturity date to December 31, 2003. This amendment requires further
reductions in outstanding balance under the facility based on expected
future asset sales and cash flow generated from operations and extended and
adjusted the minimum EBITDA covenant for 2003. Borrowings under the
facility are charged interest at the Prime Rate plus 2.75% (7.0% at January
26, 2003).
The Company has an interest rate swap agreement with one of its banks with
a notional amount of $4,850,000. 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.
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.
13
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.
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. On or before February 10, 2003, the
Company was required to have evidenced a closing bid price of at least
$1.00 per share, and, immediately thereafter, a closing bid price of at
least $1.00 per share of a minimum of ten consecutive trading days, but
was unable to provide such evidence. On February 21, 2003, The Nasdaq
Stock Market, Inc. informed the Company that the Nasdaq Listing
Qualifications Panel had determined not to delist the Company's common
stock from the Nasdaq SmallCap Market for failure to meet the
requirement of at least a $1.00 bid price until at least May 22, 2003
pending modification of Nasdaq's bid price rules. The Panel's
determination is subject to further extension, termination or
modification based on further developments in the Nasdaq rule-making
process. 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 as well as the influence of terrorism, war and political unrest
on these conditions. Lower demand for the Company's products can lower
revenues as well as cause underutilization of the Company's plant,
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.
14
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.
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.
15
ITEM 3. 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 January 26, 2003. 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 maturates, and (2) estimates obtained from
dealers to settle interest rate swap agreements. Note 6 to the condensed
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 1/26/2003
---- ---- ---- ---- ---- ---------- ----------- ---------
Debt:
Fixed rate $1,498 $ 255 $ 175 $ 94 $ 57 $ - $ 2,079 $ 2,079
Average interest rate 8.9% 7.3% 6.1% 5.0% 5.0%
Variable rate $7,000 $ 600 $ 600 $ 900 $ 900 $ 950 $10,950 $10,950
Average interest rate 7.1% 2.8% 2.8% 2.8% 2.8% 2.8%
Interest rate swap agreements:
Variable to fixed swaps $4,550 $ - $ - $ - $ - $ - $ 4,550 $ (93)
Average pay rate 4.2
Average receive rate 1.0
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer (the
principal executive officer, principal financial officer and principal
accounting officer), of the effectiveness of the design and operation of
our 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 Quarterly Report on Form 10-Q (the "Evaluation Date"). Based on that
evaluation, our Chief Executive Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in our Exchange Act
reports was recorded, processed, summarized and reported within the
applicable time periods. Since the Evaluation Date, there have been no
significant changes in internal controls or, to the Company's knowledge, in
any other factors that could significantly affect these controls including
any corrective actions with regard to significant deficiencies and material
weaknesses.
16
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Effective for the second quarter of 2000, the Company modified certain covenants
included in its revolving credit facility. In accordance with such
modifications, the Company was, and continues to be, prohibited from making
common stock dividend payments. Further modifications to the Company's revolving
credit facility in February 2001 resulted in the Company also being prohibited
from making future preferred stock dividend payments.
Item 3. Defaults Upon Senior Securities
(b) Since February 2001, the Company has been prohibited from making dividend
payments on its Class A Convertible Preferred Stock in connection with
modifications to its revolving credit facility. As of the date of the filing of
this report, accrued dividends on the Class A Convertible Preferred Stock total
$3,006,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
11 Computation of Per Share Earnings
99.1 Certification of Chief Executive Officer (the principal
executive officer, principal financial officer and principal
account officer) pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002.
(b) Form 8-K
No reports on Form 8-K were filed during the quarter ended January 26, 2003.
17
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
OWOSSO CORPORATION
Date: March 11, 2003 By: /s/ George B. Lemmon, Jr.
-------------------------
George B. Lemmon, Jr.
President, Chief Executive
Officer, and Director
CERTIFICATIONS
I, George B. Lemmon, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 quarterly
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 our 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):
18
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: March 11, 2003
/s/ George B. Lemmon, Jr.
----------------------
George B. Lemmon, Jr.
President and Chief Executive Officer
(principal executive officer and
principal financial officer)
19