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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: July 27, 2003
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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
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(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
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(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 September 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. Unaudited Financial Statements
Condensed Consolidated Statements of Operations 3
for the three and nine months ended July 27, 2003 and
July 28, 2002
Condensed Consolidated Balance Sheets at 4
July 27, 2003 and October 27, 2002
Condensed Consolidated Statements of Cash Flows 5
for the nine months ended July 27, 2003 and
July 28, 2002
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Consolidated 11
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
2
OWOSSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three-Months Ended Nine-Months Ended
------------------------------------ -----------------------------------
July 27, July 28, July 27, July 28,
2003 2002 2003 2002
Net sales $ 4,399,000 $ 11,415,000 $ 13,423,000 $ 31,515,000
Costs of products sold 3,585,000 9,743,000 10,908,000 26,913,000
----------- ------------ ------------ ------------
Gross profit 814,000 1,672,000 2,515,000 4,602,000
Selling, general and administrative expenses 779,000 2,826,000 2,635,000 6,633,000
----------- ------------ ------------ ------------
Income (loss) from operations 35,000 (1,154,000) (120,000) (2,031,000)
Interest expense 163,000 389,000 553,000 1,374,000
----------- ------------ ------------ ------------
Loss before income taxes (128,000) (1,543,000) (673,000) (3,405,000)
Income tax benefit 13,000 424,000 159,000 5,182,000
----------- ------------ ------------ ------------
Net (loss) income (115,000) (1,119,000) (514,000) 1,777,000
Dividends on preferred stock 343,000 338,000 1,026,000 1,009,000
----------- ------------ ------------ ------------
Net (loss) income available
for common shareholders $ (458,000) $ (1,457,000) $ (1,540,000) $ 768,000
=========== ============ ============ ==========
Net (loss) income per share $ (0.08) $ (0.25) $ (0.26) $ 0.13
=========== ============ ============ ==========
Basic and diluted weighted average number of common
shares outstanding 5,874,000 5,874,000 5,874,000 5,874,000
=========== ============ ============ ==========
See notes to condensed consolidated financial statements.
3
OWOSSO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
July 27, October 27,
2003 2002
(Unaudited) (See Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 541,000 $ 524,000
Receivables, net 2,187,000 3,111,000
Inventories, net 1,690,000 1,906,000
Net assets held for sale - 800,000
Prepaid expenses and other 175,000 690,000
Tax refund receivable - 919,000
Deferred taxes 295,000 295,000
------------ ------------
Total current assets 4,888,000 8,245,000
PROPERTY, PLANT AND EQUIPMENT, NET 4,961,000 5,616,000
GOODWILL, NET 8,405,000 8,405,000
OTHER INTANGIBLE ASSETS, NET 4,920,000 5,218,000
NET ASSETS OF DISCONTINUED OPERATIONS HELD FOR SALE 350,000 350,000
OTHER ASSETS 119,000 136,000
------------ ------------
TOTAL ASSETS $ 23,643,000 $ 27,970,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,569,000 $ 2,025,000
Accrued expenses 2,125,000 2,622,000
Current portion of long-term debt 6,643,000 8,951,000
------------ ------------
Total current liabilities 10,337,000 13,598,000
LONG-TERM DEBT, LESS CURRENT PORTION 4,403,000 4,594,000
COMMON STOCK PUT OPTION 600,000 600,000
POSTRETIREMENT BENEFITS AND OTHER LIABILITIES - 362,000
DEFERRED TAXES 1,900,000 1,900,000
ACCRUED PREFERRED STOCK DIVIDENDS 3,691,000 2,664,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES 20,931,000 23,718,000
SHAREHOLDERS' EQUITY 2,712,000 4,252,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 23,643,000 $ 27,970,000
============ ============
Note: the balance sheet at October 27, 2002 has been condensed from the
audited financial statements at that date.
See notes to condensed consolidated financial statements.
4
OWOSSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Nine Months Ended
-----------------------------
July 27, July 28,
2003 2002
OPERATING ACTIVITIES:
Net Loss (income) $ (514,000) $ 1,777,000
Adjustments to reconcile net loss to
net cash provided by operating activities:
Gain from sale of net assets held for sale (77,000) 0
Depreciation 787,000 1,967,000
Amortization 300,000 802,000
Other 0 313,000
Changes in operating assets and liabilities which
provided cash 1,401,000 130,000
----------- -----------
Net cash provided by operating activities 1,897,000 4,989,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (134,000) (293,000)
Proceeds from net assets held for sale 877,000 0
Increase (decrease) in other assets 17,000 (369,000)
----------- -----------
Net cash provided by (used in) investing activities 760,000 (662,000)
----------- -----------
FINANCING ACTIVITIES:
Net payments on line of credit (2,450,000) (4,400,000)
Payments on long-term debt (190,000) (242,000)
Payments on related party debt 0 (400,000)
----------- -----------
Net cash used in continuing operations (2,640,000) (5,042,000)
Net cash used in discontinued operations 763,000
----------- -----------
Net cash used in financing activities (2,640,000) (4,279,000)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,000 48,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 524,000 200,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 541,000 $ 248,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 524,000 $ 2,299,000
=========== ===========
Taxes refunded $ 1,155,000 $ 6,392,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Preferred Dividends payable $ 1,026,000 $ 1,009,000
=========== ===========
See notes to condensed consolidated financial statements.
5
OWOSSO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - Owosso Corporation (the "Company") 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, including AC,
DC and Universal, 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 July
27, 2003, the condensed consolidated statements of operations for the three
and nine months ended July 27, 2003 and July 28, 2002 and the statement of
cash flows for the nine months ended July 27, 2003 and July 28, 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 July 27, 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.
Income (loss) per share - Basic income (loss) per common share is computed by
dividing net income (loss) (the numerator) by the weighted average number of
common shares outstanding during each period (the denominator). The
computation of diluted income (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.
Recently Adopted Accounting Pronouncements - In July 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 142 "Goodwill and Other Intangible Assets". 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 the 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 nine months of 2003 of discontinuing goodwill
amortization was approximately $486,000. In accordance with SFAS No. 142, the
Company has completed its transitional goodwill impairment test. Based on its
assessment, the Company was not required to record a goodwill impairment
charge as of October 28, 2002. The impact of the adoption of SFAS No. 142 is
summarized as follows:
6
Three-Months Ended Nine-Months Ended
---------------------------- -----------------------------------
July 27, July 28, July 27, July 28,
2003 2002 2003 2002
Reported Net (loss) income available
for common shareholders $ (458,000) $ (1,457,000) $ (1,540,000) $ 768,000
Add back: Goodwill amortization - 162,000 - 486,000
---------- ------------ ------------ -----------
Adjusted Net (loss) income $ (458,000) $ (1,295,000) $ (1,540,000) $ 1,254,000
========== ============ ============ ===========
Basic (Loss) income per share:
Reported Net (loss) income available
for common shareholders $ (0.08) $ (0.25) $ (0.26) $ 0.13
Add back: Goodwill amortization - 0.03 - 0.08
---------- ------------ ------------ -----------
Adjusted Net (loss) income $ (0.08) $ (0.22) $ (0.26) $ 0.21
========== ============ ============ ===========
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 several years and has been required to modify its bank credit
facility, as further disclosed under Note 6 "Long-term Debt". Management
intends to dispose of its remaining non-operating asset, the real estate at
the Company's former Snowmax subsidiary. Management believes that 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 anticipation of management's belief that the Company would be unable to
remain in compliance with certain of its bank covenant requirements
throughout fiscal 2003, management entered into and has successfully
negotiated with the Company's lenders a waiver of the minimum EBITDA covenant
through the end of fiscal 2003. It is management's intent to refinance the
Company's bank credit facility prior to its maturity in December 2003. There
can be no assurance, however, that management's plans for refinancing 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.
7
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 July 27, 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 disposed
of the remaining Cramer real property on May 9, 2003 and the net amount
received at closing was $877,000, resulting in a gain of $77,000. For
financial reporting purposes, the assets and liabilities attributable to the
real property had been classified in the condensed consolidated balance
sheets as net assets held for sale.
5. INVENTORIES
July 27, October 27,
2003 2002
Raw materials and purchased parts $1,030,000 $1,001,000
Work in process 725,000 908,000
Finished goods 224,000 231,000
---------- ----------
Total Inventories 1,979,000 2,140,000
Inventory Provision 289,000 234,000
---------- ----------
Net Inventories $1,690,000 $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
8
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. At the beginning of the second quarter of 2003, management
realized that the EBITDA covenant would be violated in the future and entered
into negotiations with the Company's lenders to further modify the minimum
EBITDA covenant. In April 2003, the Company entered into a further amendment
to the facility, which adjusted the minimum EBITDA required under the
covenant. Borrowings under the facility are charged interest at the Prime
Rate plus 2.75% (6.75% at July 27, 2003).
In anticipation of management's belief that the Company would be unable to
remain in compliance with certain of its bank covenant requirements
throughout fiscal 2003, management entered into and has successfully
negotiated with the Company's lenders to a waiver of the minimum EBITDA
covenant through the end of fiscal 2003. It is management's intent to
refinance the Company's bank credit facility prior to its maturity in
December 2003. There can be no assurance, however, that management's plans
for refinancing will be successfully executed.
At July 27, 2003, $4,450,000 was outstanding under the Company's bank credit
facility and $601,000 was available for additional borrowing in addition to
the $541,000 cash on hand.
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 1, 2003 in exchange for receiving
payments at the BMA Municipal Swap Index (.80% at July 27, 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 decreased to $25,000 at
July 27, 2003, resulting in a credit to interest income of $85,000 for the
nine months ended July 27, 2003. The fair market value of the swap agreement
was $143,000 at July 28, 2002, resulting in a credit to interest income of
$556,000 for the nine months ended July 28, 2002.
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.
9
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 July 27, 2003 and the results of operations for the three and nine months
ended July 27, 2003 and July 28, 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, 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 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.
Three months ended July 27, 2003 compared to three months ended July 28, 2002
Net sales. Net sales for the third quarter of 2003 decreased 61.4%, or $7.0
million, to $4.4 million, as compared to net sales of $11.4 million in the
prior year quarter, primarily as a result of the sale of Motor Products. In
addition, Pacific Rim competition has also continued to affect the Company's
sales along with the reduction of business from the Company's major customers
for the quarter. Sales for the prior year quarter excluding Motor Products
were $5.5 million.
Income from operations. For the third quarter of 2003, the Company reported
income from operations of $35,000 as compared to a loss from operations of
$1,154,000 in the prior year quarter. Loss from operations for the prior year
quarter excluding Motor Products was $1,198,000.
These results reflect a lower gross profit due to the decrease in sales, the
sale of Motor Products, offset by a reduction in depreciation expense. This
was offset by reduced selling general and administrative costs mainly due to
decreased corporate expenses and discontinued amortization of goodwill.
Corporate expenses included in selling, general and administrative costs were
$329,000 in the third quarter of 2003, as compared to $1,540,000 in the prior
year quarter. This decrease reflects no change in the expense estimate of
outstanding workman's compensation claims in the third quarter of 2003
compared to an increase in the expense estimate in the prior year quarter.
Also, professional fees and other miscellaneous expenses have decreased from
the prior year quarter.
11
Interest expense. Interest expense was $163,000 for the third quarter of
fiscal 2003, as compared to $389,000 in the prior year quarter. The current
year quarter includes interest income of $34,000 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 $151,000, 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 $197,000 for the third quarter of 2003, as compared to $540,000 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
$13,000 in the third quarter of 2003 as compared to a $424,000 benefit in the
prior year quarter. The prior year quarter's benefit was as a result of
changes in Federal tax laws, which allow the carryback of net operating
losses for five years.
Net loss available for common shareholders. Net loss available for common
shareholders was $458,000, or $.08 per share, in the third quarter of 2003,
as compared to net loss of $1.5 million, or $.25 per share, in the prior year
quarter. Net loss available for common shareholders is calculated by
subtracting dividends on preferred stock of $343,000 and $338,000 for 2003
and 2002, respectively. Net loss available for common shareholder excluding
Motor Products for the prior year quarter was $1.3 million or $.22 per share.
Nine months ended July 27, 2003 compared to Nine months ended July 28, 2002
Net sales. Net sales for first nine months of 2003 decreased 57.5%, or $18.1
million, to $13.4 million, as compared to net sales of $31.5 million in the
prior year, primarily as a result of the sale of Motor Products. In addition,
Pacific Rim competition has continued to affect the Company's sales along
with the reduction of business from the Company's major customers for the
year. Sales for the prior year excluding Motor Products were $15.6 million.
Loss from operations. For the first nine months of 2003, the Company reported
a loss from operations of $120,000 as compared to a loss from operations of
$2,031,000 in the prior year. Loss from operations for the prior year
excluding Motor Products was $2,053,000.
These results reflect a lower gross profit due to the decrease in sales, the
sale of Motor Products, offset by a reduction in depreciation expense. This
was offset by reduced selling general and administrative costs mainly due to
decreased corporate expenses and discontinued amortization of goodwill.
Corporate expenses included in selling, general and administrative costs were
$1.1 million in the first nine months of 2003, as compared to $2.7 million in
the prior year period. This decrease primarily reflects the closing of the
corporate office. This decrease also reflects a reduced change in the expense
estimate of outstanding workman's compensation claims in the first nine
months of 2003 compared to an increase in the expense estimate in the prior
year. Also, professional fees and other miscellaneous expenses have decreased
from the prior year quarter.
During the second quarter of 2003, the Company negotiated a settlement with
all the Cramer retirees covered by a post retirement benefit. As a result of
the settlement, Owosso paid out $76,000 and recognized a gain of $153,000.
Interest expense. Interest expense was $553,000 for the first nine months of
fiscal 2003, as compared to $1,374,000 in the prior year. The current year
includes interest income of $85,000 resulting from a decrease in the fair
market value of the Company's interest rate swap liability. The prior year
includes interest income of $556,000, 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 $638,000 for
the first nine months of 2003, as compared to $1,930,000 in the prior year.
Interest expense decreased primarily as a result of lower interest rates and
debt levels.
12
Income tax expense (benefit). The Company recorded an income tax benefit of
$159,000 in the first nine months of 2003 as compared to a $5.2 million
benefit in the prior year. The prior year's benefit was as a result of
changes in Federal tax laws, which allow the carryback of net operating
losses for five years.
Net income (loss) available for common shareholders. Net loss available for
common shareholders was $1.5 million, or $.26 per share, in the first nine
months of 2003, as compared to net income of $768,000, or $.13 per share, in
the prior year. Net income (loss) available for common shareholders is
calculated by subtracting dividends on preferred stock of $1026,000 and
$1009,000 for 2003 and 2002, respectively. Net income available for common
shareholder excluding Motor Products for the prior year was $514,000 or $.09
per share.
Liquidity and Capital Resources
Cash and cash equivalents were $541,000 at July 27, 2003. The Company had
negative working capital of $5.4 million at July 27, 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 $1.9 million
for the nine months ended July 27, 2003, as compared to net cash provided by
operating activities from continuing operations of $5.0 million in the
comparable period.
Cash flows provided by investing activities from continuing operations
included $134,000 for capital expenditures for equipment. The Company
currently plans to invest approximately $40,000 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 $2,450,000 under the Company's revolving credit agreement, and
debt repayments of $190,000.
At July 27, 2003, $4.5 million was outstanding under the Company's revolving
credit facility. The Company has experienced a significant downturn in its
operating results over the past four years and starting 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
13
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. At the beginning
of the second quarter of 2003, management realized that the EBITDA covenant
would be violated in the future and entered into negotiations with the
Company's lenders to further modify the minimum EBITDA covenant. In April
2003, the Company entered into a further amendment to the facility, which
adjusted the minimum EBITDA required under the covenant. Borrowings under the
facility are charged interest at the Prime Rate plus 2.75% (6.75% at July 27,
2003).
Management intends to dispose of or liquidate its remaining non-operating
asset, the real estate at the Company's former Snowmax subsidiary. Management
believes that 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 maturates for fiscal 2003.
In anticipation of management's belief that the Company would be unable to
remain in compliance with certain of its bank covenant requirements
throughout fiscal 2003, management entered into and has successfully
negotiated with the Company's lenders a waiver of the minimum EBITDA covenant
through the end of fiscal 2003. It is management's intent to refinance the
Company's bank credit facility prior to its maturity in December 2003. There
can be no assurance, however, that management's plans for refinancing will be
successfully executed.
The Company has an interest rate swap agreement with one of its banks with a
notional amount of $4,550,000. 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-Q,
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.
14
o The Company's common stock was delisted from the Nasdaq SmallCap Market
effective with the close of business July 8, 2003 as a result of the
market value of the Company's publicly held shares falling below
$1,000,000. The Company's common stock is currently trading on the OTC
Bulletin Board ("OTCBB"). Among other consequences, the delisting from
the Nasdaq SmallCap Market, and trading on the OTCBB, 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.
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.
15
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.
16
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 July 27, 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 maturaties, 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 7/27/2003
------ ----- ---- ---- ---- ---------- ----------- ----------
Debt:
Fixed rate $1,592 $ 258 $ 92 $ 96 $ 8 $ - $2,046 $2,046
Average interest rate 8.9% 6.6% 5.0% 5.0% 5.0%
Variable rate $5,050 $ 600 $600 $900 $900 $950 $9,000 $9,000
Average interest rate 6.9% 2.8% 2.8% 2.8% 2.8% 2.8%
Interest rate swap agreements:
Variable to fixed swaps $4,550 $ - $ - $ - $ - $ - $4,550 $ (25)
Average pay rate 4.2
Average receive rate 0.8
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer (the principal executive officer,
principal financial officer and principal accounting officer), after
evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this quarterly
report, has concluded that the Company's disclosure controls and procedures
are effective to ensure that information required to be disclosed by the
Company in the reports that it files under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in rules and forms of the Securities and Exchange Commission.
17
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
$3,691,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
10.32 Eighteenth Amendment to the Amended and Restated Credit
Agreement by and among Owosso Corporation, its subsidiaries,
Bank One and PNC Bank, N.A., effective September 10, 2003.
11 Computation of Per Share Earnings
31.1 Certification of Chief Executive Officer (the principal
executive officer, principal financial officer and principal
accounting officer) pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
32.1 Certification of Chief Executive Officer (the principal
executive officer, principal financial officer and principal
accounting 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
The Company filed a report on 8-K dated July 8, 2003, disclosing that The Nasdaq
Stock Market, Inc. had informed Owosso Corporation that its common stock would
be delisted from the Nasdaq SmallCap Market effective with the close of business
on Tuesday, July 8, 2003. The delisting was a result of the market value of
Owosso's publicly held shares falling below $1,000,000.
18
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: September 9, 2003 By: /s/ George B. Lemmon, Jr.
-------------------------
George B. Lemmon, Jr.
President, Chief Executive
Officer, and chairman