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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: October 26, 1997 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
incorporation or organization) Identification No.)
The Triad Building, 2200 Renaissance Boulevard,
Suite 150, King of Prussia, PA 19406
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 275-4500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On January 21, 1998, the aggregate market value of the Registrant's Common
Stock, $.01 par value, held by nonaffiliates of the Registrant was approximately
$22,500,000.
On January 21, 1998, 5,808,676 shares of the Registrant's Common Stock, $.01 par
value, were outstanding.
Documents Incorporated By Reference
Portions of the Registrant's Proxy Statement to be filed with the Commission in
connection with the Annual Meeting of Shareholders scheduled to be held on March
18, 1998 are incorporated by reference into Part III of this Form 10-K.
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PART I
Item 1. Business
Overview
Owosso Corporation ("the Company") is a diversified manufacturer of
products in narrowly defined niche markets and currently operates in two
business segments, Engineered Component Products and Specialized Equipment. By
operating in narrowly defined niche markets, the Company seeks to achieve
revenue growth through market penetration and new product development, while
maximizing profit margins. The Company has also grown historically by acquiring
businesses, and acquisitions remain a key element of the Company's growth
strategy. The Company currently has manufacturing facilities in nine states and
sells its products nationwide.
The Company's subsidiaries included in the Engineered Component
Products segment are Motor Products - Owosso Corporation ("Motor Products")
acquired in 1973, Motor Products - Ohio Corporation ("MP-Ohio") incorporated in
1995, Stature Electric, Inc. ("Stature") acquired in October 1995, Owosso Motor
Group, Inc, ("Motor Group") acquired in September 1996 and Cramer Company
("Cramer") acquired in 1984 (collectively, the "Motor Companies"). The
Engineered Component Products segment also includes Snowmax, Incorporated,
("Snowmax") acquired in 1989 and The Landover Company doing business as
Dura-Bond Bearing Company ("Dura-Bond") acquired in 1987.
The Company's subsidiaries included in the Specialized Equipment
segment are DewEze Manufacturing, Inc., ("DewEze") acquired in 1991, which
includes the operations of Parker Industries, acquired in 1985, and Great
Bend Manufacturing, Inc. ("Great Bend") acquired in May 1995, (collectively the
"Agricultural Equipment Companies"), and Sooner Trailer Manufacturing Co.
("Sooner") acquired in 1994.
Strategy
The Company's objective is to maximize operating results through
revenue growth while maximizing profit margins. Components of the Company's
strategy include the following:
2
Focus on Niche Markets. Each of the Company's business units competes
in relatively narrowly defined markets in which the Company seeks substantial
market share. The Company endeavors to maintain and expand its market positions
by offering comprehensive product engineering and design services, manufacturing
products that consistently meet demanding customer specifications and providing
production flexibility to satisfy changing customer manufacturing schedules.
Enhance Internal Growth through Acquisitions. The Company continually
seeks to enhance its internal growth by acquisitions of additional businesses
and products. The objectives of such acquisitions include increasing the market
penetration of the Company's existing businesses and expanding the Company's
operations into additional niche markets.
Reduce Technological and Market Risk. The Company's strategy focuses on
manufacturing businesses with established technologies, rather than businesses
in rapidly changing technologies, and therefore seeks to reduce the risk to its
businesses of technological obsolescence. The Company's businesses generally
require substantial initial capital expenditures for required tooling and
equipment, which make entry by potential competitors more difficult. The
Company's development activities are focused on designing products for
customer-driven applications rather than developing new products with uncertain
market prospects.
Leverage Management Functions. The Company's business units are managed
on a decentralized basis, allowing operating management to concentrate on
producing and delivering competitive products and to respond quickly to market
conditions. Corporate level management coordinates strategic direction, oversees
implementation of the Company's business plans with operating management and
regularly monitors continuous operating improvement. Cash management, risk
management, management information systems, certain employee benefits and other
services are consolidated at the corporate level, allowing the Company to gain
purchasing leverage and realize operating efficiencies. The Company seeks to
maximize operating company profitability by introducing best practices and
standardized operating measurements to its businesses. Similarly, the Company
brings its operating businesses into a centralized management information system
to enhance controls and leverage its management information system capabilities.
Focus on Components Business. The Company's plans for expansion will
focus on its engineered component products businesses, which management believes
fit most logically into the Company's management systems. The Company expects
that engineered component products will comprise an increasing percentage of the
total business.
3
Products
Engineered Component Products
The Company's Engineered Component Products business consists of the
Motor Companies (Stature, Motor Products, MP-Ohio, the Motor Group and Cramer)
and Snowmax and Dura-Bond. The Motor Companies manufacture electric motors and
timers, primarily for use in non-automotive transportation, healthcare and other
industrial applications. Snowmax is a manufacturer of heat transfer coils for
use in commercial refrigeration, non-automotive transportation and light
commercial and residential heating and air conditioning. Dura-Bond manufactures
replacement camshaft bearings, valve seats and shims for the automotive
after-market. The products manufactured by the Motor Companies and Snowmax are
sold primarily to original equipment manufacturers, which incorporate these
components into their end products. Dura-Bond sells its products to engine
rebuilders through distributors. The Company seeks to expand its Engineered
Component Products segment by increasing sales to customers who value the
Company's quality and service, by introducing new products in its existing
markets and by expanding into new markets where its existing products can
successfully be adapted.
Motors and Timers. The Company designs and manufactures subfractional
horsepower AC and DC motors (less than 1/10 horsepower), fractional horsepower
permanent magnet DC motors (between 1/10 and 1 horsepower), integral horsepower
DC motors (1 horsepower or more), electromechanical timers (which incorporate
the Company's subfractional horsepower motors) and delay mechanisms. The devices
are used in trucks, buses and vans, power tools, welding equipment, motorized
wheelchairs, appliances, business equipment, heating and air conditioning
systems, pumps and other mechanical devices. Fractional and integral horsepower
motors are targeted primarily to original equipment manufacturers with small to
medium-sized production runs (i.e. up to 100,000 units per year), which is the
level at which the Company believes it has certain competitive advantages, such
as production flexibility, over larger competitors.
The Company's experienced engineering staff designs new products and
adapts existing motors and timers to meet relatively stringent size, performance
and quality standards of customers. The Company utilizes computer aided design
systems to facilitate fast turnaround on custom-engineered prototypes, in some
cases as quickly as 48 hours after a customer details its specific needs to the
Company. The sales and marketing for Motor Products, MP-Ohio and Stature is
centralized with Motor Group, a manufacturers' representative firm which was
acquired in 1996.
Heat Transfer Coils. The Company designs and manufactures fin and tube
heat transfer coils which are used in a variety of heating and cooling
applications, including commercial refrigeration, truck, bus and van heating and
air conditioning systems and commercial and residential heating and air
conditioning. The Company's engineering staff continually designs variations of
the Company's standard coils to meet particular customer requirements and
applications. In addition to offering value-added services, the
4
Company invests in capital improvements needed to develop and manufacture
additional varieties of fin and tube coil products.
Camshaft Bearings and Valve Seats and Shims. The Company's principal
camshaft bearings products are replacement camshaft bearings for internal
combustion gasoline engines in automobiles, trucks and farming equipment.
Replacement camshaft bearings are an integral component used in rebuilding cast
iron engines. The Company believes it is the leading supplier of single piece
all-round replacement camshaft bearings for cast iron engines, which the Company
manufactures by using a specialized babbitting process to coat a steel tube with
a lead based alloy and then machining the tube to the precise tolerances
required for a specific application. In fiscal 1997, 1996 and 1995, the Company
sold replacement camshaft bearings suitable for use in rebuilding approximately
1,700,000, 1,900,000 and 2,300,000 cast iron engines, respectively. In fiscal
1996, the Company added a line of valve seats and shims to this product line
through its acquisition of Snyder Industries. Sales of valve seats and shims
represent less than 10% of Dura-Bond's total sales.
Specialized Equipment
The Company's Specialized Equipment business is conducted through its
DewEze, Sooner and Great Bend subsidiaries. DewEze designs and manufactures
flatbed hay bale handlers and processing equipment, commercial mowers and
hydraulic power systems marketed under the DewEze brand name and grain wagons,
auger carts, weigh wagons and related agricultural equipment marketed under the
Parker brand name. Sooner designs and manufactures all-aluminum trailers,
primarily horse, livestock and other specialty trailers. Great Bend designs and
manufactures front-end loaders, which are designed to attach to tractors.
Bale Handling and Processing Equipment. The Company believes that it is
the leading supplier of flatbed hay bale handlers in the U.S. agricultural
equipment market, and the Company knows of only two other U.S. manufacturers of
flatbed bale handlers. The patented DewEze flatbed lift, which is installed on a
pick-up truck chassis, hydraulically lifts two large round bales weighing up to
2,500 pounds each onto the bed of the pick-up truck, providing a fast and safe
method of transporting multiple bales of hay over large acreage. In addition to
being used on the Company's own flatbed products, the Company's hydraulic power
systems are also sold for use on tow trucks, cherry pickers and other utility
vehicles.
The Company's bale processors are used to process hay for livestock
feeding and operate by slicing the bale, whereas competitors' bale processors
grind the bale. The Company believes that slicing is the preferred method of
processing hay, as it improves digestion and results in increased milk
production in dairy cows, increased weight of beef cattle and decreased feed
costs and waste.
Commercial Turf Maintenance Equipment. The Company believes that it is
the leading supplier of commercial mowers designed specifically for use on
5
sloped surfaces in the U.S. market. The Company's patented hydraulic lawn
mowers, designed and marketed by DewEze, allow the driver's seat to remain
vertical, even while mowing along the side of terrain with up to a 30 degree
slope. This design provides a higher degree of driver safety and comfort on
sloped surfaces than is currently available on conventional riding mowers. In
addition, two mowing decks allow the operator to mow culverts and ridges more
efficiently than with other mowing equipment.
Grain Handling Equipment. The Company's grain handling equipment,
including grain wagons, auger carts and weigh wagons, is sold under the Parker
trade name and is used primarily by large corn, soybean and wheat farmers and
seed companies. The Company's grain wagons and auger carts are typically used by
farmers to transport grain, while weigh wagons are typically used by seed
companies to monitor harvest yields.
Trailers. The Company manufactures and distributes all-aluminum horse
and livestock trailers, as well as all-aluminum trailers for carrying
automobiles and general cargo, all under the Sooner brand name. Sooner
trailers are the official trailers of the American Quarter Horse Association.
Over seventy-five percent of the trailers sold by Sooner in fiscal 1997 were
horse trailers, and the Company expects horse trailers to continue to be
Sooner's primary product.
The Company's trailers range from a two-horse bumper hitch trailer to
multi-horse and multi-automobile goose neck trailers complete with living
quarters, and range in price from approximately $8,000 to over $70,000. Although
trailers have traditionally been made of steel, which is less expensive than
aluminum, Sooner has been successful in marketing its all-aluminum trailers
because of several advantages of aluminum construction. These advantages include
long life and low maintenance due to the corrosion resistance of aluminum
compared to steel, and the light weight and superior weight-to-load ratio of
aluminum compared to steel.
The Company intends to expand Sooner's operations by broadening its
geographic coverage through the expansion of its dealer network and by adding
new models and product lines.
Front-End Loaders. The Company manufactures and distributes front-end
loaders which are designed to be attached to tractors ranging in size from 20 to
180 horsepower. The Company designs mounting brackets to allow the loader to be
attached to over 800 different tractor models. Through its Hot Shot(TM) program,
most models of Great Bend loaders can be delivered to a customer within four
days of order. The front-end loaders are marketed under the Great Bend brand
name to end users through independent dealers as well as to tractor
manufacturers which incorporate the front-end loaders into their tractors.
6
Manufacturing
The Company's manufacturing operations are conducted independently in
separate facilities by each of the Company's business units. The Company
regularly invests in improvements to its manufacturing facilities. While the
Company believes that its manufacturing operations, in general, have adequate
capacity and flexibility to meet current and anticipated demand for its
products, the Company may from time to time acquire new facilities or increase
the size of its existing facilities in order to accommodate the growth of the
Company's business. Throughout its operations, the Company has installed
inventory and production control systems to optimize inventory levels and
provide production flexibility and better material flow. Additional cost and
production flexibility advantages are derived from the Company's quick change
tooling and computer numerical control ("CNC") equipment, which facilitate
reduced production changeover and equipment set-up time.
The manufacturing operations of the Company's Engineered Component
Products segment are highly integrated, permitting almost all component parts to
be produced by the Company when needed. This vertical integration, together with
the Company's CNC equipment and quick change tooling, results in lower
production costs, higher product quality and greater manufacturing flexibility,
and minimizes a business' reliance on outside suppliers for component parts.
Managing for quality assurance is an integral part of the Company's strategy for
continuous operating improvement. Computer aided design systems are utilized at
all of the Company's production operations, with the exception of Sooner, which
will implement computer aided design systems in fiscal 1998.
The Company obtains raw materials, component parts and supplies from a
variety of sources, generally from more than one supplier. In certain cases,
where it has an impact on improving quality control or cost control, the Company
obtains raw materials and component parts from sole source suppliers. The
Company believes that there are other available sources that the Company could
utilize if necessary. The Company's suppliers are predominantly based in the
United States, although certain materials are obtained from foreign countries.
The Company believes that its sources of raw materials are adequate for its
needs.
Marketing
Engineered Component Products
The Company's motors and timers and heat transfer coils are marketed
directly to original equipment manufacturers and distributors by Company
salespersons and independent sales representatives. Sales and marketing for
Motor Products, MP-Ohio and Stature is centralized within Motor Group, a
manufacturers' representative firm acquired in 1996. The Company's replacement
camshaft bearings and valve seats and shims are marketed primarily to a limited
number of large brand name distributors, and to a lesser extent to engine
rebuilders, the end users of Dura-Bond's products. While sales
7
are targeted primarily to customers in North America, the Company intends to
expand its international sales.
Specialized Equipment
The Company's specialized equipment is marketed by Company salespersons
and independent manufacturers' representatives, selling primarily to independent
dealers, which resell the equipment to end users. End users of the Company's
bale handling and processing equipment and grain handling equipment are
typically farmers and ranchers. The Company's all-terrain mowing equipment is
sold direct, primarily to state and local municipalities, airports, schools,
hospitals and cemeteries. Garages, tow truck operations and specialty vehicle
manufacturers are among the principal end users of the Company's hydraulic power
systems. In order to increase inventory availability of Parker grain handling
equipment in dealers' showrooms, the Company offers extended payment plans to
dealers, allowing them to defer payment until mid-October following the purchase
date. This coincides with the fall harvest season when most farmers purchase
these products from dealers. Sooner's trailers are sold through independent
dealers primarily to horse owners, farmers, ranchers, breeders and trainers.
Sooner and Deweze have arrangements with a number of financial institutions to
provide floor plan financing for their dealers, which require them to repurchase
repossessed products from the financial institutions in the event of a default
by the financed dealer. Great Bend sells its front-end loaders primarily to
farmers and ranchers through its dealer network, and to a lesser extent to
tractor manufacturers which incorporate the front-end loaders into their
tractors.
Competition
Engineered Component Products
The Company competes with numerous companies in the motors and timers
business, some of which have greater financial, technical and marketing
resources than the Company. Competition is based on design and application
engineering capabilities and product reliability and quality, as well as price.
The Company seeks customers who need medium-sized production runs and have
higher service requirements, and believes that this strategy enables it to
compete effectively against its larger competitors, which typically have
production systems that are geared toward longer, higher volume production runs.
The Company faces competition in the heat transfer coils business from
several companies, two of which have significantly greater resources than the
Company. The Company believes that its heat transfer coils subsidiary has the
production capabilities necessary to manufacture essentially the same products
as larger suppliers of heat transfer coils competing in the Company's markets.
The Company believes that these capabilities, together with the responsiveness
of the Company's value-added engineering and design services and production
flexibility, provide its heat transfer coils business with a competitive
advantage over these larger competitors.
8
Dura-Bond, the Company's replacement camshaft bearings unit, faces
competition principally from manufacturers of laser-stitched bearings (bearings
which are welded into a round configuration), which the Company believes are
less durable than the Company's bearings. The Company's principal competitor in
this area is Federal-Mogul Corporation. The Company also faces competition in
the all-round replacement camshaft bearings market from one foreign competitor
with a lower production capacity than the Company and limited U.S. sales. The
Company competes favorably against that competitor based on the Company's
reputation for product quality.
Specialized Equipment
In the Specialized Equipment segment, the Company competes against
several companies with respect to each of its product lines. In certain of the
product lines, such as the flatbed bale handlers and the grain handling
equipment, the Company's brand name recognition and reputation for high quality
and durability outweigh the need to be the low cost provider. In the slope mower
market, the Company competes based primarily on the unique patented design and
features of its mower products. Sooner's all-aluminum trailers compete
primarily based on product quality, durability, weight and brand name
recognition. Great Bend competes primarily based on rapid order delivery,
product quality, its ability to fit loaders to a wide variety of tractors, as
well as price. For other product lines, competition is based on product
features, quality, durability and reputation, as well as price.
Backlog
The Company's backlog of unfilled orders as of December 21, 1997 and
December 22, 1996 was as follows:
December 21, December 22,
1997 1996
------------ ------------
(In thousands)
Engineered Component Products $29,195 $28,300
Specialized Equipment 12,735 10,724
------ ------
Total $41,930 $39,024
======= =======
The Company expects to fill substantially all of the December 21, 1997 backlog
by the end of fiscal 1998.
9
Patents and Trademarks
The Company owns a number of United States patents and foreign patents
relating to its Specialized Equipment businesses. The Company's material U.S.
patents expire at various dates between 2000 and 2009. The Company's products
are marketed under various trade names, including DewEze, Parker, Sooner,
Dura-Bond, Cramer and Great Bend. While the Company believes that its patents
provide certain competitive advantages in its Specialized Equipment businesses,
the Company does not consider any one patent or trademark or any group thereof
essential to its business as a whole, or to any of its business segments. The
Company relies, to a certain extent, on specialized product knowledge and
manufacturing processes in its operations, such as the babbitting procedure used
in manufacturing replacement camshaft bearings. The Company is not aware of any
pending claims of infringement or other challenges to the Company's rights to
use its marks in the United States as currently used by the Company.
Employees
The Company has approximately 1,500 employees, of which approximately
160 employees at its Owosso, Michigan facility are represented by a labor union,
the International Union, United Automobile, Aerospace and Agricultural Implement
Workers of America, Local 743, under a four-year collective bargaining agreement
which expires in 2001. The Company believes that its relationship with its
employees is good.
The Company's executive officers provide strategic direction and
emphasize and monitor continuous operating improvement, allowing operating
management to concentrate on producing and delivering competitive products and
to respond quickly to market conditions. The day-to-day management of each
business is supervised by a subsidiary president and, in appropriate
circumstances, the Company's executive officers also provide hands-on operating
management and advice.
John Annin joined the Company as president of the Parker Industries
division of DewEze in April 1996. Prior to joining Parker, Mr. Annin had served
as president of Herschel Corp., a manufacturer of replacement parts for
agricultural equipment from 1991 until 1995. Prior to 1991, Mr. Annin held
various managerial positions at Farmhand, Inc., a manufacturer of agricultural
equipment, rising to executive vice president and chief operating officer.
Gerry Averett has been president of Snowmax since October 1995. Prior
to that, Mr. Averett was the General Manager of Snowmax since June 1993. From
January 1992 until he joined the Company, Mr. Averett was the President and
owner of a metal fabrication business. From January 1990 to January 1992, he
served as General Manager of a division of Aspen Coils, which manufactured
evaporator coils. Prior to that, Mr. Averett held various sales management and
production management positions within the heating, ventilation and air
conditioning industry.
10
Charles Barnett has been the president of Dura-Bond, which manufactures
replacement camshaft bearings and valve seats and shims, since January 1995.
Prior to 1995, Mr. Barnett served as General Sales and Marketing Manager for Red
Dot Corporation, a manufacturer of custom heating and air conditioning units for
the transportation industry, since 1992. Prior to that, he was the General Sales
Manager at Paccar Parts from 1989 to 1992. Mr. Barnett began his career with the
AC-Delco Parts Division of General Motors in 1971, where he rose to Regional
Sales Manager before moving to Paccar.
James Callaway, president of Sooner Trailer, which manufactures the
Company's aluminum trailers, joined Sooner as executive vice president in
January 1997, succeeding the former president in February 1997. Prior to 1997,
Mr. Callaway served as president of Quincy Design and Manufacturing Company of
Quincy, Illinois until that company's recent acquisition. Before joining Quincy
in 1992, Mr. Callaway was director of sales and interim president of Hesston
Corporation of Hesston, Kansas for which he had worked in various management
positions since 1972.
Stephen Hughbanks has served as president of Great Bend Manufacturing,
which manufactures the Company's front-end loaders, since October 1996. Before
joining Great Bend, Mr. Hughbanks was plant manager of the automotive division
of Avery Dennison Corporation, a QS/ISO 9000 automotive supplier where he had
worked since 1989. Prior to his work at Avery Dennison, Mr. Hughbanks was plant
manager for Coleman Company's heating and air conditioning division.
Randall James has been the president of Stature, which produces
fractional and integral horsepower motors, since its acquisition by the Company
in October 1995. Prior to the acquisition, Mr. James was Vice President and
Director of Product Engineering of Stature, and served as an officer and was a
principal stockholder of Stature since he co-founded Stature in 1974. In
connection with the Company's acquisition of Stature, Mr. James entered into an
employment agreement with Stature which expires in October 1998.
Timothy Penner has been the president of DewEze, which manufactures the
Company's bale processing and handling equipment, grain handling equipment and
turf maintenance equipment, since April 1996. Before returning to DewEze, where
he had held various managerial positions from 1991, Mr. Penner was President of
Parker Industries from January 1994. From 1981 to 1991 Mr. Penner held various
management positions at MCC International, an international development company.
James Pogmore has been the president of Cramer, which produces the
Company's subfractional horsepower motors and timers, since 1989. From 1982 to
1989, he served as the President of Measurement Systems, Inc., a manufacturer of
components for consumer and military products, becoming Chief Executive Officer
in 1985.
William Rohm has been the president of Motor Products, which produces
fractional horsepower motors for the Company, since November 1986. Before
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joining Motor Products, he served as the Vice President of Marketing and Sales
at Barber Coleman's Small Motor Company Division, a competing motor
manufacturer, from 1984 to 1986. He served as President of RAE Corporation, a
competing motor manufacturer, from 1976 to 1984. Prior to 1976, he served in
various sales and sales management positions with Reliance Electric, which
manufactures motors, drives and controls.
Environmental and Safety Regulation
The Company is subject to federal, state and local environmental
regulation with respect to its operations. The Company believes that it is
operating in substantial compliance with applicable environmental regulations.
Manufacturing and other operations at the Company's various facilities may
result and may have resulted in the discharge and release of hazardous
substances and wastes from time to time. The Company routinely responds to such
incidents as deemed appropriate pursuant to applicable federal, state and local
environmental regulations.
The Company's manufacturing operations involve the storage, use,
handling and disposal of various hazardous substances and wastes. Under various
federal, state and local environmental laws, ordinances and regulations, a
current or previous owner of real property may be liable for the costs of
removal or remediation of certain hazardous or toxic substances on, in, under or
discharged from such property. The operation and subsequent removal of
underground storage tanks, which are or were located on several of the Company's
properties, are also regulated by federal, state and local environmental laws,
ordinances and regulations. The Company is also subject to the federal
Occupational Safety and Health Act and similar state statutes.
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Environmental Matters."
12
Product Liability Insurance
The Company currently maintains product liability insurance coverage of
$1.0 million per occurrence and $2.0 million in aggregate annual coverage, and
an umbrella policy for an additional $15.0 million of blanket liability
protection per occurrence. There can be no assurance that such insurance will be
sufficient to cover potential product liability claims or that the Company will
be able to maintain such insurance or obtain product liability insurance in the
future at a reasonable cost.
Executive Officers of the Company
The executive officers of the Company are:
Name Age Position
---- --- --------
George B. Lemmon, Jr................... 36 President, Chief Executive Officer, and Director
Harry Holiday, III .................... 41 Executive Vice President and Chief Operating Officer
John H. Wert, Jr. ..................... 37 Senior Vice President - Finance, Chief Financial
Officer, Treasurer and Secretary
Brian D. Tidwell ...................... 36 Vice President of Operations
George B. Lemmon, Jr. became President of the Company in May 1996, and
has served as Chief Executive Officer of the Company since August 1995 and as a
director of the Company since March 1994. Mr. Lemmon was also the Company's
Secretary and Treasurer from March 1994 until June 1996. From January 1995 to
August 1995, Mr. Lemmon served as Executive Vice President - Corporate
Development. From March 1994 until January 1995, Mr. Lemmon was the Company's
Executive Vice President and Chief Financial Officer. Mr. Lemmon served as Chief
Financial Officer of Brynavon Group from 1990 to October 1994. He had held
various managerial and sales positions with Brynavon Group since 1983.
Harry Holiday, III joined the Company as its Executive Vice President
and Chief Operating Officer in November 1996. Prior to joining the Company, Mr.
Holiday served as vice president of operations at two subsidiaries of Emerson
Electric Co. where he had worked since 1992. His most recent position was at
Emerson's E.L. Wiegand subsidiary, a manufacturer of electric heating elements,
capital equipment and controls with annual revenues of approximately $120
million. Prior to his positions at Emerson, Mr. Holiday served in various
managerial and engineering capacities at General Electric where he had worked
since 1982.
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John H. Wert, Jr. has served as Senior Vice President - Finance of the
Company since March 1994, and became the Company's Chief Financial Officer in
January 1995 and Secretary and Treasurer in June 1996. Mr. Wert joined the
Company from NBD Bank, N.A., where he had been Vice President in the Michigan
Banking Division since 1988. From 1988 to 1992, Mr. Wert was NBD Bank's
relationship manager for Brynavon Group and its affiliates, including the
Company's business units. From 1982 to 1988, Mr. Wert was a banker at J.P.
Morgan & Company, becoming a Vice President in 1988.
Brian D. Tidwell has served as the Company's Vice President of
Operations since June 1996. Mr. Tidwell has worked for the Company since 1987 in
various managerial and technical capacities, including director of operations
analysis and director of management information systems. In addition to his
responsibilities on the corporate level, Mr. Tidwell has also been actively
involved in the management of certain of the Company's operating businesses from
time to time.
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Item 2. Properties
The Company maintains manufacturing facilities with approximately
625,000 square feet in nine states. The following table sets forth information
relating to the Company's manufacturing facilities. Unless otherwise indicated,
the Company owns these manufacturing facilities.
Total Square Manufacturing
Business Segment Location Footage Square Footage
- ---------------- -------- ------- --------------
Engineered Component
Products Owosso, Michigan 86,900 67,400
Watertown, New York (1) 82,000 77,800
Old Saybrook, Connecticut (2) 79,400(3) 32,100
Barberton, Ohio (4) 29,700 27,400
Carson City, Nevada (5) 75,100 59,600
Kilgore, Texas (6) 90,000 86,600
Specialized Equipment Harper, Kansas (7) 51,700 44,500
Jefferson, Iowa 58,450 48,750
Duncan, Oklahoma (8) 122,000 112,300
Great Bend, Kansas (9) 76,300 68,300
- -----------
(1) This facility is subject to a mortgage securing a $1.8 million industrial
revenue bond financing.
(2) The lease for this facility expires in 1999 and provides for annual rental
payments of approximately $487,000.
(3) Not including 38,200 square feet subleased to unaffiliated third parties.
(4) The lease for this facility expires in 2000 and provides for annual rental
payments of approximately $83,000.
(5) This facility is subject to a mortgage securing a $5.0 million industrial
revenue bond financing.
(6) This facility is subject to a $536,000 mortgage.
(7) The lease for this facility expires in 2003 upon the payment in full of an
industrial revenue bond financing, with a remaining principal balance of
$990,000, at which time the fee interest in the facility will be
transferred to the Company.
(8) This facility is subject to a $826,000 mortgage.
(9) This facility is subject to a mortgage which secures a $935,000 industrial
revenue bond financing.
The Company leases its principal offices, located in King of Prussia,
Pennsylvania, which consist of approximately 12,700 square feet of office space.
The lease, which expires in September 2006, requires annual rental payments of
approximately $190,000 plus taxes and certain other charges, with future rental
increases
15
at specific rates set forth in the lease, increasing to $305,000 by October 1999
through 2006. The Company believes that its machinery, plants and offices are in
satisfactory operating condition and are adequate for the Company's current
needs.
Item 3. Legal Proceedings
Other that as discussed under "Environmental and Safety Regulations" in
Item 1, the Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is listed on the Nasdaq National Market
under the symbol "OWOS." The following table sets forth, for the fiscal quarters
indicated, the high and low sales prices per share for the Company's common
stock, as reported on the Nasdaq National Market:
Fiscal year ended October 26, 1997 High Low
-----------------------------------------------------------------------
First Quarter $ 8 1/8 $ 5 3/4
Second Quarter $ 8 1/4 $ 7
Third Quarter $ 8 1/8 $ 6 7/8
Fourth Quarter $ 8 $ 7 3/8
Fiscal year ended October 27, 1996 High Low
-----------------------------------------------------------------------
First Quarter $ 11 1/4 $ 8 3/8
Second Quarter $ 10 1/8 $ 7 1/2
Third Quarter $ 9 1/2 $ 7 1/4
Fourth Quarter $ 7 5/8 $ 5 5/8
As of January 16, 1998, there were approximately 100 holders of record
of the Company's common stock and an estimated number of beneficial owners of
the common stock of approximately 1,100.
The Company has paid regular quarterly dividends of $.08 per share on
the Common Stock since January 1995, and the dividend was increased to $.09 per
share effective January 1996. It is the present policy of the Board of Directors
to continue to pay quarterly dividends at the rate of $.09 per share. However,
there can be no assurances that future dividends will be paid. The payment and
rate of future dividends are subject to the discretion of the Board of Directors
and will depend upon the Company's earnings, financial condition, capital
requirements, and other factors.
17
Item 6. Selected Financial Data
The consolidated statement of operations data set forth below are
derived from the audited consolidated financial statements of the Company. The
information set forth below should be read in conjunction with the Consolidated
Financial Statements and notes thereto and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Oct. 26, Oct. 27, Oct. 29, Oct. 30, Oct. 31,
Year Ended: 1997 1996 1995(1) 1994 (2) 1993+
- ----------- -------- ------- -------- -------- ---------
(in thousands, except per share date)
STATEMENT OF OPERATIONS DATA:
Net sales $143,061 $128,216 $108,001 $73,799 $64,659
Cost of products sold 109,155 98,282 77,629 52,750 45,838
-------- ------- ------- ------ ------
Gross profit 33,906 29,934 30,372 21,049 18,821
Selling, general and administrative expenses 20,495 19,488 13,920 9,487 8,518
Corporate expenses 4,816 4,444 3,683 2,417 2,304
-------- ------- ------- ----- ------
Income from operations 8,595 6,002 12,769 9,145 7,999
Interest expense 4,143 4,081 2,876 1,855 2,424
Interest and other income 199 202 390 698 480
-------- ------- ------- --- ------
Income before income taxes and cumulative
effect of accounting change 4,651 2,123 10,283 7,988 6,055
Income tax provision (benefit) 2,100 1,275 3,900 (801) --
Cumulative effect of accounting change -- -- -- -- (1,017)
-------- -------- ------- -------- ------
Net income $2,551 $848 $6,383 $8,789 $5,038
-------- -------- ------- -------- ------
Dividends and accretion on preferred stock (1,047) (1,025) --
-------- -------- -------
Net income (loss) available to
common stockholders $1,504 ($177) $6,383
====== ========= =======
Net income (loss) per common share $0.26 ($0.03) $1.09
====== ========= =======
Weighted average number of common shares
outstanding 5,809 5,839 5,865
====== ========= =======
18
PRO FORMA DATA:
Income before pro forma tax provision and
cumulative effect of accounting change $7,988 $6,055
Pro forma tax provision (3) 2,836 2,090
----- -----
Pro forma income before cumulative effect of
accounting change 5,152 3,965
Cumulative effect of accounting change net of
pro forma tax benefit of $346 (617)
----- -----
Pro forma net income $5,152 $3,294
====== ======
Pro forma net income before cumulative effect
of accounting change per common share $1.06 $0.82
Cumulative effect of accounting change per
common share $(0.14)
------
Pro forma net income per common share $1.06 $0.68
===== =====
Pro forma common shares outstanding (4) 4,847 4,833
OTHER DATA:
Capital expenditures $5,335 $4,346 $4,437 $2,000 $1,290
Depreciation and amortization 6,200 6,298 4,213 2,786 2,968
EBITDA (5) 14,795 12,300 16,982 11,931 10,967
Oct. 26, Oct. 27, Oct. 29, Oct. 30, Oct. 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands)
BALANCE SHEET DATA:
Working capital $24,611 $20,385 $20,564 $18,489 $14,405
Total assets 111,681 107,895 108,719 66,118 45,543
Total short-term and long-term obligations 54,848 53,814 52,799 33,106 23,360
Stockholders' equity 36,730 37,020 39,570 21,671 13,752
+ 53-week fiscal year.
(1) Includes the results of operations of Great Bend from May 1, 1995, the date
of its acquisition. Excludes the results of operations of Stature, which
was acquired as of October 29, 1995.
(2) Excludes the results of operations of Sooner, which was acquired as of
October 30, 1994.
(3) Reflects federal income taxes as if the Company had not been an S
Corporation during these periods.
(4) Includes an additional 833,000 shares assumed to be outstanding necessary
to reflect a non-cash S corporation distribution of $10.0 million to its
shareholders (on account of previously taxed income).
(5) EBITDA represents income before income taxes, interest expense, interest
and other income and depreciation and amortization expenses. EBITDA has
been presented because the Company believes it is commonly used in this or
a similar format by investors to analyze and compare operating performance
and to determine a company's ability to service and/or incur debt. However,
EBITDA should not be considered in isolation or as a substitute for net
income, cash flow from operations or any other measure of income or cash
flow that is prepared in accordance with generally accepted accounting
principles, or as a measure of a company's profitability or liquidity.
EBITDA, as presented, may not be comparable to other similarly titled
measures of other companies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated
Financial Statements, including the Consolidated Statements of Cash Flows,
and the related notes thereto included elsewhere herein.
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a diversified manufacturer of products in narrowly defined niche
markets and currently operates in two business segments, Engineered Component
Products and Specialized Equipment. The Company's subsidiaries included in the
Engineered Component Products segment are Motor Products - Owosso Corporation,
Motor Products - Ohio Corporation, Stature Electric, Inc., Owosso Motor Group,
Inc, and Cramer Company (collectively, the "Motor Companies"), Snowmax,
Incorporated, ("Snowmax") and The Landover Company ("Dura-Bond"). The Motor
Companies manufacture electric motors and timers, primarily for use in
non-automotive transportation, healthcare and other industrial applications.
Snowmax is a manufacturer of heat transfer coils for use in commercial
refrigeration, non-automotive transportation and light commercial and
residential heating and air conditioning. Dura-Bond manufactures replacement
camshaft bearings, valve seats and shims for the automotive after-market. The
products in this segment are sold primarily to original equipment manufacturers
or service providers who use them in their end product or service. The Company's
subsidiaries included in the Specialized Equipment segment are DewEze
Manufacturing, Inc., including Parker Industries, ("DewEze") and Great Bend
Manufacturing, Inc. ("Great Bend"), (collectively the "Agricultural Equipment
Companies"), and Sooner Trailer Manufacturing Co. ("Sooner"). DewEze
manufactures hay bale handling and processing equipment, all-terrain commercial
mowers and grain handling equipment. Great Bend manufactures front-end loaders.
Sooner manufactures all-aluminum trailers, primarily horse and livestock
trailers. The products included in the Specialized Equipment segment are sold
through independent dealers to their end users, typically horse owners,
ranchers, farmers and municipalities.
The Company's net sales for the fiscal year ended October 26, 1997 were $143.1
million, of which net sales of products manufactured by subsidiaries in the
Engineered Component Products segment accounted for 55.2% of total net sales.
Net sales from the Specialized Equipment segment accounted for 44.8% of net
sales. Among other measures, the Company evaluates the operating performance of
its business segments and its individual subsidiaries based on business unit
income, which is defined as income from operations before allocation of
corporate expenses. In 1997, the Company's consolidated business unit income was
$13.4 million, of which $8.9 million, or 66.4% of total business unit income,
was from the Engineered Component Products segment and $4.5 million, or 33.6% of
the total, was from the Specialized Equipment segment.
20
Selected financial results for the Company by business unit and by segment are
set forth below:
Segment and Business Unit Operating Results
(In thousands)
October 26, October 27, October 29,
Fiscal Year Ended 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Net sales:
Engineered Component Products:
Fractional and integral HP motors(1) $ 46,865 $ 39,066 $ 20,786
Subfractional HP motors and timers 7,528 8,631 8,916
Heat transfer coils 15,515 14,904 16,806
Replacement camshaft bearings
and valve seats/shims (2) 9,042 9,386 10,867
------- ------- -------
Total Engineered Component Products $ 78,950 $ 71,987 $ 57,375
======= ======= =======
Specialized Equipment:
Aluminum trailers $ 30,308 $ 28,739 $ 30,327
Grain handling equipment 12,697 10,749 7,897
Front-end loaders (3) 13,689 10,065 5,336
Bale handling/processing
equipment and mowers 7,417 6,676 7,066
-------- ------- -------
Total Specialized Equipment $ 64,111 $ 56,229 $ 50,626
======== ======= =======
Total net sales $ 143,061 $ 128,216 $108,001
======== ======= =======
Business unit income (4):
Engineered Component Products:
Fractional and integral HP motors(1) $ 6,168 $ 4,857 $ 4,428
Subfractional HP motors and timers (197) (191) 445
Heat transfer coils 1,558 (448) 1,356
Replacement camshaft bearings
and valve seats/shims (2) 1,377 2,594 3,458
------- ------- ------
Total Engineered Component Products $ 8,906 $ 6,812 $ 9,687
======= ======= ======
Specialized Equipment:
Aluminum trailers $ 1,243 $ 1,789 $ 5,359
Grain handling equipment 1,044 1,265 800
Front-end loaders (3) 1,466 428 118
Bale handling/processing
equipment and mowers 752 152 508
------- ------- -------
Total Specialized Equipment $ 4,505 $ 3,634 $ 6,785
======= ======= =======
Total business unit income $ 13,411 $ 10,446 $ 16,472
======= ======= =======
(1) Includes results of Stature Electric from October 30, 1995, its date of
acquisition, and Owosso Motor Group, Inc. from October 1, 1996, its date of
acquisition.
(2) Includes results of Snyder Industries, Inc., a manufacturer of valve seats
and shims, from August 15, 1996, its date of acquisition.
(3) Includes results of Great Bend from May 1, 1995, its date of acquisition.
(4) Business unit income is calculated before corporate expenses.
21
Results of Operations
The following table sets forth for the periods indicated the percentage
relationship that certain items in the Company's Consolidated Statements of
Operations as set forth on page F-2 and the Segment and Business Unit Operating
Results, set forth above, bear to net sales.
October 26, October 27, October 29,
Fiscal Year Ended 1997 1996 1995
----------- ----------- -----------
Net sales:
Engineered Component Products 55.2% 56.1% 53.1%
Specialized Equipment 44.8% 43.9% 46.9%
Total net sales 100.0% 100.0% 100.0%
Gross profit:
Engineered Component Products 24.7% 24.0% 28.9%
Specialized Equipment 22.4% 22.5% 27.2%
Total gross profit 23.7% 23.3% 28.1%
Business unit income(1):
Engineered Component Products 11.3% 9.5% 16.9%
Specialized Equipment 7.0% 6.5% 13.4%
Total business unit income 9.4% 8.1% 15.2%
Corporate expenses 3.4% 3.5% 3.4%
Income from operations 6.0% 4.7% 11.8%
Interest expense, net 2.9% 3.2% 2.7%
Income before income taxes 3.3% 1.7% 9.5%
Net income available to
common stockholders(2): 1.1% -0.1% 5.9%
(1) Business unit income is calculated before corporate expenses.
(2) As calculated after deduction of $750,000 in preferred stock dividends for
both 1997 and 1996 and after the deduction of the accretion of the book
value of preferred stock of $297,000 and $275,000 for 1997 and 1996,
respectively.
Year ended October 26, 1997 compared to year ended October 27, 1996
Net sales. For the year ended October 26, 1997, net sales were $143.1 million,
an increase of 11.6% over 1996 net sales of $128.2 million.
In the Company's Engineered Component Products segment, net sales increased 9.7%
to $79.0 million in 1997 from $72.0 million in 1996, primarily due to a $6.7
million, or 14.0%, increase in sales at the Motor Companies as a result of
increased volume with both new and existing customers. Sales at Snowmax
increased 4.1% over the prior year, despite the discontinuation of the "A" coil
line in 1996. Sales at Dura-Bond declined 3.7% from 1996, primarily as a result
of a general decline in the automotive after-market business.
Net sales in the Specialized Equipment segment were $64.1 million, a 14.0%
increase over 1996 net sales of $56.2 million. An improved economic environment
for the
22
Agricultural Equipment Companies resulted in an increase of 23.0%, or $6.3
million, in net sales at those businesses, while sales of aluminum trailers at
Sooner increased 5.5%, or $1.6 million over the prior year.
Gross profit. For 1997, gross profit increased 13.3% to $33.9 million, or 23.7%
of net sales, from $29.9 million, or 23.3% of net sales, in 1996.
Gross profit in the Engineered Component Products segment was $19.5 million, or
24.7% of net sales, as compared to $17.3 million, or 24.0% of net sales, in the
prior year. The increase in gross profit in this segment was primarily a result
of increased sales at the Motor Companies and improved operating results at
Snowmax, partially offset by lower margins at Dura-Bond. Gross profit for 1996
was adversely affected by an inventory reduction program at Snowmax that
resulted in a decrease in gross profit of $733,000 and which did not have an
effect on gross profit in 1997.
In the Specialized Equipment segment, gross profit increased 13.6% to $14.4
million, or 22.4% of net sales, from $12.6 million, or 22.5% of net sales, in
1996. The increase in gross profit in this segment was primarily a result of
increased sales at the Agricultural Equipment Companies, partially offset by a
2.2% decrease in gross profit at Sooner as a result of higher labor costs and
production inefficiencies, primarily during the first half of the year.
Selling, general and administrative expenses. As a percentage of net sales,
selling, general and administrative expenses decreased to 14.3%, or $20.5
million, from 15.2% of net sales, or $19.5, million in 1996. In the Engineered
Component Products segment, selling, general and administrative expenses
decreased to 13.4% of net sales, or $10.6 million, from 14.6% of net sales, or
$10.5 million in 1996. In the Specialized Equipment segment, selling, general
and administrative expenses decreased to 15.4% of net sales, or $9.9 million in
1997 from 16.0%, or $9.0 million in 1996. The increase in selling, general and
administrative expenses in the Specialized Equipment segment was primarily a
result of increased advertising and promotional costs and sales salaries at
Sooner, along with increased sales and administrative salaries, commissions and
legal and professional fees at the Agricultural Equipment Companies.
Corporate expenses. Corporate expenses in 1997 were $4.8 million, or 3.4% of net
sales, as compared to $4.4 million, or 3.5% of net sales, in the prior year.
Corporate expenses increased primarily as a result of increased personnel costs
and information services expenses, including higher depreciation and
amortization related to a computer upgrade.
Income from operations. Income from operations increased 43.2% to $8.6 million,
or 6.0% of net sales in 1997 from $6.0 million, or 4.7% of net sales in 1996.
Among other measures, the Company evaluates the operating performance of its
business segments and its individual subsidiaries based on business unit income,
which is defined as income from operations before allocation of corporate
expenses. The Company believes this measurement most closely reflects the
subsidiaries' individual contributions. On this basis, business unit income for
the Engineered Component Products segment increased 30.7% to $8.9 million, or
11.3% of net sales, from $6.8 million, or 9.5% of net
23
sales, in 1996. Increased business unit income at the Motor Companies as a
result of strong sales, along with improved operating results at Snowmax, were
partially offset by decreased business unit income at Dura-Bond, caused by weak
demand in the automotive after-market.
Business unit income in the Specialized Equipment segment increased 24.0% to
$4.5 million, or 7.0% of sales, as compared to $3.6 million, or 6.5% of net
sales, in 1996. The Agricultural Equipment Companies had a substantial increase
in business unit income as compared to the prior year as a result of the
improved agricultural market. This increase was mitigated by lower business unit
income at Sooner caused by higher labor costs and production inefficiencies,
primarily in the first half of the year.
Interest expense. Interest expense was $4.1 million for both 1997 and 1996.
Income tax provision. The Company's effective income tax rate was 45.2% for
1997, as compared to 60.1% in the prior year. The effective tax rate for 1996
was impacted by a higher proportion of non-deductible expenses, primarily
non-cash amortization expenses related to acquisitions, as compared to pretax
income.
Net income (loss) available for common stockholders. Net income available for
common stockholders was $1.5 million, or $.26 per share in 1997, as compared to
a net loss available for common stockholders of $177,000, or $.03 per share in
the prior year. Income (loss) available for common stockholders is calculated by
subtracting dividends on preferred stock of $750,000 for both 1997 and 1996 and
by deducting the non-cash accretion in book value of preferred stock of $297,000
and $275,000 for 1997 and 1996, respectively.
Year ended October 27, 1996 compared to year ended October 29, 1995
Net sales. For the year ended October 27, 1996, net sales were $128.2 million,
an increase of 18.7% over 1995 net sales of $108.0 million. This increase was a
result of the acquisition of Stature Electric, Inc. in October 1995 and the
inclusion of a full year's results of Great Bend Manufacturing, acquired in May
1995, partially offset by a 3% decline in net sales at the Company's other
subsidiaries.
In the Company's Engineered Component Products segment, net sales increased
25.5% to $72.0 million in 1996 from $57.4 million in 1995. The effect of adding
Stature's net sales was partially offset by a decline of 8% at the other
subsidiaries in the segment. Most significantly, net sales at Dura-Bond declined
13.6% due to a significant reduction in sales to that subsidiary's largest
customer, Federal-Mogul Corporation, which served as Dura-Bond's largest
distribution network. Federal-Mogul began to manufacture its own replacement
camshaft bearings in the first quarter of fiscal 1996. In 1996, Dura-Bond
increased export sales and increased sales directly to end-users (rather than
through Federal-Mogul) but did not fully offset the loss of Federal-Mogul. Sales
of heat transfer coils at Snowmax declined 11.3% in 1996, primarily as a result
of a reduction in sales of "A" coils to the air conditioning market. The Company
sold the rights to this product line to an employee who began manufacturing the
coils in 1997. The employee leases
24
space and equipment in one of Snowmax's buildings and pays a royalty fee on
sales of these coils. Sales of "A" coils were $1.8 million 1996.
Net sales in the Specialized Equipment segment were $56.2 million, an 11.1%
increase over 1995 net sales of $50.6 million. This increase was a result of the
inclusion of a full year's results of Great Bend Manufacturing and a 36.1%
increase in sales of grain handling equipment at Parker Industries, partially
offset by a decline of 5.2% in net sales of Sooner's aluminum trailers and lower
net sales at DewEze, which was affected by low cattle prices. The increase in
sales of grain handling equipment was due to favorable pricing and production
conditions for farmers in the central United States, an improved product line,
and comparison to fiscal 1995 in which Parker was out of production during its
traditionally slow first quarter as the plant was expanded.
Gross profit. In 1996, gross profit was $29.9 million, or 23.3% of net sales, as
compared to $30.4 million, or 28.1% of net sales in 1995, a decrease of 1.4%.
Gross profit in the Engineered Component Products segment was $17.3 million, or
24.0% of net sales in 1996, as compared to $16.6 million, or 28.9% of net sales
in the prior year. The increase in gross profit in this segment was a result of
the acquisition of Stature Electric, partially offset by reduced gross profit at
the other subsidiaries in this segment. This reduction was due to lower margins
in the other motor companies, as a larger percentage of sales were for lower
margin wound field motors. Lower sales at Dura-Bond and Snowmax resulted in
decreased gross profit at those subsidiaries. In addition, margins were reduced
as a result of lower sales covering fixed overhead expenses and the results of
an inventory reduction program at Snowmax. The inventory reduction program
resulted in an increase in cost of goods sold of $733,000.
Gross profit in the Specialized Equipment segment decreased 8.3% to $12.6
million, or 22.5% of net sales in 1996, from $13.8 million, or 27.2% of net
sales, in the prior year. This decrease was primarily attributable to a reduced
gross margin at Sooner resulting from decreased sales as a result of reduced
demand in the second half of fiscal 1996 and production inefficiencies that led
to slower shipments. These production problems, caused in part by the disruptive
effects of an ultimately unsuccessful union organization campaign and high
employee turnover, combined with the decline in sales, reduced gross profit at
Sooner by $3.1 million as compared to 1995. The decrease attributable to Sooner
was partially offset by the inclusion of Great Bend for a full year.
At the end of fiscal 1996, the Company recognized a reduction in inventory value
of $1.1 million in connection with its year-end physical inventory count and
valuation process. See Note 16 to the Consolidated Financial Statements.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $19.5 million, or 15.2% of net sales in 1996 as
compared to $13.9 million, or 12.9% of net sales in 1995. In the Engineered
Component Products segment, selling, general and administrative expenses
increased to $10.5 million in 1996 as compared to $6.9 million in the prior
year, primarily due to the acquisition of Stature Electric in October 1995,
including non-cash amortization expenses relating to its purchase, and an
increase to the reserve for bad debt expense at Snowmax. In the Specialized
25
Equipment segment, selling, general and administrative expenses increased to
$9.0 million in 1996 from $7.0 million in 1995, primarily due to the inclusion
of the results of Great Bend Manufacturing for a full year, including non-cash
amortization expenses relating to its purchase. Selling, general and
administrative expenses also increased at the Company's other Agricultural
Equipment Companies due to the significant increase in sales and at Sooner for
personnel related expenses in anticipation of higher sales.
Corporate expenses. Corporate expenses in 1996 were $4.4 million, or 3.5% of net
sales, as compared to $3.7 million, or 3.4% of net sales, in 1995. Corporate
expenses increased primarily due to increases in personnel costs, including
severance costs and recruitment expense related to the replacement of the
Company's former president and chief operating officer, increased computer
programming and other information services expenses and increased legal and
professional expenses. Despite the increase, these expenses remained consistent
with the increase in the Company's net sales.
Income from operations. Income from operations decreased 53.0% to $6.0 million
in 1996 from $12.8 million in 1995, due to the lower gross profit and increased
selling, general and administrative expenses and corporate expenses as discussed
above. Business unit income, defined as income from operations before allocation
of corporate expenses, for the Engineered Component Products segment decreased
to $6.8 million, or 9.5% of net sales, in 1996 from $9.7 million, or 16.9% of
sales in 1995. Business unit income in the Specialized Equipment segment was
$3.6 million, or 6.5% of sales, as compared to $6.8 million, or 13.4% of sales
in the prior year.
Interest expense. Interest expense increased to $4.1 million in 1996 from $2.9
million in 1995. This increase resulted from increased average borrowing levels
in 1996 due primarily to debt carried in connection with the acquisition of
Stature and a full year of interest on debt related to the acquisition of Great
Bend.
Income tax provision. The Company's effective income tax rate was 60.1% for
1996, as compared to 37.9% in the prior year. The substantial increase in the
Company's effective tax rate resulted from the higher proportion of
non-deductible expenses, primarily non-cash amortization expenses related to
acquisitions, as compared to pretax income.
Net loss available for common stockholders. In 1996, the Company reported a loss
of $177,000 available for common stockholders. The loss was calculated by
subtracting dividends on preferred stock of $750,000 and non-cash accretion in
book value of preferred stock of $275,000 from net income. This resulted in a
net loss per common share of $0.03 in 1996. As no preferred stock was
outstanding until the end of 1995, no such subtraction was necessary in that
year.
Liquidity and Capital Resources
Cash and cash equivalents were $840,000 at both October 26, 1997 and October 27,
1996, exclusive of $298,000 of cash that was restricted under industrial revenue
financings at October 26, 1997. Working capital increased to $24.6 million at
October 26, 1997 from $20.4 million at October 27, 1996, primarily as a result
of increased levels
26
of inventory and accounts receivable and a $2.5 million reduction in the current
portion of related party and long-term debt. Excluding the effect of the
reduction in current debt, net working capital increased 5.9%, as compared to an
11.6% increase in net sales. Net cash provided by operating activities was $6.7
million in 1997, as compared to $8.8 million in the prior year. Improved
operating results were offset by increased levels of accounts receivable and
inventories, as a result of increased sales and anticipation of increased sales
in the future.
Net cash used in investing activities in 1997 included $5.3 million for capital
expenditures for equipment. Of this amount, approximately $3.6 million was
invested in the Engineered Component Products segment and $1.6 million in the
Specialized Equipment segment, with the remainder at the corporate office.
Capital expenditures are projected to be approximately $6 million in 1998,
primarily for added capacity and production efficiencies in the Engineered
Component Products segment. Management anticipates funding the capital
expenditures with cash from operations and proceeds from the Company's revolving
credit facility.
Net cash used in financing activities included net borrowings under the
Company's $55.0 million revolving credit agreement of $4.7 million, debt
repayments of $4.0 million and the payment of dividends of $2.8 million.
The Company maintains a $55.0 million revolving credit agreement with two banks
with a termination date of March 31, 2000. At October 26, 1997, $34.7 million
was outstanding and $20.3 million was available for additional borrowing under
this agreement. Interest is payable, at the Company's option, at either the
agent bank's prime rate or at a spread over the London Interbank Offered Rate
that varies with the Company's ratio of total debt to EBITDA. The LIBOR spread
was 2.0% at October 26, 1997. The agreement contains customary financial and
other covenants, including fixed charge, cash flow and net worth ratios,
restrictions on certain asset sales, mergers and other significant transactions
and a negative pledge on assets. The covenants were amended in the second
quarter of fiscal 1997 to reduce the required levels of net worth and to
increase the maximum allowable ratio of total debt to cash flow. In addition,
the definition of the fixed charge coverage ratio was changed and the leverage
covenant was eliminated. The Company anticipates that it will remain in
compliance with these covenants for the foreseeable future.
The Company has interest rate swap agreements with its two banks with notional
amounts totaling $15.0 million. The Company entered into these agreements to
change the fixed/variable interest rate mix of its debt portfolio, in order to
reduce the Company's aggregate risk from movements in interest rates. The
agreements require the Company to make quarterly fixed payments on the notional
amount at rates of 7.0675% and 7.09% through July 2002 in exchange for receiving
payments at the three-month London Interbank Offered Rate.
The Company believes anticipated funds to be generated from future operations
and available credit facilities will be sufficient to meet anticipated operating
and capital needs. To make significant acquisitions, additional financing may
be required.
27
The Company is currently engaged in active discussions regarding acquisitions
and dispositions. No definitive agreements or commitments currently exist for
the potential transactions and there can be no assurance that any of the
potential transactions will be completed.
Seasonality
Sales of certain of the Company's specialized equipment tend to be seasonal,
with lowest sales during the first fiscal quarter and higher sales during the
fourth fiscal quarter, corresponding with the fall harvest season for farmers.
Sales of the Company's engineered component products experience less seasonality
but generally are lowest during the first fiscal quarter.
Cyclicality
The Company's Engineered Component Products segment is subject to changes in the
overall level of domestic economic activity. The Specialized Equipment segment
is subject to changes in certain sectors of the agricultural economy, which may
be influenced by climate changes and governmental policy. The segment's horse
trailer sales, which have not tended to be affected by changes in the
agricultural economy, have had a moderating effect on the results of the entire
Specialized Equipment segment, but are subject to the overall domestic business
cycle.
Environmental Matters
The Company is subject to federal, state and local environmental regulation with
respect to its operations. The Company believes that it is operating in
substantial compliance with applicable environmental regulations. Manufacturing
and other operations at the Company's various facilities may result, and may
have resulted, in the discharge and release of hazardous substances and waste
from time to time. The Company routinely responds to such incidents as
considered appropriate pursuant to applicable federal, state and local
environmental regulations.
One of the Company's subsidiaries is a party to a consent decree with the State
of Connecticut pursuant to which it has agreed to complete its environmental
investigation of the site on which its facility is located and conduct any
remedial measures which may be required. The Company is also in negotiations
with the former operator of the site concerning the reimbursement by the former
operator of any costs the Company has incurred or may incur in the future in
connection with this matter. The Company does not believe that the resolution of
this matter will have a material adverse effect on the financial results of the
Company.
The Company has been named as a potentially responsible party with respect to
two hazardous substance disposal sites currently under remediation by the U.S.
Environmental Protection Agency under its "Superfund" program. With respect to
both sites, based on the minimal amount of waste alleged to have been
contributed to the site by the Company, the Company expects to resolve the
matter through the payment of de minimis amounts.
28
"Year 2000" Costs
The Company's primary centralized manufacturing and accounting information
system is currently Year 2000 compliant (meaning that it can properly process
dates in the year 2000 and beyond). The Company is currently evaluating any
possible exposures related to other date-sensitive equipment. The financial
impact to the Company of bringing such equipment into year 2000 compliance is
not anticipated to be material to its financial position or results of
operations.
Recently Issued Financial Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which will require retroactive adoption in the Company's fiscal quarter
ended January 25, 1998. The new standard simplifies the computation of earnings
per share and requires the presentation of basic and diluted earnings per share.
In light of the Company's present capital structure, the impact of adopting SFAS
No. 128 will not be significant.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement, which establishes standards for reporting and disclosure of
comprehensive income, is effective for interim and annual periods beginning
after December 15, 1997, although earlier adoption is permitted.
Reclassification of financial information for earlier periods presented for
comparative purposes is required under SFAS No. 130. As this statement only
requires additional disclosures in the Company's consolidated financial
statements, its adoption will not have any impact on the Company's consolidated
financial position or results of operations. The Company expects to adopt SFAS
No. 130 in fiscal 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement, which establishes standards
for the reporting of information about operating segments and requires the
reporting of selected information about operating segments in interim financial
statements, is effective for fiscal years beginning after December 15, 1997,
although earlier application is permitted. Reclassification of segment
information for earlier periods presented for comparative purposes is required
under SFAS No. 131. The Company has not yet completed its analysis of the
effects of adopting this statement on its presentation of financial data by
business segment. The Company expects to adopt SFAS No. 131 in the first quarter
of fiscal 1999.
29
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 are "forward-looking
statements" made pursuant to these provisions.
The Company cautions readers that the following important factors, among others,
have in the past affected and could in the future affect the Company's actual
results of operations and cause the Company's actual results to differ
materially from the results expressed in any forward-looking statements made by
or on behalf of the Company:
o The Company's results have been and can be expected to continue to be
affected by the general economic conditions in the United States and
specific economic factors influencing the manufacturing and agricultural
sectors of the economy. Lower demand for the Company's products can lower
revenues as well as cause underutilization of the Company's plants, leading
to reduced gross margins.
o Commodity prices can have a material influence on the Company's results.
Grain prices and cattle prices can affect demand for certain agricultural
equipment sold by the businesses in the Company's Specialized Equipment
segment. Metal prices, particularly aluminum, copper and steel, can affect
the Company's costs as well as demand for the Company's products and the
value of inventory held at the end of a reporting period. Lack of
availability of certain commodities could also disrupt the Company's
production.
o Weather can affect the success of the grain harvest in the United States,
which can directly affect demand for the Company's grain handling equipment
business.
o The Company's Sooner Trailer subsidiary has experienced production
inefficiencies which have caused increased production costs and lower gross
margins. Continuation of such inefficiencies could continue to adversely
affect the Company's results of operations.
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 may affect results of operations.
o The Company's results can be affected by engineering difficulties in
designing new products or applications for existing products to meet the
requirements of its customers.
o Obsolescence or quality problems leading to returned goods in need of
repair can also affect the value of the Company's inventories and its
profitability.
30
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 Acquisitions are an important part of the Company's growth strategy.
Acquisitions may have a dilutive effect on the Company's earnings and could
affect the Company's available credit and interest costs. Conversely, the
Company may from time to time divest of product lines or business units.
Any such divestiture may involve costs of disposition or losses on the
disposition that could reduce the Company's results.
31
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and supplemental
schedules appear at pages F-1 through F-22, as set forth in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
32
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors, appearing under the caption "Election
of Directors" in the Company's Proxy Statement (the "Proxy Statement") to be
filed with the Securities and Exchange Commission in connection with the Annual
Meeting of Shareholders scheduled to be held on March 18, 1998, information
concerning executive officers, appearing under the caption "Item 1. Business -
Executive Officers of the Company" in Part I of this Form 10-K, and information
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement are incorporated herein by reference in response to this
Item 10.
Item 11. Executive Compensation
The information contained in the section titled "Executive
Compensation" in the Proxy Statement, with respect to executive compensation,
and the information contained in the section entitled "Director Compensation"
with respect to director compensation, are incorporated herein by reference in
response to this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the section titled "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement, with respect
to security ownership of certain beneficial owners and management, is
incorporated herein by reference in response to this Item 12.
Item 13. Certain Relationships and Related Transactions
The information contained in the section titled "Certain Relationships
and Transactions" of the Proxy Statement, with respect to certain relationships
and related transactions, is incorporated herein by reference in response to
this Item 13.
33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The financial statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this Form 10-K,
commencing on page F-1.
(a)(2) Schedules
The following consolidated financial statement schedule of the Company
is filed as part of this Form 10-K:
Schedule II - Valuation and Qualifying Accounts
(a)(3) Exhibits
The exhibits are listed in the Index to Exhibits appearing below.
(b) No reports were filed on Form 8-K during the last quarter of fiscal 1997.
(c) Exhibits
Exhibit No. Description
- ----------- -----------
* 3.1 Articles of Incorporation of the Company (Exhibit 3.1 to
the Company's Form S-1 Registration Statement, No. 33-76964
(the "1994 Registration Statement")).
* 3.2 By-Laws of the Company, as amended June 5, 1997 (Exhibit
3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 27, 1997).
* 3.3 Designations of the Class A Convertible Preferred Stock of
Owosso Corporation (Exhibit 4.1 to the Company's Current
Report on Form 8-K dated October 31, 1995 (the "October 31,
1995 Form 8-K")).
*10.1 1994 Stock Option Plan (Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the year ended October 30, 1994 (the
"1994 Form 10-K ")).+
*10.2 MIS Agreement dated October 31, 1994 by and between Owosso
Corporation and The Owosso Company (Exhibit 10.2 to the 1994
Form 10-K).
34
*10.3 Lease Agreement, by and between Gregory M. Cook and Kevin C.
Geenty, D/B/A Mill Rock Leasing, as Landlord, and Cramer
Company, as Tenant, dated November 1, 1995 (Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the year ended
October 29, 1995 (the "1995 Form 10-K ")).
*10.4 Loan Agreement between Director of the State of Nevada
Department of Commerce as Issuer and The Landover Company
D/B/A Dura-Bond Bearing Company, dated August 1, 1988
regarding the issuance of Series 1988-A Industrial Development
Revenue Bonds (Exhibit 10.5 to the 1994 Registration
Statement).
*10.5 Loan Agreement between the City of Jefferson, Iowa and Parker
Industries, Inc., dated December 1, 1985 regarding the
issuance of Series 1985 Industrial Development Revenue Bonds
(Exhibit 10.6 to the 1994 Registration Statement).
*10.6 Offering Statement regarding the City of Harper, Kansas,
Industrial Revenue Bonds issued to DewEze Manufacturing, Inc.,
dated October 1, 1993 (Exhibit 10.7 to the 1994 Registration
Statement).
*10.7 Offering Statement regarding the Gregg County Development
Corporation, Inc. Revenue Bonds, issued to Greer & Snow Coil
Manufacturers, Inc., dated May 17, 1984 (Exhibit 10-8 to the
1994 Registration Statement).
*10.8 Guaranty Agreement, dated as of October 31, 1994, by and
between Owosso Corporation and NBD Bank, N.A. (Exhibit 10.14
to the 1995 Form 10-K).
*10.9 Fourth Amendment to Reimbursement Agreement, dated as of
September 30, 1995, by and between The Landover Company and
NBD Bank, N.A. (Exhibit 10.15 to the 1995 Form 10-K).
*10.10 Third Amendment to Credit Agreement, dated as of October 31,
1995, by and among NBD Bank, N.A., PNC Bank, N.A. and NBD
Bank, N.A. as Agent, and Owosso Corporation, Ahab Investment
Company, Cramer Company, DewEze Manufacturing, Inc., The
Landover Company, Motor Products-Owosso Corporation, Snowmax
Incorporated, Sooner Trailer Manufacturing Co., Motor
Products-Ohio Corporation, Great Bend Manufacturing Company,
Inc. and Stature Electric, Inc. (Exhibit 10.16 to the 1995
Form 10-K).
*10.11 Reimbursement Agreement, dated as of December 1, 1995, by and
between Stature Electric, Inc. and NBD Bank, N.A. (Exhibit
10.22 to the 1995 Form 10-K).
35
*10.12 Irrevocable Guaranty Agreement, dated as of December 1, 1995,
by and between Owosso Corporation and NBD Bank, N.A. (Exhibit
10.32 to the 1995 Form 10-K).
*10.13 Management Services Agreement, by and between Snowmax,
Incorporated, and The Owosso Company, dated July 31, 1989
(Exhibit 10.33 to the 1994 Registration Statement).
*10.14 Subordinated promissory note of DewEze Manufacturing, Inc.,
issued to Howard Hershberger, dated December 18, 1991 (Exhibit
10.34 to the 1994 Registration Statement).
*10.15 Subordinated promissory note of DewEze Manufacturing, Inc.,
issued to Dewey Hostetler, dated December 18, 1991 (Exhibit
10.35 to the 1994 Registration Statement).
*10.16 Non-Competition Agreement by and between DewEze Manufacturing,
Inc. and Dewey Hostetler, dated December 18, 1991 (Exhibit
10.36 to the 1994 Registration Statement).
*10.17 Non-Competition Agreement by and between DewEze Manufacturing,
Inc. and Howard Hershberger, dated December 18, 1991 (Exhibit
10.37 to the 1994 Registration Statement).
*10.18 Extension agreement among Owosso Corporation, Richard R. Carr
and I. Wistar Morris, III, dated September 27, 1994 (Exhibit
2.7 to the 1994 Registration Statement).
*10.19 Promissory Note of Snowmax, Incorporated, dated April 7, 1992,
issued to Longview Bank and Trust Company, in the amount of
$1,000,000 (Exhibit 10.39 to the 1994 Registration Statement).
*10.20 Deed of Trust, dated April 7, 1992, on property of Snowmax,
Incorporated located in Upshur County, Texas (Exhibit 10.40 to
the 1994 Registration Statement).
*10.21 Deed of Trust, dated April 7, 1992, on property of Snowmax,
Incorporated located in Gregg County, Texas (Exhibit 10.41 to
the 1994 Registration Statement).
*10.22 Lender's Subordination Agreement, dated April 7, 1992, among
Longview Bank and Trust Company, Snowcoil, Inc. and Snowmax,
Incorporated (Exhibit 10.42 to the 1994 Registration
Statement).
*10.23 Reimbursement Agreement, dated as of August 1, 1991, by The
Landover Company in favor of NBD Bank, N.A., as amended on
December 30, 1991 and March 1, 1993 (Exhibit 10.43 to the 1994
Registration Statement).
36
*10.24 Lease, dated March 21, 1995, between Motor Products - Ohio
Corporation and William Berhard Realty Company (Exhibit 10.44
to the 1995 Form 10-K).
*10.25 Confidentiality and Non-Solicitation Agreement between the
Company and Eugene P. Lynch, dated October 31, 1994 (Exhibit
10.45 to the 1994 Form 10-K).
*10.26 Confidentiality and Non-Solicitation Agreement between the
Company and Ellen D. Harvey, dated October 31, 1994 (Exhibit
10.46 to the 1994 Form 10-K).
*10.27 Confidentiality and Non-Solicitation Agreement between the
Company and George B. Lemmon, Sr., dated October 31, 1994
(Exhibit 10.47 to the 1994 Form 10-K).
*10.28 Confidentiality and Non-Solicitation Agreement between the
Company and George B. Lemmon, Jr., dated October 31, 1994
(Exhibit 10.48 to the 1994 Form 10-K).
*10.29 Confidentiality and Non-Solicitation Agreement between the
Company and John H. Wert, Jr., dated October 31, 1994 (Exhibit
10.50 to the 1994 Form 10-K).
*10.30 Confidentiality and Non-Solicitation Agreement between the
Company and John R. Reese, dated October 31, 1994 (Exhibit
10.51 to the 1994 Form 10-K).
*10.31 Credit Agreement by and among NBD Bank, N.A., PNC Bank, N.A.
and NBD Bank, N.A. as Agent, and Owosso Corporation, Ahab
Investment Company, Cramer Company, DewEze Manufacturing,
Inc., The Landover Company, Motor Products-Owosso Corporation,
Snowmax Incorporated and Sooner Trailer Manufacturing Co.
(Exhibit 10.52 to the 1994 Form 10-K).
*10.32 Third Amendment to Reimbursement Agreement, dated as of
December 15, 1995, by and between The Landover Company and NBD
Bank, N.A. (Exhibit 10.53 to the 1995 Form 10-K).
*10.33 Stock Purchase Agreement among Owosso Corporation, Richard R.
Carr and I. Wistar Morris, III, dated March 24, 1994 (Exhibit
2.2 to the 1994 Form 10-K).
*10.34 Asset Purchase Agreement among DewEze Manufacturing, Inc.,
Kuker-Parker Industries, Inc. and The Owosso Company, dated
October 31, 1994 (Exhibit 2.3 to the 1994 Form 10-K).
37
*10.35 Subordinated promissory note of DewEze Manufacturing, Inc.,
issued to Howard Hershberger, dated October 31, 1994 (Exhibit
2.4 to the 1994 Form 10-K).
*10.36 Subordinated promissory note of DewEze Manufacturing, Inc.,
issued to Dewey Hostetler, dated October 31, 1994 (Exhibit 2.5
to the 1994 Form 10-K).
*10.37 The Owosso Group, Plan of Reorganization dated March 25, 1994
(Exhibit 2.1 to the 1994 Registration Statement).
*10.38 Amendment No. 1 to The Owosso Group Plan of Reorganization
dated September 26, 1994 (Exhibit 2.8 to the 1994 Registration
Statement).
*10.39 Stock Purchase Agreement dated September 9, 1994 by and among
Owosso Corporation, Sooner Trailer Manufacturing Co., Michael
S. Bernhardt, Billy J. Bernhardt, Viola M. Bernhardt, Michael
S. and Cynthia L. Bernhardt Charitable Remainder Unitrust
U/T/A 8/15/94, Billy J. and Viola M. Bernhardt Charitable
Remainder Unitrust U/T/A 8/15/94, Steven J. Bernhardt Trust
U/T/A 8/15/94 and Cynthia L. Bernhardt Trust U/T/A 8/15/94
(Exhibit 2.9 to the 1994 Registration Statement).
*10.40 Letter Agreement by and among Owosso Corporation, The Owosso
Company and Sooner Trailer Manufacturing Co. dated October 25,
1994 (Exhibit 2.10 to the 1994 Form 10-K).
*10.41 Stock Purchase Agreement dated April 28, 1995 by and among
Owosso Corporation, Great Bend Manufacturing Inc. and the
stockholders of Great Bend Manufacturing Inc. (Exhibit 2.1 to
the Company's Current Report on Form 8-K dated May 1, 1995).
*10.42 Agreement and Plan of Merger dated October 25, 1995 by and
among Owosso Corporation, Stature Electric, Inc. and the
stockholders of Stature Electric, Inc. (Exhibit 2.1 to the
October 31, 1995 Form 8-K).
*10.43 Consulting Agreement dated October 31, 1995 by and between
Owosso Corporation and Lowell Huntsinger (Exhibit 10.1 to the
October 31, 1995 Form 8-K).+
*10.44 Registration Rights Agreement dated October 31, 1995 by and
among Owosso Corporation, Lowell Huntsinger, Randall James and
Morris Felt (Exhibit 10.2 to the October 31, 1995 Form 8-K).
*10.45 Loan Agreement dated September 18, 1993 between Sooner Trailer
Manufacturing Co. and American National Bank, Duncan,
Oklahoma, and Amendment No. 1 to Loan Agreement dated December
13, 1994 between the same parties (Exhibit 10.54 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
January 29, 1995).
38
*10.46 First Amendment to Credit Agreement by and among Owosso
Corporation, its subsidiaries, NBD Bank, PNC Bank, N.A., and
NBD Bank, as Agent, dated as of August 1, 1995 (Exhibit 10.56
to the Company's Quarterly Report on Form 10-Q for the quarter
ended July 30, 1995 (the "July 1995 Form 10-Q")).
*10.47 Second Amendment to Credit Agreement by and among Owosso
Corporation, its subsidiaries, NBD Bank, PNC Bank, N.A., and
NBD Bank, as Agent, dated as of September 1, 1995 (Exhibit
10.57 to the July 1995 Form 10-Q).
*10.48 Distribution Agreement by and among DewEze Manufacturing, Inc.
and Airens Company, dated as of July 21, 1995 (Exhibit 10.58
to the July 1995 Form 10-Q).
*10.49 Fourth Amendment to Credit Agreement by and among Owosso
Corporation, its subsidiaries, NBD Bank, PNC Bank, N.A., and
NBD Bank, as Agent, dated as of March 8, 1996. (Exhibit 10.71
to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 28, 1996)
*10.50 Fifth Amendment to Credit Agreement by and among Owosso
Corporation, its subsidiaries, NBD Bank, PNC Bank, N.A., and
NBD Bank, as Agent, dated as of May 31, 1996. (Exhibit 10.72
to the Company's Quarterly Report on Form 10-Q for the quarter
ended July 28, 1996 (the "July 1996 Form 10-Q")).
*10.51 Separation and Confidentiality Agreement between Thomas L.
French and Owosso Corporation, dated as of June 14, 1996
(Exhibit 10.73 to the July 1996 Form 10-Q).+
*10.52 Lease Agreement by and between Owosso Corporation and
Philadelphia Freedom Partners, L.P. dated September 6, 1996
(Exhibit 10.62 to the Company's Annual Report on Form 10-K for
the year ended October 27, 1996).
*10.53 Sixth Amendment to Credit Agreement by and among Owosso
Corporation, its subsidiaries, NBD Bank, PNC Bank, N.A., and
NBD Bank, as Agent, dated as of December 4, 1996. (Exhibit
10.63 to the Company's Quarterly Report on Form 10-Q for the
quarter ended January 26, 1997).
*10.54 Seventh Amendment to Credit Agreement by and among Owosso
Corporation, its subsidiaries, NBD Bank, PNC Bank, N.A., and
NBD Bank, as Agent, dated as of March 3, 1997. (Exhibit 10.64
to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 27, 1997).
39
10.55 Fifth Amendment to Reimbursement Agreement, dated as of
September 24, 1997, by and between The Landover Company and
NBD Bank, N.A.
21 Subsidiaries of the registrant.
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- --------------
* Incorporated by reference.
+ Management contract or compensatory plan or arrangement.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Philadelphia, Commonwealth of Pennsylvania, on the 21st day of January, 1998.
OWOSSO CORPORATION
By: /s/ George B. Lemmon, Jr.
---------------------------------------------
George B. Lemmon, Jr., President, Chief
Executive Officer, and Director
By: /s/ John H. Wert, Jr.
---------------------------------------------
John H. Wert, Jr., Senior Vice President -
Finance, Chief Financial Officer and
Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on January 21, 1998, in the
capacities indicated:
Signature Title
--------- -----
/s/ John R. Reese
- ------------------------------
John R. Reese Chairman of the Board and Director
/s/ George B. Lemmon, Jr.
- ------------------------------
George B. Lemmon, Jr. President, Chief Executive Officer,
and a Director
/s/ John H. Wert, Jr.
- ------------------------------
John H. Wert, Jr. Senior Vice President - Finance, Chief
Financial Officer, Treasurer and Secretary
/s/ Ellen D. Harvey
- ------------------------------
Ellen D. Harvey Director
/s/ Harry E. Hill
- ------------------------------
Harry E. Hill Director
/s/ Lowell P. Huntsinger
- ------------------------------
Lowell P. Huntsinger Director
/s/ Eugene P. Lynch
- ------------------------------
Eugene P. Lynch Director
/s/ James A. Ounsworth
- ------------------------------
James A. Ounsworth Director
41
OWOSSO CORPORATION
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 26, 1997, OCTOBER
27, 1996 AND OCTOBER 29, 1995:
Statements of Operations F-2
Balance Sheets F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6-21
FINANCIAL STATEMENT SCHEDULE F-22
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Owosso Corporation
King of Prussia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Owosso
Corporation and subsidiaries as of October 26, 1997 and October 27, 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three fiscal years in the period ended October 26,
1997. Our audits also included the financial statement schedule listed in the
index at Item 14(a)(2). These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Owosso Corporation and subsidiaries
as of October 26, 1997 and October 27, 1996, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
October 26, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
December 11, 1997
F-1
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended
---------------------------------------------------------------
October 26, October 27, October 29,
1997 1996 1995
Net sales $ 143,061,000 $ 128,216,000 $ 108,001,000
Cost of products sold 109,155,000 98,282,000 77,629,000
------------- ------------- -------------
Gross profit 33,906,000 29,934,000 30,372,000
Expenses:
Selling, general and administrative 20,495,000 19,488,000 13,920,000
Corporate 4,816,000 4,444,000 3,683,000
------------- ------------- -------------
Income from operations 8,595,000 6,002,000 12,769,000
Interest expense 4,143,000 4,081,000 2,876,000
Other income 199,000 202,000 390,000
------------- ------------- -------------
Income before income tax provision 4,651,000 2,123,000 10,283,000
Income tax provision 2,100,000 1,275,000 3,900,000
------------- ------------- -------------
Net income 2,551,000 848,000 6,383,000
Dividends and accretion on preferred stock (1,047,000) (1,025,000) --
------------- ------------- -------------
Net income (loss) available for common stockholders $ 1,504,000 $ (177,000) $ 6,383,000
============= ============= =============
Net income (loss) per common share $ 0.26 $ (0.03) $ 1.09
============= ============= =============
Weighted average number of common shares outstanding 5,809,000 5,839,000 5,865,000
============= ============= =============
See notes to consolidated financial statements.
F-2
OWOSSO CORPORATION
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------
October 26, October 27,
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 840,000 $ 840,000
Receivables, net 19,868,000 18,415,000
Inventories, net 23,084,000 19,123,000
Prepaid expenses and other 1,153,000 1,645,000
Deferred taxes 1,039,000 1,032,000
------------- -------------
Total current assets 45,984,000 41,055,000
PROPERTY, PLANT AND EQUIPMENT, NET 27,443,000 26,309,000
INTANGIBLE ASSETS, NET 37,102,000 39,277,000
OTHER ASSETS 1,152,000 1,254,000
------------- -------------
TOTAL ASSETS $ 111,681,000 $ 107,895,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 8,821,000 $ 6,597,000
Accrued compensation and benefits 3,760,000 3,006,000
Accrued expenses - other 2,308,000 1,902,000
Accrued interest 255,000 419,000
Current portion of related party debt 3,750,000 5,975,000
Current portion of long-term debt 2,479,000 2,771,000
------------- -------------
Total current liabilities 21,373,000 20,670,000
LONG-TERM DEBT, LESS CURRENT PORTION 48,619,000 45,068,000
POSTRETIREMENT BENEFITS 1,812,000 1,594,000
DEFERRED TAXES 3,147,000 3,543,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock Class A, 5% cumulative, $.01 par value;
10,000,000 shares authorized; 1,071,428 shares issued and
outstanding (aggregate liquidation value at
October 26, 1997 and October 27, 1996 - $15,000,000) 13,965,000 13,668,000
Common stock, $.01 par value; 15,000,000 shares authorized;
5,865,000 shares issued and outstanding 59,000 59,000
Additional paid-in capital 21,612,000 21,612,000
Retained earnings 1,544,000 2,131,000
------------- -------------
37,180,000 37,470,000
Less treasury stock, at cost - 56,324 shares (450,000) (450,000)
------------- -------------
Total stockholders' equity 36,730,000 37,020,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 111,681,000 $ 107,895,000
============= =============
See notes to consolidated financial statements.
F-3
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Additional
Preferred Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock Total
BALANCE, OCTOBER 30, 1994 $ - $ 59,000 $ 21,612,000 $ - $ - $ 21,671,000
Net income 6,383,000 6,383,000
Dividends paid (1,877,000) (1,877,000)
Issuance of convertible preferred stock 13,393,000 13,393,000
------------ -------- ------------ ----------- ---------- ------------
BALANCE, OCTOBER 29, 1995 13,393,000 59,000 21,612,000 4,506,000 39,570,000
Net income 848,000 848,000
Dividends paid (2,856,000) (2,856,000)
Accretion on convertible preferred stock 275,000 (275,000) -
Treasury stock purchase (1,048,000) (1,048,000)
Issuance of treasury shares (92,000) 598,000 506,000
------------ -------- ------------ ----------- ---------- ------------
BALANCE, OCTOBER 27, 1996 13,668,000 59,000 21,612,000 2,131,000 (450,000) 37,020,000
Net income 2,551,000 2,551,000
Dividends paid (2,841,000) (2,841,000)
Accretion on convertible preferred stock 297,000 (297,000) -
------------ -------- ------------ ----------- ---------- ------------
BALANCE, OCTOBER 26, 1997 $ 13,965,000 $ 59,000 $ 21,612,000 $ 1,544,000 $ (450,000) $ 36,730,000
============ ======== ============ =========== ========== ============
See notes to consolidated financial statements.
F-4
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------
Year Ended
---------------------------------------------
October 26, October 27, October 29,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,551,000 $ 848,000 $ 6,383,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Allowance for doubtful accounts 249,000 647,000 94,000
Provision for deferred taxes (403,000) (572,000) (242,000)
Loss (gain) on sale of assets 31,000 234,000 (4,000)
Depreciation 4,027,000 3,825,000 2,890,000
Amortization 2,173,000 2,473,000 1,323,000
Amortization of deferred gain on sale and leaseback -- -- (77,000)
Changes in operating assets and liabilities:
Accounts receivable (1,702,000) (787,000) (384,000)
Inventories (3,961,000) 1,753,000 (567,000)
Prepaid expenses and other 492,000 (387,000) (120,000)
Accounts payable 2,224,000 556,000 (1,746,000)
Accrued expenses 996,000 169,000 123,000
----------- ----------- -----------
Net cash provided by operating activities 6,677,000 8,759,000 7,673,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,335,000) (4,346,000) (4,437,000)
Acquisition of businesses, net of cash acquired -- (1,675,000) (1,401,000)
Decrease (increase) in other assets 465,000 (760,000) (349,000)
----------- ----------- -----------
Net cash used in investing activities (4,870,000) (6,781,000) (6,187,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 4,650,000 8,900,000 7,100,000
Proceeds from long-term debt 350,000 150,000 --
Payments on long-term debt (1,741,000) (1,712,000) (4,976,000)
Payments on related party debt (2,225,000) (7,125,000) (450,000)
Dividends paid (2,841,000) (2,856,000) (1,877,000)
Acquisistion of treasury stock -- (245,000) --
Payments on amounts due to/from affiliates -- -- (889,000)
----------- ----------- -----------
Net cash used in financing activities (1,807,000) (2,888,000) (1,092,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (910,000) 394,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 840,000 1,750,000 1,356,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 840,000 $ 840,000 $ 1,750,000
=========== =========== ===========
See notes to consolidated financial statements.
F-5
OWOSSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED OCTOBER 26, 1997, OCTOBER 27, 1996 AND OCTOBER 29, 1995
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - The consolidated financial statements represent the
consolidated financial position, results of operations and cash flows of
Owosso Corporation and subsidiaries (the "Company"). The subsidiaries
include: Motor Products-Owosso Corporation ("Motor Products"), Motor
Products - Ohio Corporation ("MP - Ohio"), Stature Electric, Inc.
("Stature"), Owosso Motor Group, Inc. ("Motor Group") and Cramer Company
("Cramer"), (collectively the "Motor Companies"), and Snowmax,
Incorporated ("Snowmax"), The Landover Company ("Dura-Bond"), Sooner
Trailer Manufacturing Co. ("Sooner"), DewEze Manufacturing, Inc.,
including Parker Industries, ("DewEze") and Great Bend Manufacturing,
Inc. ("Great Bend"). The Company is a diversified manufacturer of products
in narrowly defined niche markets and currently operates in two business
segments, Engineered Component Products (the Motor Companies, Snowmax and
Dura-Bond) and Specialized Equipment (Sooner, DewEze and Great Bend). In
the Engineered Component Products segment, the Company's products,
primarily motors, replacement cam shaft bearings and heat transfer "fin
and tube" coils, are sold primarily to original equipment manufacturers or
service providers who use them in their end product or service. The
products sold in the Specialized Equipment segment, primarily all-aluminum
horse trailers and agricultural and turf maintenance equipment, are almost
exclusively final products sold through dealers to their users. Nearly all
of the Company's customers are located in North America.
Consolidation - The consolidated financial statements of the Company
include the accounts of Owosso Corporation and its wholly owned
subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
Fiscal Year - The Company's year-end is the last Sunday in October. Fiscal
years 1997, 1996 and 1995 constituted 52-week years.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash and
highly-liquid investments with an original maturity of three months or
less.
Inventories - Inventories of the Company are recorded at cost, which is
not in excess of market. At October 26, 1997 and October 27, 1996, cost
for 9% and 17%, respectively, of the inventories was determined on the
last-in, first-out (LIFO) basis, and the remainder on the first-in,
first-out (FIFO) basis.
Information related to the FIFO method may be useful in comparing
operating results to those of companies not on LIFO. If the FIFO method of
inventory, which approximates replacement cost, had been used by the
Company for all inventories, inventory would have been approximately
$800,000 and $900,000 higher than reported at October 26, 1997 and October
27, 1996, respectively. Additionally, net income would have decreased by
approximately $98,000, $55,000 and $42,000 for 1997, 1996 and 1995,
respectively. These amounts reflect the combined effects, in each year, of
changes in inventory quantities and unit costs.
F-6
Property, Plant and Equipment - Property, plant and equipment are stated
at cost and are depreciated principally on the straight-line method over
their estimated useful lives as follows:
Land improvements 10 - 20 years
Buildings 30 years
Machinery and equipment 3 - 10 years
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates and assumptions.
Intangible Assets - Intangibles are amortized on a straight-line basis
over their estimated useful lives as follows:
Noncompetition agreements 3-6 years
Customer lists 20 years
Goodwill 20-25 years
Other 5-20 years
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." Accordingly, the Company
evaluates the carrying value of long-term assets, including goodwill and
other intangible assets, based upon current and anticipated undiscounted
cash flows, and recognizes an impairment when such estimated cash flows
will be less than the carrying value of the asset. Measurement of the
amount of impairment, if any, is based upon the difference between
carrying value and fair value. The adoption of SFAS No. 121 did not have a
significant effect on the consolidated financial position or results of
operations of the Company.
Revenue Recognition - Revenue is recognized at the time the product is
shipped. An allowance for doubtful accounts of approximately $300,000 and
$509,000 was recorded as of October 26, 1997 and October 27, 1996,
respectively.
Stock Option Plan - SFAS No. 123, "Accounting for Stock-Based
Compensation", encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", under which no
compensation cost has been recognized.
Reclassifications - Certain reclassifications were made to the 1996 and
1995 consolidated financial statements to conform to the 1997
presentation.
New Accounting Pronouncements - In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share," which
will require retroactive adoption in the Company's fiscal quarter ended
January 25, 1998. The new standard simplifies the computation of earnings
per share and requires the presentation of basic and diluted earnings per
share. In light of the present capital structure, the impact of adopting
SFAS No. 128 will not be significant.
F-7
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement, which establishes standards for reporting and
disclosure of comprehensive income, is effective for interim and annual
periods beginning after December 15, 1997, although earlier adoption is
permitted. Reclassification of financial information for earlier periods
presented for comparative purposes is required under SFAS No. 130. As this
statement only requires additional disclosures in the Company's
consolidated financial statements, its adoption will not have any impact
on the Company's consolidated financial position or results of operations.
The Company expects to adopt SFAS No. 130 in fiscal 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement, which establishes
standards for reporting of information about operating segments and
requires the reporting of selected information about operating segments in
interim financial statements, is effective for fiscal years beginning
after December 15, 1997, although earlier application is permitted.
Reclassification of segment information for earlier periods presented for
comparative purposes is required under SFAS No. 131. The Company has not
yet completed its analysis of the effects of adopting this statement on to
its presentation of financial data by business segment. The Company
expects to adopt SFAS No. 131 in the first quarter of fiscal 1999.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest in 1997, 1996 and 1995 were $4,307,000,
$4,025,000 and $2,596,000, respectively. Cash paid for taxes was of
$1,717,000, $1,880,000 and $4,708,000 for 1997, 1996 and 1995,
respectively.
In 1996, in connection with the repurchase of common stock from its
former chief operating officer, the Company issued a promissory note
totaling $802,000.
In 1996, in connection with the purchase of Motor Group, the Company
reissued 75,000 shares of treasury stock.
In 1995, in connection with the acquisition of Great Bend, subordinated
notes totaling $1,700,000 were issued to certain selling stockholders and
a noncompetition agreement totaling $600,000 was entered into with its
president.
In 1995, in connection with the acquisition of Stature Electric, 1,071,428
shares of Class A convertible preferred stock with a fair market value of
$13,393,000 and $12,500,000 of promissory notes were issued to the selling
stockholders.
3. BUSINESS ACQUISITIONS
All acquisitions have been accounted for as purchases and, accordingly,
the aggregate prices were allocated to assets and liabilities acquired
based on their fair values at the date of acquisition. The results of
operations have been included in the consolidated results of the Company
from the effective dates of each acquisition.
Great Bend - Effective May 1, 1995, the Company acquired all of the issued
and outstanding capital stock of Great Bend, a manufacturer of front-end
loaders, for $4,300,000, including $2,600,000 paid in cash and $1,700,000
of subordinated promissory notes, with a term of 10 years bearing interest
at 8% annually. The president of Great Bend entered into a six-year
employment agreement with Great Bend and received $600,000 in
consideration for his covenant not to compete with the Company.
F-8
Stature Electric - Effective October 29, 1995, the Company acquired all of
the issued and outstanding capital stock of Stature Electric, a
manufacturer of permanent magnet gear motors, for $25,900,000, including
$12,500,000 of promissory notes, with a term not exceeding 10 years
bearing interest at 8% annually, and the issuance of 1,071,428 shares of
Class A convertible preferred stock of the Company, with a fair value of
$12.50 per share.
4. INVENTORIES
October 26, October 27,
1997 1996
Raw materials and purchased parts $ 9,325,000 $ 8,468,000
Work in process 5,014,000 4,317,000
Finished goods 8,745,000 6,338,000
------------ ------------
Total $ 23,084,000 $ 19,123,000
============ ============
5. PROPERTY, PLANT AND EQUIPMENT
October 26, October 27,
1997 1996
Land and improvements $ 1,123,000 $ 1,084,000
Buildings and improvements 15,949,000 15,413,000
Machinery and equipment 37,360,000 32,855,000
Construction in progress 551,000 639,000
----------- -----------
54,983,000 49,991,000
Accumulated depreciation and amortization (27,540,000) (23,682,000)
----------- -----------
Property, plant and equipment, net $ 27,443,000 $ 26,309,000
============ ============
Depreciation expense was approximately $4,027,000, $3,825,000 and
$2,890,000 for 1997, 1996 and 1995, respectively.
F-9
6. INTANGIBLE ASSETS
October 26, October 27,
1997 1996
Noncompetition agreements $ 2,220,000 $ 2,220,000
Goodwill 32,894,000 32,876,000
Customer lists 8,000,000 8,000,000
Other 881,000 898,000
------------ ------------
43,995,000 43,994,000
Accumulated amortization (6,893,000) (4,717,000)
------------ ------------
Intangibles, net $ 37,102,000 $ 39,277,000
============ ============
Amortization expense was approximately $2,173,000, $2,473,000 and
$1,323,000 for 1997, 1996 and 1995, respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments are made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies.
Cash and Cash Equivalents, Accounts Receivable, and Accounts
Payable - The carrying amount of these items are a reasonable
estimate of their fair value.
Short-term Debt and Long-term Debt - Rates currently available to
the Company for debt with similar terms and remaining maturities
are used to estimate the fair value for debt issues. Accordingly,
the carrying amount of debt is a reasonable estimate of its fair
value.
Derivatives - The Company's interest rate swap agreements have an
aggregate notional amount of $15,000,000 and were in a liability
position of approximately $541,000 at October 26, 1997.
F-10
8. LONG-TERM DEBT AND RELATED PARTY DEBT
October 26, October 27,
1997 1996
THIRD-PARTY DEBT:
Banks:
Unsecured revolving credit agreement $ 34,650,000 $ 30,000,000
Promissory note payable in monthly installments of $8,000 to $11,000 due October 2002
with interest at 8.5% due monthly, collateralized by certain real property 536,000 634,000
Promissory note in monthly installments of $9,000 due February 2009, with a variable interest rate
(7.8% at October 26, 1997) due monthly, collateralized by certain real property 826,000 874,000
Industrial revenue bonds:
Series 1996, interest of 6%, payable in monthly installments through December 2003 316,000 -
Series 1993, interest at 4.50% to 6.75%, payable in annual installments increasing from
$120,000 to $190,000 through September 2003, collateralized by building and equipment 990,000 1,125,000
Series 1989, interest at 7.5% , payable semiannually, with principal amount due in August 1999,
collateralized by certain real property 1,800,000 1,800,000
Series 1988-A, issued August 25, 1988, payable in annual installments of $500,000 commencing
in January 2000 and final payment due January 1, 2009, collateralized by building and equipment 5,000,000 5,000,000
Series 1985, interest at 88% of prime, payable semiannually in amounts increasing from $10,000 to
$25,000; final payment due December 1997 27,000 75,000
Series 1984, interest at 75% of prime, payable in monthly installments, final payment
due December 1999, collateralized by building and equipment 86,000 129,000
Series 1984 A & B, payable in annual installments ranging from $100,000 to $155,000, plus
interest payable semi-annually at rates from 4.25% to 6.75%; final payment due March 2004,
collateralized by building and equipment 935,000 1,045,000
Former and current stockholders:
Noncompetition agreement, payable in quarterly installments of
$25,000 through December 1996, noninterest bearing - 37,000
Noncompetition agreement, payable in quarterly installments of
$25,000 through May 2001, noninterest bearing 350,000 450,000
Subordinated promissory notes, principal and interest of $20,000
and $13,000 payable in quarterly installments, interest at 9%
with final payment due April 1999 111,000 222,000
Subordinated promissory notes, payable in monthly installments of $77,000,
interest at 7.67% with final payment due October 2001 3,229,000 3,883,000
Subordinated promissory notes, payable in quarterly installments of $43,000 plus interest at
8% with final payment due April 2005 1,278,000 1,448,000
Subordinated promissory note, payable in August 1998, interest payable in quarterly
installments at 8% 802,000 802,000
Other:
Capital lease obligations 37,000 135,000
Other long-term debt 125,000 180,000
------------ ------------
Total third-party debt 51,098,000 47,839,000
------------ ------------
RELATED PARTY DEBT:
Promissory notes, payable to preferred stockholders in installments ranging
from $3,125,000 in January 1996 and $1,875,000 quarterly through October
1996, interest at 8%, with final payment of $3,750,000 thereafter due on
demand, due no later than October 2005 3,750,000 5,625,000
Subordinated promissory notes payable to a director, interest only at 10%, due December 1996 - 350,000
------------ ------------
Total related party debt 3,750,000 5,975,000
------------ ------------
Total long-term debt 54,848,000 53,814,000
Less current portion 6,229,000 8,746,000
------------ ------------
Total $ 48,619,000 $ 45,068,000
============ ============
F-11
The Company has a $55,000,000 unsecured revolving credit agreement with
two banks, which expires on March 31, 2000, of which $34,650,000 was
outstanding at October 26, 1997. Interest is payable at the Company's
option at either the bank's prime rate (8.5% at October 26, 1997) or a
variable spread (2.0% at October 26, 1997) over the London Interbank
Offered Rate. The average amount outstanding under this agreement in 1997
was $34,043,000 and the weighted average interest rate was 7.8%. The
agreement includes financial and other covenants, including fixed charge,
cash flow and net worth ratios, restrictions on certain asset sales,
mergers and other significant transactions and a negative pledge on fixed
assets. Repayment of the Industrial Revenue Bonds of certain of the
subsidiaries has been guaranteed by the Company.
Derivative Interest Rate Contracts - The Company has two interest rate
swap agreements, each with a $7,500,000 notional amount. During 1997, the
Company began receiving floating interest rate payments at the three month
London Interbank Offered Rate in exchange for quarterly fixed interest
rate payments of 7.0675% and 7.09% over the life of the agreements. The
Company entered into these interest rate swap agreements to change the
fixed/variable interest rate mix of the debt portfolio in order to reduce
the Company's aggregate risk from movements in interest rates. These
agreements are accounted for using settlement accounting.
The aggregate amount of required payments on long-term debt, is as
follows:
Year ending October:
1998 $ 6,229,000
1999 3,386,000
2000 36,795,000
2001 2,216,000
2002 1,182,000
Thereafter 5,040,000
-----------
Total $54,848,000
===========
9. TRANSACTIONS WITH RELATED PARTIES
Prior to the Company's reorganization in 1994, certain of the Company's
subsidiaries were under the common control and management of Brynavon
Group. During 1995, the Company and Brynavon Group settled all remaining
amounts outstanding, including a subordinated note payable to Brynavon
Group, which resulted in a gain of $200,000, which is included as other
income in the 1995 consolidated statement of operations. Interest expense
related to amounts owed to Brynavon Group was approximately $83,000 for
the year ended October 29, 1995.
10. PENSION AND POSTRETIREMENT PLANS
Pension Plans - In July 1995, the Company established a defined
contribution 401(k) plan covering substantially all of its employees,
except for Motor Products' hourly employees who are covered under the
defined benefit pension plan described below. Eligible employees may
contribute up to 15% of their compensation to this plan and their
contributions are matched by the Company at a rate of 50% on the first 4%
of the employees' contribution. The plan also provides for a fixed
contribution of 3% of eligible employees' compensation. The plan replaced
401(k) and defined contribution plans previously administered by certain
of the Company's subsidiaries. Such plans were merged into the newly
created 401(k) plan. Pension expense related to these plans was
approximately $891,000, $702,000 and $509,000 for 1997, 1996 and 1995,
respectively.
F-12
Motor Products has a defined benefit pension plan covering substantially
all of its hourly employees. The benefits are based on years of service,
the employee's compensation during the last three years of employment and
accumulated employee contributions. Net pension expense included in the
consolidated statements of operations for 1997, 1996, and 1995 was
determined as follows:
Year Ended
-----------------------------------------
October 26, October 27, October 29,
1997 1996 1995
Service cost $ 69,000 $ 69,000 $ 52,000
Interest cost on projected benefit obligation 194,000 186,000 187,000
Expected return on assets (243,000) (220,000) (198,000)
Amortization of unrecognized net credit (41,000) (41,000) (41,000)
Amortization of prior service cost 13,000 13,000 13,000
Amortization of unrecognized loss - 9,000 19,000
-------- -------- --------
Net pension expense (credit) $ (8,000) $ 16,000 $ 32,000
-------- -------- --------
The following is a reconciliation of the plan's funded status:
October 26, October 27,
1997 1996
Projected benefit obligation $ 3,074,000 $ 2,656,000
Plan assets at market value - consisting primarily of mutual funds 3,455,000 3,037,000
----------- -----------
Funded status 381,000 381,000
Unrecognized initial net credit (330,000) (371,000)
Unrecognized prior service cost 149,000 161,000
Unrecognized net loss 184,000 226,000
----------- -----------
Prepaid pension $ 384,000 $ 397,000
=========== ===========
Additional disclosures and assumptions:
October 26, October 27,
1997 1996
Accumulated benefit obligation $ 2,524,000 $ 2,174,000
Vested benefit obligation 2,446,000 2,128,000
Discount rate 7.0% 7.5%
Expected long-term rate of return 8.0 8.0
Salary increases 5.0 5.0
Postretirement Plan - Motor Products provides postretirement medical
benefits and life insurance benefits to current and former hourly
employees who retire from Motor Products. No contributions from retirees
are required and the Plan is unfunded.
Motor Products accounts for its postretirement benefits in accordance with
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," which requires recognition during
F-13
employees' active service periods of the expected cost of providing such
postretirement benefits. Motor Products paid $49,000, $65,000 and $44,000
in such benefits during 1997, 1996 and 1995, respectively.
The following table sets forth the accumulated obligation of the plan
reconciled with the amount shown in the consolidated balance sheet as of
October 26, 1997 and October 27, 1996:
October 26, October 27,
1997 1996
Accumulated postretirement benefit obligation:
Retirees $ 557,000 $ 455,000
Fully eligible active plan participants 153,000 172,000
Other active plan participants 1,416,000 1,068,000
----------- -----------
Accumulated postretirement benefit obligation 2,126,000 1,695,000
Unrecognized net gain (loss) from past experience different
from that assumed and from changes in assumptions (44,000) 185,000
Prior service cost not yet recognized in net periodic
postretirement benefit cost (270,000) (286,000)
----------- -----------
Accrued postretirement benefit cost $ 1,812,000 $ 1,594,000
=========== ===========
Net periodic postretirement benefit cost included the following components
for 1997, 1996 and 1995:
Year Ended
--------------------------------------------------
October 26, October 27, October 29,
1997 1996 1995
Service cost $ 119,000 $ 115,000 $ 97,000
Interest cost 132,000 114,000 109,000
Amortization of prior service cost 16,000 16,000 16,000
Amortization of unrecognized loss -- -- (2,000)
--------- --------- ---------
Total $ 267,000 $ 245,000 $ 220,000
========= ========= =========
For measurement purposes, a 9.4% annual rate of increase in the per capita
cost of covered health care benefits was assumed. The rate was assumed to
decrease gradually to 4.7% for 2015, and remain at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of October 26, 1997 by
$480,000 and the aggregate of the service cost and interest cost
components of the net periodic postretirement benefit cost for the year
then ended by $65,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% and 7.5%, as of October 26,
1997 and October 27, 1996, respectively.
F-14
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space, a production facility and certain
equipment under operating leases. Operating lease expense was
approximately $1,107,000, $1,061,000 and $702,000 for 1997, 1996 and 1995,
respectively, net of sublease rentals and reimbursements of utilities of
$44,000, $99,000 and $269,000, respectively. The lease on the corporate
headquarters office space expires in September 2006 with a base rent of
approximately $190,000 in 1997, which adjusts annually through October
1999 to $305,000. Cramer leases its facilities under an operating lease
which is scheduled to expire in 1999, with an additional 10 year renewal
option beyond 1999. The lease requires Cramer to pay property taxes,
insurance, utilities and maintenance expenses. Future minimum rental
payments under non-cancelable operating leases are as follows:
Year ending October:
1998 $ 1,104,000
1999 873,000
2000 387,000
2001 318,000
2002 310,000
Thereafter 1,199,000
-----------
$ 4,191,000
===========
At October 26, 1997, outstanding letters of credit totaled approximately
$8,311,000. These letters of credit primarily guarantee certain notes and
performance of contracts associated with acquisitions made by the Company.
The Company is subject to federal, state and local environmental
regulation with respect to its operations. The Company believes that it is
operating in substantial compliance with applicable environmental
regulations. Manufacturing and other operations at the Company's various
facilities may result, and may have resulted, in the discharge and release
of hazardous substances and waste from time to time. The Company routinely
responds to such incidents as deemed appropriate pursuant to applicable
federal, state and local environmental regulations.
Cramer is a party to a consent decree with the State of Connecticut
pursuant to which it has agreed to complete its environmental
investigation of the site on which its facility is located and conduct any
remedial measures which may be required. Cramer is also in negotiations
with the former operator of the site concerning the reimbursement by the
former operator of any costs the Company has incurred or may incur in the
future in connection with this matter. The Company does not believe that
the resolution of this matter will have a material adverse effect on the
financial results of the Company.
The Company has been named as a potentially responsible party with respect
to two hazardous substance disposal sites currently under remediation by
the U.S. Environmental Protection Agency under its "Superfund" program.
With respect to both sites, based on the minimal amount of waste alleged
to have been contributed to the site by the Company, the Company expects
to resolve the matter through the payment of de minimis amounts.
Sooner and DewEze have arrangements with a number of financial
institutions to provide floor plan financing for their dealers, which
require them to repurchase repossessed products from the financial
institutions in the event of a default by the financed dealer. Their
obligation is typically to repurchase the equipment at 90% of the purchase
price for the first 180 days, 80% for the next 90 days and 70% for the
next 90 days, after which the obligation expires. In the event of a
default by all of the financed
F-15
dealers, the Company would be required to repurchase approximately
$5,300,000 of product as of October 26, 1997. The Company does not believe
that its obligation under these repurchase agreements will have a material
adverse effect on the financial results of the Company. Neither subsidiary
has taken possession on any equipment pursuant to the repurchase
obligations in these contracts.
In addition to the matters reported herein, the Company is involved in
litigation dealing with the numerous aspects of its business operations.
The Company believes that settlement of such litigation will not have a
material effect on its consolidated financial position or results of
operations.
12. TAXES ON INCOME
The income tax provision consists of the following:
Year Ended
---------------------------------------------------------
October 26, October 27, October 29,
1997 1996 1995
Current:
Federal $ 2,400,000 $ 1,810,000 $ 3,899,000
State 103,000 40,000 178,000
Deferred - federal (403,000) (575,000) (177,000)
----------- ----------- -----------
Total income tax provision $ 2,100,000 $ 1,275,000 $ 3,900,000
=========== =========== ===========
The reconciliation to the statutory federal income tax rate is as follows:
Year Ended
---------------------------------------
October 26, October 27, October 29,
1997 1996 1995
Federal income tax provision at statutory rate 34.0% 34.0% 35.0%
State income taxes, net of federal income tax benefit 1.4 1.2 1.1
Amortization of excess cost of net assets acquired 10.8 22.9 2.4
Other (1.0) 2.0 (0.6)
---- ---- ---
Provision for income taxes 45.2% 60.1% 37.9%
==== ==== ====
The components of the Company's net deferred tax assets and liabilities
are as follows:
October 26, October 27,
1997 1996
Deferred tax asset:
Intangibles $ 963,000 $ 868,000
Accruals and reserves 1,676,000 1,540,000
Tax credits and loss carryforwards 908,000 683,000
Other 224,000 231,000
----------- -----------
3,771,000 3,322,000
Valuation allowance (1,626,000) (1,397,000)
----------- -----------
Total $ 2,145,000 $ 1,925,000
=========== ===========
F-16
October 26, October 27,
1997 1996
Deferred tax liabilities:
Intangibles $ 2,736,000 $ 2,888,000
Pension 131,000 135,000
Property, plant and equipment 1,349,000 1,413,000
Other 37,000 --
----------- -----------
Total $ 4,253,000 $ 4,436,000
=========== ===========
Net deferred tax liability $(2,108,000) $(2,511,000)
=========== ===========
These amounts are included in the accompanying consolidated financial
statements as follows:
October 26, October 27,
1997 1996
Current assets $ 1,039,000 $ 1,032,000
Long-term liabilities (3,147,000) (3,543,000)
----------- -----------
Net deferred tax liability $(2,108,000) $(2,511,000)
=========== ===========
The Company's valuation allowance relates primarily to intangible and
state deferred tax assets on which management believes realization may be
unlikely.
13. CONVERTIBLE PREFERRED STOCK
In connection with the acquisition of Stature Electric in October 1995,
the Company issued 1,071,428 of its 10,000,000 authorized preferred shares
of Class A convertible preferred stock with a stated value of $14.00 per
share. Such preferred stock is convertible into the Company's common stock
on a one for one basis, at the holders' option, through October 2000, at
which time, the Company has the right, but is not obligated, to redeem,
the preferred stock for cash at its stated value of $14.00 per share. The
Company's option to redeem the preferred stock continues after October
2000, with the redemption price increasing annually until it reaches
$21.00 per share in 2009 for a maximum liquidation amount of $22,500,000.
The Company is accreting the value of its preferred stock to its stated
value of $14.00 per share over the period ending in October 2000, when the
conversion feature of the stock expires, using the effective interest
method at a rate of 7.6%.
The preferred stock earns quarterly cash dividends as a percentage of the
stated value of $15,000,000 at a rate of 5% per annum through October
2000. Thereafter, the dividend percentage rate increases 1% each year to
its maximum rate of 10% in November 2004 and thereafter. To the extent
that the preferred stock has not been converted by October 2000, the
increasing rate dividend will be accounted for by the accrual of amounts
in excess of the cash dividend through the income statement using the
effective interest method. Dividends paid on the preferred stock were
$750,000 for both 1997 and 1996.
The Company may not pay any common stock dividends unless all preferred
dividend requirements have been met. At October 26, 1997, there are no
accrued preferred dividends. The convertible preferred stockholders are
entitled to vote as a class to elect one member of the Board of Directors
of the Company, provided at least 40% of the originally issued Class A
preferred stock is outstanding. The convertible preferred stock has
liquidation priority over common stock.
F-17
14. STOCK OPTION PLAN
The Company maintains a stock option plan (the "Plan"), designed to serve
as an incentive for retaining qualified and competent employees and
directors. All employees and directors of the Company are eligible to
participate in the Plan. The Plan provides for the grant of options to
purchase an aggregate of up to 500,000 shares of common stock of the
Company. Options granted generally vest over five years and are
exercisable for periods up to ten years from the date of grant at a price
which equals fair market value at the date of grant.
The Plan provides for the automatic acceleration of the exercisability of
all outstanding options upon the occurrence of a change in control (as
defined in the Plan) and for the cancellation of options and cash payment
to the holders of such canceled options upon the occurrence of certain
events constituting a change in control. The Plan may be amended, altered
or discontinued at any time, but no amendment, alteration or
discontinuation will be made which would impair the rights of an optionee
with respect to an outstanding stock option without the consent of the
optionee.
The Company accounts for the Plan in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation
cost for the Plan been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been reduced by $129,000 and $.02 per share,
respectively, for 1997 and $53,000 and $.01 per share, respectively, for
1996. Because the SFAS No. 123 method of accounting has not been applied
to options granted prior to October 30, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years.
The following schedule summarizes stock option activity and status:
Year Ended
-----------------------------------------------------------------------------
October 26, 1997 October 27, 1996 October 29, 1995
----------------------- ------------------------ -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding at beginning of year 334,000 $ 10.14 284,000 $ 11.98 264,000 $ 12.00
Granted 81,000 6.65 185,000 8.34 30,000 11.79
Cancelled (44,000) 10.70 (135,000) 11.54 (10,000) 12.00
------- ------- -------
Outstanding at end of year 371,000 $ 9.31 334,000 $ 10.14 284,000 $ 11.98
======= ======= =======
Exercisable, end of year 135,000 $ 10.69 90,000 $ 11.28 81,000 $ 11.98
======= ======= =======
The weighted average fair value of options granted during 1997 and 1996
was $252,000 and $604,000, respectively. The fair value of the options
granted were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for grants in 1997 and
1996: risk-free interest rate of 6.2% and 5.9%, respectively, expected
volatility of 63.1% and 49.0%, respectively, dividend yield of 1.4% and
1.1%, respectively, and expected life of 6 years in both 1997 and 1996.
F-18
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Options Life in Years Price Options Price
$5.88 - $8.00 127,000 9.17 $ 6.39 10,000 $ 5.96
$8.88 - $11.38 100,000 8.09 $ 9.13 42,000 $ 9.24
$12.00 144,000 7.19 $ 12.00 83,000 $ 12.00
-------- -------
371,000 8.11 $ 9.31 135,000 $ 10.69
======== ========
15. BUSINESS SEGMENTS
The Company operates in two business segments: Engineered Component
Products and Specialized Equipment. The Engineered Component Products
segment includes the Motor Companies, Snowmax and Dura-Bond. The
Specialized Equipment segment includes Sooner, DewEze and Great Bend.
Summarized financial information by business segment for 1997, 1996 and
1995 is as follows:
October 26, October 27, October 29,
1997 1996 1995
Identifiable assets:
Engineered Component Products $ 67,095,000 $ 67,232,000 $ 67,109,000
Specialized Equipment 42,778,000 38,491,000 40,015,000
Corporate 1,808,000 2,172,000 1,595,000
------------- ------------- -------------
Total identifiable assets $ 111,681,000 $ 107,895,000 $ 108,719,000
============= ============= =============
Years Ended
---------------------------------------------------------------
October 26, October 27, October 29,
1997 1996 1995
Net sales:
Engineered Component Products $ 78,950,000 $ 71,987,000 $ 57,375,000
Specialized Equipment 64,111,000 56,229,000 50,626,000
------------- ------------- -------------
Total net sales $ 143,061,000 $ 128,216,000 $ 108,001,000
============= ============= =============
Income (loss) from operations:
Engineered Component Products $ 8,906,000 $ 6,812,000 $ 9,666,000
Specialized Equipment 4,505,000 3,634,000 6,786,000
Corporate (4,816,000) (4,444,000) (3,683,000)
------------- ------------- -------------
Total income (loss) from operations $ 8,595,000 $ 6,002,000 $ 12,769,000
============= ============= =============
Capital additions:
Engineered Component Products $ 3,596,000 $ 2,795,000 $ 2,353,000
Specialized Equipment 1,555,000 1,123,000 1,719,000
Corporate 184,000 428,000 365,000
------------- ------------- -------------
Total capital additions $ 5,335,000 $ 4,346,000 $ 4,437,000
============= ============= =============
Depreciation and amortization expense:
Engineered Component Products $ 4,150,000 $ 4,057,000 $ 2,334,000
Specialized Equipment 1,791,000 2,052,000 1,769,000
Corporate 259,000 189,000 110,000
------------- ------------- -------------
Total depreciation and
amortization expense $ 6,200,000 $ 6,298,000 $ 4,213,000
============= ============= =============
F-19
16. QUARTERLY INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Year Ended October 26, 1997:
- ----------------------------
Net sales $ 30,162,000 $ 37,567,000 $ 38,291,000 $ 37,041,000
Gross profit 7,009,000 8,860,000 8,875,000 9,162,000
Income (loss) before taxes (96,000) 1,472,000 1,778,000 1,497,000
Net income (loss) (55,000) 819,000 934,000 853,000
Net income (loss) available
for common shareholders (315,000) 558,000 672,000 589,000
Net income (loss) per
common share $ (0.05) $ 0.10 $ 0.12 $ 0.10
Year Ended October 27, 1996:
- ----------------------------
Net sales $ 27,919,000 $ 33,443,000 $ 33,295,000 $ 33,559,000
Gross profit 7,031,000 7,967,000 8,526,000 6,410,000
Income (loss) before taxes 607,000 969,000 1,592,000 (1,045,000)
Net income (loss) 368,000 539,000 844,000 (903,000)
Net income (loss) available
for common shareholders 113,000 284,000 587,000 (1,161,000)
Net income (loss) per
common share $ 0.02 $ 0.05 $ 0.10 $ (0.20)
Fourth Quarter Adjustments - In the fourth quarter of fiscal 1996, the
Company recorded $600,000 in selling, general and administrative expenses
as a result of write-offs of doubtful accounts and additions to its
reserve for doubtful accounts at its Snowmax subsidiary. At the end of
fiscal 1996, the Company also recognized a reduction in inventory value of
$1,093,000, consisting of physical inventory adjustments ($267,000), lower
inventory valuations due to lower material, labor and overhead costs and a
change in the method of valuing Sooner's finished goods ($576,000), and an
additional reserve for obsolete inventory ($250,000). These adjustments
were made in connection with the Company's year-end physical inventory
valuation process and charged to cost of products sold. During the second
half of fiscal 1996, the Company undertook an inventory reduction program
at its Snowmax subsidiary. This led to an increase in cost of products
sold of $240,000 in the third quarter and $493,000 in the fourth quarter.
The Company's effective tax rate for the full year was 60.1%, a higher
rate than had been expensed during the first three quarters of the year.
The effect of increasing income tax expense in the fourth quarter to bring
the full year rate to that level was approximately $300,000.
F-20
Seasonality
Sales of certain of the Company's specialized equipment tend to be
seasonal with lowest sales during the first fiscal quarter and higher
sales during the fourth fiscal quarter, corresponding with the fall
harvest season for farmers. Sales of the Company's engineered component
products experience less seasonality but generally are lowest during the
first fiscal quarter.
Cyclicality
The Company's Engineered Component Products segment is subject to changes
in the overall level of domestic economic activity. The Specialized
Equipment segment is subject to changes in certain sectors of the
agricultural economy, which may be influenced by climate changes and
governmental policy. The segment's horse trailer sales, which have not
tended to be affected by changes in the agricultural economy, have had a
moderating effect on the results of the entire Specialized Equipment
segment, but are subject to the overall domestic business cycle.
******
F-21
Schedule II
Owosso Corporation
Valuation and Qualifying Accounts and Reserves
For the three years ended October 26, 1997
- --------------------------------------------------------------------------------
Balance at Charged to Balance at
Beginning Costs and Deductions End of
of Period Expenses (a) Period
--------- -------- --- ------
For the year ended October 26, 1997 Allowances on:
Accounts receivable $ 509,000 $ 249,000 $ (458,000) $ 300,000
Inventory 565,000 1,010,000 (959,000) 616,000
For the year ended October 27, 1996 Allowances on:
Accounts receivable $ 155,000 $ 647,000 $ (293,000) $ 509,000
Inventory 294,000 1,216,000 (945,000) 565,000
For the year ended October 29, 1995 Allowances on:
Accounts receivable $ 268,000 $ 94,000 $ (207,000) $ 155,000
Inventory 300,000 100,000 (106,000) 294,000
(a) Amounts written off against related assets
F-22