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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 25, 1998 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 20, 1999, the aggregate market value of the Registrant's Common
Stock, $.01 par value, held by nonaffiliates of the Registrant was approximately
$16,900,000.
On January 20, 1999, 5,815,842 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
24, 1999 are incorporated by reference into Part III of this Form 10-K.
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 eight states and
sells its products nationwide.
The Company's subsidiaries included in the Engineered Component
Products segment are:
o The "Motor Companies":
o Motor Products - Owosso Corporation ("Motor Products") - acquired 1973
o Motor Products - Ohio Corporation ("MP-Ohio") - incorporated 1995
o Stature Electric, Inc. ("Stature") - acquired October 1995
o Owosso Motor Group, Inc, ("Motor Group") - acquired September 1996
o Cramer Company ("Cramer") - merged into M.H. Rhodes, Inc., June 30, 1998
o M.H. Rhodes, Inc. ("Rhodes") - acquired June 30, 1998
o Snowmax, Incorporated, ("Snowmax") - acquired 1989
o Astro Air Acquisition, Inc. ("Astro Air") - acquired April 26, 1998
o The Landover Company ("Dura-Bond") - acquired 1987
The Company's subsidiaries included in the Specialized Equipment
segment are:
o Sooner Trailer Manufacturing Co. ("Sooner") - acquired 1994
o Parker Industries ("Parker") - acquired 1985
o Great Bend Manufacturing, Inc. ("Great Bend") - sold April 26, 1998
o DewEze Manufacturing, Inc., ("DewEze") - sold July 24, 1998
Strategy
During the second quarter of fiscal 1998, the Company announced its
intention to exit the three agricultural businesses included in its Specialized
Equipment segment in order to focus its resources on expanding the Company's
Engineered Component Products segment and improving its trailer business. As the
first step in this process, the Company completed the sale of substantially all
of the assets of Great Bend to Allied Products Corporation, effective April 26,
1998. On July 24, 1998, the Company completed the sale of the assets of DewEze
to Harper Industries, a company formed by the president of the subsidiary. On
December 10, 1998, the Company announced the signing of a letter of intent to
sell Parker to Top Air Manufacturing. In order to expand the Company's component
businesses, the Company acquired, effective April 26, 1998, substantially all of
the assets of Astro Air, Inc., a Jacksonville, Texas manufacturer of heat
transfer "fin and tube" coils. In addition, on June 30, 1998, the Company
completed the acquisition of all of the outstanding stock of M.H. Rhodes, Inc.,
a publicly-held manufacturer of mechanical timers and photo electric controls,
located in Avon, Connecticut. Additional 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.
Products
Engineered Component Products
The Company's Engineered Component Products business consists of the
Motor Companies, Snowmax, Astro Air and Dura-Bond. The Motor Companies
manufacture electric motors and timers, primarily for use in non-automotive
transportation, healthcare and other industrial applications. Snowmax and Astro
Air manufacture heat transfer coils for use in non-automotive transportation,
commercial refrigeration 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, Snowmax and Astro Air are sold primarily to original equipment
manufacturers, which incorporate these components into their end products.
Dura-Bond sells its products to engine rebuilders primarily 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.
3
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
AC and DC motors and gear motors (1 horsepower or more), electromechanical
timers (which incorporate the Company's subfractional horsepower motors) and
mechanical timers. 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 large
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.
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 and truck, bus and van heating
and air conditioning systems. 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
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 1998, 1997 and 1996, the Company
sold replacement camshaft bearings suitable for use in rebuilding approximately
1,400,000, 1,700,000 and 1,900,000 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
Sooner and Parker businesses. Sooner designs and manufactures all-aluminum
trailers, primarily horse, livestock and other specialty trailers. Parker
designs and manufactures grain wagons, auger carts, weigh wagons and related
agricultural equipment.
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 1998 were horse
trailers, and the Company expects horse trailers to continue to be Sooner's
primary product.
4
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 $150,000.
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.
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.
Manufacturing
The Company's manufacturing operations are conducted independently in
separate facilities by each of the Company's subsidiaries. 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 the 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
most of the Company's production operations.
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.
5
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 are 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 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. Sooner's trailers are sold
through independent dealers primarily to horse owners, farmers, ranchers,
breeders and trainers. Sooner has arrangements with a number of financial
institutions to provide floor plan financing for its dealers, which requires the
repurchase of repossessed products from the financial institutions in the event
of default by the financed dealer. End users of the Company's grain handling
equipment are typically farmers and ranchers. 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.
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.
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.
6
Specialized Equipment
In the Specialized Equipment segment, the Company competes against
several companies with respect to each of its product lines. Sooner's
all-aluminum trailers compete primarily based on product quality, durability,
weight and brand name recognition. In the grain handling equipment line, the
Company's brand name recognition and reputation for high quality and durability
outweigh the need to be the low cost provider.
Backlog
The Company's backlog of unfilled orders as of December 22, 1998 and
December 21, 1997 was as follows:
December 22, December 21,
1998 1997
------------ ------------
(In thousands)
Engineered Component Products $34,567 $29,195
Specialized Equipment 4,024 12,735
------- -------
Total $38,591 $41,930
======= =======
The Company expects to fill substantially all of the December 22, 1998 backlog
by the end of fiscal 1999.
Employees
The Company has approximately 1,800 employees, of which approximately
150 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. In addition, approximately 120 employees at the Company's
Avon, Connecticut facility are represented by a labor union, the International
Association of Machinists, under a two-year collective bargaining agreement
which expires in September 1999. 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 Parker Industries 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.
7
Gerry Averett has been president of Snowmax, which manufactures heat
transfer coils, 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.
Charles Barnett has been president of Dura-Bond, which manufactures
replacement camshaft bearings and valve seats and shims, since January 1995.
Prior to 1995, Mr. Barnett served as a 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 1982 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 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.
Rex Dacus has been president of Astro Air, which manufactures heat
transfer coils, since its acquisition by the Company in April 1998. Prior to the
acquisition, Mr. Dacus was involved in the management of Astro Air, Inc. since
1982 and became its president and the principal stockholder in 1984.
Randall James has been 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.
Joseph Morelli has been president of Rhodes, which manufactures
mechanical timers and photo electric controls, since its acquisition by the
Company in June 1998. Prior to the acquisition, Mr. Morelli was President and
Chairman of the Board of M.H. Rhodes, Inc., a position he held since 1989.
William Rohm has been the president of Motor Products, which produces
fractional horsepower motors, since November 1986. Before 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.
8
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."
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. ...............37 President, Chief Executive
Officer, and Director
Harry Holiday, III ..................42 Executive Vice President and
Chief Operating Officer
John H. Wert, Jr. ...................38 Senior Vice President
- Finance, Chief Financial
Officer, Treasurer and
Secretary
Brian D. Tidwell ....................37 Vice President of Operations
Steve R. Shubert ....................36 Chief Information Officer
George B. Lemmon, Jr. became President of the Company in May 1996, and
has served as Chief Executive Officer of the Company since August 1995 and as a
director of the Company since March 1994. Mr. Lemmon was also the Company's
Secretary and Treasurer from March 1994 until June 1996. From January 1995 of
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.
9
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.
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.
Steve R. Shubert joined the Company as its Chief Information Officer in
December 1998. Prior to joining the Company, Mr. Shubert served as the Chief
Information Officer of American Sunroof Company, where he had worked since 1996.
From 1994 until 1996, he served as the Director of Information Systems at the
E.L. Weigand division of Emerson Electric Co. From 1991 until 1994, he was the
Manager of Information Systems at the Convatec division of Bristol-Myers Squibb,
Inc. Prior to 1991, he was the Manager of Information Systems at the Harris
Calorific division of Emerson Electric Co., a position he held since 1988. From
1985 until 1988, he served as a systems administrator at Cummins Engines.
10
Item 2. Properties
The following table sets forth information relating to the Company's
manufacturing facilities. Unless otherwise indicated, the Company owns these
manufacturing facilities.
Total Square Manufacturing
Business Segment Location Footage Square Footage
- ---------------------------------------------------------------------------------------------------
Engineered Component
Products: Owosso, Michigan 86,900 67,400
Watertown, New York (1) 112,000 107,800
Avon, Connecticut 92,000 82,000
Barberton, Ohio (2) 29,700 27,400
Carson City, Nevada (3) 75,100 59,600
Kilgore, Texas (4) 90,000 86,600
Jacksonville, Texas (5) 133,000 123,000
Specialized Equipment: Duncan, Oklahoma (6) 122,000 112,300
Jefferson, Iowa 58,450 48,750
- --------------------
(1) This facility is subject to a mortgage securing a $5.8 million industrial
revenue bond financing.
(2) The lease for this facility expires in 2000 and provides for annual rental
payments of approximately $83,000.
(3) This facility is subject to a mortgage securing a $5.0 million industrial
revenue bond financing.
(4) This facility is subject to a $436,000 mortgage.
(5) The lease for this facility expires in 2001 and provides for annual rental
payments of approximately $250,000.
(6) This facility is subject to a $778,000 mortgage.
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 $233,000 plus taxes and certain other charges, with future rental
increases 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 than 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.
11
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.
High Low
---- ---
Fiscal year ended October 25, 1998:
First Quarter $ 7 15/16 $ 7 1/2
Second Quarter $ 8 3/16 $ 7 1/4
Third Quarter $ 7 9/16 $ 5 3/4
Fourth Quarter $ 6 15/16 $ 4 7/8
Fiscal year ended October 26, 1997:
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
As of January 7, 1999, there were approximately 115 holders of record
of the Company's common stock and an estimated number of beneficial owners of
the common stock of approximately 740.
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.
12
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."
Year Ended
------------------------------------------------------------
Oct. 25, Oct. 26, Oct. 27, Oct. 29, Oct. 30,
1998(1) 1997 1996 1995(2) 1994(3)
-------- -------- -------- -------- --------
(in thousands)
STATEMENT OF OPERATIONS DATA:
Net sales $159,968 $143,061 $128,216 $108,001 $73,799
Cost of products sold 125,419 109,867 98,948 77,629 52,750
------- ------- ------ ------ ------
Gross profit 34,549 33,194 29,268 30,372 21,049
Selling, general and administrative expenses 20,581 19,783 18,822 13,920 9,487
Corporate expenses 5,883 4,816 4,444 3,683 2,417
Restructuring charge 909 -- -- -- --
------- ------- ------ ------ ------
Income from operations 7,176 8,595 6,002 12,769 9,145
Interest expense 4,912 4,143 4,081 2,876 1,855
Gain on sale of business 2,775 -- -- -- --
Write-down of net assets held for sale (1,635) -- -- -- --
Other income 98 199 202 390 698
------- ------- ------ ------ ------
Income before income taxes 3,502 4,651 2,123 10,283 7,988
Income tax expense (benefit) 2,800 2,100 1,275 3,900 (801)
------- ------- ------ ------ ------
Net income $702 $2,551 $848 $6,383 $8,789
======
Dividends and accretion on preferred stock (1,070) (1,047) (1,025) --
------- ------- ------ ------
Net (loss) income available to
common stockholders ($368) $1,504 ($177) $6,383
====== ====== ====== ======
Basic and diluted (loss) income per common
share ($0.06) $0.26 ($0.03) $1.09
Weighted average number of common shares
outstanding (basic) 5,813 5,809 5,839 5,865
13
Year Ended
-----------------------------------------------------------
Oct. 25, Oct. 26, Oct. 27, Oct. 29, Oct. 30,
1998 1997 1996 1995(2) 1994(3)
-------- -------- -------- -------- --------
(in thousands)
PRO FORMA DATA:
Income before pro forma tax provision and
cumulative effect of accounting
change $7,988
Pro forma tax provision (4) 2,836
------
Pro forma net income $5,152
======
Pro forma net income per common share $1.06
======
Pro forma common shares outstanding (5) 4,847
OTHER DATA:
Capital expenditures $9,573 $5,335 $4,346 $4,437 $2,000
Depreciation and amortization 7,115 6,200 6,298 4,213 2,786
EBITDA (6) 14,291 14,795 12,300 16,982 11,931
Oct. 25, Oct. 26, Oct. 27, Oct. 29, Oct. 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital $19,651 $24,611 $20,385 $20,564 $18,489
Total assets 125,206 111,681 107,895 108,719 66,118
Total short-term and long-term obligations 68,524 54,848 53,814 52,799 33,106
Stockholders' equity 34,643 36,730 37,020 39,570 21,671
- --------------------------------------------------------------------------------
(1) Includes the results of operations of Great Bend and DewEze through their
dates of disposition, April 26, 1998 and July 24, 1998, respectively. Also
includes the results of operations of Astro Air and M.H. Rhodes from their
dates of acquisition, April 26, 1998 and June 30, 1998, respectively.
(2) 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.
(3) Excludes the results of operations of Sooner, which was acquired as of
October 30, 1994.
(4) Reflects federal income taxes as if the Company had not been an S
Corporation during these periods.
(5) 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).
(6) EBITDA represents income before income taxes, interest expense, other income
and expense 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.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Owosso Corporation ("the Company") is a diversified manufacturer of products in
narrowly defined niche markets. The Company's operating subsidiaries (including
those sold in fiscal 1998) include:
o The "Motor Companies":
o Motor Products - Owosso Corporation ("Motor Products")
o Motor Products - Ohio Corporation ("MP-Ohio")
o Stature Electric, Inc. ("Stature")
o Owosso Motor Group, Inc. ("Motor Group")
o Cramer Company ("Cramer") - merged into M.H. Rhodes, Inc., June 30, 1998
o M.H. Rhodes, Inc. ("Rhodes") - acquired June 30, 1998
o Snowmax, Incorporated ("Snowmax")
o Astro Air Acquisition, Inc. ("Astro Air") - acquired April 26, 1998
o The Landover Company ("Dura-Bond")
o Sooner Trailer Manufacturing Co. ("Sooner")
o DewEze Manufacturing, Inc. ("DewEze") - sold July 24, 1998
o Parker Industries ("Parker")
o Great Bend Manufacturing Company, Inc. ("Great Bend") - sold April 26, 1998
The Company currently operates in two business segments, Engineered Component
Products (the Motor Companies, Snowmax, Dura-Bond, and Astro Air), and
Specialized Equipment (Sooner, Parker, and DewEze and Great Bend prior to their
dispositions). In the Engineered Component Products segment, the Company's
products, fractional and integral HP motors (manufactured by Motor Products,
MP-Ohio, and Stature), subfractional HP motors and timers (manufactured by
Cramer and Rhodes), heat transfer "fin and tube" coils (manufactured by Snowmax
and Astro Air) and replacement cam shaft bearings (manufactured by Dura-Bond),
are sold primarily to original equipment manufacturers or service providers who
use them in their end products or services. The products sold in the Specialized
Equipment segment, all-aluminum trailers (manufactured by Sooner) and
agricultural equipment (manufactured by Parker, and by DewEze and Great Bend,
prior to their dispositions), are almost exclusively final products sold through
dealers to their users. Nearly all of the Company's customers are located in
North America.
During the second fiscal quarter of 1998, the Company announced its intention to
exit the three agricultural equipment businesses included in its Specialized
Equipment segment in order to focus its resources on expanding the Company's
Engineered Component Products businesses and improving the performance of its
trailer business.
As the first step in this process, the Company completed the sale of
substantially all of the assets of its Great Bend subsidiary to Allied Products
Corporation, effective April 26, 1998. Proceeds from the sale were approximately
$9.9 million, plus the assumption of approximately $2.1 million in liabilities.
The Company recorded a gain on the sale of $2.8 million ($924,000, net of tax).
On July 24, 1998, the Company completed the sale of the assets of DewEze to
Harper Industries, Inc., a company formed by the president of the subsidiary.
Proceeds from the sale were approximately $4.2 million in cash and a note for
$700,000, plus the assumption of approximately $600,000 in liabilities. Gain on
the sale of DewEze of $101,000 has been deferred until maturity of the note in
October 2005. The Company has no further commitments or contingencies related to
the sale of DewEze.
15
On December 10, 1998, the Company announced the signing of a letter of intent to
sell the business and assets of its Parker Industries subsidiary to Top Air
Manufacturing, Inc. of Cedar Falls, Iowa. The letter of intent calls for Top Air
to purchase all of the assets of Parker with a combination of cash, a note and
the assumption of specified liabilities. The transaction is contingent upon,
among other things, completion of due diligence and negotiating a definitive
asset purchase agreement. Completion of an agreement is anticipated to occur
during the first calendar quarter of 1999. Based upon the proposed terms of the
sale, the Company has recorded a pre-tax charge of $1.6 million to adjust the
carrying value of Parker's assets to their estimated fair market value. The
carrying value of the net assets of Parker, which is a component of the
Specialized Equipment segment, are included in the consolidated balance sheet as
"Net Assets Held for Sale."
Effective April 26, 1998, the Company acquired substantially all of the assets
of Astro Air, Inc. ("Astro Air"), a Jacksonville, Texas manufacturer of "fin and
tube" heat transfer coils, for $8.0 million in cash, plus the repayment, shortly
after closing, of approximately $2.7 million of debt. In connection with the
acquisition, the Company has entered into a five-year consulting agreement with
Dacus Properties, Inc. ("DPI"), the former owner of Astro Air, under which DPI
will receive 3.4% of the net revenues generated by certain specified customers.
The Company recorded $425,000 in connection with this agreement in 1998 as
goodwill based upon related 1998 revenues.
On June 30, 1998, the Company completed the acquisition of all of the
outstanding stock of M.H. Rhodes, Inc. ("Rhodes"), a publicly held manufacturer
of mechanical timers and photoelectric controls, located in Avon, Connecticut.
The purchase price aggregated $2.9 million, plus the assumption or repayment of
debt of approximately $1.2 million. The Company has consolidated the operations
of its Cramer subsidiary, previously located in Old Saybrook, Connecticut, into
Rhodes' manufacturing facility, recording a $909,000 restructuring charge and
incurring an additional $929,000 in other merger-related expenses in 1998. See
"Restructuring Charge."
Results of Operations
The following table sets forth for the periods indicated the percentage
relationship that certain items in the Company's Condensed Consolidated
Statements of Operations bear to net sales.
Year Ended
----------------------------------------
October 25, October 26, October 27,
1998 1997 1996
----------- ----------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of products sold 78.4% 76.8% 77.2%
----- ----- -----
Gross profit 21.6% 23.2% 22.8%
Expenses:
Selling, general and administrative 12.8% 13.8% 14.7%
Corporate 3.7% 3.4% 3.4%
Restructuring charge 0.6% 0.0% 0.0%
----- ----- -----
Income from operations 4.5% 6.0% 4.7%
Interest expense 3.1% 2.9% 3.2%
Gain on sale of business 1.7% 0.0% 0.0%
Write-down of net assets held for sale -1.0% 0.0% 0.0%
Other income 0.1% 0.2% 0.2%
----- ----- -----
Income before income taxes 2.2% 3.3% 1.7%
Income tax expense 1.8% 1.5% 1.0%
----- ----- -----
Net income 0.4% 1.8% 0.7%
Dividends and accretion on preferred stock 0.6% 0.7% 0.8%
----- ----- -----
Net (loss) income available for common stockholders -0.2% 1.1% -0.1%
===== ===== =====
16
Selected financial results for the Company by business unit and by segment are
set forth below:
Segment and Business Unit Operating Results
(In Thousands)
Year Ended
---------------------------------------------
October 25, October 26, October 27,
1998 1997 1996
----------- ----------- -----------
Net Sales:
Engineered Component Products:
Fractional and integral HP motors $ 54,188 $ 46,865 $ 39,066
Subfractional HP motors and timers 7,519 7,528 8,631
Heat transfer coils 30,555 15,515 14,904
Replacement camshaft bearings and valve seats/shims 8,748 9,042 9,386
-------- -------- --------
Total Engineered Component Products 101,010 78,950 71,987
-------- -------- --------
Specialized Equipment:
Aluminum Trailers 34,148 30,308 28,739
Grain handling equipment (1) 11,715 12,697 10,749
Front-end loaders (2) 7,251 13,689 10,065
Bale handling/processing equipment and mowers (3) 5,844 7,417 6,676
-------- -------- --------
Total Specialized Equipment 58,958 64,111 56,229
-------- -------- --------
Total Net Sales $ 159,968 $ 143,061 $128,216
========== ========= ========
Business Unit Income (Before Corporate Expenses) (4):
Engineered Component Products:
Fractional and integral HP motors $ 7,384 $ 6,168 $ 4,857
Subfractional HP motors and timers (2,429) (197) (191)
Heat transfer coils 3,571 1,558 (448)
Replacement camshaft bearings and valve seats/shims 1,463 1,377 2,594
-------- -------- --------
Total Engineered Component Products 9,989 8,906 6,812
-------- -------- --------
Specialized Equipment:
Aluminum Trailers 1,388 1,243 1,789
Grain handling equipment (1) 740 1,044 1,265
Front-end loaders (2) 670 1,466 428
Bale handling/processing equipment and mowers (3) 272 752 152
-------- -------- --------
Total Specialized Equipment 3,070 4,505 3,634
-------- -------- --------
Total Business Unit Income $ 13,059 $ 13,411 $10,446
======== ======== ========
- --------------------------------------------------------------------------------
(1) Represents the operations of Parker which the Company anticipates selling in
the first quarter of 1999.
(2) Represents the operations of Great Bend, sold April 26, 1998.
(3) Represents the operations of DewEze, sold July 24, 1998.
(4) Business unit income represents income from operations before the allocation
of corporate expenses of $5,883,000, $4,816,000 and $4,444,000 for 1998,
1997 and 1996, respectively. Business unit income for 1998 includes a
restructuring charge of $909,000 related to the merger of Cramer into
Rhodes.
Year ended October 25, 1998 compared to year ended October 26, 1997
Net sales. Net sales for the year ended October 25, 1998 increased 11.8%, to
$160.0 million, as compared to net sales of $143.1 million in 1997. These
results include both the effects of disposing of Great Bend and DewEze, and
acquiring Astro Air. Sales attributable to Great Bend were $7.3 million in 1998
and $13.7 million in 1997. Sales attributable to DewEze were $5.8 million in
1998 and $7.4 million in 1997. Sales attributable to Astro Air included in 1998
results were $13.4 million. Exclusive of the effects of Great Bend, DewEze, and
Astro Air, sales increased 9.5% as compared to the prior year.
17
In the Company's Engineered Component Products segment, net sales increased
$22.1 million, or 27.9%, to $101.0 million in 1998 from $78.9 million in 1997.
This increase reflects $13.4 million in net sales at Astro Air, acquired at the
end of the second quarter of 1998. This increase also reflects a 13.4% increase
in sales at the Motor Companies as a result of increased sales volume to
existing customers and the addition of new customers and a 10.7% increase in
sales of heat transfer coils at Snowmax, primarily as a result of increased unit
volume.
Net sales in the Specialized Equipment segment decreased 8.0%, to $59.0 million
in 1998, as compared to $64.1 million in the prior year. This reflects a 12.7%,
or $3.8 million, increase in sales of aluminum trailers, offset by a 26.6%, or
$9.0 million, decrease in sales of agricultural equipment, reflecting the
dispositions of Great Bend and DewEze, and lower sales at Parker as a result of
a weak agricultural market in the second half of fiscal 1998.
Gross profit. For the year ended October 25, 1998, gross profit increased 4.1%,
to $34.5 million, or 21.6% of net sales, as compared to $33.2 million, or 23.2%
of net sales, in the prior year.
Gross profit in the Engineered Component Products segment increased 19.5%, or
$3.6 million, to $22.4 million, as compared to $18.8 million in 1997. This
increase reflects gross profit of $1.7 million attributable to Astro Air and a
23.5%, or $660,000, increase in gross profit at Snowmax, resulting from
increased sales volume and changes in product mix and lower raw material costs.
This increase was also attributable to an 11.5%, or $1.4 million increase in
gross profit at the Motor Companies, as a whole. Gross profit at the Motor
Companies was adversely affected by the write-off of approximately $327,000 of
inventory in connection with the Cramer merger into Rhodes. As a percentage of
sales, gross profit decreased to 22.2%, from 23.7% in the prior year. This
decrease was primarily attributable to the inclusion of Astro Air, which has
lower margins as compared to the other companies in this segment, and the Cramer
merger-related costs.
In the Specialized Equipment segment, gross profit was $12.1 million in 1998, as
compared to $14.4 million in 1997. In response to disappointing operating
results in the first quarter of 1998, the Company discontinued the production of
certain low-margin livestock trailers and instituted price increases on certain
other models. As a result, Sooner's gross profit increased $821,000 or 15.6%, as
compared to the prior year. This increase was offset by the effects of selling
Great Bend and DewEze, and lower gross profit at Parker as a result of lower
sales. Gross profit attributable to Great Bend and DewEze was $3.6 million in
1998 and $6.5 million in the prior year. As a percentage of sales, gross profit
decreased to 20.6%, from 22.5% in the prior year. This decrease was primarily
attributable to the disposition of Great Bend, which had higher margins as
compared to the other companies in this segment.
Selling, general and administrative expenses. As a percentage of net sales,
selling, general and administrative expenses decreased to 12.8%, or $20.6
million, in 1998, as compared to 13.8%, or $19.8 million in the prior year.
In the Engineered Component Products segment, selling general and administrative
expenses were $11.5 million, or 11.4% of net sales, in 1998, as compared to $9.8
million, or 12.4% of net sales, in 1997. The increase in selling, general and
administrative expenses in this segment was primarily the result of
approximately $602,000 of expenses related to the merger of Cramer and $574,000
related to the inclusion of the results of Astro Air. Expenses related to the
merger consisted primarily of training costs, consulting costs for enhancements
to the management information systems, temporary help, and the cost of moving
Cramer's facility. The increase in selling, general and administrative costs was
also a result of increased sales and administrative personnel costs and
increased engineering costs in response to increased sales at the Motor
Companies.
18
In the Specialized Equipment segment, selling, general and administrative
expenses were $9.1 million, or 15.4% of net sales, in 1998, as compared to
$10.0 million, or 15.5% of net sales, in the prior year. The decrease in
selling, general and administrative expenses in this segment was primarily the
result of the effect of disposing of Great Bend and DewEze, partially offset by
an increase in sales personnel and increased advertising and promotional costs
at Sooner.
Corporate expenses. For 1998, corporate expenses were $5.9 million, or 3.7% of
net sales, as compared to $4.8 million, or 3.4% of net sales in the prior year.
Corporate expenses increased primarily as a result of higher personnel and
related costs and increased consulting and legal and professional expenses.
Restructuring charge. In connection with the merger of the Company's Cramer
subsidiary into Rhodes and the consolidation of Cramer's manufacturing into
Rhodes' manufacturing facility, the Company recorded a restructuring charge of
$909,000 in the third quarter of 1998. The restructuring charge included
$583,000 for the termination of the lease on Cramer's Old Saybrook, Connecticut
manufacturing facility, $102,000 for the write-off of inventory for discontinued
product lines, $174,000 for employee severance and termination benefits for 74
employees, and $50,000 for the write-off of manufacturing equipment. The amount
of actual termination benefits subsequently paid and charged against the
liability and the actual number of employees terminated did not differ
significantly from the original estimates. At October 25, 1998, approximately
$125,000 of accrued restructuring costs is included in accrued expenses and
accrued compensation and benefits. The Company anticipates that the remaining
restructuring costs will be paid by the end of the third quarter of fiscal 1999.
Income from operations. For the year ended October 25, 1998, income from
operations was $7.2 million, as compared to $8.6 million, in 1997. This decrease
reflects a $909,000 restructuring charge and $929,000 of merger-related
expenses incurred in connection with the Cramer merger into Rhodes, as discussed
above.
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 and before the restructuring charge. 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 22.1%, to $10.9 million in 1998, as compared to $8.9 million in 1997.
This increase in business unit income was primarily a result of the acquisition
of Astro Air and strong sales and improved margins at Snowmax. This increase was
partially offset by reduced business unit income at the Motor Companies,
attributable to the Company's Cramer subsidiary, which experienced weak sales,
reduced margins and merger-related expenses. As a percentage of net sales,
business unit income for this segment decreased to 10.8% in 1998, from 11.3% in
1997. This decrease was primarily a result of decreased margins at the Motor
Companies, primarily related to Cramer merger costs, partially offset by
improved margins at Snowmax. This decrease was also attributable to the
inclusion of Astro Air, which has lower margins as compared to other companies
in this segment.
Business unit income from the Specialized Equipment segment was $3.1 million in
1998, as compared to $4.5 million, in 1997. These results reflect a $1.6 million
decrease in business unit income from the agricultural equipment companies,
primarily as a result of the dispositions of Great Bend and DewEze, and reduced
business unit income at Parker as a result of decreased sales. This decrease was
offset by increased business unit income from Sooner Trailer, primarily as a
result of changes in product mix. Business unit income attributable to Great
Bend and DewEze was $942,000 and $2.2 million in 1998 and 1997, respectively.
19
Interest expense. For 1998, interest expense increased to $4.9 million, as
compared to $4.1 million in 1997, primarily as a result of increased borrowings
under the Company's revolving credit agreement.
Income tax expense. The Company's effective income tax rate was 80.0% for 1998,
as compared to 45.2% in the prior year. The effective tax rate for 1998 has been
adversely affected as a result of differences between the book and tax basis of
assets at the time of sale and 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 loss available for
common stockholders was $368,000, or $.06 per share in 1998, as compared to net
income available for common stockholders of $1.5 million, or $.26 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 1998 and 1997 and
by deducting the non-cash accretion in book value of preferred stock of $320,000
and $297,000 for 1998 and 1997, respectively. The current period results include
the gain on the sale of Great Bend and a restructuring charge and other
merger-related costs incurred in connection with the merger of Cramer into
Rhodes.
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 attributable 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 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 13.4% to $33.2 million, or 23.2%
of net sales, from $29.3 million, or 22.8% of net sales in 1996.
Gross profit in the Engineered Component Products segment was $18.8 million, or
23.7% of net sales, as compared to $16.6 million, or 23.1% 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 $12.7 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.
20
Selling, general and administrative expenses. As a percentage of net sales,
selling, general and administrative expenses decreased to 13.8%, or $19.8
million, from 14.7% of net sales, or $18.8 million in 1996. In the Engineered
Component Products segment, selling, general and administrative expenses
decreased to 12.4% of net sales, or $9.8 million, from 13.6% of net sales, or
$9.8 million in 1996. In the Specialized Equipment segment, selling, general and
administrative expenses decreased to 15.5% of net sales, or $10.0 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 3.4% 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.
Business unit income, which is defined as income from operations before
allocation of corporate expenses, 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 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 an 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 pre-tax
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.
Liquidity and Capital Resources
At October 25, 1998, cash and cash equivalents were $191,000, exclusive of $1.9
million of cash that was restricted under industrial revenue financings. Working
capital decreased to $19.7 million at October 25, 1998 from $24.6 million at
October 26, 1997. This decrease was principally a result of the reclassification
of Parker's net assets as held for sale. Net cash used in operating activities
was $807,000, as compared to net cash provided by operating activities of $6.7
million in the prior year period. The decrease in cash from operations was
principally the result of changes in inventory levels, accounts receivable and
accounts payable and decreased operating results, reflecting the restructuring
charge recorded in the third quarter of 1998.
21
Cash from investing activities included cash proceeds from the sale of Great
Bend of $9.9 million and from the sale of DewEze of $4.2 million. Cash used in
investing activities included the acquisition of the assets of Astro Air for
$7.8 million, net of cash acquired, the acquisition of the stock of Rhodes for
$2.7 million, net of cash acquired, and $425,000 of contingent consideration
paid to the former owner of Astro Air under a consulting agreement and recorded
as goodwill. In addition, investing activities included $9.6 million for capital
expenditures for equipment. Of this amount, approximately $7.8 million was
invested in the Engineered Component Products segment, including $3.1 million
for the expansion of the Stature manufacturing facility and related machinery
and equipment, and $1.6 million in the Specialized Equipment segment. The
remainder, $673,000, was invested in computer equipment and software upgrades at
the corporate office. The Company currently plans to invest approximately $6.0
million during fiscal 1999. Management anticipates funding such capital
expenditures with cash from operations and proceeds from the Company's revolving
credit facility.
The Company is currently negotiating a joint venture agreement with a subsidiary
of its largest customer, Bergstrom, Inc. The joint venture, to be owned 90% by
the Company, will manufacture and supply heat transfer coils primarily to
Bergstrom's facility in Birmingham, England. The joint venture will be located
on property adjacent to Bergstrom's current facility in Birmingham. The Company
anticipates investing approximately $1.0 million (included in the $6.0 million
noted above) in the joint venture in 1999, to be funded primarily from proceeds
from the Company's revolving credit facility.
Financing activities included net borrowings under the Company's $55.0 million
revolving credit agreement of $13.6 million, related to increased working
capital needs, proceeds from long-term debt of $6.0 million, primarily related
to industrial revenue bonds used to finance the Stature plant expansion, debt
repayments of $8.9 million and the payment of dividends of $2.9 million.
The Company maintains a $55.0 million revolving credit agreement with two banks
with a termination date of March 31, 2000. At October 25, 1998, $48.2 million
was outstanding and $6.8 million was available for additional borrowing under
the 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 25, 1998. The agreement contains customary financial and other
covenants, including fixed charges, cash flow and net worth ratios, restrictions
on certain asset sales, mergers and other significant transactions and a
negative pledge on assets. As of October 25, 1998, the Company was not in
compliance with such covenants. On January 22, 1999, the Company entered into a
new $55.0 million revolving credit facility with the same primary banks,
expiring in December 2002. The new agreement is secured by the non-real estate
assets of the Company. Interest is payable, at the Company's option, at either
the bank's prime rate or a variable spread (2.5% at the inception of the
agreement) over LIBOR. The agreement includes financial and other covenants
similar to those in the previous agreement. The Company would have been in
compliance with the covenants contained in the new agreement at October 25, 1998
and expects to be in compliance with such covenants for the foreseeable future.
The Company has interest rate swap agreements with its two banks with notional
amounts totaling $15.0 million and maturing in July 2002. 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.
22
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.
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 deemed
appropriate pursuant to applicable federal, state and local environmental
regulations.
The Company is a party to a consent decree with the State of Connecticut
pursuant to which it has agreed to complete its environmental investigation of
the site on which its Cramer facility was previously located and conduct any
remedial measures which may be required. 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. Based upon the amounts recorded as liabilities, the
Company does not believe that the ultimate 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 (the "EPA") 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.
Rhodes has been named as a potentially responsible party with respect to a
hazardous disposal site currently under remediation by the EPA under its
"Superfund" program. Based on the minimal amount of waste alleged to have been
contributed to the site by Rhodes, the Company expects to resolve the matter
through the payment of a de minimis amount. Rhodes is also involved in
environmental remediation at its manufacturing site, which is not subject to any
Superfund law proceeding. Based upon the amounts recorded as liabilities, the
Company does not believe that the resolution of this matter will have a material
adverse effect on the financial results of the Company.
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.
23
"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 and anticipates
being fully Year 2000 compliant by the end of July 1999. The cost to the Company
of bringing such equipment into Year 2000 compliance is expected to be
approximately $200,000. Historical costs related to Year 2000 issues have not
been material. In addition, the Company has initiated formal communications with
its significant suppliers and large customers to determine the extent to which
the Company is vulnerable to those third parties' failure to remediate their own
Year 2000 compliance issues. There can be no assurance that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company. Management believes that the Company has taken measures to minimize the
exposure of a Year 2000 disruption. The Company does not yet have a contingency
plan, but anticipates developing, by July 1999, a plan that would focus on
various types of possible business interruptions that could occur.
Recently Issued Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board (the "FASB"), issued SFAS
No. 130, Reporting Comprehensive Income. This statement, which establishes
standards for reporting and disclosure of comprehensive income, is effective for
fiscal years 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 the first quarter of fiscal 1999.
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 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. 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 its results of operations. The
Company expects to adopt SFAS No. 131 in fiscal 1999.
In March 1998, the FASB issued SFAS No. 132, Employers' Disclosure About
Pensions and Other Postretirement Benefits. This statement, which revises the
required disclosures for employee benefit plans, is effective for fiscal years
beginning after December 15, 1997, although earlier adoption is permitted.
Restatement of disclosures for earlier periods, presented for comparative
purposes, is required under SFAS No. 132. As this statement only revises
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. 132 in fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement, which establishes accounting
and reporting standards for derivative instruments and hedging activities, is
effective for fiscal years beginning after June 15, 1999, although earlier
adoption is permitted. The Company has not yet completed its analysis of the
effects of adopting this statement on its consolidated financial position or
results of operations. The Company expects to adopt SFAS No. 133 in fiscal 2000.
24
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
The following information is provided pursuant to the "Safe Harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Certain statements in
Management's Discussion and Analysis of this Form 10-K, including those which
express "belief", "anticipation" or "expectation" as well as other statements
which are not historical fact, are "forward-looking statements" made pursuant to
these provisions. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The Company cautions readers that the following important factors, among others,
have in the past affected and could in the future affect the Company's actual
results of operations and cause the Company's actual results to differ
materially from the results expressed in any forward-looking statements made by
or on behalf of the Company:
o No definitive agreement or commitment exists with regard to the sale of
Parker. Accordingly, there can be no assurance as to whether or when the sale
will be completed. The results of operations of Parker may continue to be
adversely affected as a result of the announced sale and market conditions.
o No definitive agreement exists with regard to the Company's proposed joint
venture in the United Kingdom. If the Company enters into the joint venture,
it may be subject to various risks which may include currency risk, risk
associated with compliance with foreign regulations and political and economic
risks.
o The ultimate cost and timing of the consolidation of the Cramer operations
into Rhodes and realization of anticipated cost savings in the merger may
adversely affect the operating results 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 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 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 affect the value of the Company's inventories and its profitability.
25
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 loss on the disposition
that could reduce the Company's results. In addition, acquisitions or
dispositions could effect the Company's relative mix of operating results from
engineered component products and specialized equipment, thereby effecting the
seasonality and cyclicality of such operating results.
o Although the Company has taken measures to minimize the exposure of a
Year 2000 disruption, there can be no assurance that if a disruption occurs,
it would not have a material adverse effect on the Company's operating
results.
26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company uses its revolving credit facility, industrial revenue
bonds and term loans to finance a significant portion of its
operations. These on-balance sheet financial instruments, to the extent
they provide for variable rates of interest, expose the Company to
interest rate risk resulting from changes in London Interbank Offered
Rate or the prime rate. The Company uses off-balance sheet interest
rate swap agreements to partially hedge interest rate exposure
associated with on-balance sheet financial instruments. All of the
Company's derivative financial instrument transactions are entered into
for non-trading purposes.
To the extent that the Company's financial instruments expose the
Company to interest rate risk and market risk, they are presented in
the table below. The table presents principal cash flows and related
interest rates by year of maturity for the Company's revolving credit
facility, industrial revenue bonds and term loans in effect at October
25, 1998. For interest rate swaps, the table presents notational
amounts and the related reference interest rates by year of maturity.
Fair values included herein have been determined based upon (1) rates
currently available to the Company for debt with similar terms and
remaining maturities, and (2) estimates obtained from dealers to
settle interest rate swap agreements. Note 8 to the consolidated
financial statements should be read in conjunction with the table
below (dollar amounts in thousands).
Year of Maturity
------------------------------------------------------------ Total Due Fair Value
1999 2000 2001 2002 2003 Thereafter at Maturity at 10/25/98
---- ---- ---- ---- ---- ---------- ----------- -----------
Debt:
Fixed rate $4,438 $2,197 $2,227 $ 957 $ 955 $3,754 $14,528 $14,528
Average interest rate 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Variable rate $ 340 $ 306 $ 300 $ 300 $48,800 $3,950 $53,996 $53,996
Average interest rate 7.8% 7.9% 7.9% 7.9% 8.0% 3.4%
Interest rate swap agreements:
Variable to fixed swaps $ -- $ -- $ -- $15,000 $ -- $ -- $15,000 $(1,150)
Average pay rate 7.1%
Average receive rate 5.7%
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and supplemental
schedules appear at pages F-1 through F-24, as set forth in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
27
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 24, 1999, 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.
28
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
1998.
(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).
*10.3 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).
*10.4 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).
*10.5 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).
29
*10.6 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).
*10.7 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).
*10.8 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).
*10.9 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).
*10.10 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).
*10.11 Management Services Agreement, by and between Snowmax,
Incorporated, and The Owosso Company, dated July 31, 1989
(Exhibit 10.33 to the 1994 Registration Statement).
*10.12 Subordinated promissory note of DewEze Manufacturing, Inc.,
issued to Howard Hershberger, dated December 18, 1991 (Exhibit
10.34 to the 1994 Registration Statement).
*10.13 Subordinated promissory note of DewEze Manufacturing, Inc.,
issued to Dewey Hostetler, dated December 18, 1991 (Exhibit
10.35 to the 1994 Registration Statement).
*10.14 Non-Competition Agreement by and between DewEze Manufacturing,
Inc. and Dewey Hostetler, dated December 18, 1991 (Exhibit
10.36 to the 1994 Registration Statement).
*10.15 Non-Competition Agreement by and between DewEze Manufacturing,
Inc. and Howard Hershberger, dated December 18, 1991 (Exhibit
10.37 to the 1994 Registration Statement).
*10.16 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).
*10.17 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).
*10.18 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).
*10.19 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).
*10.20 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).
*10.21 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).
30
*10.22 Lease, dated March 21, 1995, between Motor Products - Ohio
Corporation and William Berhard Realty Company (Exhibit 10.44
to the 1995 Form 10-K).
*10.23 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).
*10.24 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).
*10.25 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).
*10.26 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).
*10.27 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).
*10.28 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).
*10.29 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).
*10.30 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).
*10.31 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).
*10.32 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).
*10.33 Subordinated promissory note of DewEze Manufacturing, Inc.,
issued to Howard Hershberger, dated October 31, 1994 (Exhibit
2.4 to the 1994 Form 10-K).
*10.34 Subordinated promissory note of DewEze Manufacturing, Inc.,
issued to Dewey Hostetler, dated October 31, 1994 (Exhibit 2.5
to the 1994 Form 10-K).
*10.35 The Owosso Group, Plan of Reorganization dated March 25, 1994
(Exhibit 2.1 to the 1994 Registration Statement).
*10.36 Amendment No. 1 to The Owosso Group Plan of Reorganization
dated September 26, 1994 (Exhibit 2.8 to the 1994 Registration
Statement).
*10.37 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).
*10.38 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).
31
*10.39 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).
*10.40 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).
*10.41 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).#
*10.42 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).
*10.43 Loan Agreement dated September 18, 1993 between Sooner Trailer
Manufacturing Co. and American National Bank, Duncan,
Oklahoma, and Amendment No. 1 to Loan Agreement dated December
13, 1994 between the same parties (Exhibit 10.54 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
January 29, 1995).
*10.44 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")).
*10.45 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).
*10.46 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).
*10.47 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)
*10.48 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")).
*10.49 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).#
*10.50 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).
*10.51 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).
*10.52 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).
32
*10.53 Fifth Amendment to Reimbursement Agreement, dated as of
September 24, 1997, by and between The Landover Company and
NBD Bank, N.A.
*10.54 Eighth 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 29, 1997. (Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended January 25, 1998 (the "January 25, 1998 Form
10-Q")).
*10.55 Owosso Corporation 401(K) Savings Plan (Exhibit 10.2 to the
January 25, 1998 Form 10-Q).
*10.56 Ninth Amendment to Credit Agreement by and among Owosso
Corporation, its subsidiaries, NBD Bank, PNC Bank, N.A., and
NBD Bank, as Agent, dated as of March 27, 1998. (Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 26, 1998).
*10.57 1998 Long-Term Incentive Plan (Exhibit 4.1 to the Company's
Registration Statement on Form S-8 filed June 2, 1998,
Registration No. 333-55835).#
*10.58 Asset Purchase Agreement, dated March 27, 1998, by and among
Allied Products Corporation, Great Bend Manufacturing Company,
and Owosso Corporation (Exhibit 2.1 to the Company's Current
Report on Form 8-K dated April 26, 1998).
*10.59 Asset Purchase Agreement among Owosso Corporation, Astro Air
Acquisition Corp., Astro Air, Inc., Rex Dacus and Dacus
Properties, Inc., dated April 2, 1998 (Exhibit 2.2 to the
Company's Current Report on Form 8-K dated April 26, 1998).
*10.60 Agreement and Plan of Merger among Owosso Corporation, Cramer
Company and M.H. Rhodes, Inc., dated April 3, 1998 (Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 26, 1998).
*10.61 Asset Sale and Purchase Agreement dated June 22, 1998, by and
between Harper Industries, Inc., and DewEze Manufacturing,
Inc. (Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended July 26, 1998).
11 Computation of per share earnings
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.
33
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 22nd day of January, 1999.
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 22, 1999, 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
34
OWOSSO CORPORATION
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED OCTOBER 25, 1998, OCTOBER 26, 1997 AND OCTOBER 27, 1996:
Statements of Operations F-2
Balance Sheets F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-24
FINANCIAL STATEMENT SCHEDULE II F-25
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 25, 1998 and October 26, 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three fiscal years in the period ended October 25,
1998. 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 25, 1998 and October 26, 1997, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
October 25, 1998 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 10, 1998 (except as
to Note 8, to which the date
is January 22, 1999)
F-1
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------
Year Ended
---------------------------------------------------
October 25, October 26, October 27,
1998 1997 1996
Net sales $159,968,000 $143,061,000 $128,216,000
Costs of products sold 125,419,000 109,867,000 98,948,000
------------ ------------ ------------
Gross profit 34,549,000 33,194,000 29,268,000
Expenses:
Selling, general and administrative 20,581,000 19,783,000 18,822,000
Corporate 5,883,000 4,816,000 4,444,000
Restructuring charge 909,000 -- --
------------ ------------ ------------
Income from operations 7,176,000 8,595,000 6,002,000
Interest expense 4,912,000 4,143,000 4,081,000
Gain on sale of business 2,775,000 -- --
Write-down of net assets held for sale (1,635,000) -- --
Other income 98,000 199,000 202,000
------------ ------------ ------------
Income before income tax expense 3,502,000 4,651,000 2,123,000
Income tax expense 2,800,000 2,100,000 1,275,000
------------ ------------ ------------
Net income 702,000 2,551,000 848,000
Dividends and accretion on preferred stock (1,070,000) (1,047,000) (1,025,000)
------------ ------------ ------------
Net (loss) income available for common stockholders $ (368,000) $ 1,504,000 $ (177,000)
============ ============ ============
Basic and diluted (loss) income per common share $ (0.06) $ 0.26 $ (0.03)
============ ============ ============
Weighted average number of common shares outstanding:
Basic 5,813,000 5,809,000 5,839,000
============= ============= ============
Diluted 5,813,000 5,827,000 5,839,000
============= ============= ============
See notes to consolidated financial statements.
F-2
OWOSSO CORPORATION
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
October 25, October 26,
1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 191,000 $ 840,000
Receivables, net 17,919,000 19,868,000
Inventories, net 21,262,000 23,084,000
Prepaid expenses and other 1,283,000 1,153,000
Deferred taxes 733,000 1,039,000
------------ ------------
Total current assets 41,388,000 45,984,000
PROPERTY, PLANT AND EQUIPMENT, NET 35,915,000 27,443,000
GOODWILL, NET 28,155,000 29,048,000
OTHER INTANGIBLE ASSETS, NET 8,690,000 8,054,000
NET ASSETS HELD FOR SALE 7,619,000 --
RESTRICTED CASH 1,906,000 298,000
OTHER ASSETS 1,533,000 854,000
------------- ------------
TOTAL ASSETS $ 125,206,000 $111,681,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 9,762,000 $ 8,821,000
Accrued compensation and benefits 3,149,000 3,760,000
Accrued expenses 4,048,000 2,563,000
Related party debt 2,843,000 3,750,000
Current portion of long-term debt 1,935,000 2,479,000
------------ ------------
Total current liabilities 21,737,000 21,373,000
LONG-TERM DEBT, LESS CURRENT PORTION 63,746,000 48,619,000
POSTRETIREMENT BENEFITS 2,713,000 1,812,000
DEFERRED TAXES 2,367,000 3,147,000
COMMITMENTS AND CONTINGENCIES (Note 11)
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 25, 1998 and October 26, 1997 - $15,000,000) 14,285,000 13,965,000
Common stock, $.01 par value; authorized 15,000,000 shares; issued
5,866,000 shares in 1998 and 5,865,000 shares in 1997 59,000 59,000
Additional paid-in capital 21,618,000 21,612,000
Retained earnings (accumulated deficit) (918,000) 1,544,000
------------ ------------
35,044,000 37,180,000
Less treasury stock, at cost, 50,208 shares in 1998 and 56,324 shares in 1997 (401,000) (450,000)
------------ ------------
Total stockholders' equity 34,643,000 36,730,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $125,206,000 $111,681,000
============ ============
See notes to consolidated financial statements.
F-3
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Retained
Additional Earnings
Preferred Common Paid-in (Accumulated Treasury
Stock Stock Capital Deficit) Stock Total
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
Net income 702,000 702,000
Dividends paid (2,843,000) (2,843,000)
Accretion on convertible preferred stock 320,000 (320,000) --
Issuance of treasury shares (1,000) 49,000 48,000
Exercise of stock options 6,000 6,000
----------- ------- ----------- ---------- --------- -----------
BALANCE, OCTOBER 25, 1998 $14,285,000 $59,000 $21,618,000 $(918,000) $(401,000) $34,643,000
=========== ======= =========== ========= ========= ===========
See notes to consolidated financial statements.
F-4
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------
Year Ended
------------------------------------------
October 25, October 26, October 27,
1998 1997 1996
OPERATING ACTIVITIES:
Net income $ 702,000 $ 2,551,000 $ 848,000
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Allowance for doubtful accounts 89,000 249,000 647,000
Provision for deferred taxes (561,000) (403,000) (572,000)
Gain on sale of business (2,775,000) -- --
Write-down of net assets held for sale 1,635,000 -- --
Loss on sale of assets 87,000 31,000 234,000
Depreciation 4,704,000 4,027,000 3,825,000
Amortization 2,411,000 2,173,000 2,473,000
Changes in assets and liabilities which provided
(used) cash:
Accounts receivable (3,286,000) (1,702,000) (787,000)
Inventories (2,419,000) (3,961,000) 1,753,000
Prepaid expenses and other (138,000) 492,000 (387,000)
Accounts payable (127,000) 2,224,000 556,000
Accrued expenses (1,129,000) 996,000 169,000
----------- ---------- ----------
Net cash (used in) provided by operating
activities (807,000) 6,677,000 8,759,000
----------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (9,573,000) (5,335,000) (4,346,000)
Acquisition of businesses, net of cash acquired (10,910,000) -- (1,675,000)
Proceeds from the sale of businesses 14,075,000 -- --
(Increase) decrease in other assets (1,303,000) 465,000 (760,000)
----------- ---------- ----------
Net cash used in investing activities (7,711,000) (4,870,000) (6,781,000)
----------- ---------- ----------
FINANCING ACTIVITIES:
Borrowings from line of credit 13,550,000 4,650,000 8,900,000
Proceeds from long-term debt 6,050,000 350,000 150,000
Payments on long-term debt (8,035,000) (1,741,000) (1,712,000)
Payments on related party debt (907,000) (2,225,000) (7,125,000)
Dividends paid (2,843,000) (2,841,000) (2,856,000)
Payments to acquire treasury stock -- -- (245,000)
Other 54,000 -- --
----------- ---------- ----------
Net cash provided by (used in) financing
activities 7,869,000 (1,807,000) (2,888,000)
----------- ---------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (649,000) -- (910,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 840,000 840,000 1,750,000
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 191,000 $ 840,000 $ 840,000
========== ========== ==========
See notes to consolidated financial statements.
F-5
OWOSSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED OCTOBER 25, 1998, OCTOBER 26, 1997 AND OCTOBER 27, 1996
- --------------------------------------------------------------------------------
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 Company's
operating subsidiaries include:
o The "Motor Companies":
o Motor Products - Owosso Corporation ("Motor Products")
o Motor Products - Ohio Corporation ("MP-Ohio")
o Stature Electric, Inc. ("Stature")
o Owosso Motor Group, Inc. ("Motor Group")
o Cramer Company ("Cramer") - merged into M.H. Rhodes, Inc.,
June 30, 1998
o M.H. Rhodes, Inc. ("Rhodes") - acquired June 30, 1998
o Snowmax, Inc. ("Snowmax")
o Astro Air Acquisition, Inc. ("Astro Air") - acquired April 26, 1998
o The Landover Company ("Dura-Bond")
o Sooner Trailer Manufacturing Co. ("Sooner")
o DewEze Manufacturing, Inc. ("DewEze") - sold July 24, 1998
o Parker Industries ("Parker")
o Great Bend Manufacturing Co., Inc. ("Great Bend") - sold
April 26, 1998
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, Dura-Bond, and Astro
Air), and Specialized Equipment (Sooner, Parker, and DewEze and Great Bend
prior to their dispositions). In the Engineered Component Products
segment, the Company's products, primarily motors, heat transfer "fin and
tube" coils and replacement cam shaft bearings, are sold primarily to
original equipment manufacturers or service providers who use them in
their end products or services. The products sold in the Specialized
Equipment segment, primarily all-aluminum horse trailers and agricultural
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 1998, 1997 and 1996 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 25, 1998 and October 26, 1997, cost
for 10% and 9%, 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.
F-6
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
$820,000 and $800,000 higher than reported at October 25, 1998 and October
26, 1997, respectively. Additionally, net income would have increased by
approximately $18,000 for 1998, and decreased approximately $98,000 and
$55,000 for 1997 and 1996, respectively. These amounts reflect the
combined effects, in each year, of changes in inventory quantities and
unit costs.
Property, Plant and Equipment - Items of property, plant and equipment are
stated at cost and are depreciated principally on the straight-line method
over their estimated useful lives as follows:
Land improvements 10 - 20 years
Buildings 30 years
Machinery and equipment 3 - 10 years
Interest is capitalized in connection with the construction of major
capital additions. The capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated
useful life. In 1998, $90,000 of interest cost was capitalized. No
interest was capitalized in 1997 or 1996.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates and assumptions.
Intangible Assets - Intangibles are amortized on a straight-line basis
over their estimated useful lives as follows:
Noncompetition agreements 3-6 years
Customer lists 20 years
Goodwill 20-25 years
Other 5-20 years
Asset Impairment - 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 $341,000 and $300,000 has
been recorded as of October 25, 1998 and October 26, 1997, 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 1997 and
1996 consolidated financial statements to conform to 1998 classifications.
F-7
Earnings per Share - Effective for the first quarter of fiscal 1998, the
Company adopted SFAS No. 128, Earnings Per Share. In accordance with the
provisions of this statement, all prior periods presented have been
restated. Basic earnings per common share is computed by dividing net
earnings (the numerator) by the weighted average number of common shares
outstanding during each period (the denominator). The computation of
diluted earnings per common share is similar to that of basic earnings per
common share, except that the denominator is increased by the dilutive
effect of stock options outstanding, computed using the treasury stock
method.
The basic weighted average shares reconcile to diluted weighted average
shares as follows:
Year Ended
------------------------------------------------
October 25, October 26, October 27,
1998 1997 1996
Basic weighted average
common shares outstanding 5,813,000 5,809,000 5,839,000
Dilutive effect of stock options -- 18,000 --
--------- --------- ---------
Diluted weighted average
common shares outstanding 5,813,000 5,827,000 5,839,000
========= ========= =========
The following table summarizes those securities that could potentially
dilute (loss) income for common stockholders per common share in the
future that were not included in determining net (loss) income
available for common stockholders per common share as the effect was
antidilutive:
Year Ended
-----------------------------------------------
October 25, October 26, October 27,
1998 1997 1996
Potential common shares resulting from:
Stock options 587,000 259,000 334,000
Convertible preferred stock 1,071,000 1,071,000 1,071,000
--------- --------- ---------
1,658,000 1,330,000 1,405,000
========= ========= =========
New Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board (the "FASB") issued SFAS No. 130, Reporting Comprehensive
Income. This statement, which establishes standards for reporting and
disclosure of comprehensive income, is effective for fiscal years
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 the first quarter of fiscal 1999.
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. 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. 131 in fiscal 1999.
In March 1998, the FASB issued SFAS No. 132, Employers' Disclosure About
Pensions and Other Postretirement Benefits. This statement, which revises
the required disclosures for employee benefit plans, is effective for
fiscal years beginning after December 15, 1997, although earlier adoption
is permitted. Restatement of disclosures for earlier periods, presented
for comparative purposes, is required under SFAS No. 132. As this
statement only revises 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. 132 in fiscal 1999.
F-8
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement, which establishes
accounting and reporting standards for derivative instruments and hedging
activities, is effective for fiscal years beginning after June 15, 1999,
although earlier adoption is permitted. The Company has not yet completed
its analysis of the effects of adopting this statement on its consolidated
financial position or results of operations. The Company expects to adopt
SFAS No. 133 in fiscal 2000.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest in 1998, 1997 and 1996 were $4,693,000,
$4,307,000 and $4,025,000, respectively. Cash paid for income taxes was
$4,077,000, $1,717,000 and $1,880,000 for 1998, 1997 and 1996,
respectively.
In 1996, in connection with the repurchase of common stock from the 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.
3. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
Sale of DewEze - Effective July 24, 1998, the Company sold substantially
all of the assets of DewEze to Harper Industries, Inc., a company formed
by the president of the subsidiary, for cash proceeds of approximately
$4,200,000 and a note for $700,000, plus the assumption of approximately
$600,000 in liabilities. Quarterly principal payments are due on the note
beginning January 2001 through October 2005. Interest on the note is due
quarterly at 9% per annum beginning January 1999 through October 2001, at
which time the rate increases to 12% per annum, and further increases 1%
per year thereafter through maturity of the note and is being recorded
using the effective interest method. The Company has no further
commitments or contingencies related to the sale of DewEze. Net sales
attributable to DewEze were $5,844,000, $7,417,000 and $6,676,000 for
1998, 1997 and 1996, respectively. Income from operations, before
allocation of corporate expenses, from DewEze was $272,000, $752,000 and
$152,000 for 1998, 1997 and 1996, respectively.
Acquisition of Rhodes - Effective June 30, 1998, the Company acquired all
of the outstanding stock of M.H. Rhodes, Inc. ("Rhodes"), a publicly held
manufacturer of mechanical timers and photoelectric controls, located in
Avon, Connecticut, for $2,900,000 in cash, plus the assumption or
repayment of approximately $1,200,000 of debt. The acquisition has been
accounted for by the purchase method of accounting. The purchase price has
been allocated to the net assets acquired based on estimated fair values
at the date of acquisition. This resulted in excess of purchase price over
assets acquired of approximately $475,000, which is being amortized on a
straight-line basis over 20 years. The Company has consolidated the
operations of its Cramer subsidiary, previously located in Old Saybrook,
Connecticut, into Rhodes' manufacturing facility. See Note 12 -
Restructuring Charge.
Sale of Great Bend - Effective April 26, 1998, the Company sold
substantially all of the assets of Great Bend to Allied Products
Corporation of Chicago, Illinois, for cash proceeds of approximately
$9,900,000, plus the assumption of approximately $2,100,000 in
liabilities. The Company recorded a pre-tax gain on the sale of Great Bend
of $2,775,000 ($924,000 net of tax). Net sales attributable to Great Bend
were $7,251,000, $13,689,000 and $10,065,000 for 1998, 1997 and 1996,
respectively. Income from operations, before allocation of corporate
expenses, from Great Bend was $670,000, $1,466,000 and $428,000 for 1998,
1997 and 1996, respectively.
F-9
Acquisition of Astro Air - Effective April 26, 1998, the Company acquired
substantially all of the assets of Astro Air, Inc. ("Astro Air"), a
Jacksonville, Texas manufacturer of "fin and tube" heat transfer coils,
for $8,000,000 in cash, plus the repayment, shortly after closing, of
approximately $2,700,000 in debt. The acquisition has been accounted for
by the purchase method of accounting. The purchase price has been
allocated to the net assets acquired based on estimated fair values at the
date of acquisition. This resulted in excess of purchase price over assets
acquired of approximately $1,425,000, which is being amortized on a
straight-line basis over 20 years. In connection with the acquisition, the
Company has entered into a five-year consulting agreement with Dacus
Properties, Inc. ("DPI"), the former owner of Astro Air, under which DPI
will receive 3.4% of net revenues generated by certain specified
customers. During 1998, the Company recorded $425,000 of contingent
consideration under the agreement with DPI as goodwill based upon related
1998 revenue.
The following unaudited pro forma financial information presents the
consolidated results of operations of the Company as if the acquisitions
of Rhodes and Astro Air and the dispositions of DewEze and Great Bend had
occurred at the beginning of fiscal year 1997 after giving effect to
certain adjustments, including depreciation expense related to the fair
market write-up of machinery and equipment, amortization of intangible
assets, including goodwill, the elimination of the gain on the deposition
of Great Bend and elimination of the restructuring charge and other
merger-related costs incurred in connection with the merger of Cramer into
Rhodes, including the termination of the leases on the Cramer facility.
The unaudited pro forma information is presented for comparative purposes
only and does not purport to be indicative of the results of operations of
the Company had these transactions been made at the beginning of fiscal
year 1997.
Year Ended
---------------------------------
October 25, October 26,
1998 1997
Net sales $165,457,000 $150,630,000
Income from operations 9,126,000 8,087,000
Net income 729,000 2,241,000
Net (loss) income available for common stockholders (341,000) 1,194,000
Basic (loss) earnings per common share $ (0.06) $ 0.21
4. INVENTORIES
October 25, October 26,
1998 1997
Raw materials and purchased parts $10,039,000 $ 9,325,000
Work in process 4,161,000 5,014,000
Finished goods 7,062,000 8,745,000
----------- -----------
Total $21,262,000 $23,084,000
=========== ===========
F-10
5. PROPERTY, PLANT AND EQUIPMENT
October 25, October 26,
1998 1997
Land and improvements $ 1,443,000 $ 1,123,000
Buildings and improvements 14,928,000 15,949,000
Machinery and equipment 45,379,000 37,360,000
Construction in progress 2,525,000 551,000
----------- -----------
Total 64,275,000 54,983,000
Accumulated depreciation and amortization 28,360,000 27,540,000
----------- -----------
Property, plant and equipment, net $35,915,000 $27,443,000
=========== ===========
Depreciation expense was approximately $4,704,000, $4,027,000 and
$3,825,000 for 1998, 1997 and 1996, respectively.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
October 25, October 26,
1998 1997
Goodwill:
Goodwill $33,003,000 $32,894,000
Accumulated amortization 4,848,000 3,846,000
----------- -----------
Goodwill, net $28,155,000 $29,048,000
=========== ===========
Other Intangible Assets:
Noncompetition agreements $ 3,520,000 $ 2,220,000
Customer lists 8,000,000 8,000,000
Other 541,000 733,000
----------- -----------
Total 12,061,000 10,953,000
Accumulated amortization 3,371,000 2,899,000
----------- -----------
Other intangible assets, net $ 8,690,000 $ 8,054,000
=========== ===========
Amortization expense related to goodwill and other intangible assets was
approximately $2,411,000, $2,173,000 and $2,473,000 for 1998, 1997 and
1996, respectively.
7. RELATED PARTY DEBT
Related party debt consists of promissory notes to preferred stockholders,
payable on demand, but no later than October 2005, aggregating $2,843,000
and $3,750,000 as of October 25, 1998 and October 26, 1997, respectively.
Interest on the notes is paid quarterly at 8%.
F-11
8. LONG-TERM DEBT
October 25, October 26,
1998 1997
Unsecured revolving credit agreement $48,200,000 $34,650,000
Term loans, payable in monthly installments through 2009
at variable rates from 5% to 8.5%, collateralized by
certain real property 2,079,000 1,362,000
Industrial revenue bonds, payable in varying installments
through 2018 at rates from 4.25% to 7.5%, collaterized
by certain real property, building and equipment 11,069,000 9,154,000
Subordinated promissory notes, payable in varying installments
through 2005 at rates from 7.6% to 9% 3,923,000 5,419,000
Other long-term debt 410,000 513,000
----------- -----------
Total long-term debt 65,681,000 51,098,000
Less current portion 1,935,000 2,479,000
----------- -----------
Long-term debt, net of current portion $63,746,000 $48,619,000
=========== ===========
The Company has a $55,000,000 unsecured revolving credit agreement with
two banks, which expires on March 31, 2000 of which $48,200,000 was
outstanding at October 25, 1998. Interest is payable monthly, at the
Company's option, at either the bank's prime rate (8.0% at October 25,
1998) or a variable spread (2.0% at October 25, 1998) over the London
Interbank Offered Rate. The average amount outstanding under this
agreement in 1998 was $44,002,000 and the weighted average interest rate
was 8.3%. 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. As of October 25, 1998, the Company was not in
compliance with such covenants. The revolving credit facility has been
included as a long-term liability because, on January 22, 1999, the
Company entered into a new $55,000,000 revolving credit facility with the
same primary banks, expiring in December 2002. The new agreement is
secured by the non-real estate assets of the Company. Interest is payable,
at the Company's option, at either the bank's prime rate or a variable
spread (2.5% at the inception of the agreement) over LIBOR. The
agreement includes financial and other covenants, similar to those in the
previous agreement. The Company would have been in compliance with the
covenants contained in the new agreement at October 25, 1998 and expects
to be in compliance with such covenants for the foreseeable future.
Repayment of the Industrial Revenue Bonds of certain of the subsidiaries
has been guaranteed by the Company.
Derivative Interest Rate Contracts - The Company has two interest rate
swap agreements, each with a $7,500,000 notional amount, maturing in July
2002. The Company receives floating interest rate payments at the three
month London Interbank Offered Rate in exchange for the payment of
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 its debt
portfolio to reduce the Company's aggregate risk to movements in interest
rates. These agreements are accounted for using settlement accounting.
F-12
The aggregate amount of required payments on long-term debt, adjusted to
reflect the new $55,000,000 revolving credit facility, is as follows:
Year ending October:
1999 $ 1,935,000
2000 2,503,000
2001 2,527,000
2002 1,257,000
2003 49,755,000
Thereafter 7,704,000
-----------
Total $65,681,000
===========
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments were made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
Cash and Cash Equivalents, Accounts Receivable, and Accounts
Payable - The carrying amount of these items are a reasonable
estimate of their fair value.
Short-term Debt and Long-term Debt - Rates currently available to
the Company for debt with similar terms and remaining maturities
are used to estimate the fair value for debt issues. Accordingly,
the carrying amount of debt is a reasonable estimate of its fair
value.
Derivatives - The Company's interest rate swap agreements have an
aggregate notional amount of $15,000,000 and were in a liability
position of $1,150,000 at October 25, 1998.
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
$1,017,000, $891,000 and $686,000 for 1998, 1997 and 1996, respectively.
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.
F-13
Net pension expense (credit) included in the consolidated statements of
operations for the years ended October 25, 1998, October 26, 1997, and
October 27, 1996 was determined as follows:
Year Ended
---------------------------------------------
October 25, October 26, October 27,
1998 1997 1996
Service cost $ 83,000 $ 69,000 $ 69,000
Interest cost on projected benefit obligation 200,000 194,000 186,000
Expected return on assets (272,000) (243,000) (220,000)
Amortization of unrecognized net credit (41,000) (41,000) (41,000)
Amortization of prior service cost 19,000 13,000 13,000
Amortization of unrecognized loss -- -- 9,000
--------- -------- -------
Net pension expense (credit) $(11,000) $(8,000) $16,000
========= ======== =======
The following is a reconciliation of the plan's funded status:
October 25, October 26,
1998 1997
Projected benefit obligation $3,415,000 $3,074,000
Plan assets at market value - consisting primarily
of mutual funds 3,605,000 3,455,000
----------- -----------
Funded status 190,000 381,000
Unrecognized initial net credit (289,000) (330,000)
Unrecognized prior service cost 247,000 149,000
Unrecognized net loss 264,000 184,000
----------- -----------
Prepaid pension $ 412,000 $ 384,000
========== ==========
Additional disclosures and assumptions:
October 25, October 26,
1998 1997
Accumulated benefit obligation $2,896,000 $2,524,000
Vested benefit obligation 2,867,000 2,446,000
Discount rate 6.25% 7.0%
Expected long-term rate of return 8.0 8.0
Salary increases 5.0 5.0
Postretirement Plan - Motor Products - Motor Products provides
postretirement medical benefits and life insurance benefits to current and
former employees who retire from Motor Products. No contributions from
retirees are required and the plan is funded on a pay-as-you-go basis.
Motor Products has adopted SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions. SFAS No. 106 requires
recognition during employees' active service periods of the expected cost
of providing such postretirement benefits. Motor Products paid $48,000,
$49,000 and $65,000 in such benefits during 1998, 1997 and 1996,
respectively.
F-14
The following table sets forth the funded status of the plan reconciled
with the liability included in the consolidated balance sheets as of
October 25, 1998 and at October 26, 1997:
October 25, October 26,
1998 1997
Accumulated postretirement benefit obligation:
Retirees $ 569,000 $ 557,000
Fully eligible active plan participants 159,000 153,000
Other active plan participants 1,281,000 1,416,000
---------- ----------
Accumulated postretirement benefit obligation 2,009,000 2,126,000
Unrecognized net loss from past experience different
from that assumed and from changes in assumptions (368,000) (44,000)
Prior service cost not yet recognized in net periodic
postretirement benefit cost 333,000 (270,000)
---------- ----------
Accrued postretirement benefit cost $1,974,000 $1,812,000
========== ==========
Net periodic postretirement benefit cost included the following components
for 1998, 1997 and 1996:
Year Ended
---------------------------------------------
October 25, October 26, October 27,
1998 1997 1996
Service cost $114,000 $119,000 $115,000
Interest cost 113,000 132,000 114,000
Amortization of prior service cost (17,000) 16,000 16,000
-------- -------- --------
Total $210,000 $267,000 $245,000
======== ======== ========
For measurement purposes, a 9.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed. The rate was assumed to
decrease gradually to 5.2% for 2012, 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 25, 1998 by
$446,000 and the aggregate of the service cost and interest cost
components of the net periodic postretirement benefit cost for the year
then ended by $59,000. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 6.25%
and 7.0%, as of October 25, 1998 and October 26, 1997, respectively.
Postretirement Plan - Rhodes - Rhodes provides postretirement medical
benefits and life insurance benefits to certain current and former
employees who retire from Rhodes. No contributions from retirees are
required and the plan is funded on a pay-as-you-go basis.
Rhodes has adopted SFAS No. 106 which requires recognition during
employees' active service periods of the expected cost of providing
postretirement benefits. Rhodes paid $13,000 in such benefits during 1998.
F-15
The following table sets forth the funded status of the plan reconciled
with the liability included in the consolidated balance sheet as of
October 25, 1998:
October 25,
1998
Accumulated postretirement benefit obligation:
Retirees $387,000
Fully eligible active plan participants 397,000
--------
Accumulated postretirement benefit obligation 784,000
Unrecognized net loss from past experience different
from that assumed and from changes in assumptions (45,000)
--------
Accrued postretirement benefit cost $739,000
========
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 6.25% and the medical inflation rate
was 4.5%.
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain production facilities and
equipment under operating leases. Operating lease expense was
approximately $1,489,000, $1,107,000 and $1,061,000 for 1998, 1997 and
1996, respectively, net of sublease rentals and reimbursements of
utilities of $63,000, $44,000 and $99,000, respectively. The lease on the
corporate headquarters office space expires in September 2006 with a base
rent of approximately $233,000 in 1998, which adjusts annually through
October 1999 to $305,000. Future minimum rental payments under
non-cancelable operating leases are as follows:
Year ending October:
1999 $ 996,000
2000 717,000
2001 502,000
2002 346,000
2003 328,000
Thereafter 890,000
----------
$3,779,000
==========
At October 25, 1998, outstanding letters of credit totaled approximately
$14,194,000 and primarily guarantee certain notes.
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.
F-16
The Company is a party to a consent decree with the State of Connecticut
pursuant to which it has agreed to complete its environmental
investigation of the site on which its Cramer facility was previously
located and conduct any remedial measures which may be required. 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. Based upon the amounts recorded as liabilities, the Company does
not believe that the ultimate resolution of this matter will have a
material adverse effect on the consolidated financial results of the
Company.
The Company has been named as a potentially responsible party with respect
to two hazardous substance disposal sites currently under remediation by
the U.S. Environmental Protection Agency (the "EPA") 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 matters through the payment of de minimis amounts.
Rhodes has been named as a potentially responsible party with respect to a
hazardous disposal site currently under remediation by the EPA under its
"Superfund" program. Based on the minimal amount of waste alleged to have
been contributed to the site by Rhodes, the Company expects to resolve the
matter through the payment of a de minimis amount. Rhodes is also involved
in environmental remediation at its manufacturing site, which is not
subject to any Superfund law proceeding. Based upon the amounts recorded
as liabilities, the Company does not believe that the resolution of this
matter will have a material adverse effect on the consolidated financial
results of the Company.
Sooner has arrangements with a number of financial institutions to provide
floor plan financing for its dealers, which requires it to repurchase
repossessed products from the financial institutions in the event of a
default by the financed dealer. Its obligation is typically to repurchase
the equipment at 90% of the purchase price for the first 180 days, 80% for
the next 90 days and 70% for the next 90 days, after which the obligation
expires. In the event of a default by all of the financed dealers, the
Company would be required to repurchase approximately $11,600,000 of
product as of October 25, 1998. The Company does not believe that its
obligation under these repurchase agreements will have a material adverse
effect on the financial results of the Company. Sooner has not taken
possession of any significant amount of 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. RESTRUCTURING CHARGE
In connection with the merger of the Company's Cramer subsidiary into
Rhodes, and the consolidation of Cramer's manufacturing into Rhodes'
manufacturing facility, the Company recorded, in the third quarter of
1998, a restructuring charge of $909,000. The restructuring charge
includes $583,000 for the termination of the lease on Cramer's Old
Saybrook, Connecticut manufacturing facility, $102,000 for the write-off
of inventory for discontinued product lines, $174,000 for employee
severance and termination benefits for 74 employees, and $50,000 for the
write-off of manufacturing equipment. The amount of actual termination
benefits subsequently paid and charged against the liability and the
actual number of employees terminated did not differ significantly from
the original estimates. At October 25, 1998, approximately $125,000 of
accrued restructuring costs is included in accrued expenses and accrued
compensation and benefits. The Company anticipates that the remaining
restructuring costs will be paid by the end of the third fiscal quarter of
1999.
F-17
13. INCOME TAXES
The income tax provision consists of the following:
Year Ended
-------------------------------------------------------------
October 25, October 26, October 27,
1998 1997 1996
Current:
Federal $2,967,000 $2,400,000 $1,810,000
State 394,000 103,000 40,000
Deferred - Federal (561,000) (403,000) (575,000)
---------- ---------- ----------
Income tax expense $2,800,000 $2,100,000 $1,275,000
========== ========== ==========
The reconciliation to the statutory federal income tax rate is as follows:
October 25, October 26, October 27,
1998 1997 1996
Federal income tax provision at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit 7.2 1.4 1.2
Amortization of excess cost of net assets acquired 13.9 10.8 22.9
Effect of disposition of businesses 18.4 -- --
Other 6.4 (1.0) 2.0
----- ----- -----
Provision for income taxes 79.9% 45.2% 60.1%
===== ===== =====
The components of the Company's net deferred tax assets and liabilities
are as follows:
October 25, October 26,
1998 1997
Deferred tax asset:
Intangibles $ 971,000 $ 963,000
Accruals and reserves 3,347,000 1,676,000
Tax credits and loss carryforwards 900,000 908,000
Other 126,000 224,000
----------- -----------
5,344,000 3,771,000
Valuation allowance (2,724,000) (1,626,000)
----------- ------------
Total $ 2,620,000 $ 2,145,000
=========== ===========
Deferred tax liability:
Intangibles $ 2,584,000 $ 2,736,000
Pension 140,000 131,000
Property, plant and equipment 1,502,000 1,349,000
Other 28,000 37,000
----------- -----------
Total $ 4,254,000 $4,253,000
----------- -----------
Net deferred tax liability $(1,634,000) $(2,108,000)
============ ============
F-18
These amounts are included in the accompanying consolidated financial
statements as follows:
October 25, October 26,
1998 1997
Current assets $ 733,000 $ 1,039,000
Long-term liabilities (2,367,000) (3,147,000)
------------ ------------
Net deferred tax liability $(1,634,000) $(2,108,000)
============ ============
The Company has recorded valuation allowances which management has
determined are sufficient to reduce its deferred tax assets to an amount
which is more likely than not to be realized. The Company's valuation
allowances relate primarily to intangible assets, Federal and state net
operating loss carryforwards and other state deferred tax assets.
As a result of the acquisition of Rhodes, the Company has approximately
$1,400,000 of net operating loss carryforwards as of October 25, 1998
available to reduce the taxable income of Rhodes for Federal income tax
reporting purposes and which expire between 2003 and 2011. The utilization
of these net operating losses are subject to annual limitations under
Section 382 of the Internal Revenue Code.
14. CONVERTIBLE PREFERRED STOCK
In connection with the acquisition of Stature in October 1995, the Company
issued 1,071,428 of its 10,000,000 authorized preferred shares of Class A
convertible preferred stock with a stated value of $14.00 per share. Such
preferred stock is convertible into the Company's common stock on a one
for one basis, at the holders' option, through October 2000, at which
time, the Company has the right, but is not obligated, to redeem, the
preferred stock for cash at its stated value of $14.00 per share. The
Company's option to redeem the preferred stock continues after October
2000, with the redemption price increasing annually until it reaches
$21.00 in 2009 for a maximum liquidation amount of $22,500,000. The
Company 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 consolidated statements of
operations using the effective interest method. Dividends paid on the
preferred stock were $750,000 for both 1998 and 1997.
The Company may not pay any common stock dividends unless all preferred
dividend requirements have been met. At October 25, 1998, 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-19
15. STOCK-BASED COMPENSATION PLANS
The 1998 Long-Term Incentive Plan - In 1998, the Company adopted a
long-term incentive plan (the "Incentive Plan") which permits the granting
of Stock Options, Stock Appreciation Rights, Restricted Stock, Long-Term
Performance Awards, Performance Shares and Performance Units. Officers,
other employees and directors of the Company and consultants to the
Company are eligible to receive awards under the Incentive Plan. The
maximum number of shares of Common Stock of the Company that may be made
the subject of awards granted under the Incentive Plan is 500,000. Stock
options granted under the Incentive Plan generally vest over five years
and are exercisable for periods up to ten years from the date of grant at
a price which equals fair value at the date of grant.
During 1998, 200,000 stock options were granted under the Incentive Plan
at an exercise price of $7.88. At October 25, 1998, 200,000 stock options
were outstanding and none were exercisable.
The 1994 Stock Option Plan - The Company maintains a stock option plan
(the "1994 Plan"), designed to serve as an incentive for retaining
valuable employees and directors. All employees and directors of the
Company are eligible to participate in the 1994 Plan. The 1994 Plan
provides for the 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 1994 Plan provides for the automatic acceleration of the
exercisability of all outstanding options upon the occurrence of a change
in control (as defined) and for the cancellation of options and cash
payment to the holders of such canceled options upon the occurrence of
certain events constituting a change in control. The 1994 Plan may be
amended, altered or discontinued at any time, but no amendment, alteration
or discontinuation will be made which would impair the rights of an
optionee with respect to an outstanding stock option without the consent
of the optionee.
The following schedule summarizes stock option activity and status:
Year Ended
--------------------------------------------------------------------------------
October 25, 1998 October 26, 1997 October 27, 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding,
beginning of year 371,000 $ 9.31 334,000 $10.14 284,000 $11.98
Granted 296,000 7.82 81,000 6.65 185,000 8.34
Exercised (1,000) 6.13 -- -- -- --
Cancelled (79,000) 9.26 (44,000) 10.70 (135,000) 11.54
------- ------- -------
Outstanding, end of year 587,000 $ 8.57 371,000 $ 9.31 334,000 $10.14
======= ======= =======
Exercisable, end of year 155,000 $10.15 135,000 $10.69 90,000 $11.28
======= ======= =======
F-20
The following table summarizes information about stock options
outstanding at October 25, 1998:
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Life Exercise Exercise
Range of Exercise Prices Options in Years Price Options Price
$5.88 - $8.00 387,000 8.96 $ 7.41 33,000 $ 6.27
$8.88 - $11.38 85,000 7.09 $ 9.17 36,000 $ 9.30
$12.00 115,000 6.17 $12.00 86,000 $12.00
------- -------
587,000 8.15 $ 8.57 155,000 $10.15
======= =======
The Company accounts for the 1994 Plan and stock options granted under the
Incentive Plan in accordance with APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for the 1994
Plan and the Incentive Plan been determined consistent with SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income and
earnings per share would have been reduced by $84,000 and $0.01 per share,
respectively, for 1998, $129,000 and $0.02 per share, respectively, for
1997 and $53,000 and $0.01 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 weighted average fair value of options granted during 1998, 1997 and
1996 was $575,000, $252,000 and $604,000, respectively. The fair value of
the options granted were estimated on the date of grant using the Binomial
option-pricing model with the following assumptions for grants in 1998,
1997 and 1996: risk-free interest rate of 4.7%, 6.2% and 5.9%,
respectively, expected volatility of 31%, 63% and 49%, respectively,
dividend yield of 4.6%, 5.4% and 4.3%, respectively, and an expected life
of six years in 1998, 1997 and 1996.
F-21
16. BUSINESS SEGMENTS
The Company operates in two business segments: Engineered Components
Products and Specialized Equipment. The Engineered Component Products
segment includes the Motor Companies, Snowmax, Astro Air, and Dura-Bond.
The Specialized Equipment segment includes Sooner, Parker, DewEze and
Great Bend. Summarized financial information by business segment for 1998,
1997 and 1996 is as follows:
October 25, October 26, October 27,
1998 1997 1996
Identifiable assets:
Engineered components $ 93,244,000 $ 67,095,000 $ 67,232,000
Specialized equipment 31,190,000 42,778,000 38,491,000
Corporate 772,000 1,808,000 2,172,000
------------ ------------ ------------
Total identifiable assets $125,206,000 $111,681,000 $107,895,000
============ ============ ============
Year Ended
-------------------------------------------------------
October 25, October 26, October 27,
1998 1997 1996
Net sales:
Engineered components $101,010,000 $ 78,950,000 $ 71,987,000
Specialized equipment 58,958,000 64,111,000 56,229,000
------------ ------------ ------------
Total net sales $159,968,000 $143,061,000 $128,216,000
============ ============ ============
Income (loss) from operations:
Engineered components $ 9,989,000 $ 8,906,000 $ 6,812,000
Specialized equipment 3,070,000 4,505,000 3,634,000
Corporate (5,883,000) (4,816,000) (4,444,000)
------------ ------------ ------------
Total income from operations $ 7,176,000 $ 8,595,000 $ 6,002,000
============ ============ ============
Capital additions:
Engineered components $ 7,794,000 $ 3,596,000 $ 2,795,000
Specialized equipment 1,106,000 1,555,000 1,123,000
Corporate 673,000 184,000 428,000
------------ ------------ ------------
Total capital additions $ 9,573,000 $ 5,335,000 $ 4,346,000
============ ============ ============
Depreciation and amortization expense:
Engineered components $ 5,029,000 $ 4,150,000 $ 4,057,000
Specialized equipment 1,642,000 1,791,000 2,052,000
Corporate 444,000 259,000 189,000
------------ ------------ ------------
Total depreciation and
amortization expense $ 7,115,000 $ 6,200,000 $ 6,298,000
============ ============ ============
F-22
17. QUARTERLY INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Year Ended October 25, 1998:
----------------------------
Net sales $34,054,000 $41,868,000 $42,998,000 $41,048,000
Gross profit 7,496,000 10,224,000 8,495,000 8,334,000
Income (loss) before taxes 11,000 4,630,000 (362,000) (777,000)
Net income (loss) 6,000 1,937,000 (338,000) (903,000)
Net income (loss) available
for common shareholders (259,000) 1,670,000 (606,000) (1,173,000)
Basic and diluted earnings (loss)
per common share $ (0.04) $ 0.29 $ (0.10) $ (0.20)
Year Ended October 26, 1997:
----------------------------
Net sales $30,162,000 $37,567,000 $38,290,000 $37,042,000
Gross profit 6,910,000 8,721,000 8,628,000 8,935,000
Income (loss) before taxes (96,000) 1,471,000 1,778,000 1,498,000
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
Basic and diluted earnings (loss)
per common share $ (0.05) $ 0.10 $ 0.12 $ 0.10
The second quarter of 1998 includes a pre-tax gain of $2,775,000 on the
sale of Great Bend.
The third quarter of 1998 includes a restructuring charge of $909,000
recorded in connection with the merger of the Company's Cramer and Rhodes
subsidiaries. The third quarter of 1998 also includes a write-off of
approximately $327,000 of inventory in connection with the merger recorded
in cost of products sold and approximately $380,000 of expenses related to
the merger recorded in selling, general and administrative expenses.
The fourth quarter of 1998 includes a pre-tax charge of $1,635,000 to
adjust the carrying value of the assets of the Company's Parker subsidiary
to their estimated fair market value in connection with its pending sale
(see Note 18).
Seasonality - Sales of certain of the Company's specialized equipment tend
to be seasonal with lowest sales during the first 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.
F-23
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
government 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.
18. SUBSEQUENT EVENT - SALE OF PARKER
On December 10, 1998, the Company announced the signing of a letter of
intent to sell the business and assets of Parker to Top Air Manufacturing,
Inc., of Cedar Falls, Iowa. The letter of intent calls for Top Air to
purchase all of the assets of Parker with a combination of cash, a note,
and the assumption of specified liabilities. The transaction is contingent
upon, among other things, completion of due diligence and negotiating a
definitive asset purchase agreement. Completion of an agreement is
anticipated to occur during the first calendar quarter of 1999. Based upon
the proposed terms of the sale, the Company has recorded a pre-tax charge
of $1,635,000 to adjust the carrying value of Parker's assets to their
estimated fair market value. The carrying value of the net assets of
Parker, which is a component of the Company's Specialized Equipment
segment, are included in the consolidated balance sheet under current
assets as "Net assets held for sale." Sales attributable to Parker were
$11,715,000, $12,697,000 and $10,749,000 for 1998, 1997 and 1996,
respectively. Income from operations, before the allocation of corporate
expenses, from Parker was $740,000, $1,044,000 and $1,265,000 for 1998,
1997 and 1996, respectively.
******
F-24
Schedule II
Owosso Corporation
Valuation and Qualifying Accounts and Reserves
For the three years ended October 25, 1998
-----------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other Deductions End of
of Period Expenses Accounts (a) (b) Period
---------- ---------- ------------ ---------- -----------
For the year ended October 25, 1998
Allowances on:
Accounts receivable $300,000 $ 89,000 $ 82,000 $ (130,000) $ 341,000
Inventory 616,000 1,382,000 423,000 (1,068,000) 1,353,000
Accrued restructuring costs -- 909,000 -- (784,000) 125,000
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
--------------------------------------------------------------------------
(a) Primarily relates to the effects of acquisitions.
(b) As to accounts receivable and inventory, primarily represents amounts
written off against related assets; as to accrued restructuring costs,
represents amounts paid.
F-25