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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 27, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________________ to _____________________
Commission file number 0-25066
Owosso Corporation
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2756709
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
The Triad Building, 2200 Renaissance Boulevard, 19406
Suite 150, King of Prussia, PA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 275-4500
Securities registered pursuant to Section 12(b) of the Act:
None
Name of each exchange on which registered
Title of Class
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 23, 1997, the aggregate market value of the Registrant's
Common Stock, $.01 par value, held by nonaffiliates of the Registrant was
approximately $14,690,909.
On January 23, 1997, 5,808,676 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed with the
Commission in connection with the Annual Meeting of Shareholders scheduled to be
held on March 12, 1997 are incorporated by reference into Part III of this Form
10-K.
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PART I
Item 1. Business
Overview
Owosso Corporation is a diversified manufacturer which currently
operates in two business segments, Engineered Component Products and Specialized
Equipment. By operating in narrowly defined niche markets, the Company seeks to
combine revenue growth, through market penetration and new product development,
with consistently high profit margins. The Company has also grown historically
by acquiring businesses, and acquisitions remain a key element of the Company's
growth strategy. The Company currently has manufacturing facilities in nine
states and sells its products nationwide.
The Company was incorporated in Pennsylvania in March 1994 and is a
holding company for multiple operating companies, five of which became its
wholly-owned subsidiaries in a reorganization (the "Reorganization") which took
place effective October 30, 1994 in connection with the Company's initial public
offering of Common Stock (the "Offering"). The business units currently
operating in the Company's Engineered Component Products segment are Motor
Products - Owosso Corporation, acquired in 1973 ("Motor Products"); Motor
Products - Ohio Corporation ("MP-Ohio"), incorporated in 1995; Cramer Company,
acquired in 1984 and expanded through the acquisition of additional product
lines in 1986 ("Cramer"); Snowmax Incorporated, acquired from a subsidiary of
Brynavon Group, Inc. ("Brynavon Group") in 1989 ("Snowmax"); The Landover
Company, doing business as Dura-Bond Bearing Company, acquired in 1987
("Dura-Bond"), including the operations of Snyder Industries, Inc. ("Snyder"),
acquired in August 1996; and Stature Electric, Inc., acquired in October 1995
("Stature"). The business units operating in the Company's Specialized Equipment
segment are DewEze Manufacturing, Inc., acquired in 1991 ("DewEze"), which
includes the operations formerly conducted by Parker Industries ("Parker"),
which was acquired in 1985; Sooner Trailer Manufacturing Co. ("Sooner"),
acquired in 1994 following the Reorganization; and Great Bend Manufacturing,
Inc. ("Great Bend"), acquired in May 1995. Other than Dura-Bond, which was
controlled by an independent Board of Directors, all of the Company's businesses
which were acquired prior to the Reorganization were operated from the time of
their acquisitions until the Reorganization under the management of Brynavon
Group, a corporation controlled by certain members of the Company's Board of
Directors.
Strategy
The Company's objective is to maximize operating results by combining
revenue growth with consistently high profit margins. Components of the
Company's strategy include the following:
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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.
Products
Engineered Component Products
The Company's Engineered Component Products business is conducted
through its Stature, Motor Products, MP-Ohio, Cramer, Snowmax and Dura-Bond
subsidiaries, which manufacture and sell motors and timers, heat transfer coils,
and replacement camshaft bearings. These products are sold primarily to original
equipment manufacturers, which incorporate these components into their end
products, with the exception of the Company's replacement camshaft bearings,
which are sold to engine rebuilders through distributors. Products sold by the
motors and timers and heat transfer coils units are used principally in the
non-automotive transportation, heating, air conditioning and refrigeration,
general industrial, construction, health care, commercial appliance, business
equipment, and marine markets. Products sold by the camshaft
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bearings unit are used exclusively in the automotive aftermarket. The Company
seeks to expand its Engineered Component Products segment by increasing sales to
customers who value the Company's quality and service, by introducing new
products in its existing markets and by expanding into new markets where its
existing products can successfully be adapted.
Motors and Timers. The Company designs and manufactures subfractional
horsepower AC and DC motors (less than 1/10 horsepower), fractional horsepower
permanent magnet DC motors (between 1/10 and 1 horsepower), integral horsepower
DC motors (1 horsepower or more), electromechanical timers (which incorporate
the Company's subfractional horsepower motors) and delay mechanisms. The devices
are used in trucks, buses and vans, power tools, welding equipment, motorized
wheelchairs, appliances, business equipment, heating and air conditioning
systems, pumps and other mechanical devices. Fractional and integral horsepower
motors are targeted primarily to original equipment manufacturers with small to
medium-sized production runs (i.e. up to 100,000 units per year), which is the
level at which the Company believes it has certain competitive advantages, such
as production flexibility, over larger competitors. Stature, acquired at the end
of the fiscal 1995, manufactures the Company's integral horsepower motors and
some of the Company's fractional horsepower motors.
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. In October 1996 the Company acquired Koepke & Associates, Inc., a
manufacturers representative firm located in Northfield, Illinois to act as the
sales and marketing organization for Motor Products, MP-Ohio and Stature. Koepke
& Associates was renamed Owosso Motor Group, Inc. upon the acquisition.
Heat Transfer Coils. The Company designs and manufactures fin and tube
heat transfer coils. The Company's heat transfer coils are used in a variety of
heating and cooling applications, including commercial and residential heating
and air conditioning, truck, bus and van heating and air conditioning and
commercial refrigeration. 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.
Through fiscal 1996, the Company also designed and manufactured
evaporator coils, which include a standard fin and tube coil together with other
components, and which cool the air in commercial and residential heating and air
conditioning systems. Early in fiscal 1997, the Company entered into a licensing
and lease agreement with a company formed by one of its former employees to
manufacture evaporator coils in a now-vacant facility owned by the Company. The
Company will sell fin and tube coils to this company which will add the other
components and sell the evaporator coils. In addition to selling coils to this
new company, the
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Company will receive lease payments and a royalty fee. Sales of evaporator coils
were approximately $1.8 million in fiscal 1996.
Camshaft Bearings. 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 1994, 1995 and 1996, the Company sold replacement
camshaft bearings suitable for use in rebuilding approximately 2,400,000,
2,300,000 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.
Specialized Equipment
The Company's Specialized Equipment business is conducted through its
DewEze, Sooner and Great Bend subsidiaries. Products currently offered include
flatbed hay bale handlers and processing equipment and hydraulic power systems
marketed under the DewEze brand name, commercial mowers marketed through a
distributor, grain wagons, auger carts, weigh wagons and related agricultural
equipment marketed under the Parker brand name, all-aluminum horse, livestock
and other specialty trailers marketed under the Sooner trade name and front-end
loaders (designed to be attached to tractors) marketed under the Great Bend
trade name. The Company's expansion plans for its specialized equipment segment
involve the identification of specific agricultural and transportation market
needs and the design and manufacture of specialized equipment to satisfy those
needs.
Bale Handling and Processing Equipment. The Company believes that it is
the leading supplier of flatbed hay bale handlers in the U.S. agricultural
equipment market, and the Company knows of only two other U.S. manufacturers of
flatbed bale handlers. The patented DewEze flatbed lift, which is installed on a
pick-up truck chassis, hydraulically lifts two large round bales weighing up to
2,500 pounds each onto the bed of the pick-up truck, providing a fast and safe
method of transporting multiple bales of hay over large acreage. In addition to
being used on the Company's own flatbed products, the Company's hydraulic power
systems are also sold for use on tow trucks, cherry pickers and other utility
vehicles.
The Company's bale processors are used to process hay for livestock
feeding and operate by slicing the bale, whereas competitors' bale processors
grind the bale. The Company believes that slicing is the preferred method of
processing hay, as it improves digestion and results in increased milk
production in dairy cows, increased weight of beef cattle and decreased feed
costs and waste.
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Commercial Turf Maintenance Equipment. The Company believes that it is
the leading supplier of commercial mowers designed specifically for use on
sloped surfaces in the U.S. market. The Company's patented hydraulic lawn mowers
are designed so that the power unit and driver's seat remain vertical, even
while mowing along the side of terrain with up to a 30(0) slope. This design
provides a higher degree of driver safety and comfort on sloped surfaces than is
currently available on conventional riding mowers. In addition, two mowing decks
allow the operator to mow culverts and ridges more efficiently than other mowing
methods.
Grain Handling Equipment. The Company's grain handling equipment,
including grain wagons, auger carts and weigh wagons, is sold under the Parker
trade name and is used primarily by large corn, soybean and wheat farmers and
seed companies. The Company's grain wagons and auger carts are typically used by
farmers to transport grain, while weigh wagons are typically used by seed
companies to monitor harvest yields.
Trailers. The Company manufactures and distributes all-aluminum horse
and livestock trailers, as well as all-aluminum trailers for carrying
automobiles, boats and general cargo, all under the Sooner brand name. Sooner
trailers are the official trailers of the American Quarter Horse Association.
Over three-fourths of the trailers sold by Sooner in fiscal 1996 were horse
trailers, and the Company expects horse trailers to continue to be Sooner's
primary product.
The Company's trailers range from a two-horse bumper hitch trailer to
multi-horse and multi-automobile goose neck trailers complete with living
quarters, and range in price from approximately $8,000 to over $70,000. Although
trailers have traditionally been made of steel, which is less expensive than
aluminum, Sooner has been successful in marketing its all-aluminum trailers
because of several advantages of aluminum construction. These advantages include
long life and low maintenance due to the corrosion resistance of aluminum
compared to steel, and the light weight and superior weight-to-load ratio of
aluminum compared to steel.
The Company intends to expand Sooner's operations by broadening its
geographic coverage through the expansion of its dealer network and by adding
new models to existing and new product lines in order to address new markets,
such as boat trailers and large livestock trailers.
Front-End Loaders. The Company manufactures and distributes front-end
loaders which are designed to be attached to tractors ranging in size from 20 to
180 horsepower. The Company designs mounting brackets to allow the loader to be
attached to over 800 different tractor models. Through its Hot Shot(TM) program,
most models of Great Bend loaders are able to be delivered to a customer within
four days of receipt of the customer's order. The front-end loaders are marketed
under the Great Bend brand name to end users through independent dealers as well
as to tractor manufacturers which incorporate the front-end loaders into their
tractors.
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Manufacturing
The Company's manufacturing operations are conducted independently in
separate facilities by each of the Company's business units. The Company
regularly invests in improvements to its manufacturing facilities. While the
Company believes that its manufacturing operations, in general, have adequate
capacity and flexibility to meet current and anticipated demand for its
products, the Company may from time to time acquire new facilities or increase
the size of its existing facilities in order to accommodate the growth of the
Company's business. Throughout its operations, the Company has installed
inventory and production control systems to optimize inventory levels and
provide production flexibility and better material flow, all of which has
resulted in reduced production costs. Additional cost and production flexibility
advantages are derived from the Company's quick change tooling and computer
numerical control ("CNC") equipment, which facilitate reduced production
changeover and equipment set-up time.
The manufacturing operations of the Company's Engineered Component
Products segment are highly integrated, permitting almost all component parts to
be produced by the Company when needed. This vertical integration, together with
the Company's CNC equipment and quick change tooling, results in lower
production costs, higher product quality and greater manufacturing flexibility,
and minimizes a business' reliance on outside suppliers for component parts.
Managing for quality assurance is an integral part of the Company's strategy for
continuous operating improvement. All of the Company's production operations
other than Sooner use computer aided design systems. The Company intends to
introduce computer aided design systems in Sooner's 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 which the Company could
utilize if necessary. The Company's suppliers are predominantly based in the
United States, although certain materials are obtained from foreign countries.
The Company believes that its sources of raw materials are adequate for its
needs.
Marketing
Engineered Component Products
The Company's replacement camshaft bearings are marketed primarily to a
limited number of large brand name distributors, and to a lesser extent to
engine rebuilders, the end users of the Company's bearings. The Company's other
engineered component products are marketed directly to original equipment
manufacturers and distributors by Company salespersons and independent sales
representatives. While sales are targeted primarily to customers in North
America, the Company intends to expand its international sales, particularly in
its motor
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businesses. In October 1996 the Company acquired Koepke & Associates, Inc., a
manufacturers' representative firm located in Northfield, Illinois to act as the
sales and marketing organization for Motor Products, MP-Ohio and Stature. Koepke
& Associates was renamed Owosso Motor Group, Inc. upon the acquisition.
Specialized Equipment
The Company's specialized equipment is marketed by Company salespersons
and independent manufacturers' representatives, selling primarily to independent
dealers, which resell the equipment to end users. End users of the Company's
bale handling and processing equipment and grain handling equipment are
typically diversified farmers and ranchers. The Company's all-terrain mowing
equipment is sold through a distributor, Gravely International, primarily to
state and local municipalities, airports, schools, hospitals and cemeteries.
Garages, tow truck operations and specialty vehicle manufacturers are among the
principal end users of the Company's hydraulic power systems. In order to
increase inventory availability of Parker grain handling equipment in dealers'
showrooms, the Company offers extended payment plans to dealers, allowing them
to defer payment until mid-October following the purchase date. This coincides
with the fall harvest season when most farmers purchase these products. Sooner's
trailers are also sold to dealers and are resold primarily to horse owners,
farmers, ranchers, breeders and trainers, and car trailers are resold primarily
to race and stock car owners. Sooner and DewEze have arrangements with a number
of financial institutions to provide floor plan financing for its dealers, which
require them to repurchase repossessed products from the financial institutions
in the event of a default by the financed dealer. Great Bend sells its front-end
loaders primarily to farmers and ranchers through its dealer network, and to a
lesser extent to tractor manufacturers which incorporate the front-end loaders
into their tractors.
Competition
Engineered Component Products
The Company competes with numerous competitors 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, high volume production runs.
The Company faces competition in the heat transfer coils business from
two companies with significantly greater resources than the Company, as well as
from several smaller competitors. The Company believes that its heat transfer
coils unit 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
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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. In early fiscal 1996, one of
Dura-Bond's significant customers indicated that it would commence production
of its own laser-stitched bearings in 1996 instead of purchasing the Company's
single piece all-round bearings, which reduced Dura-Bond's net sales in fiscal
1996 by approximately $2.1 million. The Company believes that reduced sales to
Federal-Mogul will continue to have an adverse impact on Dura-Bond's results of
operations, at least in the short term. The Company also faces competition in
the all-round replacement camshaft bearings market from one foreign competitor
with a lower production capacity than the Company and limited U.S. sales. The
Company competes favorably against that competitor based on the Company's
reputation for product quality.
Specialized Equipment
In the Specialized Equipment segment, the Company competes against
several competitors with respect to each of its product lines. In certain of the
product lines, such as the flatbed bale handlers and the grain handling
equipment, the Company's brand name recognition and reputation for high quality
and durability outweigh the need to be the low cost provider. In the slope mower
market, the Company competes based primarily on the unique patented design and
features of its mower products. Sooner competes primarily based on product
quality, durability, weight and brand name recognition. Great Bend competes
primarily based on rapid order delivery, product quality, its ability to fit
loaders to a wide variety of tractors, as well as price. For other product
lines, competition is based on product features, quality, durability and
reputation, as well as price.
Backlog
The Company's backlog of unfilled orders as of December 24, 1995 and
December 22, 1996 was as follows:
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<CAPTION>
December 24, December 22,
1995(1) 1996
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(In thousands)
<S> <C> <C>
Engineered Component Products $23,982 $28,300
Specialized Equipment 9,476 10,724
Total $33,458 $39,024
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(1) Backlog at December 24, 1995 at Stature has been restated to bring it
in conformity with the December 22, 1996 presentation.
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The Company expects to fill substantially all of the December 22, 1996 backlog
by the end of fiscal 1997.
Patents and Trademarks
The Company owns a number of United States patents and foreign patents
relating to its Specialized Equipment businesses. The Company's material U.S.
patents expire at various dates between 2000 and 2009. The Company's products
are marketed under various trade names, including DewEze, Parker, Sooner,
Dura-Bond, Cramer and Great Bend. While the Company believes that its patents
provide certain competitive advantages in its Specialized Equipment businesses,
the Company does not consider any one patent or trademark or any group thereof
essential to its business as a whole, or to any of its business segments. The
Company relies, to a certain extent, on specialized product knowledge and
manufacturing processes in its operations, such as the babbitting procedure used
in manufacturing replacement camshaft bearings. The Company is not aware of any
pending claims of infringement or other challenges to the Company's rights to
use its marks in the United States as currently used by the Company.
The Company has received notification from the owner of two design
patents that certain trailers with a V-nose configuration manufactured by Sooner
may infringe such patents. The Company believes that it has substantial defenses
to the claim of infringement, including the invalidity of the patents because of
prior art, and the Company intends to continue to manufacture such trailers. If
it were determined that such patents are valid and were infringed, the Company
could be required to stop making the infringing trailers and to pay damages to
the patent holder. The Company does not believe that such an outcome would have
a material effect on the Company or its financial position or results of
operations.
Employees
As of December 22, 1996, the Company had 1,228 hourly and 216 salaried
employees, of which 117 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 fiscal 1997. 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.
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William Rohm has been the president of Motor Products, which produces
fractional horsepower motors for the Company, 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 that, he served in
various sales and sales management positions with Reliance Electric, which
manufactures motors, drives and controls.
James Pogmore has been the president of Cramer, which produces the
Company's subfractional horsepower motors and timers, since 1989. From 1982 to
1989, he served as the President of Measurement Systems, Inc., a manufacturer of
components for consumer and military products, becoming Chief Executive Officer
in 1985.
Randall James has been the president of Stature, which produces
fractional and integral horsepower motors for the Company, since Stature's
acquisition by the Company in October 1995. Prior to the acquisition, Mr. James
was Vice President and Director of Product Engineering of Stature, and Mr. James
served as an officer and was a principal stockholder of Stature since he
co-founded Stature in 1974. In connection with the Company's acquisition of
Stature, Mr. James entered into an employment agreement with Stature which
expires in October 1998.
Charles Barnett has been the president of Dura-Bond, where the
Company's replacement camshaft bearings are manufactured, since January 1995.
Prior to joining the Company, Mr. Barnett served as General Sales and Marketing
Manager for Red Dot Corporation, a manufacturer of custom heating and air
conditioning units for the transportation industry, since 1992. Prior to that,
he was the General Sales Manager at Paccar Parts from 1989 to 1992. Mr. Barnett
began his career with the AC-Delco Parts Division of General Motors in 1971,
where he rose to Regional Sales Manager before moving to Paccar.
Gerry Averett has been president of Snowmax since October 1995. Prior
to that, Mr. Averett was the General Manager of Snowmax since June 1993. From
January 1992 until he joined the Company, Mr. Averett was the President and
owner of a metal fabrication business. From January 1990 to January 1992, he
served as General Manager of a division of Aspen Coils which manufactured
evaporator coils. Prior to that, Mr. Averett held various sales management and
production management positions within the heating, ventilation and air
conditioning industry.
Timothy Penner has been the president of DewEze, which manufactures the
Company's bale processing and handling equipment, grain handling equipment and
turf maintenance equipment, since April 1996. Before returning to DewEze, where
he had held various managerial positions from 1991, Mr. Penner was President of
Parker Industries from January 1994. From 1981 to 1991 Mr. Penner held various
management positions at MCC International, an international development company.
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John Annin joined the Company as president of the Parker Industries
division of DewEze in April 1996. Prior to joining Parker, Mr. Annin had served
as president of Herschel Corp., a manufacturer of replacement parts for
agricultural equipment from 1991 until 1995. Before Herschel, Mr. Annin held
various managerial positions at Farmhand, Inc., a manufacturer of agricultural
equipment, rising to executive vice president and chief operating officer.
Max Bennett has been the president of Sooner Trailer, which
manufactures the Company's aluminum trailers, since September 1996, when he
moved to Sooner from his position as president of Great Bend. Mr. Bennett had
held that position since 1988, and remained in that position since the
acquisition of Great Bend by the Company in May 1995. Prior to the acquisition
of Great Bend by the Company, Mr. Bennett was an officer and principal
stockholder of Great Bend. Mr. Bennett is scheduled to retire from Sooner in
April 1997 when he will become a consultant to the Company.
James Callaway is executive vice president of Sooner and is scheduled
to succeed Mr. Bennett as president upon his leaving in April 1997. Mr. Callaway
joined Sooner in January 1997, having been president of Quincy Design and
Manufacturing Company of Quincy, Illinois until that company's recent
acquisition. Before joining Quincy in 1992, Mr. Callaway was director of sales
and interim president of Hesston Corporation of Hesston, Kansas for whom he had
worked in various management positions since 1972.
Stephen Hughbanks has served as president of Great Bend Manufacturing,
which manufactures the Company's front-end loaders, since October 1996. Before
joining Great Bend, Mr. Hughbanks was plant manager of the automotive division
of Avery Dennison Corporation, a QS/ISO 9000 automotive supplier, where he had
worked since 1989. Prior to his work at Avery Dennison, Mr. Hughbanks was plant
manager for Coleman Company's heating and air conditioning division.
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.
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.
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At the Company's Old Saybrook, Connecticut facility, the Company is
engaged in the closure of waste handling facilities in accordance with state
regulations. Based upon the Company's assessment of the scope of construction
necessary to satisfy regulatory requirements, required testing and remediation
is expected to cost no more than $100,000, although no assurance can be made in
this regard.
The lessor of the Company's Old Saybrook, Connecticut facility has
notified the Company that it may assert a claim against the Company relating to
potential contamination at a lagoon formerly owned by the Company and now owned
by the lessor. The property containing the lagoon is nearby the Company's
facility but is not leased or occupied by the Company. The lessor is engaged in
negotiations with the State of Connecticut regarding additional investigative or
remedial measures which may be imposed. The Company may be required to bear a
portion of the costs of the lessor's investigative or remedial measures and may
be required to become directly involved in responding to remediation
requirements. Based on the claims of the lessor and the remediation cost
estimates of the lessor, the aggregate costs which may be incurred by the
Company in connection with the remediation of the lagoon are expected to amount
to less than $250,000. The Company has also been notified by the Connecticut
Department of Environmental Protection ("CDEP") that enforcement action may be
taken against the Company with respect to this lagoon. Based on settlement
negotiations currently being conducted, the Company expects to settle the matter
with CDEP without litigation for approximately $25,000. The settlement would
require the Company to undertake environmental investigations and, if warranted,
remediation at the Old Saybrook, Connecticut facility.
The Company is named as a potentially responsible party ("PRP") with
respect to two hazardous substance disposal sites being cleaned up by the U.S.
Environmental Protection Agency under its "Superfund" program. Under applicable
laws, a PRP can be held jointly and severally liable for any investigation and
remediation costs incurred with respect to such sites and thus may be faced with
a liability that is greater than the proportion of waste it contributes to the
site. With respect to one of the 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 a de minimis amount. With respect
to the other site, the Company has only recently received the complaint in the
matter and as a result, the Company does not have sufficient information to
estimate the Company's potential financial exposure, if any, in the matter.
In December 1990, the Company was issued a non-binding request for
certain investigative and remediation measures regarding soil and groundwater by
the California Regional Water Quality Control Board relating to a facility
formerly operated by the Company. Since the issuance of the request, the State
has taken no further action against the Company and has not taken steps to
convert the request into an enforceable order. In the event the State were to
seek further remediation at the site, the Company may face claims from the State
in the form of an administrative order or claims for contribution from the
Company's former lessor at the site. Although the Company believes that it has
substantial defenses, there can be no assurance that the Company will not
eventually be required to conduct or pay for additional investigative and
-13-
<PAGE>
remediation activities at the site or the surrounding area.
Current historic manufacturing and other operations at the Company's
various facilities may result and may have resulted in the discharge and release
of hazardous substances and wastes from time to time. The Company routinely
responds to such incidents as deemed appropriate pursuant to applicable federal,
state and local environmental regulations.
The Company does not expect the outcome of any of the foregoing
environmental matters or any potential removal or remediation costs to be
material to the Company or to its financial position or results of operations.
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:
<TABLE>
<CAPTION>
Name Age Position
- --------- ----- ----------
<S> <C> <C>
George B. Lemmon, Sr................ 64 Chairman of the Board
George B. Lemmon, Jr................ 35 President, Chief Executive Officer, and
Director
Harry Holiday, III ................. 40 Executive Vice President and Chief
Operating Officer
John H. Wert, Jr. .................. 36 Senior Vice President - Finance, Chief
Financial Officer, Treasurer and Secretary
Brian D. Tidwell ................... 35 Vice President of Operations
</TABLE>
George B. Lemmon, Sr. is one of the Company's founders and is the
Chairman of the Board of Directors of the Company. Until August 1995, Mr. Lemmon
also served as the
-14-
<PAGE>
Company's Chief Executive Officer. Until the Reorganization, he served as a
senior executive officer and a director of each of the Company's business units
since their acquisition by Brynavon Group or its affiliates. Prior to his
affiliation with Brynavon Group and the Company, from 1969 to 1975, Mr. Lemmon
performed corporate finance services for Wood, Struthers & Winthrop, a New York
investment bank which was subsequently acquired by Donaldson, Lufkin & Jenrette.
Mr. Lemmon is the father of George B. Lemmon, Jr., the Company's President and
Chief Executive Officer.
George B. Lemmon, Jr. became President of the Company in May 1996, and
he has served as Chief Executive Officer of the Company since August 1995 and as
a director of the Company since March 1994. Mr. Lemmon was also the Company's
Secretary and Treasurer from March 1994 until June 1996. From January 1995 to
August 1995, Mr. Lemmon served as Executive Vice President - Corporate
Development. From March 1994 until January 1995, Mr. Lemmon was the Company's
Executive Vice President and Chief Financial Officer. Mr. Lemmon served as Chief
Financial Officer of Brynavon Group from 1990 to October 1994. He had held
various managerial and sales positions with Brynavon Group since 1983.
Harry Holiday, III joined the Company as its Executive Vice President
and Chief Operating Officer in November 1996. Before 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 Mr. Wert 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.
-15-
<PAGE>
Item 2. Properties
The Company maintains manufacturing facilities with approximately
753,000 square feet in nine states. The following table sets forth information
relating to the Company's manufacturing facilities. Unless otherwise indicated,
the Company owns these manufacturing facilities.
<TABLE>
<CAPTION>
Total Square Manufacturing
Business Segment Location Footage Square Footage
- ---------------- --------- ------------- ---------------
<S> <C> <C> <C>
Engineered Component
Products Owosso, Michigan 86,900 67,400
Watertown, New York (1) 82,000 77,800
Old Saybrook, Connecticut (2) 79,400(3) 32,100
Barberton, Ohio (4) 29,700 27,400
Carson City, Nevada (5) 75,100 59,600
Kilgore, Texas (6) 90,000 86,600
Northfield, Illinois (7) 2,046 0
Specialized Equipment Harper, Kansas (8) 51,700 44,500
Jefferson, Iowa 58,450 48,750
Duncan, Oklahoma (9) 122,000 112,300
Great Bend, Kansas (10) 76,300 68,300
</TABLE>
- -----------
(1) This facility is subject to a mortgage which secures a $1.8 million
industrial revenue bond financing.
(2) The lease for this facility expires in 1999 and provides for annual
rental payments currently in the amount of $480,000, with future rental
increases based on increases in the cost of living index.
(3) Not including 38,200 square feet subleased to unaffiliated third
parties.
(4) The lease for this facility expires in 2000 and provides for annual
rental payments currently in the amount of $79,000, with future rental
increases at specific rates set forth in the lease, increasing to
$88,000 by the year 2000.
(5) This facility is subject to a mortgage which secures a $5.0 million
industrial revenue bond financing.
(6) This facility is subject to a $634,000 mortgage.
(7) The lease for this facility expires in 1999 and provides for annual
rental payments currently in the amount of $27,000, with future rental
increases at specific rates set forth in the lease, increasing to
$29,000 by the year 1999.
(8) This lease for this facility expires in 2003 upon the payment in full
of a $1.1 million industrial revenue bond financing, at which time the
fee interest in the facility will be transferred to the Company.
-16-
<PAGE>
(9) This facility is subject to a $874,000 mortgage.
(10) This facility is subject to a mortgage which secures a $1.0 million
industrial revenue bond financing.
The Company leases its principal offices, located in King of Prussia,
Pennsylvania, which consist of approximately 12,715 square feet of office space.
The lease, which expires in September 2006, requires annual rental payments of
approximately $186,020 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 that as discussed under "Environmental and Safety Regulations" in
Item 1, the Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
-17-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company consummated its initial public offering of common stock on
October 25, 1994, and its common stock is traded 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:
<TABLE>
<CAPTION>
Fiscal 1996 High Low
----------- ---- ----
<S> <C> <C>
Fourth Quarter $ 7 5/8 $ 5 5/8
Third Quarter $ 9 1/2 $ 7 1/4
Second Quarter $10 1/8 $ 7 1/2
First Quarter $11 1/4 $ 8 3/8
Fiscal 1995 High Low
----------- ---- ----
Fourth Quarter $11 7/8 $9 3/4
Third Quarter $12 $11 1/4
Second Quarter $11 3/4 $9 3/4
First Quarter $12 1/4 $9 3/4
Fiscal 1994 High Low
----------- ---- ----
Fourth Quarter (commencing $12 1/4 $12
October 25, 1994) 1
</TABLE>
- ----------
1 The date of the initial public offering of the Company's Common Stock.
As of January 21, 1997, there were 83 holders of record of the
Company's common stock and an estimated number of beneficial owners of the
common stock of approximately 1,050.
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.
-18-
<PAGE>
Private Placement
On September 30, 1996, Owosso Motor Group, Inc., a
wholly-owned subsidiary of the Company, acquired Koepke & Associates, Inc., a
manufacturers' representative, pursuant to a merger. As consideration for the
acquisition, the Company issued 75,000 shares of common stock of the Company,
par value $.01 per share (the "Shares") to the seller. The Company has agreed to
register the Shares for resale under the Securities Act of 1933 (the "Act")
under certain conditions. The sale of the Shares was exempt from the
registration provisions of the Act pursuant to Section 4(2) of the Act for
transactions not involving a public offering, based on the fact that the private
placement was made to one accredited investor who had access to financial and
other relevant data concerning the Company, its financial condition, business
and assets. The securities sold in the private placement may not be reoffered or
resold absent registration under the Act or available exemptions from such
registration requirements.
Item 6. Selected Financial Data
The consolidated statement of operations data set forth below for the
fiscal years ended October 25, 1992, October 31, 1993, October 30, 1994, October
29, 1995 and October 27, 1996 and the consolidated balance sheet data at October
25, 1992, October 31, 1993, October 30, 1994, October 29, 1995, and October 27,
1996 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."
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------
Oct. 25, Oct. 31, Oct. 30, Oct. 29, Oct. 27,
1992 (1) 1993+ (2) 1994 (3) 1995 1996
-------- --------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $58,148 $64,659 $73,799 $108,001 $128,216
Costs of products sold 40,202 45,838 52,750 77,629 98,282
------- ------- ------- -------- --------
Gross profit 17,946 18,821 21,049 30,372 29,934
Selling, general and administrative expenses 8,111 8,518 9,487 13,920 19,488
Corporate expenses 2,316 2,304 2,417 3,683 4,444
------ ------ ------ ------- --------
Income from operations 7,519 7,999 9,145 12,769 6,002
Interest expense 2,428 2,424 1,855 2,876 4,081
Interest and other income 426 480 698 390 202
------ ------ ------ ------- -------
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------
Oct. 25, Oct. 31, Oct. 30, Oct. 29, Oct. 27,
1992 (1) 1993+ (2) 1994 (3) 1995 1996
-------- --------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income before discontinued operations, 5,517 6,055 7,988 10,283 2,123
income taxes and cumulative effect of
accounting change
Income tax (benefit) provision (801) 3,900 1,275
Cumulative effect of accounting change (1,017)
------ ------- ------ ------ -------
Net income $5,517 $5,038 $8,789 $6,383 $848
====== ======= ====== ====== =======
Dividends and accretion on preferred stock (1,025)
-------
Net (loss) available to common ($177)
shareholders ======
Net income (loss) per common share $1.09 ($0.03)
===== ======
Weighted average number of common 5,865 5,839
shares outstanding
PRO FORMA DATA:
Income before pro forma tax provision and $5,517 $6,055 $7,988
cumulative effect of accounting change
Pro forma tax provision (4) 1,891 2,090 2,836
----- ------ ------
Pro forma income before cumulative effect 3,626 3,965 5,152
of accounting change
Cumulative effect of accounting change net (671)
of pro forma tax benefit of $346 ----- ----- ------
Pro forma net income $3,626 $3,294 $5,152
====== ====== ======
Pro forma net income before cumulative $0.82 $1.06
effect of accounting change per share
Cumulative effect of accounting change per
common share $0.14
-----
Pro forma net income per common share $0.68 $1.06
===== =====
Pro forma common shares outstanding (5) 4,833 4,847
OTHER DATA:
Capital expenditures $1,610 $1,290 $2,000 $4,437 $4,346
Depreciation and amortization 2,701 2,968 2,786 4,213 6,298
EBITDA (6) 10,220 10,967 11,931 16,982 12,300
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Oct. 25, Oct. 31, Oct. 30, Oct. 29, Oct. 27,
1992 1993 1994 1995 1996
-------- --------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $10,845 $14,405 $18,488 $20,564 $20,385
Total assets 43,341 45,543 66,118 108,719 107,895
Total short-term and long-term obligations 25,004 23,360 33,106 52,799 53,814
Shareholders' equity 11,510 13,752 21,670 39,570 37,020
</TABLE>
- ---------------
+ 53-week fiscal year.
(1) Includes the results of operations of DewEze since December 18, 1991,
the date of its acquisition.
(2) Does not include the results of Sooner, which was acquired as of
October 30, 1994.
(3) Includes the results of operations of Great Bend since May 1, 1995, the
date of its acquisition. Does not include the results of Stature, which
was acquired as of October 29, 1995.
(4) Reflects federal income taxes as if the Company had not been an S
Corporation during these periods. See Notes 2 and 12 of "Notes to
Consolidated Financial Statements."
(5) Historical consolidated shares outstanding for fiscal 1993 and 1994
include an additional 833,000 shares assumed to be outstanding (valued
at the initial public offering price of $12.00 per share) necessary to
reflect a non-cash S corporation distribution of $10.0 million to its
shareholders (on account of previously taxed income) in the form of
certain indebtedness owed to Motor Products by Brynavon Group.
(6) EBITDA represents income before income taxes, interest expense,
interest and other income and depreciation and amortization expenses.
EBITDA is presented as additional financial data but may not be
representative of operating results or cash flows for the periods
presented. EBITDA data should be considered in conjunction with the
Company's Consolidated Statements of Cash Flows included elsewhere in
this Form 10-K, which set forth information concerning the Company's
cash flows for each of the three years in the period ended October 27,
1996.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
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. In the Engineered Component Products
segment, the Company's products are sold primarily to original equipment
manufacturers or service providers who use them in their end product or service.
Products manufactured in this segment include electric motors, timers, heat
-21-
<PAGE>
transfer coils, replacement camshaft bearings, valve seats and shims. The
products sold in the Specialized Equipment segment are almost exclusively final
products sold through independent dealers to their end users, typically horse
owners, ranchers, farmers and municipalities. Products sold in the Specialized
Equipment segment include aluminum trailers, grain handling equipment, front-end
loaders, hay bale handling and processing equipment, and all-terrain commercial
mowers.
The Company's net sales for fiscal 1996 were $128.2 million on which net sales
of products manufactured by subsidiaries in the Engineered Component Products
segment accounted for 56.1% of total net sales while net sales of specialized
equipment accounted for 43.9% of net sales. Among other financial data, the
Company measures the profitability of its subsidiaries by its business unit
income, which is defined as a subsidiary's income from operations before
allocation of corporate office expenses. In fiscal 1996, the Company's
consolidated business unit income was $10.4 million, of which the Engineered
Component Products segment produced $6.8 million, or 65.2% of the total. The
Specialized Equipment segment had business unit income of $3.6 million, or 34.8%
of the total.
The Company's goal is to achieve long term growth in cash flow and net income,
with the growth being divided more or less evenly over time between internal
growth and growth through acquisition. The Company's internal growth objective
is to maximize operating results by combining revenue growth with consistently
high profit margins. It seeks to accomplish this objective, in part, by
competing on the basis of engineering and design expertise, production
capabilities and customer service rather than primarily on price, and by
controlling costs. The Company's individual subsidiaries' businesses are managed
on a day-to-day basis by their local management teams so that operating
decisions can be made by managers close to the customer and the manufacturing
operations. Annual plans are agreed upon by subsidiary management and the
corporate office, and subsidiary managers' compensation is tied to their unit's
performance in comparison to those goals. Corporate management monitors progress
towards these objectives and adds assistance where necessary to help
subsidiaries meet them. The corporate staff also coordinates the development and
monitors the implementation of long-term strategic plans. Certain administrative
functions are handled by corporate staff so that business unit presidents can
concentrate on operating objectives. The corporate office also handles functions
that are not value-added to its customers, and where economies of scale can
reduce costs, such as benefits, insurance and banking.
Growth through acquisition is also important in achieving the Company's growth
objectives. The Company attempts to acquire businesses that operate in high
margin, narrowly defined markets similar to those served by its existing
businesses. Acquisitions may add new markets or enhance the market positions of
existing businesses. Target acquisition candidates typically have high initial
capital requirements and low ongoing capital needs, incorporate mature
technologies in their products, have integrated manufacturing processes, compete
on the basis of value-added services, and have a management team with a proven
record of accomplishment. The Company
-22-
<PAGE>
has focused its acquisition plans in its existing product segments and intends
to continue to do so, with more of its efforts concentrated on its Engineered
Component Products segment.
During fiscal 1996, the Company made two small strategic acquisitions. In
August, the Company acquired Snyder Industries, Inc. of Seattle, Washington
through its Dura-Bond Bearing subsidiary. Snyder's operations will be
consolidated into Dura-Bond during the first quarter of fiscal 1997. Snyder
manufactures valve seats, valve seat inserts and valve seat booster shims used
in remanufacturing automobile engines. These products serve as an addition to
Dura-Bond's product line serving the engine remanufacturing industry. Dura-Bond
paid $1.35 million in cash and assumed $0.3 million of Snyder's debt, which was
retired at closing.
In October, 1996, the Company acquired Koepke & Associates of Northfield,
Illinois, a manufacturers' representative firm, in exchange for 75,000 shares of
common stock. Koepke & Associates has been renamed Owosso Motor Group, Inc. and
serves as the central sales organization for the Company's Stature Electric,
Motor Products-Owosso and Motor Products-Ohio subsidiaries. The acquisition is
intended to give these subsidiaries an enhanced and more focused presence among
their large corporate accounts and prospects.
The acquisition history of the Company's businesses is as follows:
Year
Business Acquired
- ---------- ----------
Motor Products - Owosso Corporation 1973
Snow Coil, Inc. (1) 1980
Airmax, Inc. (1) 1984
Cramer Company 1984
Parker Industries (2) 1985
Bristol Company (3) 1986
Dura-Bond Bearing Company 1987
DewEze Manufacturing, Inc. 1991
Sooner Trailer Manufacturing Co. 1994
Great Bend Manufacturing, Inc. 1995
Stature Electric, Inc. 1995
Snyder Industries, Inc. (4) 1996
Owosso Motor Group, Inc. 1996
- -------------
(1) Consolidated into Snowmax, Incorporated in 1989.
(2) Consolidated into DewEze in 1994.
(3) Consolidated into Cramer Company in 1987.
(4) Consolidated into Dura-Bond Bearing Company upon acquisition.
-23-
<PAGE>
Selected financial results for the Company by business unit and by segment are
set forth below:
Segment and Business Operating Results
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------
October 27, October 29, October 30,
1996 1995 1994
-------------- --------------- --------------
(In thousands)
<S> <C> <C> <C>
Net Sales:
Engineered Component Products:
Fractional and Integral HP motors (1) $39,066 $20,786 $22,425
Heat transfer coils 14,904 16,806 17,145
Replacement camshaft bearings and valve seats/shims (2) 9,386 10,867 10,423
Subfractional HP motors and timers 8,631 8,916 8,413
------- ------- -------
Total Engineered Component Products $71,987 $51,375 $58,406
======= ======= =======
Specialized Equipment:
Aluminum trailers $28,739 $30,327 ---
Grain handling equipment 10,749 7,897 7,790
Front-end loaders (3) 10,065 5,336 ---
Bale handling/processing equipment and mowers 6,676 7,065 7,603
----- ------- -------
Total Specialized Equipment $56,229 $50,626 $15,393
======= ======== =======
Total net sales $128,216 $108,001 $73,799
======== ======== =======
Business unit income (4):
Engineered Component Products
Fractional HP motors (1) $4,857 $4,428 $5,935
Heat transfer coils (448) 1,356 603
Replacement camshaft bearings and valve seats/shims (2) 2,594 3,458 3,361
Subfractional HP motors and timers (191) 445 32
----- ------ ------
Total Engineered Component Products $6,812 $9,687 $9,931
====== ====== ======
Specialized Equipment:
Aluminum trailers $1,789 $5,359 ---
Grain handling equipment 1,265 800 646
Bale handling/processing equipment and mowers 152 508 986
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------
October 27, October 29, October 30,
1996 1995 1994
-------------- --------------- --------------
(In thousands)
<S> <C> <C> <C>
Front end loaders (3) 428 118 --
------- ------ ------
Total Specialized Equipment $3,634 $6,785 $1,632
======= ======= =======
Total business unit income $10,446 $16,472 $11,563
======= ======= =======
EBITDA (5):
Engineered Component Products $10,994 $12,080 $12,292
Specialized Equipment 5,750 8,605 2,057
Corporate expenses 4,444 3,682 2,418
Total EBITDA $12,300 $16,982 $11,931
EBITDA/share $2.11 $2.90 $2.46
</TABLE>
- ------------
(1) Includes results of Stature Electric from October 30, 1995, its date
of acquisition, and Owosso Motor Group, Inc. from October 1, 1996, its
date of acquisition.
(2) Includes results of Snyder Industries, Inc. from August 15, 1996, its
date of acquisition.
(3) Includes results of Great Bend from May 1, 1995, its date of
acquisition.
(4) Business unit income is calculated before corporate expenses and
before the cumulative effect of accounting change. Amortization
expenses resulting from acquisitions are included as expenses in
calculating business unit income.
(5) EBITDA represents income before income taxes, interest expense,
interest and other income, depreciation and amortization expenses.
EBITDA is presented as additional financial data but may not be
representative of operating results or cash flows for the periods
presented.
Results of Operations
The following table sets forth certain statement of earnings items as a
percentage of net sales for the periods included.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------
October 27, October 29, October 30,
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
Net sales:
Engineered Component Products 56.1% 53.1% 79.1%
Specialized Equipment 43.9% 46.9% 20.9%
Total net sales: 100.0% 100.0% 100.0%
Gross profit (1):
Engineered Component Products 24.0% 28.9% 28.6%
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------
October 27, October 29, October 30,
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
Specialized Equipment 22.5% 27.2% 31.4%
Total gross profit 23.3% 28.1% 29.7%
Business unit income from operations (1):
Engineered Component Products 9.5% 16.9% 17.0%
Specialized Equipment 6.5% 13.4% 10.6%
Total business unit income from operations 8.1% 15.2% 15.7%
Corporate expenses 3.5% 3.4% 3.3%
Income from operations 4.7% 11.8% 12.4%
Interest income, net 3.2% 2.7% 1.6%
Income before income taxes 1.7% 9.5% 10.8%
Net income available to common shareholders (2) (0.1%) 5.9% 7.0%
</TABLE>
- -----------
(1) Calculated as a percent of segment net sales.
(2) See Note 2 of "Notes to Consolidated Financial Statements." Amount for
fiscal year 1994 is calculated on a pro forma basis to reflect income
taxes that would have been recorded if none of the Company's businesses
had been an S corporation. Net income available to common shareholders
for fiscal 1996 is calculated after deduction of $750,000 in preferred
stock dividends and $275,000 in accretion of preferred stock value.
Fiscal 1996 Compared to Fiscal 1995
Net sales. In fiscal 1996 the Company's net sales were $128.2 million, an
increase of 18.7% over fiscal 1995 net sales of $108.0 million. The increase in
net sales arose from the addition of the results of Stature Electric, acquired
in October 1995 and the addition of a full year's results of Great Bend
Manufacturing, acquired in May 1995. These factors more than offset a 3% decline
in net sales at the Company's other subsidiaries.
In the Company's Engineered Component Products segment, net sales increased
25.5% to $72.0 million in fiscal 1996 from $57.4 million in fiscal 1995. The
effect of adding Stature's net sales more than offset a decline of 8% for the
other subsidiaries in the segment. Most significantly, net sales at Dura-Bond
declined 13.6% due to a significant reduction in sales to that subsidiary's
largest customer, Federal-Mogul Corporation, which served as Dura-Bond's largest
distribution network. Federal-Mogul began to manufacture its own replacement
camshaft bearings in the first quarter of fiscal 1996. In fiscal 1996,
Dura-Bond's increased sales directly to end-users (rather than through
Federal-Mogul) did not offset the loss of Federal-Mogul sales. Sales of heat
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<PAGE>
transfer coils declined 11.3% in fiscal 1996, primarily due to a reduction in
sales of "A" coils to the air conditioning market. The Company has arranged to
sell the rights to this product line to an employee who will begin to
manufacture coils during fiscal 1997. The employee will lease space and
equipment in one of Snowmax's buildings and will pay a royalty fee on sales of
these coils. Sales of "A" coils were $1.8 million in fiscal 1996. Because of
more favorable market conditions and increased orders in its motor businesses,
particularly for the Motor Products-Ohio subsidiary, the Company expects that
net sales in the Engineered Component Products segment will be higher in fiscal
1997 than in fiscal 1996.
Net sales in the Specialized Equipment segment were $56.2 million, an 11.1%
increase over fiscal 1995 net sales of $50.6 million. The inclusion of a full
year of results of Great Bend Manufacturing and a 36.1% increase in sales of
grain handling equipment at Parker more than offset a decline of 5.2% in net
sales of Sooner's aluminum trailers and lower net sales at DewEze, which
continued to be affected by low cattle prices. The increase in sales of grain
handling equipment was due to favorable pricing and production conditions for
grain farmers in the central United States, an improved product line, and
comparison to fiscal 1995 in which Parker was out of production during its
traditionally slow first quarter as the plant was expanded.
Gross profit. In fiscal 1996 the Company's gross profit was $29.9 million, or
23.3% of net sales, 1.4% below fiscal 1995 gross profit of $30.4 million, or
28.1% of net sales.
Gross profit in the Engineered Component Products segment was $17.3 million, or
24.0% of net sales in fiscal 1996, as compared to $16.6 million, or 28.9% of net
sales in the prior fiscal year. The increase in gross profit in this segment was
due to the addition of Stature's results, offsetting reduced gross profit at the
other subsidiaries in this segment. This reduction was due to lower margins in
the Company's Motor Products operations, as a larger percentage of motors were
lower margin wound field motors produced in Motor Products' Ohio plant. Lower
sales at Dura-Bond and Snowmax decreased gross profit at those subsidiaries, and
margins were reduced in the segment due to lower sales to cover fixed overhead
expenses and the results of an inventory reduction program at Snowmax. The
inventory reduction program led to an increase in cost of goods sold of $733,000
during the year, and the Company does not expect to incur similar expenses in
fiscal 1997 to a material extent.
Gross profit in the Specialized Equipment segment was $12.6 million, or 22.5% of
net sales in fiscal 1996, representing a reduction of 8.3% from gross profit of
$13.8 million, or 27.2% of net sales, in fiscal 1995. The inclusion of Great
Bend's results for a full year was more than offset by a significant reduction
in margin and a decline in sales at Sooner. Sooner's sales were reduced by
slower demand in the second half of fiscal 1996 and production inefficiencies
that led to slower shipments. These production problems, caused in part by the
disruptive effects of an ultimately unsuccessful union organization campaign and
high employee turnover, combined with the decline in sales reduced the gross
profit in that operation by $3.1 million as compared to fiscal 1995. Reduced
margins at DewEze due to a less favorable product mix were offset by higher
gross profit at Parker due to that subsidiary's significantly higher sales.
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<PAGE>
At the end of fiscal 1996, the Company recognized a reduction in inventory value
of $1.1 million in connection with its year-end physical inventory count and
valuation process. See Note 16 to Consolidated Financial Statements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $19.5 million, or 15.2% of net sales, in fiscal
1996 as compared to $13.9 million, or 12.9% of net sales in fiscal 1995. In the
Company's Engineered Component Products segment, selling, general and
administrative expenses increased to $10.5 million in fiscal 1996 as compared to
$6.9 million in the prior fiscal year. These expenses increased in fiscal 1996
primarily due to including results of Stature, including non-cash amortization
expenses relating to its purchase, and an increase to the reserve for bad debt
expense at Snowmax recognized in the fourth quarter. The increase to selling,
general and administrative expenses of reserves for and write-offs of doubtful
accounts at Snowmax was $0.6 million. In the Specialized Equipment segment,
selling, general and administrative expenses increased to $9.0 million in fiscal
1996 from $7.0 million in fiscal 1995, primarily due to including Great Bend's
results for a full year, including non-cash amortization expenses relating to
its purchase. These expenses also increased at Parker due to the large increase
in sales at that subsidiary and at Sooner for personnel related expenses in
anticipation of higher sales.
Corporate Expenses. Corporate expenses in fiscal 1996 were $4.4 million, or 3.5%
of net sales, as compared to $3.7 million, or 3.4% of net sales, in fiscal 1995.
Corporate expenses increased primarily due to increases in personnel costs,
including severance costs and recruitment expense related to the replacement of
the Company's former president and chief operating officer, increased computer
programming and other information services expenses and increased legal and
professional expenses. Despite the increase, these expenses remained consistent
with the increase in the Company's net sales. The Company expects that its
continuing investment in upgraded information systems and additional personnel
to help manage its growth will cause corporate expenses to increase somewhat in
fiscal 1997, though not materially disproportionately to its sales.
Income from Operations. Income from operations fell 53% to $6.0 million in
fiscal 1996 from $12.8 million in fiscal 1995, due to the lower gross profit and
increased selling, general and administrative expenses and corporate expenses as
discussed above. Among other measures, the Company evaluates the operating
performance of its business segments and its subsidiaries based on business unit
income, which is defined as income from operations before allocation of
corporate expenses. The Company believes this measurement most closely reflects
the subsidiaries' individual contributions. On this basis, business unit income
for the Engineered Component Products segment decreased to $6.8 million, or 9.5%
of net sales, in fiscal 1996 from $9.7 million, or 16.9% of sales, in fiscal
1995 due to the factors discussed above. Business unit income in the Specialized
Equipment segment before corporate expenses was $3.6 million, or 6.5% of sales,
as compared to $6.8 million, or 13.4% of sales, in fiscal 1995 due to the
factors discussed above. A table presenting business unit income by product line
and segment for the past three fiscal years is presented above on page 24.
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<PAGE>
Interest Expense, Net. Net interest expense increased to $4.1 million, or 3.2%
of net sales in fiscal 1996 from $2.9 million, or 2.7% of net sales in fiscal
1995. The increase in net interest expense arose from increased average
borrowing levels in fiscal 1996 due primarily to debt carried in connection with
the acquisition of Stature and a full year of interest on debt related to the
acquisition of Great Bend.
Net income. Net income in fiscal 1996 was $0.8 million, or 0.7% of net sales,
after a tax provision at an effective rate of 60.1%. This compares to net income
in fiscal 1995 of $6.4 million, or 5.9% of net sales, after a tax provision at
an effective rate of 37.9%. The decrease is attributable to the lower income
from operations, higher interest expense and higher effective tax rate. The
substantial increase in the Company's effective tax rate results from the higher
proportion of non-deductible expenses, primarily non-cash amortization expenses
related to acquisitions, as compared to pretax income. Because of the pretax
loss in the fourth quarter, the Company recognized income tax expense at a
substantially higher rate in that quarter to bring the full year rate to 60.1%.
See Note 16 to Consolidated Financial Statements. The company expects a lower
effective tax rate in fiscal 1997 due to relatively flat non-deductible expenses
and higher pretax income.
Net loss available for common stockholders. In fiscal 1996, the Company reported
a loss of $0.2 million available for common stockholders. The loss is calculated
by subtracting dividends on preferred stock of $0.8 million and non-cash
accretion in value of preferred stock of $0.3 million from net income. This
results in a net loss per common share of $0.03 in fiscal 1996. As no preferred
stock was outstanding until the end of fiscal 1995, no such subtraction was
necessary in that fiscal year. The Company expects to show improvement in income
available to common shareholders from its current businesses for the full year
in fiscal 1997 as compared to fiscal 1996.
Fiscal 1995 Compared to Fiscal 1994
Net sales. Net sales were $108.0 million for fiscal 1995, as compared to $73.8
million for the prior year period, representing an increase of 46.3%. Net sales
of engineered component products decreased 1.8% to $57.4 million from $58.4
million in fiscal 1994. A decrease in sales of fractional horsepower motors in
the second half of the fiscal year due to a slower manufacturing economy and the
loss of some sales at the higher volume end of that business, combined with a
small decrease in heat transfer coil sales, more than offset increases at the
other businesses in this segment. In the Specialized Equipment segment, sales
more than tripled to $50.6 million in fiscal 1995 from $15.4 million in fiscal
1994. The increase was attributable to the purchase of Sooner and Great Bend.
Sales of grain handling equipment rose slightly despite a plant shutdown in the
first quarter of fiscal 1995 during a construction project, while sales of bale
handling and processing equipment declined in the face of a difficult
agricultural economy in its region of the country.
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<PAGE>
Gross profit. Gross profit for fiscal 1995 was $30.4 million, or 28.1% of sales,
an increase of 44.3% over $21.0 million, or 28.5% of net sales, in fiscal 1994.
The gross profit in the Engineered Component Products segment was $16.6 million,
or 28.9% of net sales, in fiscal 1995, as compared to $16.7 million, or 28.6% of
net sales in fiscal 1994. The small decrease is attributable to the decrease in
net sales. In the Specialized Equipment segment the gross profit was $13.8
million, or 27.2% of net sales in fiscal 1995, as compared to $4.4 million, or
28.3% of net sales, in fiscal 1994. The increase in gross profit as well as the
decrease in gross margin is due to including the results of Sooner and Great
Bend in fiscal 1995; the gross margins at those subsidiaries is lower than the
1994 gross margin in the other specialized equipment subsidiaries.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $13.9 million, or 12.9% of sales in fiscal 1995 as
compared to $9.5 million, or 12.9% of sales in fiscal 1994. The increase
resulted primarily from the addition of selling, general and administrative
expenses of Sooner and Great Bend, including non-cash amortization expenses of
approximately $0.9 million relating to the acquisition of those businesses by
the Company. Selling, general and administrative expenses for the rest of the
Company's businesses in fiscal 1995 were approximately equal to the fiscal 1994
level. Selling, general and administrative expenses in the Engineered Component
Products segment increased to $6.9 million, or 12.0% of sales, in fiscal 1995
from $6.8 million, or 11.6% of sales, in fiscal 1994 due to non-cash
amortization expenses at its Dura-Bond subsidiary created in connection with the
reorganization of the Company which took place at the end of fiscal 1994 (the
"Reorganization"). In the Specialized Equipment segment, selling, general and
administrative expenses increased to $7.0 million in fiscal 1995, or 13.8% of
net sales, from $2.7 million, or 17.7% of net sales, in the prior fiscal year
due to including Sooner's and Great Bend's expenses in fiscal 1995.
Corporate Expenses. Corporate expenses in fiscal 1995 were $3.7 million, or 3.4%
of net sales, as compared to $2.4 million, or 3.3% of net sales, in fiscal 1994.
Corporate expenses rose in fiscal 1995 primarily due to increased legal and
professional fees and other expenses resulting from the Company's new status as
a public company, increased insurance expense, higher personnel expenses
commensurate with the Company's growth, and increased lease expense for an
upgraded corporate computer system.
Income from Operations. Income from operations increased 39.6% to $12.8 million,
or 11.8% of sales, in fiscal 1995 from $9.1 million, or 12.4% of sales, in
fiscal 1994. The increase can be attributed to the acquisition of Sooner and
Great Bend, while the operating margin decreased because of non-cash
amortization expenses related to these acquisitions, and the other factors
described above. Among other measures, the Company evaluates the operating
performance of its business segments and its subsidiaries based on business unit
income which is defined as income from operations without the allocation of
corporate expenses. The Company believes this measurement most closely reflects
the subsidiaries' individual contributions. On this basis, business unit income
for the Engineered Component Products segment decreased to $9.7 million, or
16.9% of net sales, in fiscal 1995 from $9.9 million, or 17.0% of net sales, in
fiscal 1994 due to the factors discussed above. Business unit income in the
Specialized Equipment segment was
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<PAGE>
$6.8 million, or 13.4% of net sales, as compared to $1.6 million, or 10.6% of
sales, in fiscal 1995 due to the factors discussed above. A table presenting
business unit income by product line and segment for the past three fiscal years
is presented above on page 24.
Interest Expense, Net. Net interest expense increased to $2.9 million, or 2.7%
of sales, from $1.2 million, or 1.6% of sales, in fiscal 1994. The increase was
due to higher debt outstanding during fiscal 1995, primarily as a result of the
acquisition of Great Bend, and the lack of interest income from affiliates due
to the retirement of affiliate notes in connection with the Reorganization.
Net income. The Company's net income in fiscal 1995 was $6.4 million, or 5.9% of
net sales, in fiscal 1995 after an income tax provision at an effective rate of
37.9%. This represents a 23.9% increase compared to net income of $5.2 million,
or 7.0% of net sales, in fiscal 1994 after a pro forma tax provision calculated
at a rate of 35.5%. The decrease in net income as a percentage of sales is
attributable to the decline in operating margin described above, as well as
increased net interest expense and the higher effective tax rate.
Reported net income of $8.8 million for fiscal 1994 does not include a provision
for income taxes because the Company's businesses were Subchapter S Corporations
in that year. In addition, reported 1994 net income benefited from a change in
accounting for income taxes that resulted in a $0.8 million gain. Income before
the provision for income taxes increased by 29% from $8.0 million to $10.3
million. The effective tax rate increased due to higher non-deductible expenses,
consisting primarily of non-cash amortization expense related to acquisitions
and the Reorganization.
Liquidity and Capital Resources
Cash and cash equivalents decreased to $0.8 million at October 27, 1996 from
$1.8 million at October 29, 1995. In addition to cash and cash equivalents at
October 29, 1995, the Company had $0.3 million of cash that was restricted under
industrial revenue financings. Net cash provided by operating activities rose to
$8.8 million in fiscal 1996 from $7.7 million in fiscal 1995. This increase
arose despite the substantial decrease in net income because of a $2.1 million
increase in non-cash expenses resulting from the acquisitions of Great Bend and
Stature deducted before calculating net income in fiscal 1996. Additionally, the
Company reduced its working capital needs in fiscal 1996, particularly due to a
$1.8 million decrease in inventory, about half of which resulted from its
inventory reduction program at Snowmax. During fiscal 1995, the Company's
working capital needs accounted for a use of cash of approximately $2.6 million.
These internally generated funds provided for capital expenditures, financing of
acquisitions and dividends to common and preferred shareholders.
The Company's primary cash requirements have been for operating expenses,
including raw materials, labor costs and funding of accounts receivable, as well
as capital expenditures,
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<PAGE>
acquisitions and dividends to shareholders. Primary sources of cash have been
from operations and bank borrowings, with industrial revenue bonds being used
for specific capital projects.
Working capital decreased to $20.4 million at October 27, 1996 from $20.6
million at October 29, 1995 primarily due to the decrease in inventory mentioned
above. This decrease more than offset the reduction in the current portion of
notes payable to affiliates issued in connection with the purchase of Stature
which were paid for using the Company's revolving credit facility.
The Company maintains a $55.0 million revolving credit agreement with two banks
with a termination date of March 31, 2000. At October 27, 1996 borrowings of
$30.0 million were outstanding under the revolving credit 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 1.75% at October 27, 1996.
The agreement contains customary financial and other covenants, including
leverage, fixed charge, cash flow and net worth ratios, restrictions on certain
asset sales, mergers and other significant transactions and a negative pledge on
assets. During fiscal 1996, the Company entered into interest rate swap
agreements with its two banks with notional amounts totaling $15.0 million. The
agreements call for the company to make quarterly fixed payments on the notional
amount at rates of 7.0675% and 7.09% for five years beginning in July 1997 in
exchange for receiving payments at the three month London Interbank Offered
Rate.
During fiscal 1994, 1995 and 1996, the Company invested $2.0 million, $4.4
million and $4.3 million in capital expenditures, respectively. In fiscal 1996,
$2.8 million of capital expenditures related to the Engineered Component
Products segment, $1.1 million related to the Specialized Equipment segment, and
$0.4 million related to the corporate office. Capital expenditures have grown
due to the Company's acquisitions and internal sales growth and have been used
primarily for updating production equipment, providing tooling and equipment for
the manufacture of new products, expanding the capacity of manufacturing
facilities and reconfiguring production lines. The Company expects to continue
to invest in significant levels of capital expenditures as it invests in the
tooling and equipment necessary to produce its products efficiently and to
respond to customer quality and production flexibility demands. The Company
expects that capital expenditures for fiscal 1997 should remain at a level
consistent with or somewhat higher than that of fiscal 1996. The Company expects
that capital expenditures will continue to be concentrated primarily in the
Engineered Component Products segment in fiscal 1997.
During fiscal 1996 and fiscal 1995, the Company invested cash of $1.7 million
and $1.4 million, respectively, for the acquisition of businesses, net of
acquired cash. In fiscal 1996, the Company also issued common stock as
consideration for an acquisition and in fiscal 1995, in addition to cash, the
Company also issued notes and preferred stock in consideration for acquired
businesses. In connection with the severance agreement with the Company's former
president and chief operating officer, the Company paid $245,000 in cash and
issued a subordinated note for $802,543 in payment for common shares he held,
based on the market value of the shares at the time. See notes 3 and 4 to
Consolidated Financial Statements.
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<PAGE>
The Company believes that funds from operations and borrowings from its bank
facilities will be sufficient to fund its activities, including capital
expenditures, for the foreseeable future.
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 have higher sales during the second fiscal quarter while sales of
these products are lowest during the first fiscal quarter.
Cyclicality
The Company's Engineered Component Products segment is subject to changes in the
overall level of domestic economic activity. The Specialized Equipment segment
is subject to changes in certain sectors of the agricultural economy, which may
be influenced by climate changes and governmental policy. The segment's horse
trailer sales, which have not tended to be affected by changes in the
agricultural economy, have had a moderating effect on the results of the entire
Specialized Equipment segment, but are subject to the overall domestic business
cycle.
Environmental Matters
The Company is subject to environmental regulation with respect to its
operations and is named as a potentially responsible party at two sites which
are the subject of a government-mandated clean-up and which may require the
Company to incur additional expenses. While it is not possible to quantify the
potential financial impact of actions regarding environmental matters, the
Company believes that the outcome of this action is not likely to have a
material effect on the Company's financial position or results of operations.
Compliance by the Company's customers with environmental laws may also require
the Company to incur additional capital expenditures. For example, federal
regulations mandated the cessation of the production by 1996 of
chlorofluorocarbons, the main component of the most widely used coolant used in
heat transfer coils. Although the heat transfer coils manufactured by the
Company are designed for use both with chlorofluorocarbons as well as with
certain other coolants complying with the new requirements, if federal
regulations were implemented which required the use of a coolant for which the
Company's heat transfer coils are not designed, the Company may be required to
incur additional capital expenditures to enable it to produce new heat transfer
coils suitable for use with the new coolant. The Company is not aware of any
such proposed or pending regulations.
Inflation
The Company believes that the relatively moderate inflation over the last few
years has not had a significant impact on the Company's revenues or
profitability.
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<PAGE>
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
The following information is provided pursuant to the "Safe Harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Certain statements in
Management's Discussion and Analysis of this Form 10-K are "forward-looking
statements" made pursuant to these provisions.
The Company cautions readers that the following important factors, among others,
have in the past affected and could in the future affect the Company's actual
results of operations and cause the Company's actual results to differ
materially from the results expressed in any forward-looking statements made by
or on behalf of the Company:
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.
Commodity prices can have a material influence on the Company's results. Grain
prices and cattle prices can affect demand for certain agricultural equipment
sold by the businesses in the Company's Specialized Equipment segment. Metal
prices, particularly aluminum, copper and steel, can affect the Company's costs
as well as demand for the Company's products and the value of inventory held at
the end of a reporting period. Lack of availability of certain commodities could
also disrupt the Company's production.
Weather can affect the success of the grain harvest in the United States, which
can directly affect demand for the Company's grain handling equipment business.
The start-up of the Company's new Ohio plant has affected results of operations.
Manufacturing difficulties at this plant could lead to continuing losses from
that operation.
Changes in demand that change product mix may reduce operating margins by
shifting demand toward less profitable products.
Loss of a substantial customer may affect results of operations. For example,
the Company's replacement camshaft bearing business sells a substantially
reduced volume of its products through Federal-Mogul Corporation, which had been
that business unit's largest customer.
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.
Obsolescence or quality problems leading to returned goods in need of repair can
also affect the value of the Company's inventories and its profitability.
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<PAGE>
The Company's results are dependent on the hiring and retention of qualified
executive and local management. There can be no assurance that the Company will
be able to find qualified candidates in the future.
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.
Acquisitions are an important part of the Company's growth strategy.
Acquisitions may have a dilutive effect on the Company's earnings and could
affect the Company's available credit and interest costs. Conversely, the
Company may from time to time divest of product lines or business units. Any
such divestiture may involve costs of disposition or losses on the disposition
that could reduce the Company's results.
The Company is subject to various Federal and state environmental laws which
could be costly to adhere to if changed materially.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and supplemental
schedules appear at pages F-1 through F-25, as set forth in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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<PAGE>
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 12, 1997, 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.
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.
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<PAGE>
(2) Schedules
None.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ------------
<S> <C>
* 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 (Exhibit 3.2 to the 1994 Registration Statement).
* 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 Lease Agreement, by and between Gregory M. Cook and Kevin C.
Geenty, D/B/A Mill Rock Leasing, as Landlord, and Cramer
Company, as Tenant, dated November 1, 1995 (Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the year ended
October 29, 1995 (the "1995 Form 10-K ")).
*10.4 Second Amended and Restated Credit Agreement by and among The Owosso
Company, Motor Products-Owosso Corporation, Cramer Company, The Macton
Corporation, Seajay Manufacturing Corporation, Redmond Financial Corporation,
Parker Industries, Inc., Kuker-Parker Industries, Inc., Tannewitz, Inc., Gluco, Inc.,
Snow Coil, Inc., Robert A. Martin Company, Inc., Copco, Inc., Beachmont
Company, Beachmont-Tabor Company, and NBD Bank, N.A., dated April 1,
1991, as amended July 31, 1992, and as amended March 21, 1994 (Exhibit 10.4 to
the 1994 Registration Statement).
*10.5 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).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ------------
<S> <C>
*10.6 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).
*10.7 Offering Statement regarding the City of Harper, Kansas, Industrial Revenue
Bonds issued to DewEze Manufacturing, Inc., dated October 1, 1993 (Exhibit
10.7 to the 1994 Registration Statement).
*10.8 Offering Statement regarding the Gregg County Development Corporation, Inc.
Revenue Bonds, issued to Greer & Snow Coil Manufacturers, Inc., dated May 17,
1984 (Exhibit 10-8 to the 1994 Registration Statement).
*10.9 Lease by and between Gregory M. Cook, D/B/A Mill Rock Leasing,
as Landlord, and Cramer Company, as Tenant, dated April 11,
1986 (Exhibit 10.9 to the 1994 Registration Statement).
*10.10 Equipment Lease Agreement, by and between X/L Datacomp, Inc. and The
Owosso Company, dated March 17, 1989 (Exhibit 10.13 to the 1994 Registration
Statement).
*10.11 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).
*10.12 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).
*10.13 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).
*10.14 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).
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ------------
<S> <C>
*10.22 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).
*10.23 Management Services Agreement, by and between Snowmax,
Incorporated, and The Owosso Company, dated July 31, 1989
(Exhibit 10.33 to the 1994 Registration Statement).
*10.24 Subordinated promissory note of DewEze Manufacturing, Inc.,
issued to Howard Hershberger, dated December 18, 1991 (Exhibit
10.34 to the 1994 Registration Statement).
*10.25 Subordinated promissory note of DewEze Manufacturing, Inc.,
issued to Dewey Hostetler, dated December 18, 1991 (Exhibit
10.35 to the 1994 Registration Statement).
*10.26 Non-Competition Agreement by and between DewEze Manufacturing, Inc. and
Dewey Hostetler, dated December 18, 1991 (Exhibit 10.36 to the 1994
Registration Statement).
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ------------
<S> <C>
*10.27 Non-Competition Agreement by and between DewEze Manufacturing, Inc. and
Howard Hershberger, dated December 18, 1991 (Exhibit 10.37 to the 1994
Registration Statement).
*10.28 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).
*10.29 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).
*10.30 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).
*10.31 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).
*10.32 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).
*10.33 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).
*10.34 Lease, dated March 21, 1995, between Motor Products - Ohio
Corporation and William Berhard Realty Company (Exhibit 10.44
to the 1995 Form 10-K).
*10.35 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).
*10.36 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).
*10.37 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).
*10.38 Confidentiality and Non-Solicitation Agreement between the
Company and George B. Lemmon, Jr., dated October 31, 1994
(Exhibit 10.48 to the 1994 From 10-K).
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ------------
<S> <C>
*10.39 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).
*10.40 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).
*10.41 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).
*10.42 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).
*10.43 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).
*10.44 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).
*10.45 Subordinated promissory note of DewEze Manufacturing, Inc.,
issued to Howard Hershberger, dated October 31, 1994 (Exhibit
2.4 to the 1994 Form 10-K).
*10.46 Subordinated promissory note of DewEze Manufacturing, Inc.,
issued to Dewey Hostetler, dated October 31, 1994 (Exhibit 2.5
to the 1994 Form 10-K).
*10.47 The Owosso Group, Plan of Reorganization dated March 25, 1994 (Exhibit 2.1 to
the 1994 Registration Statement).
*10.48 Amendment No. 1 to The Owosso Group Plan of Reorganization dated September
26, 1994 (Exhibit 2.8 to the 1994 Registration Statement).
*10.49 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).
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ------------
<S> <C>
*10.50 Letter Agreement by and among Owosso Corporation, The Owosso Company and
Sooner Trailer Manufacturing Co. dated October 25, 1994 (Exhibit 2.10 to the
1994 Form 10-K).
*10.51 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).
*10.52 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).
*10.53 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).
*10.54 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).
*10.55 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).
*10.56 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")).
*10.57 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).
*10.58 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).
*10.59 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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ------------
<S> <C>
*10.60 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")).
*10.61 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).
10.62 Lease Agreement by and between Owosso Corporation and Philadelphia Freedom
Partners, L.P. dated September 6, 1996.
21 Subsidiaries of the registrant.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule
</TABLE>
- --------------
* Incorporated by reference.
(b) Reports filed on Form 8-K during the last quarter of fiscal 1996:
The Company filed a Current Report on Form 8-K dated November 13, 1996
to report expected results of operations for fiscal 1996.
-43-
<PAGE>
OWOSSO CORPORATION
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 27,
1996, OCTOBER 29, 1995 AND OCTOBER 30, 1994:
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6-24
<PAGE>
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 27, 1996 and October 29, 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three fiscal years in the period ended October 27,
1996. 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 27, 1996 and October 29, 1995, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
October 27, 1996 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.
Philadelphia, Pennsylvania
December 5, 1996
F-1
<PAGE>
OWOSSO CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 27, October 29,
ASSETS 1996 1995
---------- ----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 839,889 $ 1,750,236
Receivables, net 18,415,245 18,190,026
Inventories, net 19,123,122 20,564,974
Prepaid expenses and other 1,608,169 1,164,617
Advances and interest receivable from affiliate 36,766 27,807
Deferred taxes 1,032,000 785,000
------------- -------------
Total current assets 41,055,191 42,482,660
PROPERTY, PLANT AND EQUIPMENT, NET 26,308,809 25,353,517
INTANGIBLES, NET 39,277,112 39,719,089
OTHER ASSETS 1,254,233 1,164,005
------------- -------------
TOTAL ASSETS $ 107,895,345 $ 108,719,271
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Payables - trade $ 6,597,061 $ 6,026,511
Accrued compensation and benefits 3,005,658 3,127,438
Accrued expenses 1,901,892 1,734,491
Accrued interest 419,565 363,827
Current portion of related party debt 5,975,000 8,950,000
Current portion of long-term debt 2,770,934 1,715,951
------------- -------------
Total current liabilities 20,670,110 21,918,218
RELATED PARTY DEBT, LESS CURRENT PORTION 4,150,000
LONG-TERM DEBT, LESS CURRENT PORTION 45,068,116 37,982,933
POSTRETIREMENT BENEFITS 1,593,950 1,412,298
DEFERRED TAXES 3,543,000 3,686,000
COMMTMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock Class A, 5% cumulative, $.0l par value; 10,000,000 shares
authorized; 1,071,428 shares issued and outstanding (aggregate liquidation value at
October 27, 1996 and October 29, 1995 - $15,000,000) 13,667,814 13,392,850
Common stock, $.0l par value; 15,000,000 shares authorized; 5,865,000 shares issued
and outstanding 58,650 58,650
Additional paid-in capital 21,611,701 21,611,701
Retained earnings 2,131,288 4,506,621
------------- -------------
Total 37,469,453 39,569,822
Less treasury stock, at cost (56,324 shares at October 27, 1996) (449,284)
------------- -------------
Total stockholders' equity 37,020,169 39,569,822
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 107,895,345 $ 108,719,271
============= =============
</TABLE>
See notes to consolidated finaincial statements.
F-2
<PAGE>
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------
October 27, October 29, October 30,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 128,215,995 $ 108,000,652 $ 73,799,423
Costs of products sold 98,282,019 77,628,763 52,749,667
------------- ------------- -------------
Gross profit 29,933,976 30,371,889 21,049,756
Expenses:
Selling, general and administrative 19,488,114 13,919,978 9,487,211
Corporate 4,444,313 3,682,413 2,417,317
------------- ------------- -------------
Income from operations 6,001,549 12,769,498 9,145,228
Interest expense 4,080,762 2,876,317 1,855,449
Interest income 11,561 663,501
Other income 202,184 378,679 34,249
------------- ------------- -------------
Income before income tax provision (benefit) 2,122,971 10,283,421 7,987,529
Income tax provision (benefit) 1,275,000 3,900,000 (801,000)
------------- ------------- -------------
Net income 847,971 6,383,421 $ 8,788,529
=============
Dividends and accretion on preferred stock (1,024,964)
------------- -------------
Net (loss) income available for common stockholders $ (176,993) $ 6,383,421
============= =============
Net (loss) income per commom share $ (0.03) $ 1.09
============= =============
Weighted average number of common shares outstanding 5,839,000 5,865,000
============= =============
PRO FORMA
Pro forma income before pro forma tax provision $ 7,987,529
Pro forma tax provision 2,836,000
-------------
Pro forma net income $ 5,151,529
=============
Pro forma net income per share $ 1.06
=============
Pro forma common shares outstanding 4,847,000
=============
</TABLE>
See notes to consolidated finaincial statements.
F-3
<PAGE>
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock Total
--------- -------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1993 $ 516,929 $ 1,706,652 $ 11,604,400 $ (76,325) $ 13,751,656
Net income 8,788,529 8,788,529
Capital contributions 977,632 977,632
Distributions of current earnings (5,226,081) (5,226,081)
Capital distribution (10,000,000) (10,000,000)
Exchange of common stock (476,929) (792,499) 1,193,103 76,325
Purchase of Parker (4,500,000) (4,500,000)
Payment for warrant (1,000,000) (1,000,000)
Redemption of Dura-Bond stock (859,951) (859,951)
Initial public offering of common
stock 18,650 19,719,916 19,738,566
----------- ------------ ------------ ------------ ------------
BALANCE, OCTOBER 30, 1994 58,650 21,611,701 21,670,351
Net income 6,383,421 6,383,421
Dividends paid (1,876,800) (1,876,800)
Issuance of convertible preferred
stock $ 13,392,850 13,392,850
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 29, 1995 13,392,850 58,650 21,611,701 4,506,621 39,569,822
Net income 847,971 847,971
Dividends paid (2,856,331) (2,856,331)
Accretion on convertible preferred
stock 274,964 (274,964)
Treasury stock purchase (1,047,543) (1,047,543)
Issuance of treasury shares (92,009) 598,259 506,250
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 27, 1996 $ 13,667,814 $ 58,650 $ 21,611,701 $ 2,131,288 $ (449,284) $ 37,020,169
============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
OWOSSO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
October 27, October 29, October 30,
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 847,971 $ 6,383,421 8,788,529
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes (572,420) (242,193) (801,000)
Corporate expenses paid by Brynavon Group 977,632
Loss (gain) on sale of assets 233,803 (3,633) (87,387)
Depreciation 3,824,744 2,889,753 2,553,000
Amortization 2,473,543 1,323,584 232,928
Amortization of defeffed gain on sale and leaseback (77,183) (77,183)
Changes in assets and liabilities which provided (used) cash:
Accounts receivable (140,108) (290,237) (2,514,516)
Inventories 1,752,803 (567,265) (642,014)
Prepaid expenses and other (402,306) (152,301) (231,500)
Prepaid pension 15,727 32,174 25,000
Accounts payable 556,371 (1,745,924) 2,134,967
Accrued expenses 169,238 123,117 446,086
------------ ------------ ------------
Net cash provided by operating activities 8,759,366 7,673,313 10,804,542
------------ ------------ ------------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired (1,675,200) (1,401,241) (12,726,982)
Proceeds from sale and leaseback of assets 113,003
Purchases of property, plant and equipment (4,346,267) (4,437,238) (2,000,024)
Purchase of Parker (4,500,000)
(Increase) decrease in other assets (759,538) (348,582) 57,907
------------ ------------ ------------
Net cash used in investing activities (6,781,005) (6,187,061) (19,056,096)
------------ ------------ ------------
FINANCING ACTIVITIES:
Payments to acquire treasury stock (245,000)
Payments on amounts due to/from affiliates (889,172) (11,598,730)
Borrowings from line of credit 8,900,000 7,100,000 14,000,000
Proceeds from long-term debt 150,000 18,278
Payments on long-term debt (1,712,377) (4,975,748) (4,402,026)
Payments on related party debt (7,125,000) (450,000) (200,000)
Dividends paid (2,856,331) (1,876,800) (5,226,081)
Payment for warrant (1,000,000)
Redemption of Dura-Bond stock (2,148,927)
Initial public offering of common stock 19,738,566
------------ ------------ ------------
Net cash (used in) provided by financing activities (2,888,708) (1,091,720) 9,181,080
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (910,347) 394,532 929,526
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,750,236 1,355,704 426,178
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 839,889 $ 1,750,236 $ 1,355,704
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
OWOSSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 27, 1996, OCTOBER 29, 1995 AND OCTOBER 30, 1994
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
The Company - The consolidated financial statements represent the
consolidated financial position, results of operations and cash flows of
Owosso Corporation and subsidiaries (the "Company"). The subsidiaries include
Motor Products-Owosso Corporation (Motor Products), Motor Products - Ohio
Corporation: (MP - Ohio), Sooner Trailer Manufacturing Co. (Sooner), Cramer
Company (Cramer), DewEze Manufacturing, Inc., including Parker Industries,
Inc. (DewEze), Snowmax, Incorporated (Snowmax), The Landover Company
(Dura-Bond), Great Bend Manufacturing, Inc. (Great Bend) and Stature
Electric, Inc. (Stature Electric) and Owosso Motor Group, Inc. (Motor Group).
Certain of the Company's subsidiaries were previously affiliated with the
Brynavon Group, due to those entities being under common control and common
management. 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. In the Engineered
Component Products segment, the Company's products are sold primarily to
original equipment manufacturers or service providers who use them in their
end product or service. These products are primarily motors, cam shaft
bearings, heat transfer "fin and tube" coils and air conditioning evaporator
units. The products sold in the Specialized Equipment segment are almost
exclusively final products sold through dealers to their users. These
products are primarily all-aluminum horse trailers and agricultural and turf
maintenance equipment. The majority of the Company's customers are located in
North America.
The Reorganization - On October 25, 1994 the Company sold 1,865,000 shares of
its common stock at $12 per share in an initial public offering (the
"Offering"). The proceeds of the Offering along with proceeds from a new line
of credit agreement with a bank were used to repay certain indebtedness,
complete the Reorganization (see below) and acquire Sooner.
Immediately prior to the closing of the Offering, the stockholders of certain
subsidiaries of the Company received an aggregate of 4,000,000 shares of
common stock of the Company, constituting all of the shares of the Company
outstanding prior to the completion of the Offering. At the same time,
substantially all of the assets of Parker, a division of Kuker Industries,
Inc. which was a wholly owned subsidiary of Brynavon Group, was purchased by
DewEze for $4,500,000 plus the assumption of certain liabilities. The
consolidated statements of earnings prior to the Reorganization include the
results of operations of Parker and the entire amount of the purchase price
reduced stockholders' equity. Cash payments between Brynavon Group and Parker
have been accounted for as capital contributions or distributions.
Prior to the Reorganization discussed above, shares of certain stockholders
of Dura-Bond were redeemed for approximately $4,300,000. The redemption of
such shares were considered a partial purchase of Dura-Bond for accounting
purposes. As such, a proportionate share of the assets and liabilities was
recorded at their fair values. The Company performed an analysis and
concluded that the current recorded values do not materially differ from
their fair values. The result of this accounting treatment is that the
premium paid of approximately $3,400,000 over the proportionate share of the
equity redeemed has been reflected as goodwill and stockholders' equity was
reduced by approximately $900,000. Goodwill arising from this transaction is
being amortized over 25 years.
F-6
<PAGE>
In 1989, Snowmax purchased its operating assets from a subsidiary of Brynavon
Group in exchange for consideration which included a promissory note (the
"Earn-Out Note") requiring Snowmax to pay amounts to Brynavon Group from 1990
through 1999 depending upon the future earnings of Snowmax. In 1991, Brynavon
Group acquired a warrant held by a third party to acquire a 10% interest in
Snowmax (the "Warrant"). In connection with the Reorganization, the Earn-Out
Note and the Warrant were canceled in consideration for a payment of
$2,150,000 to Brynavon Group, which was paid out of the proceeds of the
Offering. The Earn-Out Note was recorded in the historical financial
statements and the payment for the Warrant resulted in a reduction of
stockholders' equity of $1,000,000.
Motor Products distributed a dividend to certain stockholders in the form of
certain indebtedness owed to Motor Products by Brynavon Group of $10,000,000
which resulted in a reduction in stockholders' equity.
The corporate headquarters of Brynavon Group were assumed by the Company
subsequent to the Offering. As such, the cost of operating the Brynavon Group
corporate headquarters, except for an allocation to the remaining
subsidiaries and affiliates of Brynavon Group of approximately $150,000 per
year, has been included in the statement of operations for the fiscal year
ended October 30, 1994. Brynavon Group paid certain expenses on behalf of the
Company of approximately $978,000 for the fiscal year ended October 30, 1994.
This amount has been included as corporate expenses and capital contributions
in the accompanying consolidated financial statements.
Pro Forma Presentation (Unaudited):
The pro forma data for 1994 reflects the following:
o Pro forma tax provision represents the pro forma tax provision as if the
Company was subject to federal income tax.
o Pro forma net income represents the pro forma net income of the Company,
after consideration of the pro forma tax provision.
o Pro forma net income per share was based on 4,000,000 shares outstanding
upon the completion of the Reorganization, an additional 833,000 shares to
give effect to the number of shares required to fund the $10,000,000
distribution to the Motor Products stockholders and the effect of shares
issued in the Offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 1996, 1995 and 1994 constituted 52-week years.
Cash and Cash Equivalents - consist of cash and highly-liquid investments
with an original maturity of three months or less.
Inventories - Inventories of the Company are recorded at cost, which is not
in excess of market. At October 27, 1996 and October 29, 1995, cost for 17%
and 14%, respectively, of the inventories are determined on the last-in,
first-out (LIFO) basis, and the remainder on the first-in, first-out (FIFO)
basis.
Information related to the FIFO method may be useful in comparing operating
results to those of companies not on LIFO. If the FIFO method of inventory,
which approximates replacement cost, had
F-7
<PAGE>
been used by the Company for all inventories, inventory would have been
approximately $900,000 and $955,000 higher than reported at October 27, 1996
and October 29, 1995, respectively. Additionally, net income would have
(decreased) increased by approximately $(55,000), $(42,000) and $247,000 for
the years ended October 27, 1996, October 29, 1995 and October 30, 1994,
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
Income Taxes - The Company elected to be taxed as an S corporation for
federal tax purposes prior to the Reorganization. As such, taxable income was
included on the income tax returns of the stockholders under those elections
(see pro forma presentation in Notes 1 and 12).
Subsequent to the Reorganization, taxes on income are provided based upon
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes, which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed for differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future. Such deferred income tax asset and liability
computations are based on enacted tax laws and rates applicable to periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amounts expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
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 $360,000 at October 27, 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.
F-8
<PAGE>
Intangibles - Items 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
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 Company must adopt SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of in fiscal 1997. Adoption of SFAS No. 121 is not expected to
have a significant effect on the consolidated financial position or results
of operations of the Company.
Revenue Recognition - Revenue is recognized at the time the product is
shipped. An allowance for doubtful accounts of approximately $509,000 and
$155,000 has been recorded as of October 27, 1996 and October 29, 1995,
respectively.
Stock-Based Compensation - In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123 defines a fair value method of accounting for stock options and
other equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Under SFAS No. 123, the Company is permitted to continue to account for
employee stock-based transactions under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB No. 25"), but will be
required to disclose in a note to the consolidated financial statements pro
forma net income and income per share information as if the Company had
applied the new method of accounting. SFAS No. 123 also requires increased
disclosures for stock-based compensation arrangements regardless of the
method chosen to measure and recognize compensation for employee stock-based
arrangements.
The Company has determined that it will continue to account for such
transactions under APB No. 25 and will provide the disclosures required by
SFAS No. 123 during the year ending October 26, 1997.
Reclassifications - Certain reclassifications were made to the 1995 and 1994
consolidated financial statements to conform to 1996 classifications.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments in 1996, 1995 and 1994 included payments for interest of
$4,025,024, $2,596,438 and $1,773,307, respectively. Cash payments in 1996
and 1995 included payments for taxes of $1,880,000 and $4,708,000.
In 1996, in connection with the repurchase of common stock from the former
chief operating officer, the Company issued a promissory note totaling
$802,543.
In 1996, in connection with the purchase of Motor Group, the Company reissued
75,000 shares of treasury stock.
F-9
<PAGE>
In 1995, in connection with the acquisition of Great Bend, subordinated notes
totaling $1,700,000 were issued to certain selling stockholders and a
noncompetition agreement totaling $600,000 was entered into with the
president.
In 1995, in connection with the acquisition of Stature Electric 1,071,428
shares of Class A convertible preferred stock with a fair market value of
$13,392,850 and $12,500,000 of promissory notes were issued to the selling
stockholders.
In 1994, in connection with the Reorganization, shares of Dura- Bond were
redeemed for approximately $4,300,000 of which approximately $2,100,000 was
in the form of a note payable. In addition, Motor Products distributed a
dividend to certain stockholders in the form of certain indebtedness to Motor
Products by Brynavon Group of $10,000,000.
In 1994, in connection with the acquisition of Sooner, subordinated notes
totaling $5,000,000 were issued to certain selling stockholders.
4. BUSINESS ACQUISITIONS
All acquisitions have been accounted for as purchases and, accordingly, the
aggregate prices were allocated to assets and liabilities acquired based on
their fair values at the date of acquisition. The results of operations have
been included in the consolidated results of the Company from the effective
dates of each acquisition.
Acquisition of Sooner - Effective October 30, 1994, the Company acquired all
of the issued and outstanding capital stock of Sooner, a manufacturer of
all-aluminum horse trailers. The purchase price was $17,000,000, including
$12,000,000 paid in cash and $5,000,000 payable under a seven-year promissory
note bearing interest at 7.67%. One of the former principal stockholders and
management employees of Sooner received $1,000,000 in consideration for his
covenant not to compete with the Company.
Acquisition of Great Bend - Effective May 1, 1995, the Company acquired all
of the issued and outstanding capital stock of Great Bend which manufactures
and markets front-end loaders. The purchase price was $4,300,000, including
$2,600,000 paid in cash and $1,700,000 of subordinated promissory notes, with
a term of 10 years bearing interest at 8% annually. The president of Great
Bend entered into a six-year employment agreement with Great Bend and
received $600,000 in consideration for his covenant not to compete with the
Company.
Acquisition of Stature Electric- Effective October 29, 1995, the Company
acquired all of the issued and outstanding capital stock of Stature Electric,
a manufacturer of permanent magnet gear motors. As such, the consolidated
balance sheet includes the assets and liabilities of Stature Electric. The
purchase price was $25,900,000, including $12,500,000 of promissory notes,
with a term not exceeding 10 years bearing interest at 8% annually, and the
issuance of 1,071,428 shares of Class A convertible preferred stock of the
Company, with a fair value of $12.50 per share.
F-10
<PAGE>
The following unaudited pro forma financial information shows the results of
the Company's operations for the period presented as though the purchase of
Great Bend and Stature Electric had been made at the beginning of the period.
October 29,
1995
Net sales $133,058,000
Income from operations 15,699,000
Net income 7,086,000
Dividends and accretion on preferred stock 1,025,000
Net income available for common stockholders 6,061,000
Net income per common share $ 1.03
Number of shares 5,865,000
5. INVENTORIES
Inventories are summarized as follows:
October 27, October 29,
1996 1995
Raw materials and purchased parts $ 8,468,218 $10,187,479
Work in process 4,316,588 4,957,924
Finished goods 6,338,316 5,419,571
----------- -----------
Total $19,123,122 $20,564,974
=========== ===========
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized by major classification as
follows:
October 27, October 29,
1996 1995
Land and improvements $ 1,165,459 $ 1,200,243
Buildings 15,131,406 14,786,844
Machinery and equipment 32,457,930 28,195,307
Construction in progress 638,574 748,258
------------ ------------
Total 49,393,369 44,930,652
Accumulated depreciation and amortization (23,084,560) (19,577,135)
------------ ------------
Property, plant and equipment, net $ 26,308,809 $ 25,353,517
============ ============
Depreciation expense was approximately $3,825,000, $2,890,000 and $2,553,000
for the years ended October 27, 1996, October 29, 1995 and October 30, 1994,
respectively.
F-11
<PAGE>
7. INTANGIBLES
Intangibles are summarized as follows:
October 27, October 29,
1996 1995
Noncompetition agreements $ 2,220,000 $ 2,220,000
Goodwill 32,876,500 30,878,865
Customer lists 8,000,000 8,000,000
Other 897,734 863,793
----------- -----------
Total 43,994,234 41,962,658
Accumulated amortization (4,717,122) (2,243,569)
----------- -----------
Intangibles, net $39,277,112 $39,719,089
=========== ===========
Amortization expense was approximately $2,474,000, $1,324,000 and $234,000
for the years ended October 27, 1996, October 29, 1995 and October 30, 1994,
respectively.
F-12
<PAGE>
8. LONG-TERM DEBT AND RELATED PARTY DEBT
Long-term debt and related party debt consists of the following:
<TABLE>
<CAPTION>
October 27, October 29,
1996 1995
<S> <C> <C>
THIRD-PARTY DEBT:
Banks:
Unsecured revolving credit agreement $30,000,000 $21,100,000
Promissory note payable in monthly installments of $4,100 to $7,400 due April 1997
with interest at 9% due monthly, collateralized by certain real property 633,938 735,085
Promissory note in monthly installments of $8,864 due February 2009,
with a variable interest rate
(7.7% at October 27, 1996) due monthly, collateralized by certain real property 873,705 911,360
Industrial revenue bonds:
Series 1993, interest at 4.50% to 6.75%, payable in annual installments increasing from
$120,000 to $190,000; commencing in September 1994 and final payment due September 2003
collateralized by building and equipment 1,125,000 1,255,000
Series 1988-A; issued August 25, 1988, payable in annual installments of $500,000 commencing
in January 1997 and final payment due January 1, 2006, collateralized by building
and equipment 5,000,000 5,000,000
Series 1985, interest at 88% of prime, payable semiannually in amounts increasing from $10,000 to
$25,000; final payment due December 1997 74,780 118,364
Series 1984, interest at 75% of prime payable in monthly installments; final payment
due December 1999, collateralized by building and equipment 128,862 166,320
Series 1984 A & B, payable in annual installments ranging from $100,000 to $155,000, plus
interest payable semi-annually at rates from 4.25% to 6.75%; final payment due March 2004,
collateralized by building and equipment 1,045,000 1,150,000
Series 1989, interest at 7.5% , payable semiannually, with principal amount due
in August 1999, collateralized by certain real property 1,800,000 1,800,000
Former and current stockholders:
Noncompetition agreement, payable in quarterly installments of
$25,000 through December 1996, noninterest bearing 37,500 125,000
Noncompetition agreement, payable in quarterly installments of
$25,000 through May 2001, noninterest bearing 450,000 550,000
Subordinated promissory notes, principal and interest of $20,054
and $13,281 payable in quarterly installments, interest at 9%
with final payment due April 1999 221,887 332,830
Subordinated promissory notes, payable in monthly installments of $77,107,
interest at 7.67% with final payment due October 2001 3,882,859 4,487,099
Subordinated promissory notes, payable in quarterly installments of $42,585 plus interest at
8% with final payment due April 2005 1,447,903 1,618,245
Subordinated promissory note, payable in August 1998, interest payable in quarterly
installments at 8% 802,543
Other:
Capital lease obligations 134,516 281,042
Other long-term debt 180,557 68,539
----------- -----------
Total third-party debt 47,839,050 39,698,884
----------- -----------
RELATED PARTY DEBT:
Promissory notes, payable to preferred stockholders in installments ranging from $3,125,000 in January
1996 and $1,875,000 quarterly through October 1996, interest at 8%, with final payment of $3,750,000
thereafter due on demand, due no later than October 2005 5,625,000 12,500,000
Subordinated promissory notes payable to a director, interest only at 10%, due December 1996 350,000 350,000
Subordinated notes payable to a director, annual payments of $137,500 to $200,000 due October 1992
through October 1996 with interest at 15% due quarterly 250,000
----------- -----------
Total related party debt 5,975,000 13,100,000
----------- -----------
Total long-term debt 53,814,050 52,798,884
Less current portion 8,745,934 10,665,951
----------- -----------
Total $45,068,116 $42,132,933
=========== ===========
</TABLE>
F-13
<PAGE>
The Company has a $55,000,000 unsecured revolving credit agreement with two
banks, which expires on March 31, 2000 of which $30,000,000 was outstanding
at October 27, 1996. On December 5, 1996, the Company amended the agreement
in order to meet certain financial covenants with which the Company would not
have been in compliance as of October 27, 1996. Interest is payable monthly,
at the Company's option, at either the bank's prime rate (8.25% at October
27, 1996) or a variable spread (1.75% at October 27, 1996) over the London
Interbank Offered Rate. The effective rate at October 27, 1996 was 7.4%. The
agreement includes financial and other covenants, including leverage, fixed
charge, cash flow and net worth ratios, restrictions on certain asset sales,
mergers and other significant transactions and a negative pledge on fixed
assets. Repayment of the Industrial Revenue Bonds of certain of the
subsidiaries has been guaranteed by the Company.
Derivative Interest Rate Contracts - The Company entered into two interest
rate swap agreements, each with a $7.5 million notional amount. Beginning in
fiscal year 1997, the Company will receive floating interest rate payments at
the three month London Interbank Offered Rate in exchange for quarterly fixed
interest rate payments of 7.0675% and 7.09% over the life of the agreements.
The Company enters into these interest rate swap agreements to change the
fixed/variable interest rate mix of the debt portfolio to reduce the
Company's aggregate risk to movements in interest rates. The agreements are
accounted for using settlement accounting.
The aggregate amount of required payments on long-term debt, excluding
capital lease obligations, is as follows:
Year ending October:
1997 $ 8,650,159
1998 2,796,174
1999 3,750,469
2000 31,976,689
2001 1,816,038
Thereafter 4,690,005
-----------
Total $53,679,534
===========
Future capital lease obligations are as follows:
1997 $106,657
1998 41,676
--------
Total 148,333
Amount representing interest 13,817
--------
Present value of payments 134,516
Less current portion 95,775
--------
Long-term capital lease obligations $ 38,741
========
Equipment with a net book value of $253,255 and $276,240 at October 27, 1996
and October 29, 1995 (net of accumulated amortization of $539,646 and
$452,644 at October 27, 1996 and October 29, 1995), has been leased under
capital leases.
9. TRANSACTIONS WITH RELATED PARTIES
Advances and interest receivable from affiliate represent amounts owed to the
Company for the cash balances advanced to Brynavon Group. Prior to the
Reorganization (see Note 1) interest income was
F-14
<PAGE>
received on these balances at the prime rate and was approximately $614,000
for the year ended October 30, 1994.
During 1995, the Company and Brynavon Group settled all remaining amounts
outstanding, including a subordinated note payable to Brynavon Group, which
resulted in a gain of $200,000, which has been included as other income in
the 1995 consolidated statement of operations.
Interest expense related to amounts owed to Brynavon Group were
approximately $83,000 and $809,000 for the years ended October 29, 1995 and
October 30, 1994.
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 expense for the years ended October 27, 1996 and October
29, 1995 under this plan was approximately $686,000 and $206,000,
respectively. All existing 401(k) and defined contribution plans were merged
into the newly created 401(k) plan. These other plans are described below.
Great Bend sponsors a 401(k) savings plan covering substantially all of its
employees. Employees can contribute up to 15% of their salary and their
contributions are matched at a rate of 25% on the first 4% of the employees'
contribution. Expense for the years ended October 27, 1996 and October 29,
1995 under this plan was approximately $16,000 and $7,000, respectively.
Motor Products, Snowmax, Cramer and other affiliated entities of Brynavon
Group had participated in a defined contribution plan covering substantially
all of their employees, except for Motor Products hourly employees who are
covered under a defined benefit pension plan described below. This plan
provided for contributions which, when added to forfeitures which have
become available for allocation, totaled 4.5% of eligible employees'
compensation. The sponsors' fund costs accrued currently. The expense for
the years ended October 29, 1995 and October 30, 1994 under this plan was
approximately $228,000 and $280,000, respectively.
DewEze sponsored a 401(k) savings plan covering substantially all of its
employees. Employees could contribute up to 10% of their salary, of which up
to 3% was matched by DewEze. Expense for the years ended October 29, 1995
and October 30, 1994 under this plan was approximately $30,000 for each
year-end.
Dura-Bond sponsored a defined contribution pension plan covering
substantially all of its employees. Contributions were determined as 4% of
each covered employee's compensation, net of employee forfeitures. Dura-Bond
also sponsored, beginning in fiscal 1992, a 401(k) savings plan covering
substantially all of its employees. Employees could contribute up to 15% of
their salary, of which 1/2%
F-15
<PAGE>
was matched by Dura-Bond. Expense for the Dura-Bond plans for the years
ended October 29, 1995 and October 30, 1994 was approximately $38,000 and
$120,000, 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. Net pension expense included in the
consolidated statements of operations for the years ended October 27, 1996,
October 29, 1995, and October 30, 1994 was determined as follows:
<TABLE>
<CAPTION>
October 27, October 29, October 30,
1996 1995 1994
<S> <C> <C> <C>
Service cost $ 68,600 $ 52,500 $ 63,200
Interest cost on projected benefit obligation 186,543 187,088 175,112
Expected return on assets (220,463) (197,459) (207,225)
Amortization of unrecognized net credit (41,235) (41,235) (41,235)
Amortization of prior service cost 12,641 12,641 12,641
Amortization of unrecognized loss 9,641 18,639 23,212
--------- --------- ---------
Net pension expense $ 15,727 $ 32,174 $ 25,705
========= ========= =========
</TABLE>
The following is a reconciliation of the plan's funded status:
<TABLE>
<CAPTION>
October 27, October 29,
1996 1995
<S> <C> <C>
Projected benefit obligation $ 2,656,200 $ 2,752,500
Plan assets at market value - consisting primarily of mutual funds 3,036,722 2,755,787
----------- -----------
Funded status 380,522 3,287
Unrecognized initial net credit (371,110) (412,345)
Unrecognized prior service cost 161,721 174,362
Unrecognized net loss 226,349 647,905
----------- -----------
Prepaid pension $ 397,482 $ 413,209
=========== ===========
</TABLE>
Additional disclosures and assumptions:
October 27, October 29,
1996 1995
Accumulated benefit obligation $ 2,174,200 $ 2,186,900
Vested benefit obligation 2,127,500 2,169,700
Discount rate 7.50% 7.25%
Expected long-term rate of return 8.0 8.0
Salary increases 5.0 5.0
Stature Electric had a defined benefit pension plan covering substantially
all of its employees. Upon the acquisition, the Company initiated a plan to
freeze the benefits, terminate the plan and provide new retirement benefits
under the Company's 401(k) plan.
F-16
<PAGE>
Postretirement Plan - 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 106). SFAS 106 requires
recognition during employees' active service periods of the expected cost of
providing such postretirement benefits. Motor Products paid $64,500, $44,400
and $33,900 in such benefits during the years ended October 27, 1996, October
29, 1995 and October 30, 1994, respectively.
The following table sets forth the funded status of the plan reconciled with
the amount shown in the consolidated balance sheet as of October 27, 1996 and
at October 29, 1995:
<TABLE>
<CAPTION>
October 27, October 29,
1996 1995
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 454,800 $ 407,300
Fully eligible active plan participants 171,900 225,300
Other active plan participants 1,067,900 1,054,200
----------- -----------
Total 1,694,600 1,686,800
Plan assets at fair value 0 0
----------- -----------
Accumulated postretirement benefit obligation in excess
of plan assets 1,694,600 1,686,800
Unrecognized net gain from past experience different from that
assumed and from changes in assumptions 185,290 27,318
Prior service cost not yet recognized in net periodic
postretirement benefit cost (285,940) (301,820)
----------- -----------
Accrued postretirement benefit cost $ 1,593,950 $ 1,412,298
=========== ===========
</TABLE>
Net periodic postretirement benefit cost included the following components
for the years ended October 27, 1996 and October 29, 1995:
October 27, October 29,
1996 1995
Service cost $ 115,600 $ 97,100
Interest cost 113,700 109,100
Amortization of prior service cost 15,880 15,880
Amortization of unrecognized loss (2,500)
--------- ---------
Total $ 245,180 $ 219,580
========= =========
For measurement purposes, a 9.4% and 10.4% annual rate of increase in the per
capita cost of covered health care benefits was assumed for the years ended
October 27, 1996 and October 29, 1995, respectively; the rate was assumed to
decrease gradually to 4.9% for 2015 and 5.2% for 2012, and remain
F-17
<PAGE>
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 27, 1996 by $361,000 and the aggregate of the service cost and
interest cost components of the net periodic postretirement benefit cost for
the year then ended by $60,300.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% and 7.25%, as of October 27, 1996
and October 29, 1995, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space, a production facility and certain equipment
under operating leases. Operating lease expense was approximately
$1,061,000, $702,000 and $574,000 for the years ended October 27, 1996,
October 29, 1995 and October 30, 1994, respectively, net of sublease rentals
and reimbursements of utilities of $99,000, $269,000 and $260,000,
respectively. The lease on the corporate headquarters office space expires
in September 2006 with a base rent of approximately $186,000 in 1996, which
adjusts annually through October 1999 to $305,000. Cramer leases its
facilities under an operating lease which is scheduled to expire in 1999,
with an additional 10 year renewal option beyond 1999. The lease requires
Cramer to pay the property taxes, insurance, utilities and maintenance
expenses. Future minimum rental payments under non-cancellable operating
leases are as follows:
Year ending October:
1997 $ 909,163
1998 963,297
1999 773,694
2000 353,741
2001 305,160
Thereafter 1,500,370
---------
$4,805,425
==========
At October 27, 1996, outstanding letters of credit totaled approximately
$8,111,000. These letters of credit primarily guarantee certain notes and
performance of contracts associated with acquisitions made by the Company.
The Company is subject to federal, state and local environmental regulation
with respect to its operations. The Company believes that it is operating in
substantial compliance with applicable environmental regulations.
In December 1990, Dura-Bond was issued a non-binding request for certain
investigative and remediation measures by the California Regional Water
Quality Control Board relating to a facility it formerly operated. Since the
issuance of the request, the State has taken no further action against
Dura-Bond. In the event the State were to seek further remediation,
Dura-Bond may face claims from the State or claims for contribution to its
former lessor. Dura-Bond believes that it has substantial defenses to any
such claim.
The lessor of Cramer's facility is engaged in negotiations with the State of
Connecticut regarding additional investigative or remedial measures at this
facility. Cramer may be required to bear a portion of the costs of any such
investigative or remedial measures, the amount of which cannot currently be
F-18
<PAGE>
reasonably estimated. Cramer is also engaged in the closure of waste
handling facilities at this location in accordance with State regulations.
Closure is expected to be completed in 1997 at a cost which is not expected
to be significant.
Cramer has been named as a potentially responsible party with respect to a
hazardous substance disposal site being cleaned up by the U.S. Environmental
Protection Agency under its "Superfund" program, which they expect to settle
through the payment of minor amounts.
A portion of Sooner's manufacturing facility was used in the past to store
containers of waste oil and solvents, and an above-ground diesel fuel
storage tank is currently located at the facility. The Company intends to
establish a well at the facility for the purpose of monitoring the ground
water for any contamination, and the Company estimates such monitoring will
cost approximately $12,500 per year.
Current historic 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.
Sooner and DewEze have arrangements with a number of financial institutions
to provide floor plan financing for its dealers, which require them to
repurchase repossessed products from the financial institutions in the event
of a default by the financed dealer. Their obligation is typically to
repurchase the equipment at 90% of the purchase price for the first 180
days, 80% for the next 90 days and 70% for the next 90 days, after which the
obligation expires. Neither subsidiary has taken possession on any equipment
pursuant to the repurchase obligations in these contracts.
In addition to the matters reported herein, the Company is involved in
litigation dealing with the numerous aspects of its business operations. The
Company believes that settlement of such litigation will not have a material
effect on its consolidated financial position or results of operations.
12. TAXES ON INCOME
Effective with the Reorganization, taxes on income are provided based upon
SFAS No. 109. As such, the Company established deferred taxes at the date of
the Reorganization in the amount of $801,000 which was reflected in the
consolidated statement of operations for the year ended October 30, 1994.
The income tax provision consists of the following:
October 27, October 29,
1996 1995
Current:
Federal $ 1,810,000 $ 3,899,000
State 40,000 178,000
Deferred - federal (575,000) (177,000)
----------- -----------
Total income tax provision $ 1,275,000 $ 3,900,000
=========== ===========
F-19
<PAGE>
The reconciliation to the statutory federal income tax rate is as follows:
October 27, October 29,
1996 1995
Federal income tax provision at statutory rate 35.0% 35.0%
State income taxes, net of federal income tax benefit 1.2 1.1
Amortization of excess cost of net assets acquired 23.5 2.4
Other 0.4 (0.6)
---- ---
Provision for income taxes 60.1% 37.9%
==== ===
The components of the Company's net deferred tax assets and liabilities,
including the deferred tax liability recorded upon the acquisition of Stature
Electric are as follows:
October 27, October 29,
1996 1995
Deferred tax asset:
Intangibles $ 615,000 $ 615,000
Accruals and reserves 1,540,000 1,369,000
Tax credits and loss carryforwards 683,000 315,000
Other 484,000 121,000
----------- -----------
3,322,000 2,420,000
Valuation allowance (1,397,000) (961,000)
----------- -----------
Total $ 1,925,000 $ 1,459,000
=========== ===========
Deferred tax liabilities:
Intangibles $ 2,888,000 $ 3,040,000
Pension 135,000 140,000
Property, plant and equipment 1,413,000 1,180,000
----------- -----------
Total $ 4,436,000 $ 4,360,000
=========== ===========
Net deferred tax liability $(2,511,000) $(2,901,000)
=========== ===========
These amounts are included in the accompanying consolidated financial
statements as follows:
October 27, October 29,
1996 1995
Current assets $ 1,032,000 $ 785,000
Long-term liabilities (3,543,000) (3,686,000)
----------- -----------
Net deferred tax liability $(2,511,000) $(2,901,000)
=========== ===========
The Company's valuation allowance relates primarily to intangibles and state
deferred tax assets on which management believes realization may be
unlikely.
F-20
<PAGE>
Prior to the Reorganization, the Company had elected to be taxed as an S
corporation for federal income tax purposes. As such, current taxable income
had been included on the income tax returns of the stockholders under these
elections. The completion of the Reorganization, (see Note 1) resulted in a
termination of the S corporation election. The pro forma provision for
federal income tax presented below reflects the provision for income taxes
the Company would have reported had the Company been taxed on its income.
The pro forma tax provision for 1994 consists of the following:
October 30,
1994
Current $ 3,206,000
Deferred (370,000)
-----------
Total $ 2,836,000
===========
The pro forma effective income tax rate differs from the federal statutory
tax rate due to adjustments for amortization of goodwill, officers' life
insurance premiums, state income taxes and meals and entertainment.
13. CONVERTIBLE PREFERRED STOCK
As part of the Stature Electric acquisition, the Company issued 1,071,428 of
its 10,000,000 authorized preferred shares as Class A convertible preferred
stock, with a stated value of $14 per share. The stock was recorded at its
fair market value of $12.50 per share. The convertible preferred stock is
entitled to quarterly cash dividends as a percentage of the stated value of
$15,000,000 as follows:
November 1996 to October 2000 5% per annum
November 2000 to October 2001 6% per annum
November 2001 to October 2002 7% per annum
November 2002 to October 2003 8% per annum
November 2003 to October 2004 9% per annum
November 2004 and thereafter 10% per annum
The Company may not pay any common stock dividends unless all preferred
dividend requirements have been met. At October 27, 1996, there are no
accrued preferred dividends. The Class A convertible preferred stock has a
liquidation preference of $14 per share at October 27, 1996. At any time
prior to October 26, 2000, the holders of the preferred stock have a right
to convert all, or any portion of the preferred stock into shares of common
stock on a one to one ratio, (subject to adjustment under certain
conditions). At any time after October 29, 2000, the Company may, at its
option, redeem all, or any portion of the then outstanding preferred stock.
The redemption price and the liquidation preference of the preferred stock
is initially equal to the stated value of $14 per share and increases after
November 2000 by 5% each year for ten years to a maximum of 150% of stated
value. The convertible preferred stockholders are entitled to vote as a
class to elect one member of the Board of Directors of the Company so long
as at least 40% of the originally issued Class A preferred stock is
outstanding. The convertible preferred stock has liquidation priority over
common stock.
F-21
<PAGE>
14. STOCK OPTION PLAN
The Company's 1994 Stock Option Plan (the "Stock Option Plan") provides for
the grant of options to purchase an aggregate of up to 500,000 shares of
common stock of the Company. The Stock Option Plan is designed to serve as
an incentive for retaining qualified and competent employees and directors.
Eligible participants under the Stock Option Plan are all employees and
directors of the Company. The Stock Option Plan is administered by the
Company's Compensation Committee of the Board of Directors.
The Stock Option Plan contains a provision for the automatic acceleration of
the exercisability of all outstanding options upon the occurrence of a
change in control (as defined in the Stock Option Plan) and a provision for
the cancellation of options and cash payment to the holders of such canceled
options upon the occurrence of certain of the events constituting a change
in control. The Compensation Committee may generally amend, alter or
discontinue the Stock Option Plan 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:
<TABLE>
<CAPTION>
October 27, October 29, October 30,
1996 1995 1994
<S> <C> <C> <C>
Outstanding at beginning of year 284,340 264,340 264,340
Granted 175,500 30,000 0
Cancelled (135,000) (10,000) 0
-------- ------- ---------
Outstanding at end of year 324,840 284,340 264,340
======= ======= =======
Exercise price of options outstanding at the
end of year $5.875-$12.00 $11.375-$12.00 $ 12.00
============= ============== ==========
</TABLE>
At October 27, 1996, a total of 175,160 shares were available for issuance
under the Stock Option Plan to be granted in the future. At October 27,
1996, 88,340 options were fully vested and exercisable.
F-22
<PAGE>
15. BUSINESS SEGMENTS
Business segment information is as follows:
<TABLE>
<CAPTION>
Engineered Specialized Corporate
Components Equipment Expenses
<S> <C> <C> <C>
Net sales:
1996 $ 71,987,398 $ 56,228,597
1995 57,374,938 50,625,714
1994 58,406,532 15,392,891
Income (loss) from operations:
1996 6,811,929 3,633,933 $ (4,444,313)
1995 9,666,192 6,785,719 (3,682,413)
1994 9,930,971 1,631,574 (2,417,317)
Identifiable assets:
1996 67,231,968 38,491,159 2,172,218
1995 67,109,265 40,014,760 1,595,246
1994 34,351,722 29,951,268 1,815,316
Capital additions:
1996 2,794,999 1,123,560 427,708
1995 2,352,722 1,719,327 365,189
1994 1,366,781 571,935 61,308
Depreciation and amortization expense:
1996 4,056,704 2,052,157 189,426
1995 2,334,540 1,768,610 110,187
1994 2,360,817 425,111
</TABLE>
F-23
<PAGE>
16. QUARTERLY INFORMATION (UNAUDITED)
The following table details net sales, gross profit, income (loss) before
taxes, net income (loss) and net income (loss) per share on a quarterly
basis for 1996 and 1995:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
January 1996 April 1996 July 1996 October 1996
<S> <C> <C> <C> <C>
Net sales $ 27,919,402 $ 33,442,895 $ 33,294,650 $ 33,559,048
Gross profit 7,030,686 7,967,068 8,526,174 6,410,048
Income (loss) before taxes 607,107 968,311 1,592,208 (1,044,655)
Net income (loss) 367,300 539,180 844,180 (902,689)
Net income (loss) available
for common shareholders 112,986 283,598 587,305 (1,160,882)
Net income (loss) per
common share $ 0.02 $ 0.05 $ 0.10 $ (0.20)
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
January 1995 April 1995 July 1995 October 1995
Net sales $ 21,492,937 $ 26,819,155 $ 29,549,940 $ 30,138,620
Gross profit 6,403,949 7,993,514 7,872,238 8,102,188
Income before taxes 2,212,819 3,381,216 2,609,923 2,079,463
Net income 1,383,014 2,096,476 1,612,933 1,290,998
Net income per share $ 0.24 $ 0.36 $ 0.28 $ 0.21
</TABLE>
Fourth Quarter Adjustments
In the fourth quarter of fiscal 1996, the Company recorded $600,000 in
selling, general and administrative expenses due to write-offs of doubtful
accounts and additions to its reserve for doubtful accounts at its Snowmax
subsidiary. At the end of fiscal 1996, the Company also recognized a
reduction in inventory value of $1,093,000, consisting of physical inventory
adjustments ($267,000), lower inventory valuations due to lower material,
labor and overhead costs and a change in the method of valuing Sooner's
finished goods ($576,000), and an additional reserve for obsolete inventory
($250,000). These adjustments were made in connection with the Company's
year-end physical inventory valuation process and charged to cost of
products sold. During the second half of fiscal 1996, the Company undertook
an inventory reduction program at its Snowmax subsidiary. This led to an
increase in cost of products sold of $240,000 in the third quarter and
$493,000 in the fourth quarter. The Company's effective tax rate for the
full year was 60.1%, a higher rate than had been expensed during the first
three quarters of the year. The effect of increasing income tax expense in
the fourth quarter to bring the full year rate to that level was
approximately $300,000.
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 have higher sales during the second fiscal
quarter while sales of these products 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 may be subject to
the overall domestic business cycle.
******
F-24
<PAGE>
Schedule II
Owosso Corporation
Valuation and Qualifying Accounts and Reserves
For the three years ended October 27, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and Deductions End of
of Period Expenses (a) Period
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
For the year ended October 27, 1996
Allowances on:
Accounts receivable $ 155,352 $ 646,547 $ (292,923) $ 508,976
Inventory 294,382 1,216,017 (945,437) 564,962
For the year ended October 29, 1995
Allowances on:
Accounts receivable $ 267,779 $ 94,104 $ (206,531) $ 155,352
Inventory 300,000 100,000 (105,618) 294,382
For the year ended October 30, 1994
Allowances on:
Accounts receivable $ 220,430 $ 115,335 $ (67,986) $ 267,779
Inventory 300,000 300,000
(a) Amounts written off against related assets
</TABLE>
F-25
<PAGE>
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 24th day of January, 1997.
OWOSSO CORPORATION
By: /s/ George B. Lemmon, Jr.
------------------------------------------
George B. Lemmon, Jr., President, Chief
Executive Officer, and Director,
the principal executive officer
By: /s/ John H. Wert, Jr.
------------------------------------------
John H. Wert, Jr., Senior Vice President -
Finance, Chief Financial Officer and
Treasurer and Secretary, the principal
financial and accounting officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on January 24, 1997, in the
capacities indicated:
<TABLE>
<CAPTION>
Signature Title
--------- --------
<S> <C>
/s/ George B. Lemmon, Sr. George B. Lemmon, Sr., Chairman of the Board and a
- ------------------------------- 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/ John R. Reese John R. Reese, Director
- --------------------------------------
/s/ Harry E. Hill Harry E. Hill, Director
- --------------------------------------
/s/ Ellen D. Harvey Ellen D. Harvey, Director
- --------------------------------------
/s/ Eugene P. Lynch Eugene P. Lynch, Director
- --------------------------------------
/s/ Lowell P. Huntsinger Lowell P. Huntsinger, Director
- --------------------------------------
</TABLE>
<PAGE>
AGREEMENT OF LEASE
BETWEEN
PHILADELPHIA FREEDOM PARTNERS, L.P.,
LANDLORD
AND
OWOSSO CORPORATION, TENANT
TABLE OF CONTENTS
Page
----
1. Term 1
2. Base Rent 1
3. Improvement and Fixturing of Premises 2
(a) Landlord's Work 2
(b) Tenant's Work 2
(c) Tenant Delay 2
(d) Access; Acceptance of Work 3
(e) Delivery of Possession 3
(f) Occupancy 3
4. Additional Rent 3
(a) Definitions 4
(b) Expense Adjustment 6
(c) Adjustment for Services not Rendered
by Landlord 7
(d) Tax Adjustment 8
(e) Partial Year 8
(f) Disputes 9
(g) Place of Payment 9
(h) Tenant Taxes 10
(i) Delay in Computation 10
(j) No Credit 10
5. Use of Premises 10
6. Condition of Premises 10
7. Services 11
(a) List of Services 11
(b) Billing for Electricity 13
(c) Interruption of Services 14
8. Alterations 15
9. Liens 16
10. Insurance and Waiver of Subrogation 16
11. Fire or Casualty 18
12. Waiver of Claims - Indemnification 19
13. Nonwaiver 20
14. Condemnation 21
15. Assignment and Subletting 22
16. Holdover 24
<PAGE>
17. Estoppel Certificate 25
18. Subordination 26
19. Certain Rights Reserved by Landlord 28
20. Rules and Regulations 30
21. Landlord's Remedies 30
22. Expenses of Enforcement 34
23. Covenant of Quiet Enjoyment 34
24. Letter of Credit 35
25. Real Estate Broker 36
26. Miscellaneous 36
(a) Rights Cumulative 36
(b) Captions and Usage 36
(c) Binding Effect 36
(d) Lease Contains All Terms 37
(e) Delivery for Examination 37
(f) No Air Rights 37
(g) Modification of Lease 37
(h) Intentionally Omitted 37
(i) Transfer of Landlord's Interest 37
(j) Prohibition Against Recording 38
(k) Covenants and Conditions 38
(l) Relationship of Parties 38
(m) Application of Payments 38
(n) Partial Invalidity 39
(o) Waiver of Trial by Jury 39
(p) Tenant's Authority 39
(q) Moving Allowance 39
(r) Landlord Representation 39
27. Notices 39
28. Hazardous Substances 40
29. Americans with Disabilities Act 42
EXHIBITS
- --------
"A" - Plan
"B" - Landlord's Work
"C" - Rules and Regulations
"D" - Schedule of Base Rent
"E" - Rules and Regulations for Work Performed by Tenant
or Tenant's Contractors
"F" - Form of Letter of Credit
<PAGE>
OFFICE LEASE
------------
THE TRIAD BUILDING
2200 RENAISSANCE BOULEVARD
KING OF PRUSSIA, PA
THIS AGREEMENT OF OFFICE LEASE is made as of the 6th day of September,
1996 (hereinafter referred to as the "Lease") between PHILADELPHIA FREEDOM
PARTNERS, L.P., a Delaware limited partnership (hereinafter referred to as
"Landlord"), and OWOSSO CORPORATION, a Pennsylvania corporation, whose present
address is One Tower Bridge, 100 Front Street, Suite 1400, West Conshohocken, PA
19428 (hereinafter referred to as "Tenant").
WITNESSETH:
----------
Landlord hereby leases to Tenant, and Tenant hereby accepts from
Landlord, the premises (hereinafter referred to as the "Premises") containing
approximately 12,715 square feet of rentable area on the first floor, and, as of
the date of this Lease, currently known as Suite 150, and designated on the plan
attached hereto as Exhibit "A" in the building known as The Triad Building, 2200
Renaissance Boulevard, King of Prussia, Pennsylvania (hereinafter referred to as
the "Building") located on land (hereinafter referred to as the "Land" and the
Building and the Land are sometimes hereinafter together called the "Property"),
subject to the covenants, terms, provisions and conditions of this Lease.
In consideration thereof, Landlord and Tenant covenant and agree as
follows:
1. Term. The term of this Lease (the "Term") shall commence on that
date (the "Commencement Date") which is the sooner of October 1, 1996 (the
"Scheduled Commencement Date") or the date upon which Tenant shall have
commenced occupancy of any part of the Premises and, unless sooner terminated as
provided herein, shall end, absolutely and without the need for notice from
either party to the other, on September 30, 2006 (the "Termination Date").
2. Base Rent. Subject to adjustment as herein provided, the Base Rent
to be paid hereunder shall be in accordance with Exhibit "D" attached hereto and
made a part hereof, per annum which shall be paid in advance on or before the
first day of each calendar month during the Term, in equal monthly installments
in accordance with Exhibit "D" attached hereto and made a part hereof, provided,
however, that Tenant shall pay the first full monthly installment at the time of
1
<PAGE>
execution of this Lease. If the Term commences other than on the first day of a
month or ends other than on the last day of a month, the Base Rent for such
month shall be prorated. The Base Rent for the portion of the month in which the
Term commences shall be paid on the first day of the first full month of the
Term.
3. Improvement and Fixturing of Premises.
(a) Landlord's Work. Landlord shall (at its cost and expense
except as noted below) construct the Premises for Tenant's use and occupancy in
accordance with plans and specifications prepared by Polek Schwartz Architects,
incorporating in such construction all items of Landlord's work described in
Exhibit "B" (the "Final Plans"). The parties hereto acknowledge and agree that
Landlord has budgeted the sum of One Hundred Thirty-Nine Thousand Eight Hundred
Sixty-Five Dollars ($139,865.00) for the construction of the improvements to the
Premises as set forth in the Final Plans (which includes a six (6) percent
construction management fee) and Tenant shall be responsible for the cost of all
improvements in excess of such allowance.
(b) Tenant's Work. All work in or upon the Premises required
for Tenant to open for business in addition to the items of Landlord's Work
specifically enumerated as Landlord's Work in Exhibit "B" shall be "Tenant's
Work" and shall be performed by Tenant at Tenant's cost and expense. Landlord
and Tenant acknowledge that all of Tenant's Work shall be completed by Tenant,
or its designated agents or contractors. Tenant shall comply with the Rules and
Regulations for Work Performed by Tenant or Tenant's Contractors, attached
hereto as Exhibit "E" and made a part hereof.
(c) Tenant Delay. As used herein, the term "Tenant Delay"
shall mean any delay caused by Tenant, its architect, representatives, agents,
servants or employees, including, without limitation, (i) any delay which is
caused by changes, requested by Tenant, in the work to be performed by Landlord,
(ii) any delay caused by any failure of Tenant to furnish to Landlord any
required plan, information, approval or consent within any period of time
required therefor by the terms of this Lease or, in any instance where no
specific time period is so required by the terms of this Lease, within such
reasonable period of time as shall be required for the expeditious prosecution
of the work to be done by Landlord, (iii) any delay caused by any failure of
Landlord to approve any plan or other information required to be submitted by
Tenant and approved by Landlord (to the extent that Landlord has the right to
withhold such approval pursuant to the terms of this Lease) or (iv) any delay
which is caused by the performance of any work or activity in the Premises by
Tenant or any contractor of Tenant. In the event of any Tenant Delay causing
2
<PAGE>
delay in substantial completion of the work to be done by Landlord in the
Premises, the Commencement Date shall be deemed to be the date which would have
been the Commencement Date had such delay not occurred.
(d) Access; Acceptance of Work. Landlord shall afford Tenant
and its employees, agents and contractors access to the Premises at reasonable
times prior to the commencement of the Term and at Tenant's sole risk and
expense, for the purposes of inspecting and verifying Landlord's performance of
the Landlord's Work. Tenant shall advise Landlord promptly of any objection to
the performance of such work.
(e) Delivery of Possession. If Landlord shall, for any reason
fail to make available to Tenant possession of the Premises on or before the
Scheduled Commencement Date, Landlord shall not be subject to any liability for
such failure. Under such circumstances, Tenant's obligations to pay the Base
Rent, the Tax Adjustment and the Operating Expense Adjustment shall not commence
until Landlord makes possession available; and such failure to make available to
Tenant possession of the Premises on or before the Scheduled Commencement Date
or any other date, shall not in any other way affect the validity of this Lease,
or the Term, or the obligations of Tenant hereunder, nor shall such failure be
construed in any way to extend the Term. Such deferral of rent shall be Tenant's
sole and exclusive right and remedy with respect to any such failure. There
shall be no deferral of rent, however, if any such failure is caused in whole or
part by a delay in taking occupancy caused by Tenant.
(f) Occupancy. The Premises shall not be deemed incomplete or
not ready for occupancy or for delivery of possession, if details of
construction, mechanical adjustments or decoration, or other items of the
Landlord's Work which do not materially interfere with Tenant's use of the
Premises, remain to be done, provided that such items are completed within 45
days of delivery of possession.
4. Additional Rent. In addition to paying the Base Rent specified in
Paragraph 2 hereof, Tenant shall pay as "additional rent" the amounts determined
as hereinafter set forth in this Paragraph 4, any and all other sums, expenses
and charges due or payable by Tenant under this Lease, and any and all costs,
expenses and reasonable attorneys' fees incurred by Landlord in collecting any
and all Base Rent, amounts due pursuant to this Paragraph 4, and such other
sums, expenses, charges, or in enforcing any of Tenant's obligations under this
Lease. The Base Rent and such additional rent are sometimes herein collectively
referred to as "rent". All amounts due under this Lease as additional rent shall
be payable in the same manner and at the same place as the Base Rent.
3
<PAGE>
(a) Definitions. As used in this Paragraph 4, the terms:
(i) "Base Year" shall mean the calendar year 1996.
(ii) "Calendar Year" shall mean each calendar year in which
any part of the Term falls, through and including the year in which the Term
expires.
(iii) "Consumer Price Index" shall mean the United States
Department of Labor, Bureau of Labor Statistics, Consumer Price Index for Urban
Wage Earners and Clerical Workers (CPI-W) (Philadelphia area only), 1982-84 =
100.
(iv) "Tenant's Proportionate Share" shall mean 7.41% being the
percentage calculated by dividing 12,715 square feet, the rentable area of the
Premises provided at the beginning of this Lease by 171,563 square feet. The
rentable area of the Premises has been calculated according to a method pursuant
to which a portion of the common areas has been deemed included in the Premises.
Landlord and Tenant irrevocably acknowledge and agree that the rentable area of
the Premises for the purposes of calculation of Additional Rent and Tenant's
Proportionate Share shall be deemed to be 12,715 square feet and the area of the
rentable office space in the Building shall be deemed to be 171,563 square feet.
(v) "Taxes" shall mean all real estate taxes and assessments
(general, extraordinary, special or otherwise) transit taxes, water and sewer
rents, taxes based upon the receipt of rent, including gross receipts or sales
taxes, or similar impositions and expenses, levied or assessed upon or with
respect to the Land and/or Building and ad valorem taxes for any personal
property used in connection therewith and all taxes levied or assessed upon or
with respect to the leasing, use or occupancy of the Property or any part
thereof or the rents or receipts paid or payable to Landlord therefrom
(including, without limitation, any tax levied or assessed especially with
respect to real property or any type of real property which includes the
Property), which Landlord shall become obligated to pay with respect to the
Property during any Calendar Year, any portion of which occurs during the Term
(without regard to any different fiscal year by the respective governmental or
municipal authority). Should the Commonwealth of Pennsylvania, or any political
subdivision thereof, or any other governmental authority having jurisdiction
over the Property, impose a tax, assessment, charge or fee, which Landlord shall
be required to pay, wholly or partially in substitution for or in addition to
any of the above Taxes, all such taxes, assessments, fees or charges shall be
deemed to constitute Taxes hereunder. "Taxes" shall include all fees and costs,
including reasonable attorneys' fees, appraisals and consultants' fees, incurred
by Landlord in any year subsequent to the Base Year in seeking to obtain a
reduction of, or a limit on, any increase in any Taxes (regardless of whether
any reduction or limitation is obtained) in excess of the aggregate amount of
such fees and costs incurred by Landlord in the Base Year for such purposes.
4
<PAGE>
(vi) "Operating Expenses" shall mean all expenses, costs and
disbursements (other than Taxes) of every kind and nature (determined for the
applicable Calendar Year on an accrual basis) paid or incurred by or on behalf
of Landlord in connection with the ownership, management, operation, maintenance
and repair of the Land, the Building and the office park known as Renaissance at
Gulph Mills which are incurred with respect to the Building or the ground or
facilities used in connection therewith, or are payable or allocable with
respect to the Building by virtue of the ownership of the Property and Building
or by an Owner's Association Agreement or by the Declaration of Protective
Covenants for Renaissance at Gulph Mills. Landlord agrees that it will not
collect more than one hundred percent (100%) of the Operating Expenses for the
Building in any given lease year. The following will not be included in
Operating Expenses:
(A) Costs of the initial improvement to, or alterations
of any tenant's premises;
(B) Principal or interest payments on loans secured by
mortgages or trust deeds on the Building and/or on the Land;
(C) Costs of capital improvements, except that Operating
Expenses shall include the cost as amortized over such number of years as
Landlord may reasonably determine, in accordance with generally accepted
accounting principles, with interest at the rate of twelve percent (12%) per
annum on the unamortized amount, of any capital improvements made or installed
during the Base Year or any Calendar Year which, (1) in Landlord's reasonable
opinion, will have the effect of reducing any component cost included within
Operating Expenses, (2) are made or installed to keep the Property in compliance
with all governmental rules and regulations applicable from time to time
thereto, and (3) under generally applied real estate accounting practices may be
expensed or treated as deferred expenses (and the amortization and interest so
determined for each Calendar Year shall be included in Operating Expenses for
that Calendar Year). Landlord represents and warrants that as of the date hereof
there are no material outstanding deferred maintenance or replacement projects
(other than ordinary repairs and wear and tear that do not exceed, in the
aggregate, $25,000), including without limitation, capital repairs for Americans
with Disabilities, lead paint, CFC's or other compliance items required under
applicable law, which will not be included within the Base Year calculation;
5
<PAGE>
(D) Leasing commissions for space in the Building;
(E) The cost of electricity for which Landlord receives
reimbursement from Tenant or other tenants;
(F) Accountants', consultants', auditors' or attorneys'
fees, costs and disbursements and other expenses incurred in connection with the
negotiations or disputes with tenants or prospective tenants or other occupants,
or associated with the enforcement of any leases;
(G) Costs of any items or services sold or provided to
tenants (including Tenant) for which Landlord is actually reimbursed by such
parties;
(H) Depreciation taken as a deduction on Landlord's
federal income tax return;
(I) Overhead and profit increment paid to subsidiaries or
affiliates of Landlord or to any party as a result of non-competitive selection
process, for management or other services on or to the building or for supplies
or other materials, but only to the extent that the costs of such services,
supplies or materials exceeds the costs that would have been paid had the
services, supplies or materials been provided by unaffiliated parties on a
competitive basis;
(J) Any compensation paid to clerks or tenants or other
persons in commercial concessions operated by Landlord; and
(K) Any fines or fees for Landlord's failure to comply
with governmental, quasi-governmental or regulatory agency's rules and
regulations provided such fines or fees were not imposed upon them are due to
Tenant's failure to comply with its obligations under this Lease.
(b) Expense Adjustment.
(i) Tenant shall pay as additional rent for each Calendar
Year, that amount ("Expense Adjustment Amount") which is Tenant's Proportionate
Share of the amount by which the Operating Expenses incurred with respect to
such Calendar Year exceed the amount thereof incurred with respect to the Base
Year; provided, however, that in determining the amount of Operating Expenses
for each Calendar Year subsequent to the Base Year, if less than 95% of the
Rentable Area of the Building shall have been occupied at any time during such
Calendar Year, Operating Expenses shall be deemed for such Calendar Year to be
in the amount reasonably determined by Landlord to be equal to that amount of
like expenses which normally would be expected to be incurred had such occupancy
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been 95% throughout such Calendar Year. Landlord represents that the Operating
Expenses for the Base Year have been or will be adjusted to reflect an occupancy
level of ninety five percent (95%) as aforesaid.
(ii) The Expense Adjustment Amount with respect to each
Calendar Year shall be paid in monthly installments, payable in advance on the
first day of each calendar month during the course of such year, in amounts
estimated from time to time by Landlord and communicated by written notice to
Tenant. Landlord shall cause to be kept books and records showing Operating
Expenses in accordance with generally-accepted accounting principles. Following
the close of each Calendar Year, Landlord shall cause the amount of the Expense
Adjustment Amount for such Calendar Year to be computed based on Operating
Expenses for such Calendar Year, and Landlord shall deliver to Tenant a
statement of such amount and Tenant shall pay any deficiency as shown by such
statement to Landlord within 30 days after receipt of such statement. If the
total of the estimated monthly installments paid by Tenant during any Calendar
Year exceed the actual Expense Adjustment Amount due from Tenant for such
Calendar Year, then, at Landlord's option, such excess shall be either credited
against payments next due hereunder or refunded by Landlord, provided Tenant is
not then in default hereunder. Tenant's obligations to pay the Expense
Adjustment Amount and Landlord's obligations to refund any excess amount shall
survive the expiration or earlier termination of this Lease. In the event a
refund is due Tenant after the expiration or earlier termination of this Lease,
such refund shall be paid upon the final reconciliation of the Expense
Adjustment Amount for such Calendar Year provided that Tenant is not in default
of any obligations under this Lease.
(c) Adjustment for Services not Rendered by Landlord. If Landlord
is not furnishing any particular work or service (the cost of which, if
furnished by Landlord would be included in Operating Expenses) to a tenant who
has undertaken to itself to perform or obtain such work or service in lieu of
the furnishing thereof by Landlord, Operating Expenses shall be deemed for
purposes of this Paragraph 4 to be increased by an amount equal to the
additional Operating Expenses, as reasonably determined by Landlord, which would
have been incurred during such period if Landlord had at its own expense
furnished such work or service to such tenant.
(d) Tax Adjustment. Tenant shall pay as additional rent, in
addition to the Base Rent required by Paragraph 2 hereof, an amount ("Tax
Adjustment Amount") equal to Tenant's Proportionate Share of the amount by which
the Taxes with respect to each Calendar Year exceeds the Taxes with respect to
the Base Year. The Tax Adjustment Amount with respect to each Calendar Year
shall be paid in monthly installments, payable in advance on the first day of
each calendar month during the course of such year in amounts estimated from
time to time by Landlord and communicated by written notice to Tenant. Following
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the close of each Calendar Year, Landlord shall cause the amount of the Tax
Adjustment Amount for such Calendar Year to be computed based on Taxes for such
Calendar Year and Landlord shall deliver to Tenant a statement of such amount
and Tenant shall pay any deficiency as shown by such statement to Landlord
within 30 days after receipt of such statement. If the total of the estimated
monthly installments paid by Tenant during any Calendar Year exceeds the actual
Tax Adjustment Amount due from Tenant for such Calendar Year, then, at
Landlord's option such excess shall be either credited against payments next due
hereunder or refunded by Landlord, provided Tenant is not then in default
hereunder. The amount of any refund of Taxes received by Landlord shall be
credited against Taxes for the year in which such refund is received. In
determining the amount of Taxes for any year, the amount of special assessments
to be included shall be limited to the amount of the installment (plus any
interest payable thereon) of such special assessment required to be paid during
such year as if the Landlord had elected to have such special assessment paid
over the maximum period of time permitted by law; if the authority to whom such
assessment is to be paid shall not permit such assessment to be paid in
installments, the amount of such assessment shall be treated as being amortized
over such number of calendar years, beginning with the Calendar Year in which
the assessment is payable, as Landlord shall reasonably determine, with interest
at the rate of 15% per annum on the unamortized amount, and such amortization
and interest for each Calendar Year shall be included in Taxes for that Calendar
Year.
(e) Partial Year. If only part of any Calendar Year shall fall
within the Term, the amounts computed as additional rent, with respect to such
Calendar Year under the foregoing provisions of this Paragraph 4 shall be
prorated in proportion to the portion of such Calendar Year falling within the
Term, but the expiration or termination of this Lease prior to the end of such
Calendar Year shall not impair the Tenant's obligation hereunder to pay such
prorated portion of such additional rent with respect to that portion of such
year falling within the Term, and such obligation shall survive the expiration
or termination of this Lease. In the event a refund is due Tenant after the
expiration or earlier termination of this Lease, such refund shall be paid upon
the final reconciliation of the Tax Adjustment Amount or the Expense Adjustment
Amount for such period provided that Tenant is not in default of any obligations
under this Lease.
(f) Disputes. Any statement furnished to Tenant by Landlord under
the provisions of this Paragraph 4 shall constitute a final determination as
between Landlord and Tenant as to the rent set forth therein due from Tenant for
the period represented thereby, unless Tenant, within sixty (60) days after such
statement is furnished, shall give a notice to Landlord that it disputes the
correctness thereof, specifying in detail the basis for such assertion. Pending
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resolution of such dispute, Tenant shall pay all disputed amounts in accordance
with the statement furnished by Landlord. Landlord agrees, upon prior written
request, during normal business hours to make available for Tenant's inspection,
at Landlord's offices, Landlord's books and records which are relevant to any
items in dispute. Provided that Tenant is not in default, upon at least seven
(7) days prior written notice, Tenant, at Tenant's own cost and expense shall
have the right to audit Landlord's books and records: (a) at any time (but only
once during the term of the Lease) with respect to the Base Year calculation,
and (b) at any time within the above said sixty (60) day period for any other
period, in order to determine if Tenant agrees with Landlord's calculation of
such costs and expenses. Any such audit shall be conducted at a location
designated by Landlord and Tenant's notice of its intention to audit shall
include a reasonably detailed explanation of the nature of its dispute. If
Tenant's audit determines that Landlord has incorrectly charged Tenant for
Operating Expenses in the aggregate by a factor of five percent (5%) or more,
the costs of such audit shall be borne by Landlord and Landlord shall either
refund or credit the overpayment to Tenant.
(g) Place of Payment. Tenant shall, without any demand therefor and
without setoff, reduction or recoupment, pay, to Landlord's agent, Amerimar
Triad Management Co., Inc. at 210 W. Rittenhouse Square, Suite 1900,
Philadelphia, Pennsylvania 19103 Attention: Lori LoBiondo ("Agent") or to such
other person and/or at such other place as Landlord may from time to time direct
by notice given to Tenant, the Base Rent as well as all other sums which may
become due by Tenant under this Lease. All such other sums shall be payable as
additional rent. All checks shall be made payable to PHILADELPHIA FREEDOM
PARTNERS, L.P. Tenant hereby covenants and acknowledges that Tenant's obligation
to pay Base Rent and all additional rent pursuant to this Paragraph 4 is
independent of each and every of Landlord's covenants and agreements contained
in this Lease.
(h) Tenant Taxes. Any provision hereof to the contrary
notwithstanding, Tenant shall, within five (5) business days after written
demand from time to time, as additional rent, pay to Agent or, as Landlord may
direct, to Landlord or to the tax collecting authority, the full amount of all
taxes, levies, charges and assessments legally required or authorized to be
collected by Landlord from Tenant or any subtenant or occupant of the Premises
and all taxes, levies, charges and assessments required to be paid by Landlord
(or imposed upon the Property) if not paid by or collected from Tenant or a
subtenant or occupant of the Premises. Tenant hereby agrees to defend, indemnify
and hold harmless Landlord from and against all loss, cost, liability and
expenses (including counsel fees and costs of litigation) which Landlord may
suffer, incur or be exposed to as a result of any assertion against Landlord of
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liability for any of the taxes referred to in this subparagraph (h), and from
and against any penalties or interest relating thereto, which Tenant fails to
pay pursuant hereto.
(i) Delay in Computation. Delay in computation of the Expense
Adjustment Amount or Tax Adjustment Amount shall not be deemed a default
hereunder or a waiver of Landlord's right to collect any of such amounts.
(j) No Credit. Tenant shall not be entitled to any rebate or credit
in the event either Taxes or Operating Expenses for any Calendar Year is lower
than the Base Year.
5. Use of Premises. Tenant shall use and occupy the Premises solely as
an office for general and administrative purposes in connection with the
management of a diversified manufacturing company and for no other purpose. The
maximum permitted occupancy of the Premises is one person for each 200 rentable
square feet of the Premises.
6. Condition of Premises. The Tenant's taking possession of the
Premises or any portion thereof shall be conclusive evidence that the Premises
or any such portion was in good order and satisfactory condition when the Tenant
took possession. At the expiration or other termination of this Lease or of
Tenant's right of possession, Tenant shall leave the Premises, and during the
Term will keep the same, in good order and condition, ordinary wear and tear,
insured damage by fire or other casualty (which fire or other casualty has not
occurred through the negligence of Tenant or those claiming under Tenant or
their employees or invitees respectively) alone excepted; and for that purpose,
Tenant shall make all necessary repairs and replacements if required hereunder.
Tenant shall give Landlord prompt notice of any damage to or accident upon the
Premises and of any breakage or defects in the window glass, wires or plumbing,
heating, ventilating or cooling or electrical apparatus or systems on or serving
the Premises. Tenant shall at the expiration or termination of this Lease or of
Tenant's right of possession, also have had removed from the Premises all
furniture, trade fixtures, office equipment and all other items of Tenant's
property so that Landlord may again have and repossess the Premises. Tenant
shall comply with all laws, rules, orders, ordinances and regulations at any
time issued or in force by any lawful authority, applicable to Tenant or any
other occupant of the Premises, or to the Premises, or to the use or occupancy
of the Premises. Tenant shall repair, at or before expiration or termination of
this Lease or of Tenant's right of possession, all damage done to the Premises
or any other part of the Building by installation or removal of furniture and
property by Tenant or any subtenant or any agent, employee or invitee of Tenant
or any subtenant. Tenant shall, within five (5) business days after written
demand, pay to Landlord the amount of any uninsured (including the amount of any
deductibles) damages suffered or incurred by Landlord as a result of any injury
to any part of the Property other than the Premises, done by Tenant or any
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subtenant or any agent, employee or invitee of Tenant or any subtenant. Tenant
shall not do or commit, or suffer or permit to be done or committed, any act or
thing as a result of which any policy of insurance of any kind on or in
connection with the Property shall become void or suspended, or any insurance
risk on or in connection with the Building or any other portion of the Property
shall (in the opinion of the insurer or any insurance organization) be rendered
more hazardous; without limitation of all other rights and remedies of Landlord,
Tenant shall pay as additional rent the amount of any reasonably documented
increase of premiums for such insurance, resulting from any breach of this
provision.
7. Services.
(a) List of Services. Landlord shall provide the following
services, and no others, on all days during the Term, except Saturdays, Sundays
and holidays, unless otherwise stated:
(i) Subject to subparagraph 7(b) hereof, Landlord shall
provide heating between October 15 and April 15, and air conditioning between
May 1 and October 1, when necessary for normal comfort in the Premises (but
Landlord shall not be required to provide heating or air conditioning to any
extent in excess of that which is within the parameters of any federal, state or
local requirements or recommendations which may be applicable or with which
Landlord in good faith may decide to comply) from Monday through Friday, during
the period from 8 a.m. to 6 p.m., holidays excepted. Landlord shall, upon 24
hours notice by Tenant, provide heating or cooling at other times at its
standard rates for such services. Landlord shall use reasonable efforts to
maintain the temperature within the Premises between 67(degree) and 76(degree)
Fahrenheit. Tenant, within ten days after its receipt of each bill therefor,
will pay for all heating and air conditioning requested and furnished at other
times or required due to heat producing equipment, or equipment requiring a
controlled climate, installed by or for Tenant, at rates to be established from
time to time by Landlord.
(ii) Subject to subparagraph 7(b) hereof, Landlord shall
provide electrical energy for standard building lighting fixtures provided by
Landlord and for the operation of desk-top portable office equipment, provided
that (A) the connected electrical load of such equipment does not exceed an
average of one watt per square foot of the Premises and (B) the electricity so
furnished for equipment uses will be at a nominal 120 volts and no electrical
circuit for the supply of such use need have a current capacity exceeding 20
amperes. If Tenant's requirements for electricity are in excess of those set
forth in the preceding sentence, and if, in Landlord's sole judgment, Landlord's
facilities are inadequate for such additional requirements and if electrical
energy for such additional requirements is available to Landlord, Landlord upon
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written request and at the sole cost and expense of Tenant will furnish and
install, or, at Landlord's sole discretion, permit Tenant to furnish and
install, such additional wires, risers, conduits, feeders and switchboards as
reasonably may be required to supply such additional requirements of Tenant
provided (1) that the same shall be permitted by applicable laws and insurance
regulations (2) that, in Landlord's sole judgment, the same are necessary and
will not cause permanent damage or injury to the Building or the Premises or
cause or create a dangerous or hazardous condition or entail excessive or
unreasonable alterations or repairs or interfere with or disturb other tenants
or occupants of the Building, (3) that, in Landlord's sole judgment, the same
will not in any way diminish or adversely affect the electricity which Landlord
deems should remain available for other tenants, and (4) that Tenant, at
Tenant's expense, shall, concurrently with the making of such written request,
execute and deliver to Landlord, Tenant's written undertaking, in form and
substance satisfactory to Landlord, obligating Tenant to fully and promptly pay
the entire cost and expense of so furnishing and installing any additional
wires, risers, conduits, feeders and/or switchboards.
Tenant shall bear the cost of replacement of lamps, starters and ballasts for
lighting fixtures, and shall reimburse Landlord therefor within 15 days of
Landlord's submission of each bill therefor.
(iii) Domestic water from the regular Building outlets for
drinking, lavatory and toilet purposes.
(iv) Janitorial services Monday through Friday in and about
the Premises (except holidays). If any material use made of the Premises after 6
p.m. shall by reason of work force scheduling or security, overtime, union
rules, general security or otherwise cause any increase in Landlord's cost for
providing janitorial services, Tenant shall, as additional rent, pay all bills
for reimbursement of Landlord for such increase, within 10 days after Tenant's
receipt of such bill.
(v) Automatic passenger elevator service at all times for
authorized building personnel.
(vi) Freight elevator services subject to reasonable
scheduling by Landlord.
(vii) Clearance of snow from walkways, parking areas and
access drives as soon as practicable after the end of snowfall or end of any
such storm, and removal of ice and ice accumulation.
(viii) Common area maintenance and landscaping.
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(ix) repair, maintain (including compliance with all
applicable laws relating to same) and replace where required: (A) plumbing,
sprinkler, heating, ventilating and air conditioning systems, building
electrical systems and mechanical lines and equipment associated therewith, all
of which are either located in or serve the Building, the Premises or Common
Areas; (B) the exterior and interior structure of the Building including the
roof, atrium, exterior walls, bearing walls, wood beams, foundation, columns,
lateral support to the Building, the Premises, the Common Areas; and (C) the
exterior improvements to the land including curbs, driveways, parking areas,
sidewalks, lighting and ditches.
(b) Billing for Electricity.
Tenant shall pay to Landlord as Additional Rent, within 10 days
after receipt from Landlord of each statement of the amount due, in each period
chosen by Landlord, the costs of Landlord supplying such quantity of electricity
as is consumed by Tenant and the Tenant's Proportionate Share of the electricity
consumed by all of the tenants of the Building for interior and exterior common
areas or elements of the Building (including, without limitation, the cost for
taxes, fuel adjustment charges, transfer charges and other like charges
regularly passed on to the consumer by the public utility furnishing electricity
to the Building (collectively, "Tenant Electric Charges"). Tenant Electric
Charges shall be based upon (i) a submeter installed at or for the Premises or
the floor of the Building on which the Premises is located or, at Landlord's
option, (ii) for any Premises less than a full floor, on the basis of the
Tenant's pro rata share of all of the space located on such floor, the numerator
of which is the Rentable Area of the Premises and the denominator of which is
the Rentable Area of all leased premises on such floor of the Building which
share a common electrical submeter and which are occupied during the period in
question. The Tenant Electric Charge shall be further based upon the general
service rates of the Philadelphia Electric Company prevailing from time to time
for similar service and shall be equal to: (a) 100% of all metered electricity
for the Premises; (b) Tenant's Proportionate Share of electricity attributable
to the Building for interior and exterior common areas or elements; (c) Tenant's
Proportionate Share or allocable share, as reasonably apportioned by Landlord,
of electric (or other energy supply) for HVAC which will be apportioned
considering all factors that bear on Tenant's use, including but not limited to,
Tenant's special demands caused by the number of people using the Premises and
heat generated by the electrical usage in the Premises.
In the event that electric service to the Premises is not
properly submetered, Tenant shall pay to Landlord, in monthly installments at
the time prescribed for the monthly installments of the Base Rent, amounts, as
estimated by Landlord from time to time, which Tenant would pay for use if the
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same were separately metered to the Premises by the local electric utility
company and billed to Tenant at the general service rates of the Philadelphia
Electric Company prevailing from time to time for similar service.
(c) Interruption of Services. Tenant agrees that Landlord shall not
be liable for damages (by abatement of rent or otherwise) for failure to furnish
or delay in furnishing any service, or for any diminution in the quality or
quantity thereof, when such failure or delay or diminution is occasioned, in
whole or in part, by repairs, renewals, or improvements, by any strike, lockout
or other labor trouble, by inability to secure electricity, gas, water, or other
fuel at the Building after reasonable effort so to do, by any accident or
casualty whatsoever, by act or default of Tenant or other parties, or by any
other cause beyond Landlord's reasonable control; and such failures or delays or
diminution shall never be deemed to constitute an eviction or disturbance of the
Tenant's use and possession of the Premises or relieve the Tenant from paying
Rent or performing any of its obligations under this Lease unless such
interruption is due or caused by Landlord's, or its agents or employees'
negligence or willful misconduct and such interruption continues for five (5)
consecutive business days and renders the Premises untenantable.
8. Alterations.
(a) Tenant shall not, without the prior written consent of Landlord,
make any alterations, improvements or additions to the Premises. It is agreed
that with respect to alterations, improvements or additions costing less than
Three Thousand Dollars ($3,000.00) in the aggregate, Landlord's consent shall
not be unreasonably withheld or delayed. For such work costing more than Three
Thousand Dollars ($3,000.00) in the aggregate such consent may be granted or
withheld in Landlord's sole discretion. If Landlord consents to any alterations,
improvements or additions, it may impose such conditions with respect thereto as
Landlord deems appropriate, including, without limitation, Landlord's approval
of the contractors to perform the work, contractor's lien waivers, insurance
against liabilities which may arise out of such work, plans, specifications and
permits necessary for such work and as-built drawings upon completion of such
work. All work done by Tenant or its contractors pursuant to and in accordance
with this Paragraph 8, or otherwise shall be done in a first-class workmanlike
manner, using only good grades of materials and without disturbing other
tenants, shall be done in compliance with all insurance requirements and all
applicable laws or ordinances and rules and regulations of governmental
departments or agencies and shall be done by responsible contractors and
subcontractors approved by Landlord in advance whose engagement will not in
Landlord's opinion, and in fact does not, result in any labor dispute at the
Building, whether in connection with any construction at the Building, the
operation of the Building or otherwise.
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(b) All alterations, additions or improvements made by Tenant and all
fixtures attached to the Premises shall become the property of Landlord and
remain at the Premises (including the Landlord's Work and the Tenant's Work).
Notwithstanding the foregoing, for alterations, additions or improvements other
than the Tenant's Work and the Landlord's Work ("Additional Work"), Tenant
shall, at the time it seeks consent for such Additional Work, ask Landlord for a
determination of whether said Additional Work shall be removed at the expiration
or sooner termination of the Lease. Should Tenant fail to seek such
determination or should Landlord determine that the Additional Work shall be
removed, any or all of the Additional Work shall be removed at the cost of
Tenant before the expiration or sooner termination of this Lease and in such
event Tenant shall repair all damage to the Premises caused by the installation
and/or removal thereof. Tenant shall not permit or suffer any signs,
advertisements or notices to be displayed, inscribed upon or affixed on any part
of the outside or inside of the Premises, or in the Building, except on the
directory board to be provided by Landlord and on the entrance doors of the
Premises, provided, however, that Tenant shall not display, inscribe or affix
any sign on such directory board or on the entrance doors of the Premises
without, in each instance, obtaining the prior written approval from Landlord as
to the size, color and style of such sign. Landlord shall have the right to
remove unauthorized signs at Tenant's expense.
9. Liens. Tenant shall not permit there to be filed against the
Property or Landlord's interest therein or any part of either, and shall
forthwith remove or have removed, any mechanics', or materialmen's or other
lien, or claim thereof, filed by reason of work, labor, services or materials
provided for or at the request of Tenant (other than work, labor, services or
materials provided by the Landlord) or any subtenant or occupant or for any
contractor or subcontractor employed by Tenant or any subtenant or occupant, and
shall exonerate, protect, defend and hold free and harmless Landlord against and
from any and all such claims or liens. Without limitation of the foregoing, if
any such claim or lien be filed, Landlord may, but shall not be obligated to,
discharge it either by paying the amount claimed to be due in the claim or lien
or by procuring the discharge of such lien or claim by deposit or by bonding
proceedings, and in any such event, Landlord shall be entitled, if Landlord so
elects, to compel the prosecution of any action for the foreclosure of such lien
by the claimant or lienor and to pay the amount of any judgment in favor of the
lienor with interest, costs and allowances. Any amount so paid by Landlord and
all costs and expenses, including, without limitation, reasonable attorneys'
fees, in connection therewith, together with interest thereon at the Lease
Interest Rate (hereinafter defined) from the respective dates of Landlord's
making of the payments and incurring of the costs and expenses, shall constitute
additional rent payable by Tenant under this Lease and shall be paid by Tenant
to Landlord on demand.
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10. Insurance and Waiver of Subrogation.
(a) During the Term, Tenant at its sole cost shall maintain, with
responsible insurance companies acceptable to Landlord and qualified to do
business in the Commonwealth of Pennsylvania, general comprehensive public
liability insurance with the broad form commercial liability endorsement
including contractual liability insurance covering Tenant's indemnity
obligations hereunder, insuring against claims for personal injury (including
death) and property damage, with respect to Tenant's activities and property in,
on and about the Premises, and with respect to occurrences arising out of or
related to this Lease and/or Tenant's use or occupancy of the Premises and the
Property and the activities therein, thereon and thereabout of Tenant and any
subtenants and their respective servants, employees, agents, invitees and
licensees, with coverage on an occurrence basis in all cases of not less than a
combined single limit of $1,000,000 per occurrence. Landlord, Amerimar Triad
Management Company, Inc. ("Manager"), or any other manager of the Building, any
Mortgagee (as hereinafter defined) and, if Landlord requires, Landlord's
architect or contractor who may perform services or work in, on, about or in
connection with the Premises, and the respective agents, partners and employees
of the foregoing, all as their interests may appear, shall be designated named
insureds in the policies for such insurance. Said policies shall contain
endorsements providing that the naming of more than one insured shall not
operate to limit or void the coverage of any named insured relating to claims by
another named insured. Tenant shall, prior to the commencement of the Term, and
at least 30 days prior to the expiration date of each policy which Tenant is
required by this Lease to maintain, furnish to Landlord certificates evidencing
the coverage required hereinabove in this Paragraph and the renewal thereof,
which certificates shall state that such insurance coverage may not be
materially changed or canceled without at least twenty (20) days prior written
notice to Landlord. The aforesaid amount of required insurance coverage shall,
from time to time, be increased, effective upon the sixtieth (60th) day after
Landlord shall have given Tenant notice specifying the new amount, to be that
amount which bears the same ratio to $1,000,000 as the Consumer Price Index
(hereinabove defined) for the calendar month next preceding the date of such
notice bears to the Consumer Price Index for the last month of the Measurement
Year (hereinabove defined). Such notice shall not be given sooner than the fifth
anniversary of the date of this Lease, nor more frequently than once every five
years. During the Term, Tenant, at its sole cost, shall maintain "all risk"
physical damage insurance including fire, sprinkler, leakage, vandalism and
extended coverage for the full replacement cost of all additions, improvements
and alterations to the Premises and of all office furniture, trade fixtures,
office equipment, merchandise and all other items of Tenant's property on the
Premises. Landlord agrees to maintain, during the Term, property and liability
insurance in scope and coverage amounts consistent with office building projects
similar to the Property.
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(b) Tenant shall not do or commit, or suffer or permit to be done
or committed, any act or thing as a result of which any policy of insurance of
any kind on or in connection with the Property shall become void or suspended,
or any insurance risk on or in connection with the Building or any other portion
of the Property shall (in the opinion of the insuring companies or any insurance
organization) be rendered more hazardous. Tenant shall pay as additional rent
the amount of any increase of premiums for such insurance, resulting from any
breach of this covenant.
(c) As used in this Paragraph 10(c) and in Paragraph 12 hereof
only, "Landlord" shall mean Landlord, Beneficiary (if Landlord is a trustee
under a land trust), Manager, any other manager of the Building, any Mortgagee,
and the respective partners, shareholders, agents, employees, officers and
directors of the foregoing. Notwithstanding anything herein to the contrary,
Landlord and Tenant each hereby releases the other, its partners, agents and
employees, to the extent of the releasing party's coverage under its insurance
policies (or to the extent required to be carried hereunder), from any and all
liability for any loss or damage which may be inflicted upon the property of
such party, notwithstanding that such loss or damage shall have arisen out of
the negligence of the other party, its partners, agents or employees. Each party
agrees to require its insurers to issue policies containing such provisions and
a waiver of the right of subrogation. Landlord and Tenant shall provide notice
to the other party to the extent either of their respective policies do not
contain such a required waiver of the right of subrogation.
11. Fire or Casualty.
(a) If the Premises or the Building (including machinery or
equipment used in the operation of the Building) shall be damaged by fire or
other casualty and if such damage does not render all or a substantial portion
of the Premises (in the case of the Premises, substantial shall mean 20% or more
of the area of the Premises) or Building untenantable, then Landlord shall
repair and restore the Premises (exclusive of tenant finishes and/or build-outs)
or the core and shell of the Building with reasonable promptness (not to exceed
one hundred twenty (120) days, subject, however, to reasonable delays for
insurance adjustments and delays caused by matters beyond Landlord's reasonable
control). If any such damage renders all or a substantial portion of the
Premises or Building untenantable, Landlord shall have the right to terminate
this Lease (with appropriate prorations of rent being made for Tenant's
possession subsequent to the date of such damage of those tenantable portions of
the Premises) upon giving written notice to the Tenant at any time within 60
days after the date of such damage; and if such notice is given Landlord shall
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have no obligation to repair or restore. Landlord shall have no liability to
Tenant, and Tenant shall not be entitled to terminate this Lease by virtue of
any delays in completion of such repairs and restoration. Rent, however, shall
abate on those portions of the Premises as are, from time to time, untenantable
as a result of such damage. Additionally, if Landlord has determined to repair
or restore the Premises or Building as aforesaid, Landlord shall so notify
Tenant within sixty (60) days after the date of such damage ("Repair Notice").
The Repair Notice shall include Landlord's estimate of the time required to
repair or restore. If such time estimate is less than, or equal to, nine (9)
months from the date of such damage, Tenant shall have no right to terminate the
Lease. However, if the repair estimate is greater than nine (9) months from the
date of such damage, Tenant may terminate the Lease by providing Landlord
written notice thereof within ten (10) days after receipt of the Repair Notice.
If Tenant does not terminate the Lease and should Landlord be unable to complete
the repairs within the nine (9) month repair period, Tenant shall send notice of
its intent to cancel the Lease effective on the date that is 60 days after the
expiration of the nine month repair period (the "Cancellation Effective Date").
Should Landlord complete the repairs before the Cancellation Effective Date,
Tenant's notice to cancel shall be null and void and this Lease shall continue
in full force and effect.
(b) Notwithstanding anything to the contrary herein set forth,
Landlord shall have no duty pursuant to this Paragraph 11 to repair or restore
any portion of any alterations, additions or improvements in the Premises or the
decorations thereto except to the extent that such alterations, additions,
improvements and decorations were provided by Landlord, at Landlord's cost, at
the beginning of the Term.
12. Waiver of Claims - Indemnification. To the extent not prohibited by
law, Landlord shall not be liable for, and Landlord is hereby released by Tenant
from all liability for, any damage either to person or property or resulting
from the loss of use thereof sustained by Tenant or by other persons claiming
through Tenant due to the Property or any part thereof or any appurtenances
thereof becoming out of repair, or due to the happening or any accident or event
in, on or about the Property, or due to any act or neglect of any tenant or
occupant of the Building or of any other person. This provision shall apply
particularly, but not exclusively, to damage caused by gas, electricity, snow,
frost, steam, sewage, sewer gas or odors, fire, water or by the bursting or
leaking of pipes, faucets, sprinklers, plumbing fixtures and windows, and shall
apply without distinction as to the person (whether Landlord or other) whose act
or neglect was responsible for the damage and whether or not such act or neglect
occurred before, at or after the execution of this Lease, and whether the damage
was due to any of the causes specifically enumerated above or to some other
cause of an entirely different kind. Tenant further agrees that all personal
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property of Tenant upon the Premises, or upon receiving and holding areas, or
elsewhere in, on or about the Property, shall be at the risk of Tenant only, and
that Landlord shall not be liable for any loss or damage thereto or theft
thereof. Without limitation of any other provisions hereof, Tenant agrees to
defend, protect, indemnify and save harmless Landlord from and against all
liability to third parties arising out of the acts of Tenant or any subtenant or
the servants, agents, employees, contractors, suppliers, workmen and invitees of
Tenant or any subtenant.
To the extent covered by the insurance required to be maintained by
Tenant pursuant to this Lease (plus any deductible amounts), Tenant agrees to
indemnify and save harmless, and upon request defend, Landlord against and from
any and all claims by or on behalf of any person, arising out of or related to
(a) Tenant's use or occupancy of the Premises or the conduct of its
business, or any activity, work, or thing, permitted or suffered by Tenant, in,
on or about the Premises or the Property,
(b) any occurrence, in, on or about the Premises,
(c) any breach or default on Tenant's part in the performance or
observance of, or compliance with, any term, covenant or condition on Tenant's
part to be performed pursuant to the terms of this Lease, or
(d) any act or negligence of Tenant or any subtenant, or any of
their respective agents, contractors, servants, employees, invitees or
licensees, from and against all costs, counsel fees, expenses, penalties, fines
and liabilities which Landlord may suffer or incur in connection with any such
claim and any action or proceeding brought with respect thereto. In the event
that any action or proceeding shall be brought by reason of any such claim,
against any party to be indemnified hereunder, Tenant covenants that Tenant,
upon notice from such party and at Tenant's expense, shall resist and defend
such action or proceeding by counsel reasonably satisfactory to such party. All
of Tenant's obligations under this Paragraph 12, and any and all sums due from
Tenant hereunder shall survive the expiration or termination of this Lease.
13. Nonwaiver. No waiver of any provision of this Lease shall be
implied by any failure of Landlord to enforce any remedy on account of the
violation of such provision, even if such violation be continued or repeated
subsequently, and no express waiver shall affect any provision other than the
one specified in such waiver and that one only for the time and in the manner
specifically stated. No payment by Tenant or receipt by Landlord of a lesser
amount than the rent payment herein stipulated shall be deemed to be other than
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on account of the rent, nor shall any endorsement or statement on any check or
any letter accompanying any check or payment as rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such rent or pursue any other remedy
provided in this Lease. No receipt of moneys by Landlord from Tenant after the
termination of this Lease shall in any way alter the length of the Term or of
Tenant's right of possession hereunder or after the giving of any notice shall
reinstate, continue or extend the Term or affect any notice given Tenant prior
to the receipt of such moneys, it being agreed that after the service of notice
or the commencement of a suit or after final judgment for possession of the
Premises, Landlord may receive and collect any rent due, and the payment of said
rent shall not waive or affect said notice, suit or judgment.
14. Condemnation. In the event that the whole of the Premises shall be
lawfully condemned or taken for a public or quasi-public use, so that as a
result the Premises are rendered untenantable, this Lease shall terminate as of
the date that possession is to be surrendered to the condemnor or taking
authority. In the event that there shall be a lawful condemnation or taking for
any public or quasi-public use of any part of the building, without there being
condemned or taken all of the Premises, then, at the option of Landlord,
exercisable by notice given to Tenant not later than 90 days after the date upon
which Landlord receives notice of the taking or condemnation, this Lease shall
terminate as of the date that possession of the Premises taken is required to be
surrendered to the condemnor or taking authority. In the event of any such
taking or condemnation, of all or any part of the Premises or of all or any part
of the Property, Tenant shall have no claim against Landlord and shall not have
any claim or right to any portion of the amount that may be awarded as damages
or paid as a result of such taking or condemnation; and all rights of Tenant to
damages therefore are hereby assigned by Tenant to Landlord and Tenant shall
have no claim against Landlord or the condemnor for the value of the unexpired
term of this Lease. However, the foregoing provisions of this section shall not
be construed to deprive Tenant of the right to claim and receive payment from
the condemnor or taking authority for moving and related expenses as long as
such claim or the payment thereof does not reduce the award which Landlord would
otherwise be entitled to receive. In the event of any such taking or
condemnation of part of the Premises, the Base Rent, the Tax Adjustment and the
Operating Expense Adjustment shall be proportionately reduced from the date that
possession is required to be surrendered to the condemnor or taking authority.
15. Assignment And Subletting.
(a) Tenant shall not, without the prior written consent of
Landlord, (i) assign, transfer, convey or mortgage this Lease or any interest
hereunder; (ii) suffer to occur or permit to exist any assignment of this Lease,
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or any lien or charge upon Tenant's interest, involuntarily or by operation of
law; (iii) sublet the Premises or any part thereof, or (iv) permit the use of
the Premises or any part thereof by any parties other than Tenant and its
employees. Any such action on the part of Tenant shall be void and of no effect.
Landlord's consent to any assignment, subletting or transfer or Landlord's
election to accept any assignee, subtenant or transferee as the tenant hereunder
and to collect rent from such assignee, subtenant or transferee shall be at
Landlord's sole and exclusive discretion and shall not release Tenant or any
subsequent tenant from any covenant or obligation under this Lease. Landlord's
consent to any assignment, subletting or transfer shall not constitute a waiver
of Landlord's right to withhold its consent to any future assignment,
subletting, or transfer. In no event shall this Lease be assigned or assignable
by voluntary or involuntary bankruptcy proceedings or otherwise, and in no event
shall this Lease or any rights or privileges hereunder be an asset of Tenant
under any bankruptcy, insolvency or reorganization proceedings, except as
provided by law. Provided that Tenant is not in default hereof, Landlord agrees
that it will not unreasonably withhold its consent to a proposed sublet of this
Lease. The parties acknowledge that the Landlord shall be entitled to consider,
among other things, the net worth of the proposed sublessee, the proposed use of
the proposed sublessee, whether the proposed sublessee is considering leasing
other space at the Building, the rent to be paid in connection with the proposed
sublet and any other reasonable factor in connection with its decision whether
to grant its consent to a proposed sublet.
(b) Notwithstanding the foregoing in Paragraph 15(a) above, Tenant
shall be permitted to assign this Lease or sublet all or any portion of the
Demised Premises as long as Tenant shall have met each of the following
conditions precedent, in which event Landlord's consent will not be required for
any transfer, merger, consolidation, or reorganization of Tenant, so long as in
any of the foregoing events, the transfer, merger, consolidation or
reorganization (1) is not taking place for the purpose of avoiding liability for
Tenant's obligations hereunder; and (2) results in an entity which intends to
continue the business of Tenant at the Demised Premises; and (3) the resulting
entity has a net worth which is at least the same as that of Tenant as of the
date hereof or otherwise has the financial ability, in the reasonable opinion of
Landlord's accountant, sufficient to meet the obligations of Tenant under this
Lease. Notwithstanding the foregoing, Tenant shall provide written notice to
Landlord at least 30 days prior to any sublet or assignment under this
subparagraph 15(b).
(c) At least forty five (45) days prior to any proposed subletting
or assignment, Tenant shall submit to Landlord a statement seeking Landlord's
consent and containing the name and address of the proposed subtenant or
assignee, the terms of the proposed sublease or assignment and such financial
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and other information with respect to the proposed subtenant as Landlord
reasonably may request. Landlord shall indicate its consent or non-consent
within 15 days of its receipt of said statement.
(d) In addition to withholding its consent, Landlord shall have the
additional right to terminate this Lease as to that portion of the Premises
which Tenant seeks to assign or sublet, whether by requesting Landlord's consent
thereto or otherwise. Landlord may exercise such right to terminate by giving
written notice to Tenant at any time prior to Landlord's written consent to such
assignment or sublease. In the event that Landlord exercises such right to
terminate, Landlord shall be entitled to recover possession of such portion of
the Premises on the later of (i) the proposed date for possession by such
assignee or subtenant, or (ii) seventy five (75) days after the date of
Landlord's notice of termination to Tenant.
(e) In the event that Landlord fails to exercise its termination
right and its right to withhold its consent as set forth in the preceding
paragraph, and in the event that Landlord consents to any assignment or sublease
of any portion of the Premises, as a condition of Landlord's consent, if
Landlord so elects to consent, Tenant shall pay to Landlord 90% of all profit
derived by Tenant from such assignment or sublease. Tenant shall furnish
Landlord with a sworn statement, certified by an independent certified public
accountant, setting forth in detail the computation of profit (which computation
shall be based upon generally accepted accounting principles), and Landlord, or
its representatives, shall have access to the books, records and papers of
Tenant in relation thereto, and to make copies thereof. Any rent in excess of
that paid by Tenant hereunder realized by reason of such assignment or sub-lease
shall be deemed an item of such profit. If a part of the consideration for such
assignment shall be payable other than in cash, the payment to Landlord shall be
payable in accordance with the foregoing percentage of the cash and other
non-cash considerations in such form as is satisfactory to Landlord. Such
percentage of Tenant's profits shall be paid to Landlord promptly by Tenant upon
Tenant's receipt from time to time of periodic payments from such assignee or
subtenant or at such other earlier time as Tenant shall realize its profits from
such assignment or sublease.
(f) If Tenant shall assign this Lease as permitted herein, the
assignee shall expressly assume all of the obligations of Tenant hereunder in a
written instrument satisfactory to Landlord and furnished to Landlord not later
than fifteen (15) days prior to the effective date of the assignment. If Tenant
shall sublease the Premises as permitted herein, Tenant shall obtain and furnish
to Landlord, not later than fifteen (15) days prior to the effective date of
such sublease and in form satisfactory to Landlord, the written agreement of
such subtenant to the effect that the subtenant will attorn to Landlord, at
Landlord's option and written request, in the event this Lease terminates before
the expiration of the sublease.
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(g) If Tenant is a corporation, a change or series of changes in
ownership of stock which would result in direct or indirect change in ownership
by the stockholders or an affiliated group of stockholders of more than forty
nine percent (49%) of the outstanding stock as of the date of the execution and
delivery of this Lease shall be deemed to be a transfer of this Lease for the
purpose of Paragraph 15(a). If Tenant is a partnership, joint venture, or a
limited liability company, any transaction or series of transactions (including,
without limitation, any withdrawal or admittance of a partner, or a member, as
the case may be, or any change in any partner's or member's interest, as the
case may be, in Tenant, whether voluntary, involuntary or by operation of law,
or any combination of any of the foregoing transactions) resulting in the
transfer of control of Tenant, shall be deemed to be a transfer of Tenant's
interest under this Lease for the purposes of Paragraph 15(a). The term
"control" as used in this Paragraph 15(f) means the power to directly or
indirectly direct or cause the direction of the management or policies of
Tenant.
16. Holdover. If the Tenant or any person claiming through the Tenant
shall retain possession of the Premises or any part thereof after the expiration
or earlier termination of the Term and if Landlord shall have consented to such
continuation of possession, such possession shall be (unless the parties hereto
shall otherwise have agreed in writing) deemed to be under a month-to-month
tenancy which shall continue until either party shall notify the other in
writing, at least 30 days prior to the end of any calendar month, that the party
giving such notice elects to terminate such tenancy at the end of such calendar
month, in which event such tenancy shall so terminate. Anything contained in the
foregoing provisions of this paragraph to the contrary notwithstanding, the
rental payable with respect to each such monthly period shall be 1/6 of the per
annum Base Rent as adjusted in accordance with subparagraph 4(d) hereof and 1/9
of the Tax Adjustment Amount and of the Expense Adjustment Amount (both
calculated in accordance with the provisions of Paragraph 4 hereof) which would
have been payable had this Lease been renewed until the end of the calendar year
which includes such month on the terms and conditions in effect immediately
prior to the expiration or termination of the Term; and such month-to-month
tenancy with Landlord's consent shall be upon the same terms and subject to the
same conditions as those which are set forth in this Lease except as aforesaid.
If Tenant or any person claiming through Tenant shall retain possession of the
Premises or any part thereof, after the expiration or earlier termination of the
term or of Tenant's right of possession, and if such retention shall be without
Landlord's consent, Tenant shall pay Landlord (a) for each month or portion
thereof during which such possession continues, an amount equal to the rental to
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be paid for each month pursuant to the foregoing provisions of this Paragraph
when such possession is with Landlord's consent, plus all other sums which would
have been payable hereunder had the term continued during such retention of
possession and (b) all other damages sustained by Landlord, whether direct or
consequential, by reason of such retention of possession. During any such
retention of possession without Landlord's consent, all of Tenant's obligations
with respect to the use, occupancy and maintenance of the Premises shall
continue. The provisions of this Paragraph shall not be deemed to limit or
constitute a waiver of any other rights or remedies of Landlord provided herein
or at law or in equity and applicable to unlawful retention of possession or
otherwise.
17. Estoppel Certificate. Tenant shall from time to time, within ten
days after Tenant's receipt of Landlord's request therefor, execute, enseal,
acknowledge and deliver to Landlord, or as Landlord may direct, a written
instrument in recordable form (a) certifying (i) that this Lease is in full
force and effect and has not been modified, supplemented or amended in any way
(or, if there have been modifications, supplements or amendments thereto, that
it is in full force and effect as modified, supplemented or amended, and stating
such modifications, supplements and amendments) and that this Lease (as
modified, supplemented or amended, as aforesaid) represents the entire agreement
among Landlord and Tenant as to the Premises and the leasehold; (ii) the dates
to which the Base Rent, additional rent and other charges arising hereunder have
been paid, (iii) the amount of any prepaid rents or credits due to Tenant, if
any; and (iv) that if applicable, Tenant has entered into occupancy of the
Premises; (v) the date on which the Term shall have commenced and the
corresponding expiration date; and (b) stating, to the best knowledge of Tenant,
whether or not all conditions under the Lease to be performed by Landlord prior
the date of such certificate have been satisfied and whether or not Landlord is
then in default in the performance of any covenant, agreement or condition
contained in this Lease and specifying, if any, each such unsatisfied condition
and each such default; and (c) stating any other fact or certifying any other
condition reasonably requested by Landlord or by any mortgagee or prospective
mortgagee or purchaser of the Property or of any interest therein. In the event
that Tenant shall fail to complete, execute and deliver any such instrument
within ten (10) days after Landlord's request therefor, in addition to
committing a default hereunder, Tenant shall be deemed to have irrevocably
appointed Landlord or Beneficiary (if Landlord is a trustee of a land trust) as
Tenant's attorney-in-fact to execute and deliver any such instrument or
instruments in Tenant's name.
18. Subordination.
(a) This Lease shall be subject and subordinate at all times to the
lien of any mortgage or deed of trust, heretofore or hereafter placed by
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Landlord upon any or all of the Premises or the Building the Land, the Property,
or any interest therein and of all renewals, modifications, consolidations,
replacements and extensions thereof (all of which are hereinafter referred to
collectively as a "Mortgage"), all automatically and without the necessity of
any further act on the part of Tenant to effectuate such subordination provided
that the current holder of the first mortgage encumbering the Property executes
and deliveres to Tenant its standard form of subordination and non-disturbance
agreement. With respect to holders of mortgages placed of record after the date
of this Lease, upon written request by Tenant, Landlord shall use commercially
reasonable efforts to have said mortgagee(s) provide Tenant a subordination and
non-disturbance agreement. However, Landlord does not ensure that such agreement
will be made available to Tenant and it is expressly agreed that Landlord shall
have fulfilled its obligations hereunder by using commercially reasonable
efforts to obtain such agreement. Tenant shall, at the request of the holder of
a Mortgage (the "Mortgagee"), upon foreclosure thereof attorn to the Mortgagee.
Tenant shall also execute, enseal, acknowledge and deliver, within 15 days after
Tenant's receipt of demand from Landlord or the Mortgagee such further
instrument or instruments evidencing such subordination of Tenant's right, title
and interest under this Lease to the lien of the Mortgage, and such further
instrument or instruments of attornment, as shall be desired by the Mortgagee.
In the event that Tenant shall fail to complete, execute and deliver any such
instrument within ten (10) days after Landlord's request therefor, in addition
to committing a default hereunder, Tenant shall be deemed to have irrevocably
appointed Landlord or Beneficiary (if Landlord is a trustee of a land trust) as
Tenant's attorney-in-fact to execute and deliver any such instrument or
instruments in Tenant's name.
(b) Anything contained in the foregoing provisions of this
Paragraph to the contrary notwithstanding, any Mortgagee may at any time
subordinate its Mortgage to this Lease, without the necessity of obtaining
Tenant's consent, by giving notice of the same in writing to Tenant, and
thereupon this Lease shall be deemed to be prior to such mortgage without regard
to their respective dates of execution, delivery or recordation and/or the date
of commencement of Tenant's possession, and in that event the Mortgagee shall
have the same rights with respect to this Lease as though this Lease shall have
been executed, delivered and recorded prior to the execution and delivery of the
Mortgage.
(c) If Landlord is or becomes lessee of premises of which the
Premises are a part, Tenant agrees that, automatically and without the necessity
of any further act, Tenant's possession shall be as a subtenant and shall be
subordinate to the interest of Landlord's lessor, its heirs, personal
representatives, successors and assigns (which lessor, its heirs, personal
representatives, successors and assigns, or any of them, is hereinafter called
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"Paramount Lessor"), but notwithstanding the foregoing, if Landlord's tenancy
shall terminate by expiration, by forfeiture or otherwise, then Tenant hereby
agrees, upon request of Paramount Lessor, to attorn to Paramount Lessor, and to
recognize such lessor as Tenant's landlord for the balance of the term of this
Lease and any extensions or renewals hereof. Tenant shall execute, enseal,
acknowledge and deliver, upon demand by Landlord or Paramount Lessor, such
further instrument or instruments evidencing such subordination of Tenant's
right, title and interest under this Lease to the interest of such lessor, and
such further instrument or instruments of attornment, as shall be prescribed by
the Paramount Lessor.
(d) It is further agreed that if any Mortgage shall be foreclosed,
or if the lease of the Paramount Lessor be terminated, (A) the liability of the
Mortgagee or purchaser at such foreclosure sale, or the Paramount Lessor, as the
case may be, or the liability of a subsequent owner designated as landlord under
this Lease shall exist only so long as such Mortgagee, Paramount Lessor, or such
subsequent owner, as the case may be, is the owner of the Property, or any
portion thereof, and such liability shall not continue or survive after further
transfer of ownership; (B) the Mortgagee, or Paramount Lessor, or such
subsequent owner, as the case may be, and their respective successors or assigns
that succeed to the interest of the Landlord in the Building or the Land, or
acquires the right to possession of the Property, or any portion thereof, shall
not be (1) liable for any act or omission of the party named above as the
Landlord under this Lease; (2) liable for the performance of Landlord's
covenants pursuant to the provisions of this Lease which arise and accrue prior
to such entity succeeding to the interest of Landlord under this Lease or
acquiring such right to possession; (3) subject to any offsets or defenses which
Tenant may have at any time against Landlord; and (4) bound by any rent which
Tenant may have paid previously for more than one month; and (C) upon request of
the Mortgagee, if the Mortgage shall be foreclosed, Tenant will attorn, as
Tenant under this Lease, to the purchaser at any foreclosure sale under any
Mortgage.
19. Certain Rights Reserved By Landlord. Landlord shall have the
following rights, each of which Landlord may exercise without notice to Tenant
and without liability to Tenant for damage or injury to property, person or
business on account of the exercise thereof (except that Landlord shall use
commercially reasonable efforts not to materially disrupt Tenant's business
operations during the exercising of any such rights), and the exercise of any
such rights shall not be deemed to constitute an eviction or disturbance of
Tenant's use or possession of the Premises and shall not give rise to any claim
for set-off or abatement of rent or any other claim:
(a) To change the Building's name or street address.
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(b) To install, affix and maintain any and all signs on the
exterior and on the interior of the Building.
(c) To decorate or to make repairs, alterations, additions, or
improvements, whether structural or otherwise (including alterations in the
configuration of the common area), in and about the Building, or any part
thereof, and for such purposes to enter upon the Premises, and during the
continuance of any of said work, to temporarily close doors, entryways, public
space and corridors in the Building and to interrupt or temporarily suspend
services or use of facilities.
(d) To furnish door keys for the entry door(s) in the Premises at
the commencement of the Lease and to retain at all times, and to use in
appropriate instances, keys to all doors within and into the Premises. Tenant
agrees to purchase for $2.50 per key and $15.00 per card key only from Landlord
or Landlord's designee, additional duplicate keys or card keys as required, to
change no locks, and to affix no locks on doors without the prior written
consent of the Landlord. Notwithstanding the provisions for Landlord's access to
Premises, Tenant relieves and releases the Landlord of all responsibility
arising out of theft, robbery and pilferage. Upon the expiration of the Term or
of Lessee's right to possession, Tenant shall return all keys to Landlord and
shall disclose to Landlord the combination of any safes, cabinets or vaults left
in the Premises.
(e) To designate and approve all window coverings used in the
Building.
(f) To approve the weight, size and location of safes, vaults and
other heavy equipment and articles in and about the Premises and the Building so
as not to exceed the live load per square foot designated by the structural
engineers for the Building, and to require all such items and furniture and
similar items to be moved into or out of the Building and Premises only at such
times and in such manner as Landlord shall direct in writing. Tenant shall not
install or operate machinery or any mechanical devices of a nature not directly
related to Tenant's ordinary use of the Premises without the prior written
consent of Landlord, which consent shall not be unreasonably withheld nor
delayed. Tenant's movements of property into or out of the Building or Premises
and within the Building are entirely at the risk and responsibility of Tenant,
and Landlord reserves the right to require permits before allowing any property
to be moved into or out of the Building or Premises.
(g) To establish controls for the purpose of regulating all
property and packages, both personal and otherwise, to be moved into or out of
the Building and Premises and all persons using the Building after normal office
hours.
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(h) To regulate delivery and service of supplies in order to insure
the cleanliness and security of the Premises and to avoid congestion of
receiving areas and freight elevators.
(i) To show the Premises to lenders, purchasers and investors at
reasonable hours and to prospective tenants at reasonable hours during the last
twelve months of the Term and, if vacated or abandoned, to show the Premises at
any time and to prepare the Premises for re-occupancy.
(j) To erect, use and maintain pipes, ducts, wiring and conduits,
and appurtenances thereto, in and through the Premises at reasonable locations.
Landlord shall use reasonable efforts to perform such work in a non-intrusive
and non-visible manner.
(k) To enter the Premises at any reasonable time to inspect the
Premises.
(1) To grant to any person or to reserve unto itself the exclusive
right to conduct any business or render any service in the Building. If Landlord
elects to make available to tenants in the Building any services or supplies, or
arranges a master contract therefor, Tenant agrees to obtain its requirements,
if any, therefore from Landlord or under any such contact, provided that the
charges therefor are reasonable.
(m) To prescribe the location and style of the suite number and
identification sign or lettering for the Premises.
(n) To grant to anyone the right to conduct any business or render
any service in the Building, whether or not it is the same as or similar to the
use expressly permitted to Tenant by Paragraph 5 hereof.
(o) To require all persons entering or leaving the Building during
such hours as Landlord may from time to time reasonably determine to identify
themselves to security personnel by registration or otherwise in accordance with
Building security controls, and to establish their right to enter or leave in
accordance with Exhibit C attached to this Lease.
20. Rules and Regulations. Tenant shall, and shall cause all of its
subtenants and occupants, its and their agents, employees, invitees and
licensees to, observe faithfully, and comply strictly with, the rules and
regulations attached to this Lease as Exhibit "C", as they may be supplemented
and revised by Landlord from time to time, for all tenants, and such other rules
and regulations promulgated from time to time by Landlord for all tenants, as in
the Landlord's judgment may be desirable for the safety, care and cleanliness of
the Building and the Premises, or for the preservation of good order therein.
Landlord shall not be liable to Tenant for violation of such rules and
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regulations by, or for Landlord's failure to enforce the same against, any other
tenant, its subtenants and occupants and its and their agents, employees,
invitees or licensees, nor shall any such violation or failure constitute, or be
treated as contributing to, an eviction, actual or constructive, or affect
Tenant's covenants and obligations hereunder, or allow Tenant to reduce, abate
or offset the payment of any rent under this Lease.
21. Landlord's Remedies. If default shall be made in the payment of any
rent or any installment thereof or in the payment of any other sum required to
be paid by Tenant under this Lease or under the terms of any other agreement
between Landlord and Tenant and such default shall continue for five (5) days,
or if default shall be made in the observance or performance of any of the other
agreements, covenants or conditions in this Lease (or in any other agreement
between Landlord and Tenant) which Tenant is required to observe and perform and
such default shall continue for 30 days after written notice to Tenant, or if a
default hereunder (or thereunder) involves a hazardous condition and is not
cured by Tenant immediately upon written notice to Tenant, or if the interest of
Tenant in this Lease shall be levied on under execution or other legal process,
or if any voluntary petition in bankruptcy or any similar relief shall be filed
by Tenant, or if any involuntary petition in bankruptcy shall be filed against
Tenant under any federal or state bankruptcy or insolvency act and shall not
have been dismissed within 30 days from the filing thereof, or if a receiver
shall be appointed for Tenant or any of the property of Tenant by any court and
such receiver shall not have been dismissed within 30 days from the date of his
appointment, or if Tenant shall make an assignment for the benefit of creditors,
or if Tenant shall admit in writing Tenant's inability to meet Tenant's debts as
they mature, or if Tenant shall cease to occupy the Premises for a period of
seven (7) days during the Term (other than during the last sixty (60) days of
the Term or if Tenant has ceased to occupy the Premises due solely to Landlord's
inability to accommodate Tenant's needs for additional space in the Building),
or if Tenant fails to observe or perform any of the covenants with respect to
assignment, subletting or transfer set forth in paragraph 15 hereof, or if
Landlord, on more than two (2) occasions within any twelve-month period, gives
Tenant written notice concerning Tenant's failure to timely pay rent, the
Landlord may treat the occurrence of any one or more of the foregoing events as
a breach of this Lease, and thereupon at its option may, without notice or
demand of any kind to Tenant or any other person, have any one or more of the
following described remedies in addition to all other rights and remedies
provided at law or in equity or elsewhere herein:
(a) The whole balance of rent, charges and all other sums payable
hereunder, whether or not payable as rent, for the entire balance of the Term,
and any renewal or extension thereof, herein reserved or agreed to be paid by
Tenant, or any part of such rent, charges and other sums, and also all or any
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costs and sheriff's, marshal's, constable's or other official's commissions,
whether chargeable to Landlord or Tenant, including watchman's wages
(collectively the "Outstanding Amount"), shall be taken to be due and payable
from Tenant and in arrears as if by the terms of this Lease said balance of
rent, charges and other sums and expenses were on that date payable in advance;
provided, however, that the amount of any such judgment for the above-referenced
Outstanding Amount which shall be due from Tenant to Landlord shall be
discounted to present value using an interest factor of 8 percent per annum;
and/or
(b) Landlord may terminate this Lease and the Term, in which event
Landlord may forthwith repossess the Premises by legal proceedings, force or
otherwise; and/or
(c) Landlord may terminate Tenant's right of possession and may
repossess the Premises by legal proceedings, force or otherwise, without
terminating this Lease. After reentry or retaking or recovering of the Premises,
whether by termination of this Lease or not, Landlord may, but shall be under no
obligation to, relet the same or a portion thereof for such rent and upon such
terms as shall be deemed advisable by Landlord; and whether or not the Premises
are relet, Tenant shall be liable for any loss of rent for such period as would
be the balance of the term of this Lease and any renewals thereof plus the costs
and expenses of reletting and of redecorating, remodelling and making repairs
and alterations to the Premises for the purpose of reletting, the amount of such
liability to be computed monthly and paid by Tenant to Landlord at the end of
each month. Landlord shall use its commercially reasonable efforts to relet the
Premises provided, however, Landlord shall not be obligated to relet the
Premises before any other vacant space in the Building. Landlord shall in no
event be liable for, nor shall any damages or other sums to be paid by Tenant to
Landlord be reduced by, failure to relet the Premises or failure to collect the
rent from any reletting. Tenant shall not be entitled to any rents received by
Landlord in excess of the rents provided for in this Lease. Tenant agrees that
Landlord may file suit to recover any sums falling due under the terms of this
Paragraph 21 from time to time and that no suit or recovery of any portion due
Landlord hereunder shall be any defense to any subsequent action brought for any
amount not theretofore reduced to judgment in favor of Landlord; and/or
(d) Landlord may enforce the provisions of this Lease and may
enforce and protect the rights of Landlord hereunder by a suit or suits in
equity or at law for the specific performance of any covenant or agreement
contained herein, and for the enforcement of any other appropriate legal or
equitable remedy, including, without limitation, injunctive relief, and for
recovery of all moneys due or to become due from Tenant under any of the
provisions of this Lease.
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If any payment of rent or any other sum, or any part of any such
payment, to be made by Tenant under the terms of this Lease shall become overdue
for a period in excess of five days Tenant shall pay to Landlord (x) a "late
charge" of $.04 for each dollar so overdue, for the purpose of defraying the
expense incident to handling such overdue or delinquent payment, and (y)
interest on the overdue amount at the Lease Interest Rate (defined below) from
the date when such payment was due until the date paid, but in no event more
than the amount or rate which is the maximum amount or rate Landlord may
lawfully charge in respect of Tenant in such circumstances under applicable law.
The "Lease Interest Rate" shall mean the greater of 15% per annum or such
variable per annum rate which is from time to time equal to 3% above the base
rate as stated by Citibank, N.A. or its successor, or, in the absence of there
being a successor to Citibank, N.A. by such other bank having an office in the
City of New York as Landlord may from time to time select. Nothing herein shall
be construed as waiving any rights of Landlord arising out of any default of
Tenant by reason of Landlord's accepting any such late charge or interest; the
right to collect a late charge and interest is separate and apart from any other
rights or remedies of Landlord after default by Tenant.
Without limiting the generality of the foregoing, if Tenant shall be in
default in the performance of any of its obligations hereunder (after the
expiration of applicable notice and cure periods, if any), Landlord, without
being required to give Tenant any notice or opportunity to cure, may (but shall
not be obligated to do so), in addition to any other rights it may have in law
or in equity, cure such default on behalf of Tenant, and Tenant shall reimburse
Landlord upon demand for any sums paid or costs incurred by Landlord in curing
such default, including reasonable attorneys' fees and other legal expenses,
together with interest at the Lease Interest Rate from the dates of Landlord's
incurring of costs or expenses.
Tenant further waives the right to any notices to quit as may be
specified in the Landlord and Tenant Act of Pennsylvania, Act of April 6, 1951,
as amended, or any similar or successor provision of law, and agrees that five
days notice shall be sufficient in any case where a longer period may be
statutorily specified.
In addition to, and not in lieu of any of the foregoing rights granted
to Landlord;
(i) [INTENTIONALLY OMITTED]
(ii) When this Lease or Tenant's right of possession shall be
terminated by covenant or condition broken, or for any other reason, either
during the Term of this Lease or any renewal or extension thereof, and also when
and as soon as the Term hereby created or any extension thereof shall have
expired, it shall be lawful for any attorney as attorney for Tenant to file an
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agreement for entering in any competent Court an action to confess judgment in
ejectment against Tenant and all persons claiming under Tenant, whereupon, if
Landlord so desires, a writ of Execution or of Possession may issue forthwith,
without any prior writ of proceedings, whatsoever, and provided that if for any
reason after such action shall have been commenced the same shall be determined
and the possession of the Premises hereby demised remain in or be restored to
Tenant, Landlord shall have the right upon any subsequent default or defaults,
or upon the termination of this Lease as hereinbefore set forth, to bring one or
more action or actions as hereinbefore set forth to recover possession of the
said Premises.
In any action to confess judgment in ejectment, Landlord shall first
cause to be filed in such action an affidavit made by it or someone acting for
it setting forth the facts necessary to authorize the entry of judgment, of
which facts such affidavit shall be conclusive evidence, and if a true copy of
this Lease (and of the truth of the copy such affidavit shall be sufficient
evidence) be filed in such action, it shall not be necessary to file the
original as a warrant of attorney, any rule of Court, custom or practice to the
contrary notwithstanding.
All remedies available to Landlord hereunder and otherwise available at
law or in equity shall be cumulative and concurrent. No determination of this
Lease nor taking or recovering possession of the Premises shall deprive Landlord
of any remedies or actions against Tenant for rent, for charges, or for damages
for the breach of any term, covenant or condition herein contained, nor shall
the bringing of any such action for rent, charges or breach of term, covenant or
condition, nor the resort to any other remedy or right for the recovery of rent,
charges or damages for such breach be construed as a waiver or release of the
right to insist upon the forfeiture and to obtain possession. The failure of
Landlord to insist upon strict and/or prompt performance of the terms,
agreements, covenants and conditions of this Lease or any of them, and/or the
acceptance of such performance thereafter shall not constitute or be construed
as a waiver of Landlord's right to thereafter enforce the same strictly
according to the tenor thereof in the event of a continuing or subsequent
default.
22. Expenses of Enforcement. Tenant shall pay upon demand all
Landlord's costs, charges and expenses including the fees and out-of-pocket
expenses of counsel, agents and others retained by Landlord incurred in
enforcing Tenant's obligations hereunder or incurred by Landlord in any
litigation, negotiation or transaction in which the Tenant causes the Landlord
without the Landlord's fault to become involved or concerned.
23. Covenant of Quiet Enjoyment. Landlord covenants that Tenant, on
paying the rent, charges for services and other payments herein reserved or
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required and on keeping, observing and performing all the other material terms,
covenants, conditions, provisions and agreements herein contained on the part of
the Tenant to be kept, observed and performed, shall, during the Term, peaceably
and quietly have, hold and enjoy the Premises subject to the terms, covenants,
conditions, provisions and agreements hereof.
24. Letter of Credit. Notwithstanding any provision of this Section 24,
upon execution of this Lease, Tenant shall deliver to Landlord an irrevocable
one (1) year Letter of Credit in the amount of One Hundred Ninety-One Thousand
Dollars ($191,000.00) and in the form attached hereto as Exhibit "F" . Said
Letter of Credit shall be established with a federally insured financial
institution satisfactory to Landlord. Tenant shall renew such Letter of Credit
as required by this paragraph for each year (and partial year) of the Term, and
shall deliver to Landlord written proof that the same has been timely renewed at
least thirty (30) days prior to the expiration thereof. The Letter of Credit
shall authorize Landlord, at Landlord's sole option, to draw upon the Letter of
Credit by a draft delivered to the issuer thereof accompanied by an affidavit of
an authorized agent of Landlord certifying that: (i) the Tenant is in default
under the Lease beyond any applicable cure periods, if any, or (ii) that Tenant
has failed to timely renew the Letter of Credit. In either such case, Landlord
shall be entitled to draw upon the entire amount thereof (the "Collateral") to
cure any outstanding default, or, at Landlord's sole option, to apply towards
future rent due under the Lease or otherwise as set forth below. Tenant's
failure to timely deliver or renew said Letter of Credit shall constitute a
default under the Lease.
If Tenant fails to perform any of its obligations hereunder, after
expiration of any applicable notice or grace periods, Landlord may use, apply or
retain the whole or any part of the Collateral for the payment of (a) any rent
or other sums of money which Tenant may not have paid when due, (b) any sum
expended by Landlord on Tenant's behalf in accordance with the provisions of
this Lease, and/or (c) any sum which Landlord may expend or be required to
expend by reason of Tenant's default, including, without limitation, any damage
or deficiency in or from the reletting of the Premises as provided in Paragraph
21. The use, application or retention of the Collateral, or any portion thereof,
by Landlord shall not prevent Landlord from exercising any other right or remedy
provided by this Lease or by law (it being intended that Landlord shall not
first be required to proceed against the Collateral) and shall not operate as a
limitation on any recovery to which Landlord may otherwise be entitled. If any
portion of the Collateral is used, applied or retained by Landlord for the
purposes set forth above, Tenant agrees, within ten days after the written
demand therefor is made by Landlord, to deposit cash with the Landlord in an
amount sufficient to restore the Collateral to its original amount.
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Tenant acknowledges that Landlord has the right to transfer or mortgage
its interest in the Land and the Building and in this Lease and Tenant agrees
that in the event of any such transfer or mortgage, Landlord shall have the
right to transfer or assign the Collateral to the transferee or mortgagee. In
the event of any such transfer or mortgage, the issuer of the Letter of Credit
shall re-issue the same in favor of the transferee or mortgagee within ten (10)
days of Landlord's written instructions. Upon written acknowledgement of
transferee's or mortgagee's receipt of such Collateral, Landlord shall thereby
be released by Tenant from all liability or obligation for the return of such
Collateral and Tenant shall look solely to such transferee or mortgagee for the
return of the Collateral.
25. Real Estate Broker. Tenant represents that Tenant has dealt with
(and only with) Binswanger and Jackson-CrossoONCOR International as brokers in
connection with this Lease, whose commission Landlord hereby agrees to pay
pursuant to separate agreement between such brokers and Landlord. Insofar as
Tenant knows, no other broker negotiated this Lease or is entitled to any
commission in connection therewith. Landlord and Tenant agree to indemnify,
defend and hold each other harmless from and against any claims, for a
commission or other compensation in connection with this Lease, made by any
broker or finder other than the brokers named above who claims to have dealt
with or communicated with Landlord or Tenant as the case may be, in connection
with this Lease, provided that either party has not in fact retained such broker
or finder and has not agreed to pay such broker(s) fees.
26. Miscellaneous.
(a) Rights Cumulative. All rights and remedies of Landlord under
this Lease shall be cumulative and none shall exclude any other rights or
remedies allowed by law, in equity or otherwise.
(b) Captions and Usage. The titles appearing in connection with the
various sections and paragraphs of this lease are for convenience only; they are
not intended to indicate all of the subject matter in the text and they are not
to be used in interpreting this Lease nor for any other purpose in the event of
any controversy. As used herein (i) the term "person" shall be deemed to include
a natural person, a trustee, a corporation, a joint venture, a partnership, a
limited liability company, a governmental unit and any other form of legal
entity; (ii) all usages in the singular or plural number shall be deemed to have
been made, respectively, in the plural or singular number as well; the use of
any gender includes all genders.
(c) Binding Effect. Each of the provisions of this Lease shall
extend to and shall, as the case may require, bind or inure to the benefit not
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only of the Landlord and of Tenant, but also of their respective successors or
assigns, provided this clause shall not permit any assignment by Tenant contrary
to the provisions of Paragraph 15 hereof.
(d) Lease Contains All Terms. All of the representations and
obligations of Landlord are contained herein, and no modification, waiver or
amendment of this Lease or of any of its conditions or provisions shall be
binding upon the parties unless in writing signed by both parties or by a duly
authorized agent of such party empowered by a written authority signed by such
party.
(e) Delivery for Examination. Submission of the form of the
Lease for examination shall not bind Landlord in any manner, and no Lease or
obligations of the Landlord shall arise until this instrument is signed by both
Landlord and Tenant and delivery is made to each; provided, however, the
execution and delivery by Tenant of this Lease to Landlord or Manager, or the
leasing agent of the Building shall constitute an irrevocable offer by Tenant to
lease the Premises on the terms and conditions herein contained, which offer may
not be revoked for thirty (30) days after such delivery.
(f) No Air Rights. No rights to any view or to light or air over
any property, whether belonging to Landlord or any other person, are granted to
Tenant by this Lease.
(g) Modification of Lease. If any prospective Mortgagee or
Paramount Lessor requires that certain modifications be made to this Lease,
which modifications will not require Tenant to pay any additional amounts or
otherwise change materially the rights or obligations of Tenant hereunder,
Tenant shall, within ten (10) days following Landlord's request, execute and
deliver appropriate instruments effecting such modifications. Tenant's failure
to complete, execute and deliver any such modifications within five (5) days
after Landlord's request therefor shall be deemed a material default under
Paragraph 21 hereof, or, at Landlord's sole option, Tenant shall be deemed to
have irrevocably appointed Landlord or Beneficiary (if Landlord is a trustee of
a land trust) as Tenant's attorney-in-fact to execute and deliver such
modifications in Tenant's name.
(h) [INTENTIONALLY OMITTED
(i) Transfer of Landlord's Interest. Notwithstanding anything
contained herein to the contrary, Tenant agrees that neither Landlord nor any
partner in Landlord or Beneficiary, as the case may be, nor any other person
having any interest, direct or indirect, immediate or more removed than
immediate, in Landlord or Beneficiary, as the case may be, shall have any
personal liability with respect to any of the provisions of this Lease and
Tenant shall look solely to the estate and property of Landlord in the Land and
the Building for the satisfaction of Tenant's remedies, including without
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limitation, the collection of any judgment or the enforcement of other judicial
process requiring the payment or expenditure of money by Landlord, subject,
however, to the prior rights of any Mortgagee, and no other assets of Landlord
and Beneficiary (if Landlord is a trustee of a land trust) or its partners, or
of any other aforesaid person having an interest in Landlord or Beneficiary, as
the case may be, shall be subject to levy, execution or other judicial process
for the satisfaction of Tenant's claims. Without limitation of the foregoing,
upon each transfer of the Land and the Building and the landlord's interest in
this Lease, the transferor shall automatically be released from all liability
under this Lease. Tenant further acknowledges that Landlord may assign its
interest in this Lease to a mortgage lender as additional security and agrees
that such an assignment shall not release Landlord from its obligations
hereunder and that, subject to the other provisions of this Section, Tenant
shall continue to look to Landlord for the performance of its obligations
hereunder.
(j) Prohibition Against Recording. Neither this Lease, nor any
memorandum, affidavit or other writing with respect thereto, shall be recorded
by Tenant or by anyone acting through, under or on behalf of Tenant, and the
recording thereof in violation of this provision shall make this Lease null and
void at Landlord's election.
(k) Covenants and Conditions. All of the covenants of Tenant
hereunder shall be deemed and construed to also be "conditions", if Landlord so
elects, as well as "covenants" as though the words specifically expressing or
importing covenants and conditions were used in each separate instance.
(l) Relationship of Parties. Nothing contained in this Lease shall
be deemed or construed by the parties hereto or by any third party to create the
relationship of principal and agent, partnership, joint venturer or any
association between Landlord and Tenant, it being expressly understood and
agreed that neither the method of computation of rent nor any act of the parties
hereto shall be deemed to create any relationship between Landlord and Tenant
other than the relationship of landlord and tenant.
(m) Application of Payments. Landlord shall have the right to apply
payments received from Tenant pursuant to this Lease (regardless of Tenant's
designation of such payments) to satisfy any obligations of Tenant hereunder, in
such order and amounts, as Landlord in its sole discretion, may elect.
(n) Partial Invalidity. If any term, provision or condition
contained in this Lease shall, to any extent, be invalid or unenforceable, the
remainder of this Lease (or the application of such term, provision or condition
to persons or circumstances other than those in respect of which it is invalid
or unenforceable) shall not be affected thereby, and each and every other term,
provision and condition of this Lease shall be valid and enforceable to the
fullest extent possible permitted by law.
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(o) Waiver of Trial by Jury. Landlord and Tenant hereby do waive
trial by jury in any action, proceeding or counterclaim brought by either of the
parties hereto against the other on any matter whatsoever arising out of, or in
any way connected with, this Lease, the relationship of Landlord and Tenant,
Tenant's use or occupancy of the Premises, or any claim of injury or damage in
any emergency statutory or any other statutory remedy.
(p) Tenant's Authority. Tenant hereby represents that Tenant is a
corporation, duly organized pursuant to the laws of the Commonwealth of
Pennsylvania, and is authorized to conduct business in the Commonwealth of
Pennsylvania. Upon the execution of this Lease, Tenant shall furnish Landlord
with a certified copy of _________, certified by Tenant's secretary as being a
true and correct copy of such _____________. The persons executing this Lease on
behalf of Tenant further represent and warrant that they are duly authorized to
do so, and that they occupy the positions with Tenant as delineated on the
signature page(s) of this Lease.
(q) Moving Allowance. Provided Tenant is not in default hereunder,
Landlord shall reimburse Tenant an amount not to exceed $50,860.00 (the "Moving
Allowance"). Payment shall be conditioned upon presentation of paid invoices
equal to, or in excess of, the Moving Allowance. Such expenditures shall have
been incurred in the relocation of Tenant's personal property and equipment from
its current place of business to the Premises.
(r) Landlord Representation. Landlord hereby represents and
warrants that as of the date hereof, it is the fee simple owner of the Building
and the Premises and it has the right and authority to lease the Premises to
Tenant pursuant to this Lease.
27. Notices. All notices to be given under this Lease shall be in
writing and delivered personally or by reputable overnight courier, or deposited
in the United States mail, certified or registered mail with return receipt
requested, postage prepaid, addressed as follows:
If to Landlord:
Philadelphia Freedom Partners, L.P.
c/o Amerimar Triad Management Company, Inc.
Triad Building - Suite 320
2200 Renaissance Boulevard
King of Prussia, PA 19406
Attention: Property Manager
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with a copy to:
Amerimar Enterprises, Inc.
210 West Rittenhouse Square, Suite 1900
Philadelphia, PA 19103
Attention: Gerald Marshall
Howard Treatman, Esquire
or to such other person or such other address designated by notice sent by
Landlord or Tenant.
If to Tenant:
At the address set forth at the
beginning of this Lease,
With a copy to:
Brad Molotsky, Esquire
Pepper, Hamilton & Sheetz
3000 Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103-2799
And after occupancy of the Premises by Tenant, at the Premises, or to such other
address as is designated by Tenant in a notice to Landlord.
Notice by mail shall be deemed to have been given when deposited in the United
States mail as aforesaid. Notice from the building or property manger shall be
deemed to be notice from Landlord. If Tenant vacates the Premises, then notices
may be served on the Tenant's registered agent, or if there be no agent, then
notices may be by publication.
28. Hazardous Materials. (a) Tenant shall not transport, use, store,
maintain, generate, manufacture, handle, dispose, release or discharge any
"Hazardous Material" (as defined below) upon or about the Property, nor permit
Tenant's employees, agents, contractors, and other occupants of the Premises to
engage in such activities upon or about the Property. However, the foregoing
provisions shall not prohibit the transportation to and from, and use, storage,
maintenance and handling within, the Premises of substances customarily used in
offices (or such other business or activity expressly permitted to be undertaken
in the Premises under Paragraph 5); provided that such substances shall be used
and maintained only in such quantities as are reasonably necessary for such
permitted use of the Premises, strictly in accordance with applicable law and
the manufacturers' instructions thereto, and any remaining such substances shall
be completely, properly and lawfully removed from the Property upon expiration
or earlier termination of this Lease.
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(b) Tenant shall promptly notify Landlord of: (i) any enforcement,
cleanup or other regulatory action taken or threatened by any governmental or
regulatory authority with respect to the presence of any Hazardous Material on
the Premises or the migration thereof from or to other property, (ii) any
demands or claims made or threatened by any party against Tenant or the Premises
relating to any loss or injury resulting from any Hazardous Material, (iii) any
release, discharge or nonroutine, improper or unlawful disposal or
transportation of any Hazardous Material on or from the Premises, and (iv) any
matters where Tenant is required by law to give a notice to any governmental
regulatory authority respecting any Hazardous Materials on the Premises.
Landlord shall have the right (but not the obligation) to join and participate,
as a party, in any legal proceedings or actions affecting the Premises initiated
in connection with any environmental, health or safety law. At such times as
Landlord may reasonably request, Tenant shall provide Landlord with a written
list identifying any Hazardous Material then used, stored, or maintained upon
the Premises, the use and approximate quantity of each such material, a copy of
any material safety data sheet ("MSDS") issued by the manufacturer therefor,
written information concerning the removal, transportation and disposal of the
same, and such other information as Landlord may reasonably require or as may be
required by law. The term "Hazardous Material" for purposes hereof shall mean
any chemical, substance, material or waste or component thereof which is now or
hereafter listed, defined or regulated as a hazardous toxic chemical, substance,
material or waste or component thereof by any federal, state or local governing
or regulatory body having jurisdiction, or which would trigger any employee or
community "right-to-know" requirements adopted by any such body, for which any
such body has adopted any requirements for the preparation or distribution of an
MSDS.
(c) If any Hazardous Material is released, discharged or disposed of by
Tenant or any other occupant of the Premises, or their employees, agents or
contractors, on or about the Property in violation of the foregoing provisions,
Tenant shall immediately, properly and in compliance with applicable laws clean
up and remove the Hazardous Material from the Property and any other affected
property and clean or replace any affected personal property (whether or not
owned by Landlord), at Tenant's expense. Such clean up and removal work shall be
subject to Landlord's prior written approval (except in emergencies), and shall
include, without limitation, any testing, investigation, and the preparation and
implementation of any remedial action plan required by any governmental body
having jurisdiction or reasonably required by Landlord. If Tenant shall fail to
comply with the provisions of this Article within five (5) days after written
notice by Landlord, or such shorter time as may be required by law or in order
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to minimize any hazard to persons or property, Landlord may (but shall not be
obligated to) arrange for such compliance directly or as Tenant's agent through
contractors or other parties selected by Landlord, at Tenant's expense (without
limiting Landlord's other remedies under this Lease or applicable law).
29. ADA. The parties acknowledge that the Americans with Disabilities Act of
1990 (42 U.S.C. ss.12101 et seq.) and regulations and guidelines promulgated
thereunder, as amended and supplemented from time to time (collectively referred
to herein as the "ADA") establish requirements under Title III of the ADA
("Title III") pertaining to business operations, accessibility and barrier
removal, and that such requirements may be unclear and may or may not apply to
the Premises and the Building. The parties acknowledge and agree that Tenant has
been provided an opportunity to inspect the Premises and the Building sufficient
to determine whether or not the Premises and the Building in their condition as
of the date hereof deviate in any manner from the ADA Accessibility Guidelines
("ADAAG") or any other requirements under the ADA pertaining to the
accessibility of the Premises or the Building. Tenant further acknowledges and
agrees that except as may otherwise be specifically provided herein, Tenant
accepts the Premises and the Building in "as-is" condition and agrees that
Landlord makes no representation or warranty as to whether the Premises or the
Building conform to the requirements of the ADAAG or any other requirements
under the ADA pertaining to the accessibility of the Premises or the Building.
Tenant has prepared or reviewed the plans and specifications for the Landlord's
Work and the Tenant's Work within the Premises and the architect hired to
prepare such plans will independently determine that such plans and
specifications are in conformance with the ADAAG and any other requirements of
the ADA. Tenant further acknowledges and agrees that to the extent that Landlord
prepared, reviewed or approved any of those plans and specifications, such
action shall in no event be deemed any representation or warranty that the same
comply with any requirements of the ADA. Notwithstanding anything to the
contrary in this Lease, the parties hereby agree to allocate responsibility for
Title III compliance as follows: (a) Tenant shall be responsible for all Title
III compliance and costs in connection with the Premises, including structural
work, if any, and including any leasehold improvements or other work to be
performed in the Premises under or in connection with this Lease, and (b)
Landlord shall perform, and Tenant shall be responsible for the cost of, any
so-called Title III "path of travel" requirements triggered by any construction
activities or alterations in the Premises. Except as set forth above with
respect to Landlord's Title III obligations, tenant shall be solely responsible
for all other requirements under the ADA relating to the Tenant or any
affiliates or persons or entities related to the Tenant (collectively,
"Affiliates"), operations of the Tenant or Affiliates, or the Premises,
including, without limitation, requirements under Title I of the ADA pertaining
to Tenant's employees.
40
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant, intending to be legally bound
hereby, have executed this Agreement of Office Lease as of the day and year
first above written.
TENANT: LANDLORD:
OWOSSO CORPORATION PHILADELPHIA FREEDOM PARTNERS,
L.P.
By: John H. Wert, Jr.
---------------------------------
By: Amerimar Triad Management
Its: Svp. Finance & CFO Co., Inc., as Agent for
----------------------- Owner
(Title)
Attest: John A. Craft By: Steven Gleason
----------------------------- ------------------------------
Its: Director Corporate Accounting Its: President
-------------------------------- -----------------------------
41
<PAGE>
EXHIBIT A
[This Exhibit includes a plan of the leased premises]
<PAGE>
EXHIBIT B
LANDLORD'S WORK
Work to be completed as set forth on Plan SK-2 dated August 20, 1996 by Polek
Schwartz Architects for Owosso Corporation (Project Number 96-020-135), Triad
Building, First Floor, "B" wing.
<PAGE>
EXHIBIT C TO LEASE
FOR
THE TRIAD BUILDING
KING OF PRUSSIA, PA
RULES AND REGULATIONS
(a) Any sign, lettering, picture, notice, or advertisement installed
within Tenant's Premises which is visible to the public from within the Building
shall be installed at Tenant's cost and in such manner, character and style as
Landlord may approve in writing. No sign, lettering, picture, notice or
advertisement shall be placed on any outside window or in any position so as to
be visible from inside or outside the Building.
(b) The use of the name of the Building or of pictures or illustrations
of the Building in advertising or other publicity, without prior written consent
of Landlord, is prohibited.
(c) Tenant, its subtenants and its and their customers, invitees,
licensees, and guests
(i) shall not obstruct sidewalks, entrances, passages, atrium,
courts, corridors, vestibules, halls, elevators and stairways in and about the
Building,
(ii) shall not use sidewalks, entrances, passages, atrium, courts,
corridors, vestibules, halls, elevators and stairways, outside of the Premises,
in and about the Building, for storage or as a waiting area or reception area,
(iii) shall not place objects against glass partitions or doors or
windows or adjacent to any open common space which would be unsightly from the
Building corridors or from the exterior of the Building, and will promptly
remove the same upon notice from Landlord,
(iv) shall not make noises, cause disturbances, conduct itself or
permit its employees, agents, licensees, invitees or contractors to conduct
themselves in a manner inconsistent with the comfort, safety or convenience of
other tenants or the first-class character of the Building or create vibrations,
odors or noxious fumes or use or operate any electrical or electronic devices or
other devices that emit sound, waves or are dangerous to other tenants and
occupants of the Building or that would interfere with the operation of any
<PAGE>
device or equipment or radio or television broadcasting or reception from or
within the Building or elsewhere, and shall not place or install any
projections, antennae, aerials or similar devices inside or outside of the
Premises,
(v) shall not make any room-to-room canvass to solicit business
from other tenants in the Building, and shall not exhibit, sell or offer to
sell, use, rent or exchange any item or services in or from the Premises unless
ordinarily embraced within the Tenant's use of the Premises as specified in its
lease,
(vi) shall refrain from attempting to adjust any controls,
(vii) shall not waste, and shall not suffer or permit to be wasted,
electricity or water and shall cooperate fully with Landlord to assure the most
effective operation of the Building's heating and air conditioning,
(viii) shall keep public corridor doors closed, and
(ix) shall neither install nor operate machinery or any mechanical
devices of a nature not directly related to Tenant's ordinary use of the
Premises without the written permission of the Landlord.
(d) Bicycles shall not be permitted in the Building in other than
Landlord-designated locations.
(e) Tenant assumes full responsibility for protecting its space from
theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed and secured.
(f) Peddlers, solicitors and beggars shall be reported to the office of
the Building or as Landlord otherwise requests.
(g) No person or contractor not employed by Landlord shall be used to
perform window washing, cleaning, or other work in the Premises.
(h) Unless Landlord so consents, Tenant shall not, and Tenant shall not
permit or suffer anyone to:
(i) Cook in the premises other than a microwave oven as part of
pantry operations;
(ii) Place vending or dispensing machines of any kind in or about
the Premises; or
(iii) At any time sell, purchase or give away, or permit the sale,
purchase or gift of, food in any form.
-2-
<PAGE>
(iv) Use the Premises for lodging or for any immoral or illegal
purposes.
(v) Use the Premises to engage in the manufacture or sale of, or
permit the use of, any spirituous, fermented, intoxicating or alcoholic
beverages on the Premises.
(vi) Use the premises to engage in the manufacture or sale of, or
permit the use of, any illegal drugs.
(i) Tenant must move into the Building only between the hours of 6:00
p.m. and 11:00 p.m. Monday through Friday or Saturday and Sunday between the
hours of 10:00 a.m. and 3:30 p.m. Tenant must move out of the Building only
between the aforementioned hours. Tenant must pay prevailing wages to
maintenance crew per man for assisting Tenant's move-out.
(j) Access to the Building or to the halls, corridors, elevators and
stairways in the Building may be restricted, and access at all times shall be
gained only by exhibiting an appropriate security pass or by otherwise complying
with the established Building security regulations. Landlord may from time to
time establish security controls and regulations for the purpose of regulating
or restricting access to the Building, and Landlord may restrict access to
washrooms by key, key combination or other security device. Tenant shall abide
by all such security controls and regulations so established.
(k) A directory of the Building shall be located in the lobby of the
Building and one line thereof shall be available for Tenant's name and will be
provided at the expense of Landlord. Any additional names or modifications to
existing name(s) requested by Tenant in the directory other than Tenant's name
must be approved by Landlord in writing, and, if so approved, will be provided
at the sole expense of Tenant.
(l) Service requirements of Tenant will be attended to only upon
application at the management office for the Building. Employees of Landlord,
its beneficiaries or the managing agent of the Property shall not perform any
work or do anything outside of their duties unless under special instructions
from Landlord.
(m) The toilet rooms, urinals, wash bowls and the other bathroom
apparatus shall not be used for any purpose other than that for which they were
constructed, and no foreign substance of any kind whatsoever shall be thrown
therein, and the expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees,
agents, licensees, invitees or contractors, shall have caused it.
-3-
<PAGE>
(n) Tenant shall not use or permit to be brought into the Premises or
the Building any flammable oils or fluids, or any explosive or other articles
deemed hazardous to persons or property, or do or permit to be done anything in
or upon the Premises, or bring or keep anything therein, which shall not comply
with all rules, orders, regulations or requirements of any organization, bureau,
department or body having jurisdiction with respect thereto (and Tenant shall at
all time comply with all such rules, orders, regulations or requirements), or
which shall invalidate or increase the rate of insurance on the Building, its
appurtenances, contents or operation.
(o) Tenant shall not attach or permit to be attached additional locks
or similar devices to any door or window, change existing locks or the
mechanisms thereof, or make or permit to be made any keys or security access
cards for any door other than those provided by Landlord. If more than two keys
or security access cards are desired, Landlord will provide them to Tenant upon
payment therefor by Tenant. Upon termination of this Lease or of Tenant's
possession, Tenant shall surrender all keys or security access cards to the
Premises and all keys or security access cards for offices, rooms or toilet
rooms which have been furnished to Tenant or which Tenant shall have made, and
in the event of loss of any keys or security access cards so furnished, Tenant
shall pay Landlord therefor.
-4-
<PAGE>
EXHIBIT D
---------
Schedule of Base Rent
---------------------
Annual Monthly
Period Base Rent Base Rent
- ------ --------- ---------
October 1, 1996 -
September 30, 1997 $186,020.45 $ 15,501.70
October 1, 1997 -
September 30, 1998 $231,031.55 $ 19,252.63
October 1, 1998 -
September 30, 1999 $255,952.95 $ 21,329.41
October 1, 1999 -
September 30, 2006 $305,160.00 $ 25,430.00
<PAGE>
EXHIBIT F
Form of Letter of Credit
------------------------
[Bank Letterhead]
Irrevocable Unconditional Letter of Credit No. _________
August ______, 1996
Philadelphia Freedom Partners, L.P.
c/o Amerimar Enterprises, Inc.
210 W. Rittenhouse Square
Suite 1900
Philadelphia, PA 19103
Dear Sir/Madam:
By order of our client, Owosso Corporation, a Pennsylvania corporation
("Owosso"), we hereby open our irrevocable, unconditional Letter of Credit No.
________ in favor of Philadelphia Freedom Partners, L.P., for an amount equal
to One Hundred Ninety-One Thousand Dollars ($191,000.00), U.S., effective
immediately.
This Letter of Credit shall expire automatically on September 30, 1997 ("First
Expiry Date"), unless extended or terminated as set forth herein. This Letter of
Credit shall be automatically extended, without amendment (except for the amount
of a permitted site draft as described below), for nine (9) additional one (1)
year periods on each anniversary of the First Expiry Date (each an "Extended
Expiry Date") unless Philadelphia Freedom Partners, L.P.
receives written notice from us, ______________________________________________
__________________________________________("Issuer"), by certified mail, return
receipt requested, at least thirty (30) days prior to the First Expiry Date or
Extended Expiry Date then in effect, that this Letter of Credit will not be
extended for an additional one (1) year period ("Notice"). If Issuer gives such
Notice, this Letter of Credit shall expire at the close of business at the
offices of Issuer on the First Expiry Date or Extended Expiry Date, as
applicable.
Site drafts may be made in the full face amount or in any partial amount. Funds
under this Letter of Credit are available to you against your site draft on us
mentioning thereon our Letter of Credit No. ____, accompanied by an affidavit
of an authorized agent of Landlord certifying that: (i) Owosso is in default
under the Lease beyond any applicable cure periods, if any, or (ii) Owosso has
-6-
<PAGE>
Philadelphia Freedom Partners, L.P.
c/o Amerimar Enterprises, Inc.
August , 1996
Page -2-
failed to timely renew this Letter of Credit, or (iii) Issuer has sent us timely
notice that this Letter of Credit will not be extended for an additional one (1)
year period, and Owosso has not provided us with a satisfactory replacement at
least thirty (30) days prior to the First Expiry Date or Extended Expiry Date,
as applicable.
This Letter of Credit is transferable and may be transferred one or more times
upon receipt of your written instructions. We will reissue this Letter of Credit
in favor of any transferee within ten (10) days of the date of your written
instructions.
We hereby agree with you that all site drafts drawn in accordance with the terms
of this Letter of Credit will be duly honored upon presentment and delivery to
Issuer's office at ____________________________________________________________
__________________________________________on or before the First Expiry Date or
the Extended Expiry Date, as applicable. If a site draft is delivered to us on
or before 12:00 noon on any day on which we are open for business, it will be
will honored and paid on the next day on which we are open for business, and
if a site draft is delivered to us after 12:00 noon on any day on which we are
open for business, it will be will honored and paid on the second day
thereafter on which we are open for business.
Except as otherwise specified herein, this Letter of Credit is subject to the
Uniform Customs and Practice for Documentary Credits, International Chamber of
Commerce Publication No. 500, 1993 revision ("UCP"), and shall be subject to the
Pennsylvania Uniform Commercial Code with respect to those matters not addressed
by the UCP.
Very truly yours,
[Name of Bank]
By:
--------------------------------
Title:
-----------------------------
-7-
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Jurisdiction of Other Names under which
Subsidiaries of the Company Incorporation Subsidiary does Business
Ahab Investment Company Delaware N/A
Cramer Company Delaware N/A
DewEze Manufacturing, Company Pennsylvania Parker Industries
Great Bend Manufacturing
Company, Inc. Kansas N/A
The Landover Company Pennsylvania Dura-Bond Bearing Co.
Motor Products -
Ohio Corporation Delaware N/A
Motor Products -
Owosso Corporation Delaware N/A
Owosso Motor Group, Inc. -------- --------
Snowmax, Incorporated Pennsylvania N/A
Snyder Industries, Inc. -------- --------
Sooner Trailer Manufacturing Co. Delaware N/A
Stature Electric, Inc. New York N/A
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-98474 of Owosso Corporation on Form S-8 and Registration Statement
No. 33-99526 of Owosso Corporation on Form S-3 of our report dated December 5,
1996, appearing in this Annual Report on Form 10-K of Owosso Corporation for
the year ended October 27, 1996.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
January 23, 1997
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-27-1996
<PERIOD-END> OCT-27-1996
<CASH> 839,889
<SECURITIES> 0
<RECEIVABLES> 18,415,245
<ALLOWANCES> 509,000
<INVENTORY> 19,123,122
<CURRENT-ASSETS> 41,055,191
<PP&E> 49,393,369
<DEPRECIATION> 23,084,560
<TOTAL-ASSETS> 107,895,345
<CURRENT-LIABILITIES> 20,670,110
<BONDS> 53,814,050
0
13,667,814
<COMMON> 58,650
<OTHER-SE> 23,293,705
<TOTAL-LIABILITY-AND-EQUITY> 107,895,345
<SALES> 128,215,995
<TOTAL-REVENUES> 128,418,179
<CGS> 98,282,019
<TOTAL-COSTS> 98,282,019
<OTHER-EXPENSES> 23,932,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,080,762
<INCOME-PRETAX> 2,122,971
<INCOME-TAX> 1,275,000
<INCOME-CONTINUING> 847,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 847,971
<EPS-PRIMARY> (0.03)
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