10-K 1 ten-k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: October 27, 2002 Commission file number: 0-25066 OWOSSO CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-2756709 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 22543 Fisher Road, PO Box 6660, Watertown, New York 13601 --------------------------------------------------------- (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (315) 782-5910 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by a check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES [ ] NO [X]. The aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $1,750,000 as of April 26, 2002 (based upon the closing price for shares of the registrant's common stock as reported on The Nasdaq SmallCap Market for April 26, 2002, the last business day of the registrant's most recently completed second fiscal quarter). As of January 7, 2003, 5,824,306 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 April 3, 2003 are incorporated by reference into Part III of this Form 10-K. PART I Item 1. Business. As of July 30, 2002, Owosso Corporation (the "Company") had one operating subsidiary, Stature Electric, Inc. ("Stature"), representing the Company's historical "Motors segment." Stature is a custom designer and manufacturer of motors and gear motors, including AC, DC, and Universal. Established in 1974 in Watertown, New York, Stature is a progressive company, which emphasizes a partnership approach in all aspects of its business. Significant markets for Stature include commercial products and equipment, healthcare, recreation and non-automotive transportation. Stature's component products are sold throughout North America and in Europe, primarily to original equipment manufacturers who use them in their end products. In 1998, the Company formulated a long-term plan to concentrate on value-added components for industry. In connection with its implementation of that plan, the Company began a series of divestitures beginning with the sale of the four businesses comprising its historical Agricultural Equipment segment. The sale of the last of those businesses was completed in January 2001 with the divestiture of Sooner Trailer Manufacturing Company ("Sooner Trailer"). During that time, however, the Company experienced a significant down-turn in its operating results and at the end of fiscal 2000 was out of compliance with covenants under its bank credit facility. Throughout fiscal 2001, the Company remained out of compliance with financial covenants, including maintenance of minimum operating profit, under its bank credit facility. As a result, the Company and its lenders entered into a series of amendments to the facility during fiscal 2001 and 2002, and in each case the Company's lenders agreed to forebear from exercising their rights and remedies under the facility. In order to meet the lenders' requirements for reduced outstanding balances and to secure the lenders' agreement to forebear, the Company engaged in a series of divestitures of its operating subsidiaries, concluding with the sale of its Motor Products subsidiaries, Motor Products Owosso Corporation and Motor Products Ohio Corporation in July of 2002. As disclosed under Note 11 "Long-term Debt," the amendments to the bank credit facility modified the interest rates charged, called for reductions in the outstanding balance during calendar 2001 and 2002, added additional reporting requirements, suspended payments of principal and interest on subordinated debt, prohibited the payment of preferred or common dividends, prohibited the purchase of the Company's stock and added a covenant requiring the maintenance of minimum operating profit. In December 2002, the Company entered into a further amendment to the facility which extended the maturity date to December 31, 2003. This amendment requires further reductions in the outstanding balance based on expected future asset sales and cash flow generated from operations. Management intends to dispose of or liquidate additional non-operating assets during fiscal 2003, including real estate at the Company's former Cramer Company ("Cramer") and Snowmax Corporation subsidiaries and various notes receivable, which arose from previous asset divestitures. Proceeds from these sales and collections, which are expected to be between $1.5 and $2.5 million net of taxes, and an anticipated tax refund of approximately $1.3 million will be utilized to further reduce the Company's outstanding balance under its bank credit facility. Management believes that, along with the sale of assets, the tax refund, available cash and cash equivalents, cash flows from operations and available borrowings under the Company's bank credit facility will be sufficient to fund the Company's operating activities, investing activities and debt maturities for fiscal 2003. In addition, management believes that the Company will be in compliance with its bank covenant requirements throughout fiscal 2003. It is management's intent to refinance the Company's bank credit facility prior to its maturity in December 2003. However, there can be no assurance that management's plans will be successfully executed. On July 30, 2002, the Company completed the sale of all of the outstanding stock of its Motor Products subsidiaries, manufacturers of fractional and integral horsepower motors. The purchase price paid by Hathaway Motion Control Corporation (the "Buyer") for the outstanding stock of Motor Products consisted of $11.5 million in cash and a promissory note in the principal amount of $300,000, payable six months after closing. Net cash proceeds of $10.7 million from the sale, after payment of certain transaction costs, were utilized to reduce outstanding bank debt. As a result of this transaction, the Company presently has only one operating subsidiary, Stature. The Company's historical Other segment included Dura-Bond Bearing Company ("Dura-Bond") and Cramer Company ("Cramer"). Dura-Bond manufactured replacement camshaft bearings, valve seats and shims for the automotive after-market. On November 2, 2000, the Company completed the sale of the stock of Dura-Bond to a joint venture formed by Melling Tool Company of Jackson, Michigan and Engine Power Components, Inc. of Grand Haven, Michigan (the "Joint Venture"). The Joint Venture acquired the stock of Dura-Bond for approximately $4.6 million, the net assets of which included debt of approximately $5.0 million. Based upon the terms of the sale, the Company recorded, in the fourth quarter of fiscal 2000, a pretax charge of $1.2 million to adjust the carrying value of Dura-Bond's assets to their estimated fair value. Such charge represented a reduction in goodwill and was included in "Write-down of net assets held for sale" in the consolidated statements of operations for fiscal 2001. Cramer manufactured timers and subfractional horsepower motors for use in commercial applications. On December 4, 2000, the Company completed the sale of the assets associated with the timer and switch line of Cramer to Capewell Components, LLC of South Windsor, Connecticut for cash of approximately $2.0 million, plus the assumption of approximately $400,000 in liabilities. As a result of the sale, the name of the company was changed from M.H. Rhodes, Inc. to Cramer Company. In connection with the sale of the timer and switch line and the anticipated sale of the remainder of the operating assets (excluding the real estate) of Cramer, the Company recorded, in the fourth quarter of fiscal 2000, a pretax charge of $1.6 million to adjust the carrying value for the Cramer assets to their estimated fair value, based upon an estimated sales price of the assets. Such charge represented the write-down of goodwill of $400,000 and the write-down of other non-current assets of $1.2 million and was included in "Write-down of net assets held for sale" in the consolidated statements of operations for fiscal 2000. On September 23, 2001, the Company sold substantially all of the remaining operating assets (excluding the real estate) of Cramer to the Chestnut Group of Wayne, Pennsylvania for cash proceeds of $565,000, plus the assumption of $317,000 in liabilities. In connection with that sale, the Company recorded a further adjustment to the carrying value of the Cramer assets resulting in a pre-tax charge of $1.1 million, recorded in the third fiscal quarter of 2001. The Company recorded a pretax charge of $270,000 in the fourth quarter of 2002 to adjust the carrying value for the Cramer real estate to the estimated fair value, based upon an estimated sales price of the assets and was included in "Write-down of net assets held for sale" in the consolidated statements of operations for fiscal 2002. The Company's historical Coils segment manufactured heat exchange coils and included Astro Air Coils, Inc. ("Astro Air"), Snowmax, Inc. ("Snowmax"), and Astro Air UK, Limited ("Astro UK"). Astro UK was a joint venture with the Company's largest customer, Bergstrom, Inc. On May 9, 2001, the sale of substantially all of the assets of Astro UK to ACR Heat Transfer Limited of Norfolk, England for cash of (pound)450,000 (approximately $643,000) was completed. Based upon the terms of the sale, the Company recorded, in the second quarter of 2001, a pretax charge of $700,000 to adjust the carrying value of Astro UK's assets to their estimated realizable value. No additional gain or loss was recorded upon completion of the sale. Proceeds from the sale were utilized to reduce the Company's bank credit facility. 2 On October 26, 2001, the Company completed the sale of the assets of the remaining businesses in its Coils segment, Astro Air and Snowmax (together, the "Coils Subsidiaries"). The sale of the Coils Subsidiaries was effectuated pursuant to an Asset Purchase Agreement, dated as of October 26, 2001, by and among the Coils Subsidiaries, Astro Air, Inc. (the "Buyer"), and Rex Dacus, the manager of the Coils segment and the person from whom the Company acquired the assets and operations of Astro Air Coils, Inc. in 1998. Proceeds from the sale of $5.6 million were utilized to reduce the Company's bank credit facility. The Buyer also assumed approximately $3.7 million of liabilities. The Company recorded a pretax charge of $9.3 million related to this sale in the fourth quarter of 2001. The Company recorded a charge of $520,000 net of taxes in the fourth quarter of 2002 to adjust the carrying value for the real estate assets to the estimated fair value, based upon an estimated sales price of the assets. The Company has reported the results of the Coils segment as discontinued operations for all periods presented in the consolidated statements of operations. On January 24, 2001, the Company completed the sale of stock of Sooner Trailer to the McCasland Investment Group and certain members of Sooner Trailer's management for cash of $11.5 million, subject to certain post-closing adjustments based on changes in working capital, plus the assumption of debt of approximately $670,000. In May 2001, the Company received approximately $2.0 million related to such post-closing adjustments. In connection with the anticipated sale, the Company recognized a loss of $8.6 million in the fourth quarter of 2000 to adjust the carrying value of Sooner Trailer's assets to their estimated fair value based on an expected sales price. No additional gain or loss was recorded upon completion of the sale. Sooner Trailer had been included in the Company's historical Agricultural Equipment segment (formerly known as the Trailers and Agricultural Equipment segment). Accordingly, the Company has reported the results of Sooner Trailer as discontinued operations for all periods presented in the consolidated statements of operations. The Company was incorporated in Pennsylvania and organized as a holding company in 1994. The holding company structure separated the administrative and financing activities of the Company from the activities of its operating subsidiaries. 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 anticipates it will have no significant problems with respect to sources or availability of the raw materials or component parts essential to the conduct of its business. No material portion of the Company's business is seasonal, nor was any historical segment's seasonal. A significant portion of the Company's sales are concentrated among a small number of customers. Sales to the two largest customers represented approximately 14%, 15% and 12% of total sales from continuing operations for 2002, 2001 and 2000, respectively. The Company's backlog of unfilled orders for the historical Motors segment was $5.5 million as of December 12, 2002, as compared to $12.3 million as of December 23, 2001. The backlog for 2001 includes the Motor Products subsidiaries. The Company's business is highly competitive. Competition is based primarily on design and application engineering capabilities and product reliability and quality, as well as price. The Company has approximately 200 employees and believes that its relationship with its employees is good. The Company is subject to federal, state and local environmental regulations with respect to its operations. The Company believes that it is operating in substantial compliance with applicable environmental regulations. Manufacturing and other operations at the Company's facilities may result, and may have resulted, in the discharge and release of hazardous substances and wastes from time to time. The Company routinely responds to such incidents as deemed appropriate pursuant to applicable federal, state and local environmental regulations. The Company's manufacturing operations involve the storage, use, handling and disposal of various hazardous substances and wastes. Under applicable 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 3 from such property. The Company is also subject to the federal Occupational Safety and Health Act and similar state statutes. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters." 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 $20.0 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 officer(s) of the registrant The sole executive officer of the Company is: Name Age Positions ---- --- --------- George B. Lemmon, Jr. ...... 41 President, Chief Executive Officer, and Director George B. Lemmon, Jr. became President of the Company in May 1996, and has served as Chief Executive Officer of the Company since August 1995 and as a director of the Company since its inception in March 1994. Mr. Lemmon has been acting as the Company's principle accounting officer and principle financial officer since February 2002. Prior to joining the Company, Mr. Lemmon was the CFO of Brynavon Group, a private equity firm that contributed part of its investment portfolio to the Company in exchange for shares during the initial public offering of the Company in October of 1994. Item 2. Properties. The Company's principal executive offices and manufacturing, warehousing and distribution facility are located at 22543 Fisher Road, Watertown, New York. This facility consists of approximately 112,000 square feet, of which 107,800 square feet are dedicated to manufacturing, warehousing and distribution, with the remaining portion dedicated to office space. This facility is utilized by Stature, the Company's sole remaining business, and is subject to a mortgage securing a $4.6 million industrial revenue bond financing. The Company's former principal executive offices, located at 2200 Renaissance Boulevard, King of Prussia, Pennsylvania, are still under lease. This location consists of approximately 12,700 square feet of office space. The lease, which expires in September 2006, requires annual rental payments of approximately $305,000 plus taxes and certain other charges. In 2000, the Company entered into a sublease agreement for approximately 5,000 square feet of this office space. Under the sublease agreement, which expires in September 2006, the Company receives annual sublease rental payments aggregating $119,000. The Company is actively seeking to sublease the remaining 7,700 square feet of space. The Company continues to own a 92,000 square foot manufacturing facility located in Avon, Connecticut which housed the Company's former Cramer subsidiary, and a 90,000 square foot manufacturing facility located in Kilgore, Texas, which housed the Company's former Snowmax subsidiary. The Company is actively seeking to sell these facilities. 4 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. As discussed in Item 7 under "Environmental Matters," the Company is a party to various legal proceedings concerning environmental regulations. In addition, the Company is a party to various lawsuits arising in the ordinary course of business, none of which is expected to be material with respect to the business assets or continuing operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 5 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's common stock began its listing on the Nasdaq SmallCap Market under the symbol "OWOS" in February 2001. Prior to that, the Company's common stock was listed on the Nasdaq National Market. During the second quarter of fiscal of 2002, the Company was notified by the Nasdaq Stock Market that the Company's stock was to be delisted from the Nasdaq SmallCap Market for failure to meet the SmallCap Market's criteria of continued listing, including the $1.00 per share minimum bid price. The Company announced it would appeal the delisting, and in the fourth quarter of fiscal 2002 the Company received notice from the Nasdaq Stock Market that the Company had met certain of the continued listing criteria for the SmallCap Market, and that the Company would have an additional 180 calendar days, or until February 10, 2003, to demonstrate compliance with the SmallCap Market's $1.00 per share minimum bid price requirement. The Company can make no assurances that it will be able to demonstrate compliance with the $1.00 per share minimum bid price requirement. The following table sets forth, for the fiscal quarters indicated, the high and low sales prices per share for the Company's common stock. Fiscal year ended October 27, 2002: High Low ---- --- First Quarter $0.550 $0.100 Second Quarter $0.780 $0.210 Third Quarter $0.850 $0.290 Fourth Quarter $0.805 $0.450 Fiscal year ended October 28, 2001: High Low ---- --- First Quarter $2.000 $0.813 Second Quarter $1.953 $0.720 Third Quarter $1.250 $0.860 Fourth Quarter $1.000 $0.300 As of January 9, 2003, there were approximately 120 holders of record of the Company's common stock and an estimated number of beneficial owners of the common stock of approximately 450. Effective for the second quarter of 2000, the Company modified certain covenants included in its bank credit facility. In connection with such modifications, the Company was, and continues to be, prohibited from making common stock dividend payments subsequent to August 28, 2000. Further modifications to the Company's bank credit facility in February 2001 resulted in the Company also being prohibited from making future preferred stock dividend payments and from purchasing the Company's stock. 6 Item 6. Selected Financial Data. The information set forth below, which has been derived from the audited consolidated financial statements of the Company, has been restated to reflect the Coils segment and Agricultural Equipment as discontinued operations and 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."

-------------------------------------------------------------------------------- (1) Includes the results of operations of the Company's former Parker Industries subsidiary through its disposition on March 5, 1999. Fiscal 1999 included 53 weeks, while the other years presented included 52 weeks. (2) Includes the results of operations of the Company's former subsidiaries, Great Bend Manufacturing, Inc. and DewEze Manufacturing, Inc., through their dates of disposition, April 26, 1998 and July 24, 1998, respectively. Also includes the results of operations of Astro Air and Cramer from their dates of acquisition, April 26, 1998 and June 30, 1998, respectively. (3) EBITDA represents income from continuing operations before income taxes, interest expense, other income and expense, gain on the sale of businesses, write-down of net assets held for sale, restructuring charges, and depreciation and amortization expenses. EBITDA has been presented because the Company believes it is commonly used in this or a similar format by investors to analyze and compare operating performance and to determine a company's ability to service and/or incur debt. However, EBITDA should not be considered in isolation or as a substitute for net income, cash flow from operations or any other measure of income or cash flow that is prepared in accordance with generally accepted accounting principles, or as a measure of a company's profitability or liquidity. EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements, including the Consolidated Statements of Cash Flows, and the related notes thereto included elsewhere herein. (4) The results include Motor Products which was sold July, 30, 2002 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. General As of July 30, 2002, Owosso Corporation (the "Company") had one operating subsidiary, Stature Electric, Inc. ("Stature"), representing the Company's historical "Motors segment." Stature is a custom designer and manufacturer of motors and gear motors, including AC, DC and Universal. Established in 1974 in Watertown, New York, Stature is a progressive company, which emphasizes a partnership approach in all aspects of its business. Significant markets for Stature include commercial products and equipment, healthcare, recreation and non-automotive transportation. Stature's component products are sold throughout North America and in Europe, primarily to original equipment manufacturers who use them in their end products. In 1998, Company formulated a long-term plan to concentrate on value-added components for industry. In connection with its implementation of that plan, the Company began a series of divestitures beginning with the sale of the four businesses comprising its former Agricultural Equipment segment. The sale of the last of those businesses was completed in January 2001 with the divestiture of Sooner Trailer Manufacturing Company ("Sooner Trailer"). During that time, however, the Company experienced a significant downturn in its operating results and at the end of fiscal 2000 was out of compliance with covenants under its bank credit facility. Throughout fiscal 2001, the Company remained out of compliance with financial covenants, including maintenance of minimum operating profit, under its bank credit facility. As a result, the Company and its lenders entered into a series of amendments to the facility during fiscal 2001 and 2002, and in each case the Company's lenders agreed to forebear from exercising their rights and remedies under the facility. In order to meet the lenders' requirements for reduced outstanding balances and to secure the lenders' agreement to forebear, the Company engaged in a series of divestitures of its operating subsidiaries, concluding with the sale of its Motor Products subsidiaries, Motor Products Owosso Corporation and Motor Products Ohio Corporation in July of 2002. As disclosed under Note 11 "Long-term Debt," the amendments to the bank credit facility modified the interest rates charged, called for reductions in the outstanding balance during calendar 2001 and 2002, added additional reporting requirements, suspended payments of principal and interest on subordinated debt, prohibited the payment of preferred or common dividends, prohibited the purchase of the Company's stock and added a covenant requiring the maintenance of minimum operating profit. In December 2002, the Company entered into a further amendment to the facility which extended the maturity date to December 31, 2003. This amendment requires further reductions in the outstanding balance based on expected future asset sales and cash flow generated from operations. Management intends to dispose of or liquidate additional non-operating assets during fiscal 2003, including real estate at the Company's former Cramer Company ("Cramer") and Snowmax Corporation subsidiaries and various notes receivable which arose from previous asset divestitures. Proceeds from these sales and collections, which are expected to be between $1.5 and $2.5 million net of taxes, and an anticipated tax refund of approximately $1.3 million will be utilized to further reduce the Company's outstanding balance under its bank credit facility. Management believes that, along with the sale of assets, the tax refund, available cash and cash equivalents, cash flows from operations and available borrowings under the Company's bank credit facility will be sufficient to fund the Company's operating activities, investing activities and debt maturities for fiscal 2003. In addition, management believes that the Company will be in compliance with its bank covenant requirements throughout fiscal 2003. It is management's intent to refinance the Company's bank credit facility prior to its maturity in December 2003. However, there can be no assurance that management's plans will be successfully executed. 9 On July 30, 2002, the Company completed the sale of all of the outstanding stock of its Motor Products subsidiaries, manufacturers of fractional and integral horsepower motors. The purchase price paid by Hathaway Motion Control Corporation (the "Buyer") for the outstanding stock of Motor Products consisted of $11.5 million in cash and a promissory note in the principal amount of $300,000, payable six months after closing. Net cash proceeds of $10.7 million from the sale, after payment of certain transaction costs, were utilized to reduce outstanding bank debt. As a result of this transaction, the Company presently has only one operating subsidiary, Stature. The Company's historical Other segment included Dura-Bond Bearing Company ("Dura-Bond") and Cramer Company ("Cramer"). Dura-Bond manufactured replacement camshaft bearings, valve seats and shims for the automotive after-market. On November 2, 2000, the Company completed the sale of the stock of Dura-Bond to a joint venture formed by Melling Tool Company of Jackson, Michigan and Engine Power Components, Inc. of Grand Haven, Michigan (the "Joint Venture"). The Joint Venture acquired the stock of Dura-Bond for approximately $4.6 million, the net assets of which included debt of approximately $5.0 million. Based upon the terms of the sale, the Company recorded, in the fourth quarter of fiscal 2000, a pretax charge of $1.2 million to adjust the carrying value of Dura-Bond's assets to their estimated fair value. Such charge represented a reduction in goodwill and was included in "Write-down of net assets held for sale" in the consolidated statements of operations for fiscal 2001. Cramer manufactured timers and subfractional horsepower motors for use in commercial applications. On December 4, 2000, the Company completed the sale of the assets associated with the timer and switch line of Cramer to Capewell Components, LLC of South Windsor, Connecticut for cash of approximately $2.0 million, plus the assumption of approximately $400,000 in liabilities. As a result of the sale, the name of the company was changed from M.H. Rhodes, Inc. to Cramer Company. In connection with the sale of the timer and switch line and the anticipated sale of the remainder of the operating assets (excluding the real estate) of Cramer, the Company recorded, in the fourth quarter of fiscal 2000, a pretax charge of $1.6 million to adjust the carrying value for the Cramer assets to their estimated fair value, based upon an estimated sales price of the assets. Such charge represented the write-down of goodwill of $400,000 and the write-down of other non-current assets of $1.2 million and was included in "Write-down of net assets held for sale" in the consolidated statements of operations for fiscal 2000. On September 23, 2001, the Company sold substantially all of the remaining operating assets (excluding the real estate) of Cramer to the Chestnut Group of Wayne, Pennsylvania for cash proceeds of $565,000, plus the assumption of $317,000 in liabilities. In connection with that sale, the Company recorded a further adjustment to the carrying value of the Cramer assets resulting in a pre-tax charge of $1.1 million, recorded in the third fiscal quarter of 2001. The Company recorded a pretax charge of $270,000 in the fourth quarter of 2002 to adjust the carrying value for the Cramer real estate to the estimated fair value, based upon an estimated sales price of the assets and was included in "Write-down of net assets held for sale" in the consolidated statements of operations for fiscal 2002. The Company's historical Coils segment manufactured heat exchange coils and included Astro Air Coils, Inc. ("Astro Air"), Snowmax, Inc. ("Snowmax"), and Astro Air UK, Limited ("Astro UK"). Astro UK was a joint venture with the Company's largest customer, Bergstrom, Inc. On May 9, 2001, the sale of substantially all of the assets of Astro UK to ACR Heat Transfer Limited of Norfolk, England for cash of (pound)450,000 (approximately $643,000) was completed. Based upon the terms of the sale, the Company recorded, in the second quarter of 2001, a pretax charge of $700,000 to adjust the carrying value of Astro UK's assets to their estimated realizable value. No additional gain or loss was recorded upon completion of the sale. Proceeds from the sale were utilized to reduce the Company's bank credit facility. 10 On October 26, 2001, the Company completed the sale of the assets of the remaining businesses in its Coils segment, Astro Air and Snowmax (together, the "Coils Subsidiaries"). The sale of the Coils Subsidiaries was effectuated pursuant to an Asset Purchase Agreement, dated as of October 26, 2001, by and among the Coils Subsidiaries, Astro Air, Inc. (the "Buyer"), and Rex Dacus, the manager of the Coils segment and the person from whom the Company acquired the assets and operations of Astro Air Coils, Inc. in 1998. Proceeds from the sale of $5.6 million were utilized to reduce the Company's bank credit facility. The Buyer also assumed approximately $3.7 million of liabilities. The Company recorded a pretax charge of $9.3 million related to this sale in the fourth quarter of 2001. The Company recorded a charge of $520,000 net of taxes in the fourth quarter of 2002 to adjust the carrying value for the real estate assets to the estimated fair value, based upon an estimated sales price of the assets. The Company has reported the results of the Coils segment as discontinued operations for all periods presented in the consolidated statements of operations. On January 24, 2001, the Company completed the sale of stock of Sooner Trailer to the McCasland Investment Group and certain members of Sooner Trailer's management for cash of $11.5 million, subject to certain post-closing adjustments based on changes in working capital, plus the assumption of debt of approximately $670,000. In May 2001, the Company received approximately $2.0 million related to such post-closing adjustments. In connection with the anticipated sale, the Company recognized a loss of $8.6 million in the fourth quarter of 2000 to adjust the carrying value of Sooner Trailer's assets to their estimated fair value based on an expected sales price. No additional gain or loss was recorded upon completion of the sale. Sooner Trailer had been included in the Company's historical Agricultural Equipment segment (formerly known as the Trailers and Agricultural Equipment segment). Accordingly, the Company has reported the results of Sooner Trailer as discontinued operations for all periods presented in the consolidated statements of operations. Critical Accounting Policies The SEC recently issued disclosure guidance for critical accounting policies. The SEC defines critical accounting policies as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our significant accounting policies are described in Note 3 to the Consolidated Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following accounting policies could be deemed to be critical by SEC. Use of estimates. In preparing the Consolidated Financial Statements we use estimates in determining the economic useful lives of our assets, obligations under our employee benefit plans, provisions for doubtful accounts, provisions for restructuring charges, tax valuation allowances and various other recorded or disclosed amounts. Estimates require us to use our judgment. While we believe that our estimates for these matters are reasonable, if the actual amount is significantly different than the estimated amount, our assets, liabilities or results of operations may be overstated or understated. Contingencies. We account for contingencies in accordance with SFAS No. 5, " Accounting for Contingencies." SFAS No. 5 requires that we record estimated loss from a loss contingency when information available prior to issuance of the Consolidated Financial Statement indicates that it is probable that an asset has been impaired or liability has been incurred at the date of the Consolidated Financial Statements and the amount of the loss can be reasonable estimated. Accounting for contingencies such as environmental, legal and income tax matters requires us to use our judgment. While we believe that our accruals for these matters are adequate, if the actual loss from a loss contingency is significantly different from the estimated loss, our results of operations may be overstated or understated. 11 Impairments of Long-Lived Assets. We record impairments losses on long-lived assets used in used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of those assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceedes the fair value of the asset. Assets to be disposed are reported at the lower of the carrying amount or fair value, less cost to sell. If the actual value is significantly less than the estimated value, our assets may be overstated. Inventories. We record the value of inventory at the lower of cost or market, and periodically review the book value of products and product lines to determine if they are properly valued. We also periodically review the composition of our inventories and seek to identify slow-moving inventories. In connection with those reviews, we seek to identify products that may not be properly valued and assess the ability to dispose of them at a price greater than cost. If it is determine that the cost is less than market value, then cost is used for inventory valuation. If a write down to current market value is necessary, the market value cannot be greater than the net realizable value, sometimes called the ceiling (defined as selling price less cost to complete and dispose), and cannot be lower than net realizable value less a normal profit margin, sometimes called the floor. If the actual value is significantly less than the recorded value, our assets may be overstated. Results of Operations The Company's fiscal year includes 52 or 53 weeks, ending on the last Sunday in October. Fiscal years 2002, 2001 and 2000 consisted of 52 weeks. Year ended October 27, 2002 compared to year ended October 28, 2001 Net sales. Net sales for 2002 were $36.9 million, as compared to net sales of $54.3 million in 2001, a decrease of 32.0%. Net sales from Motors, the Company's only remaining segment decreased to $36.9 million in 2002, as compared to $51.4 million in 2001, a decrease of 28.2%. These results include the effects of the disposition of Motor Products in July 2002, the effects of the general economic slowdown on the Company's primary markets, particularly the heavy truck and recreational vehicle markets, as well as the effects of increased Pacific Rim competition in the healthcare market. These results also include the effect of disposing of Cramer's operating assets (excluding the real estate) in 2001. Sales attributed to Cramer were $2.9 million in 2001. Loss from operations. For 2002, the Company recorded a loss from operations of $2.9 million, as compared to a loss from operations of $1.9 million in 2001. These results reflect decreased sales volumes and decreased margins caused by price pressures and changes in product mix, as well as the under absorption of overhead costs, partially offset by a reduction in selling, general and administrative expenses. The current year loss includes a charge of $381,000, as compared to $1.1 million in 2001 for the write-down of net assets held for sale, related to the Cramer real estate asset. Interest expense. Interest expense decreased to $1.6 million for 2002 from $4.3 million in the prior year, primarily as a result of lower debt levels. The current period includes a charge of $589,000 resulting from a decrease in the fair market value of the Company's interest rate swap agreements as a result of decreases in interest rates. This charge was recorded in accordance with SFAS No. 133. 12 Other (income) expense. For 2001, other (income) expense primarily represents the partial recovery of a note received in connection with the sale of certain Cramer assets in 1999 (the "Cramer Note Receivable"). Income tax expense (benefit). The Company recorded an income tax benefit of $4.5 million for 2002 of which $4.3 million was as a result of recent changes in federal tax laws, which allow the carryback of net operating losses for five years. The Company recorded an income tax expense at an effective rate of 6.4% for 2002, when excluding the $4.3 million tax benefit as compared to an effective tax rate of 32.4% in the prior year. Income (loss) from discontinued operations. For 2002, the Company recorded a loss from discontinued operations, representing the remaining real estate asset of the Coils segment, of $520,000 (net of income tax expense of $268,000). For 2001, the Company recorded a loss from discontinued operations, representing the operations of Sooner Trailer and the Coils segment, of $12.1 million (net of income tax expense of $514,000) on revenues of $35.6 million. The prior year results reflect a pre-tax loss on the sale of the Coils segment of $10.0 million. Net income (loss) available for common stockholders. Net income available for common shareholders was $3.8 million, or $.66 per share, in 2002, as compared to a net loss of $17.6 million, or $3.00 per share, in the prior year. Income (loss) available for common shareholders is calculated by subtracting dividends of preferred stock of $1.3 million for both 2002 and 2001, respectively. Year ended October 28, 2001 compared to year ended October 29, 2000 Net sales. Net sales for 2001 were $54.3 million, as compared to net sales of $75.2 million in 2000, a decrease of 27.8%. These results include the effects of disposing of Dura-Bond in November 2000. Sales attributable to Dura-Bond were $8.2 million in 2000. Net sales from Motors were $51.4 million in 2001, as compared to 57.7 million in 2000, a decrease of 11.0%. Sales volume at the Motors segment was adversely effected by the general economic slowdown effecting the Company's primary markets, particularly the heavy truck and recreational vehicle markets and increased Pacific Rim competition in the healthcare market. Net sales from the Company's Other segment were $3.0 million in 2001, as compared to $17.5 million in 2000. Sales attributable to Dura-Bond, which was sold November 2, 2000, were $8.2 million in 2000. Net sales at Cramer decreased $6.4 million, as compared to the prior year, reflecting the sale of the timer and switch line on December 4, 2000, and the subsequent sale, on September 23, 2001, of substantially all of the remaining Cramer assets. Income (loss) from operations. For 2001, the Company recorded a loss from operations of $1.9 million, as compared to a loss from operations of $265,000 in 2000. The current year loss includes a charge of $1.1 million for the write-down of net assets held for sale, related to Cramer. The prior year period includes a $2.8 million charge for the write-down of net assets held for sale related to both Cramer and Dura-Bond. Income from operations for the Motors segment was $4.7 million, or 9.1% of net sales for 2001, as compared to $5.0 million, or 8.6% of net sales in the prior year. Despite an 11.0% decrease in sales, income from operations improved as a percentage of net sales as a result of increased productivity attributable to lean manufacturing processes implemented in 2000. 13 The Company's Other segment reported a loss from operations of $1.4 million in 2001, as compared to a loss of $666,000 in 2000. The current period loss includes a charge of $1.1 million for the write-down of net assets held for sale related to Cramer. The prior year period includes a $2.8 million charge for the write-down of net assets held for sale related to both Cramer and Dura-Bond. Exclusive of the write-downs, the loss from operations would have been $317,000 for 2001, as compared to income from operations of $2.1 million in 2000. This decrease reflects the sale of Dura-Bond, which had income from operations of $1.5 million in 2000. In addition, operating results from Cramer decreased as a result of the sale of the timer and switch line in December 2000 and the sale of the remaining Cramer assets in September 2001. Unallocated corporate expenses included in income (loss) from operations were $5.1 million, or 9.4% of net sales, as compared to $4.6 million, or 6.1% of net sales in 2000. This increase reflects severance costs for the corporate office staff of $650,000, increased incentive compensation of $344,000, and increased bank service charges of $339,000, partially offset by rental income received on the sublet of corporate office space of $119,000, reduced corporate office employee costs of $150,000, and income of $400,000 from a vendor dispute. Interest expense. Interest expense decreased to $4.3 million for 2001 from $5.1 million in the prior year, primarily as a result of lower debt levels. The current period includes a charge of $598,000 resulting from a decrease in the fair market value of the Company's interest rate swap agreements as a result of decreases in interest rates. This charge was recorded in accordance with SFAS No. 133. Other (income) expense. For 2001, other (income) expense primarily represents the partial recovery of a note received in connection with the sale of certain Cramer assets in 1999 (the "Cramer Note Receivable"). For 2000, other (income) expense includes a $620,000 charge recorded as a reserve against a note receivable obtained in connection with the sale of Parker Industries ("Parker") in 1999 to Top Air Manufacturing, Inc. ("Top Air"), which filed for Chapter 7 bankruptcy liquidation in November 2000. Also included in other (income) expense for 2000 is a charge of $219,000 recorded as a reserve against the Cramer Note Receivable, partially offset by income of $100,000 representing a change in estimate on an allowance against a note receivable. Income tax expense (benefit). The Company recorded an income tax benefit at an effective rate of 32.4% for 2001, as compared to an effective tax rate of 18.6% in the prior year. The Company's effective tax rate was adversely effected in the prior year as a result of a higher proportion of non-deductible taxable losses. Income (loss) from discontinued operations. For 2001, the Company recorded a loss from discontinued operations, representing the operations of Sooner Trailer and the Coils segment, of $12.1 million (net of income tax expense of $514,000) on revenues of $35.6 million. For 2000, loss from discontinued operations was $8.9 million (net of income tax expense of $522,000) on revenues of $85.1 million. The current year results reflect a pre-tax loss on the sale of the Coils segment of $10.0 million. The prior year reflects an $8.6 million charge for the write-down of the net assets of Sooner in connection with its sale, which was completed in January 2001. Net income (loss) available for common stockholders. Net loss available for common shareholders was $17.6 million, or $3.00 per share, in 2001, as compared to a net loss of $14.8 million, or $2.53 per share, in the prior year. Income (loss) available for common shareholders is calculated by subtracting dividends of preferred stock of $1.3 million and $750,000 for 2001 and 2000, respectively, and by deducting the non-cash accretion in book value of preferred stock of $371,000 for 2000. 14 Liquidity and Capital Resources At October 27, 2002, cash and cash equivalents were $524,000. The Company had negative working capital of $5.4 million, as compared to negative working capital of $14.4 million at October 28, 2001. This increase in working capital reflects the sale of the Motor Products subsidiary and an income tax refund that allowed the Company to pay down the current portion of long-term debt. Net cash provided by operating activities of continuing operations was $5.7 million for 2002, as compared to $1.5 million in the prior year. The increase in cash from operations was principally the result of the sale of the Motor Products subsidiaries and better operating results. The Company currently plans to invest approximately $250,000 in capital expenditures during fiscal 2002. Management anticipates funding such capital expenditures with cash from operations and proceeds from the Company's bank credit facility. Net cash used in financing activities included net repayments of $15.1 million under the Company's revolving credit agreement, debt repayments of $959,000, including the repayment of $400,000 of related party debt. At October 27, 2002, $6.9 million was outstanding under the Company's bank credit facility. On January 22, 1999, the Company entered into a new bank credit facility with the Company's two primary banks, originally expiring in December 2002. The agreement included financial and other covenants, including fixed charge, cash flow and net worth ratios and restrictions on certain asset sales, mergers and other significant transactions. The Company was not in compliance with such covenants at October 29, 2000. In February 2001, the Company entered into an amendment to its bank credit facility agreement, wherein the lenders agreed to forbear from exercising their rights and remedies under the facility in connection with such non-compliance until February 15, 2002, at which time the facility was to mature. The amendment to the bank credit facility, which was further amended in February 2001, called for reductions in the outstanding balance during calendar 2001 and modified the interest rates charged. The amendment required additional collateral, effectively all the assets of the Company, and reporting requirements, as well as the addition of a covenant requiring minimum operating profits. The amendment also required the suspension of principal and interest payments on subordinated debt, with an aggregate outstanding balance of $2.1 million as of October 28, 2001. Furthermore, the amendment to the facility prohibits the payment of preferred or common stock dividends and prohibited the purchase of the Company's stock. Beginning in August 2001, the Company was out of compliance with its minimum operating profit covenant. In February 2002, the Company entered into a further amendment to the facility, which extended the maturity date to December 31, 2002. That amendment called for further reductions in the outstanding balance based on expected future asset sales, increases the interest rate charged and requires minimum EBITDA. See Item 7. "General" section. In December 2002, the Company entered into a further amendment to the facility, which extends the maturity date to December 31, 2003. This amendment calls for further reductions in outstanding balance based on expected future asset sales and cash flow generated from operations and requires minimum EBITDA. Borrowings under the facility are charged interest at the Prime Rate plus 2.75% (7.5% at October 27, 2002). The Company has an interest rate swap agreement with its bank with a notional amount totaling $4.9 million. The Company entered into these agreements to change the fixed/variable interest rate mix of its debt portfolio, in order to reduce the Company's aggregate risk from movements in interest rates. The value of the swap agreement at October 27, 2002 is ($110,000). Environmental Matters The Company is subject to federal, state and local environmental regulations with respect to its operations. The Company believes that it is operating in substantial compliance with applicable environmental regulations. Manufacturing and other operations at the Company's facilities may result, and may have resulted, in the discharge and release of hazardous substances and waste from time to time. The Company routinely responds to such incidents as deemed appropriate pursuant to applicable federal, state and local environmental regulations. 15 In connection with the Company's divestitures of its operating businesses over the past four years, it has agreed to indemnify buyers from and against certain known and unknown environmental liabilities. In addition, the Company may be liable for the costs of removal or remediation of hazardous or toxic substances on, in, under or discharged from it's current or previously owned real property under applicable federal, state and local environmental laws, ordinances and regulations. A subsidiary of the Company is a party to a consent decree with the State of Connecticut pursuant to which it has agreed to complete its environmental investigation of the site on which its Old Saybrook facility was previously located and conduct any remedial measures which may be required. In the second quarter of 2000, the Company revised its estimate of the cost to complete the remedial measures required at the site. The revision to the estimate resulted in a reduction in the liability of $260,000. Based upon the amounts recorded as liabilities, the Company believes that the ultimate resolution of this matter will not have a material adverse effect on the financial results of the Company. Recently Issued Financial Accounting Standards In July 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations" ("SFAS No. 141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criterion and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations but, instead, would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001 are required to be adopted for fiscal years beginning after December 15, 2001. The Company has not yet completed its analysis of the effects of adopting these statements on its consolidated financial position or results of operations. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144, which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, supercedes SFAS No. 121 and is effective for fiscal years beginning after December 15, 2001. The Company has not yet completed its analysis of the effects of adopting this statement on its consolidated financial position or results of operations. In April 2002, the Financial Accounting Standards Board issued SFAS No.145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are 16 similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of this Statement related to SFAS No. 13 shall be effective for transactions occurring after May 15, 2002. The Company has not yet completed its analysis of the effects of adopting this statement on its consolidated financial position or results of operation. In June 2002, the Financial Accounting Standards Board issued SFAS No.146 "Accounting for Costs Associated with Exit or Disposal Activities". This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The Company has not yet completed its analysis of the effects of adopting this statement on its consolidated financial position or results of operation. In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation --Transition and Disclosure, an amendment of FASB Statement No. 123". This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. The transition provisions of this statement shall be effective financial statements for fiscal years ending after December 15, 2002. The disclosure provisions of this statement shall be effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Company has not yet completed its analysis of the effects of adopting this statement on its consolidated financial position or results of operation. Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The following information is provided pursuant to the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. Certain statements in Management's Discussion and Analysis of this Form 10-K, including those which express "belief," "anticipation" or "expectation" as well as other statements which are not historical fact, are "forward-looking statements" made pursuant to the "Safe Harbor" provisions. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The Company cautions readers that the following important factors, among others, have in the past affected and could in the future affect the Company's actual results of operations and cause the Company's actual results to differ materially from the results expressed in any forward-looking statements made by or on behalf of the Company: o The Company's continued liquidity is dependent upon its ability to achieve levels of revenue necessary to support the Company's cost structure, its ability to maintain adequate financing, its ability to maintain compliance with debt covenants, and its ability to generate sufficient cash flows to meets its obligations on a timely basis. 17 o The Company's common stock is currently traded on the Nasdaq SmallCap Market. For continued listing the Nasdaq SmallCap Market requires, among other things, that listed securities maintain a minimum bid price of not less than $1.00 per share. Nasdaq has notified the Company that it has failed to maintain this continued listing requirement, and will commence procedures to delist the Company's securities from the Nasdaq SmallCap Market unless the Company has regained compliance with this listing requirement by February 10, 2003. If, at anytime before February 10, 2003, the bid price of the Company's common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, the Company will regain compliance with the continued listing requirements. If delisted from the Nasdaq SmallCap Market, the Company's common stock may be eligible for trading on the OTC Bulletin Board or on other over-the-counter markets, although there can be no assurance that the Company's common stock will be eligible for trading on any alternative exchanges or markets. Among other consequences, moving from the Nasdaq SmallCap Market, or delisting from the Nasdaq SmallCap Market may cause a decline in the stock price, reduced liquidity in the trading market for the common stock, and difficulty in obtaining future financing. o The Company's results have been and can be expected to continue to be affected by the general economic conditions in the United States and specific economic factors influencing the manufacturing sector of the economy. Lower demand for the Company's products can lower revenues as well as cause underutilization of the Company's plants, leading to reduced gross margins. o Metal prices, particularly of copper and steel, can affect the Company's costs as well as demand for the Company's products and the value of inventory held at the end of a reporting period. Lack of availability of certain commodities could also disrupt the Company's production. o Changes in demand that change product mix may reduce operating margins by shifting demand toward less profitable products. o Loss of a substantial customer or customers may affect results of operations. o The influence of foreign competition from low-cost areas of the world may affect results of operations. o The Company's results have been and can be affected by engineering difficulties in designing new products or applications for existing products to meet the requirements of its customers. o The Company's results can be affected by changes in manufacturing processes and techniques. o Obsolescence or quality problems leading to returned goods in need of repair can affect the value of the Company's inventories and its profitability. o The Company has a substantial amount of floating rate debt. Increases in short-term interest rates could be expected to increase the Company's interest expense. o In that the Company's outstanding derivative instruments do not meet the stringent requirements for hedge accounting under SFAS 133, future earnings could reflect greater volatility. 18 o The Company has divested all but one of its operating businesses over the past four years. The Company remains responsible for certain third party liabilities in connection with these transactions, including product liabilities, environmental liabilities and taxes, and has obligations to indemnify the buyers against certain matters arising out of the transactions. Although the Company maintains general liability insurance coverage, including coverage for errors and omissions, there can be no assurance that such coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer(s) will not disclaim coverage as to any future claim. The successful assertion of one or more large claims against the Company that are uninsured, exceed available insurance coverage or result in changes to the Company's insurance policies, including premium increases or the imposition of a large deductible or co-insurance requirements, could adversely affect the Company's business, results of operations and financial condition. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company uses a bank credit facility, industrial revenue bonds and term loans to finance a significant portion of its operations. These on-balance sheet financial instruments, to the extent they provide for variable rates of interest, expose the Company to interest rate risk resulting from changes in the prime rate. The Company uses interest rate swap agreements to partially change interest rate exposure associated with the Company's variable rate debt. All of the Company's derivative financial instrument transactions are entered into for non-trading purposes. To the extent that the Company's financial instruments expose the Company to interest rate risk and market risk, they are presented in the table below. The table presents principal cash flows and related interest rates by year of maturity for the Company's bank credit facility, industrial revenue bonds and term loans in effect at October 27, 2002. For interest rate swaps, the table presents notional amounts and the related reference interest rates by year of maturity. Fair values included herein have been determined based upon (1) rates currently available to the Company for debt with similar terms and remaining maturities, and (2) estimates obtained from dealers to settle interest rate swap agreements. Notes 10 and 11 to the consolidated financial statements should be read in conjunction with the table below (dollar amounts in thousands).

19 Item 8. Financial Statements and Supplementary Data. The Company's consolidated financial statements and supplemental schedules appear at pages F-1 through F-28, as set forth in Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 20 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 April 3, 2003, 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 and Related Stockholder Matters. The following table summarizes information about the Company's equity compensation plans as of October 27, 2002. All outstanding awards relate to the Company's common stock. For additional information about the Company's equity compensation plans, see note 19 of Notes to Consolidated Financial Statements under Item 8.

21 The other information required under this Item is contained in the section titled "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive proxy statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders scheduled to be held on April 3, 2003, and 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. Item 14. Controls and Procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer (the principal executive officer, principal financial officer and principal accounting officer), of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the date of filing this Annual Report on Form 10-K (the "Evaluation Date"). Based on that evaluation, the Chief Executive Officer concluded that, as of Evaluation Date, the disclosure controls and procedures of the Company are effective to ensure that information required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported within the applicable time periods. Since the Evaluation Date, there have been no significant changes to the Company's internal controls or, to the Company's knowledge, in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 22 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) Financial Statements The financial statements listed in the accompanying Table of Contents to Consolidated Financial Statements are filed as part of this Form 10-K, commencing on page F-1. (a)(2) Schedules The following consolidated financial statement schedule of the Company is filed as part of this Form 10-K: Schedule II - Valuation and Qualifying Accounts (a)(3) Exhibits The exhibits are listed in the index to Exhibits appearing below. (b) Reports on Form 8-K The Company filed a report on Form 8-K, dated July 30, 2002, to report under Item 2 that the Company had completed the sale of all of the outstanding stock of Motor Products - Owosso Corporation, a Delaware corporation and Motor Products - Ohio Corporation, a Delaware corporation (together, "Motor Products"), manufacturers of fractional and integral horsepower motors. The Company filed a report on Form 8-K, dated July 30, 2002, to comply with a condition imposed on the Company by the Nasdaq Listing Qualification Panel on August 13, 2002 and to avert a delisting of the Company's common stock from the Nasdaq SmallCap Market. The condition required the Company to file a July 28, 2002 balance sheet with pro forma adjustments for any significant events or transactions occurring on or before September 11, 2002 and evidencing shareholders' equity of at least $7,000,000. Accordingly, the Company filed a pro forma condensed consolidated balance sheet as of July 28, 2002. (c) Exhibits Exhibit No Description -------------------------------------------------------------------------------- *2.1 Stock Purchase Agreement among Hathaway Motion Control Corporation, Motor Products -- Owosso Corporation, Motor Products -- Ohio Corporation, and Owosso Corporation, dated July 8, 2002. (Exhibit 2.1 to the Company's Current Report on Form 8-K dated July 30, 2002). *2.2 Asset Purchase Agreement among Rex Dacus, Dacus Properties, Inc., Astro Air Coils, Inc. and Snowmax Incorporated, dated October 26, 2001 (Exhibit 2.1 to the Company's Current Report on Form 8-K, dated October 26, 2001). *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")). 23 *3.2 By-Laws of the Company, as amended June 5, 1997 (Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 27, 1997). *3.3 Designations of the Class A Convertible Preferred Stock of Owosso Corporation (Exhibit 4.1 to the Company's Current Report on Form 8-K dated October 31, 1995 (the "October 31, 1995 Form 8-K")). #*10.1 1994 Stock Option Plan (Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended October 30, 1994 (the "1994 Form 10-K ")). 10.2 Employment Agreement between Michael Koepke and Owosso Motor Group, Inc., dated September 30, 1996. *10.3 Lease, dated March 21, 1995, between Motor Products - Ohio Corporation and William Berhard Realty Company (Exhibit 10.44 to the 1995 Form 10-K). *10.4 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). *10.5 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). *10.6 Confidentiality and Non-Solicitation Agreement between the Company and George B. Lemmon, Jr., dated October 31, 1994 (Exhibit 10.48 to the 1994 Form 10-K). *10.7 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). *10.8 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). *10.9 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). *10.10 Lease Agreement by and between Owosso Corporation and Philadelphia Freedom Partners, L.P. dated September 6, 1996 (Exhibit 10.62 to the Company's Annual Report on Form 10-K for the year ended October 27, 1996). *10.11 Owosso Corporation 401(k) Savings Plan (Exhibit 10.2 to the January 25, 1998 Form 10-Q). 24 #*10.12 1998 Long-Term Incentive Plan (Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed June 2, 1998, Registration No. 333-55835). *10.13 Amended and Restated Credit Agreement by and among Owosso Corporation, its subsidiaries, NBD Bank, PNC Bank, N.A., and NBD Bank, as Agent, dated as of January 22, 1999. (Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1999). *10.14 First Amendment to Amended and Restated Credit Agreement (Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 30, 2000). *10.15 Stock Purchase and Redemption Agreement among Owosso Corporation, MEPC, L.L.C., the Landover Company (d/b/a "Dura-Bond Bearing Company"), Engine Power Components, Inc., and Melling Tool Co., effective as of October 29, 2000. (Exhibit 10.2 to the Company's Current Report on Form 8-K, dated January 24, 2001). *10.16 Asset Purchase Agreement by and between M.H. Rhodes, Inc. and Capewell Component Company, L.L.C., dated December 1, 2000 (Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended October 29, 2000). *10.17 Stock Purchase Agreement between Sooner Investment Manufacturing Company (purchaser) and Owosso Corporation (seller), dated January 19, 2001 (Exhibit 10.1 to the Company's Current Report on Form 8-K, dated January 24, 2001). *10.18 Amendment Agreement by and among Owosso Corporation, its subsidiaries, Bank One and PNC Bank, N.A., dated February 12, 2001 (Exhibit 10.37 to the Company's Annual Report on Form 10-K for the year ended October 29, 2000). 10.19 Executive Salary Continuation Agreement between Owosso Corporation and John M. Morrash, dated August 27, 2001. *10.20 Seventh Amendment to Amended and Restated Credit Agreement by and among Owosso Corporation, its subsidiaries, Bank One and PNC Bank, N.A., effective May 9, 2001 (Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 29, 2001). *10.21 Tenth Amendment to Amended and Restated Credit Agreement by and among Owosso Corporation, its subsidiaries, Bank One and PNC Bank, N.A., effective February 8, 2002 (Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended October 28, 2001). *10.22 Eleventh Amendment to Amended and Restated Credit Agreement by and among Owosso Corporation, its subsidiaries, Bank One and PNC Bank, N.A., effective May 16, 2002 (Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 28, 2002). 25 *10.23 Twelfth Amendment to Amended and Restated Credit Agreement by and among Owosso Corporation, its subsidiaries, Bank One and PNC Bank, N.A., effective July 8, 2002 (Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 28, 2002). *10.24 Thirteenth Amendment to Amended and Restated Credit Agreement by and among Owosso Corporation, its subsidiaries, Bank One and PNC Bank, N.A., effective July 30, 2002 (Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 28, 2002). 10.25 Fourteenth Amendment to Amended and Restated Credit Agreement by and among Owosso Corporation, its subsidiaries, Bank One and PNC Bank, N.A., effective September 30, 2002. 10.26 Fifteenth Amendment to Amended and Restated Credit Agreement by and among Owosso Corporation, its subsidiaries, Bank One and PNC Bank, N.A., effective October 27, 2002. 10.27 Sixteenth Amendment to Amended and Restated Credit Agreement by and among Owosso Corporation, its subsidiaries, Bank One and PNC Bank, N.A., effective December 13, 2002. 10.28 Executive Salary Continuation Agreement between Owosso Corporation and George B. Lemmon, Jr., dated October 1, 2001. 10.29 Executive Salary Continuation Agreement between Owosso Corporation and Kirk E. Moore, dated August 27, 2001. 10.30 Executive Salary Continuation Agreement between Owosso Corporation and Harry Holiday III, dated August 24, 2001. 11 Computation of per share earnings 21 Subsidiaries of the registrant. 23 Consent of Deloitte & Touche LLP 99.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. --------------- * Incorporated by reference. # Management contract or compensatory plan or arrangement. 26 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. OWOSSO CORPORATION Date: January 23, 2003 By: /s/ George B. Lemmon, Jr. --------------------------------------- George B. Lemmon, Jr., President, Chief Executive Officer (principal executive officer, principal financial officer and principal accounting officer) and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on January 23, 2003, in the capacities indicated: Signature Title /s/ John R. Reese ------------------------ John R. Reese Chairman of the Board and Director /s/ George B. Lemmon, Jr. ------------------------ George B. Lemmon, Jr. President, Chief Executive Officer (principal executive officer, principal financial officer and principal accounting officer) and Director /s/ Ellen D. Harvey ------------------------ Ellen D. Harvey Director /s/ Harry E. Hill ------------------------ Harry E. Hill Director /s/ Lowell P. Huntsinger ------------------------ Lowell P. Huntsinger Director /s/ Eugene P. Lynch ------------------------ Eugene P. Lynch Director /s/ James A. Ounsworth ------------------------ James A. Ounsworth Director 27 CERTIFICATIONS I, George B. Lemmon, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Owosso Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-4 and 15d-4) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing of this annual report (the "Evaluation Date"); and c) Presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and audit committee of registrant's board of directors (or other persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 23, 2003 /s/ George B. Lemmon, Jr. ---------------------------------- George B. Lemmon, Jr. President and Chief Executive Officer (principal executive officer and principal financial officer) 28 OWOSSO CORPORATION TABLE OF CONTENTS --------------------------------------------------------------------------------

INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders of Owosso Corporation King of Prussia, Pennsylvania We have audited the accompanying consolidated balance sheets of Owosso Corporation and subsidiaries as of October 27, 2002 and October 28, 2001, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three fiscal years in the period ended October 27, 2002. Our audits also included the financial statement schedule listed in the index at Item 15(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 and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2002 and October 28, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended October 27, 2002 in conformity with accounting principles generally accepted in the United States of America. 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. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's recurring losses from operations, working capital deficiency, default under terms of its credit agreement, and inability to comply with the covenants of its credit agreement raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Deloitte & Touche LLP Philadelphia, Pennsylvania December 13, 2002 F-1 OWOSSO CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements. F-2 OWOSSO CORPORATION CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements. F-3 OWOSSO CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See notes to consolidated financial statements. F-4 OWOSSO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements. F-5 OWOSSO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FISCAL YEARS ENDED OCTOBER 27, 2002, OCTOBER 28, 2001, AND OCTOBER 29, 2000 -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS The Company - The consolidated financial statements represent the consolidated financial position, results of operations and cash flows of Owosso Corporation and its subsidiaries (the "Company"). The Company has historically operated in four business segments: Motors, Coils, Agricultural Equipment, and Other. As of July 2002, the Company had one operating subsidiary, Stature Electric, Inc. ("Stature"), representing the Company's historical Motors segment. Stature is a custom designer and manufacturer of motors and gear motors both AC and DC, established in 1974 in Watertown, New York. Significant markets for Stature, or the Motors segment, include commercial products and equipment, healthcare, recreation and non-automotive transportation. The products are sold throughout North America and in Europe, primarily to original equipment manufacturers who use them in their end products. The Company completed the sale of all of the outstanding stock of Motor Products - Owosso Corporation and Motor Products - Ohio Corporation (together, "Motor Products"), manufacturers of fractional and integral horsepower motors, on July 30, 2002. Prior to that time, these entities were included in the results of the Motors segment The Coils segment included Astro Air Coils, Inc. ("Astro Air"), Snowmax, Inc. ("Snowmax"), and Astro Air UK Ltd. ("Astro UK"). The assets of Astro UK were sold May 9, 2001. The assets of Astro Air and Snowmax were sold on October 26, 2001. During the fourth quarter of 2000, the Company adopted a plan to dispose of Sooner Trailer Manufacturing Company ("Sooner Trailer"), which manufactured all-aluminum trailers, primarily horse and livestock trailers. Sooner Trailer had been included in the Company's historical Agricultural Equipment segment. The Company completed the sale of Sooner Trailer on January 24, 2001. For financial statement purposes, the assets, liabilities, results of operations and cash flows of Sooner Trailer and the Coils segment have been segregated from those of continuing operations and are presented in the Company's financial statements as discontinued operations. The net assets of Sooner Trailer and the Coils segment have been included in "Net Assets of Discontinued Operations Held for Sale" in the consolidated balance sheets. The Company's Other segment included Dura-Bond Bearing Company ("Dura-Bond"), and Cramer Company (formerly known as M.H. Rhodes, Inc., and hereinafter referred to as "Cramer"). Dura-Bond, which manufactured replacement camshaft bearings, valve seats and shims for the automotive after-market, was sold November 2, 2000. Cramer manufactured timers and subfractional horsepower motors for use in commercial applications. The Company completed the sale of the assets associated with the timer and switch line of Cramer on December 4, 2000, and in connection with the sale, changed the name of the company from M.H. Rhodes, Inc. to Cramer Company. The Company disposed of substantially all of the remaining Cramer assets (excluding real property) in a separate transaction completed on September 23, 2001. The net assets of Dura-Bond and Cramer have been included in "Net Assets Held for Sale" in the consolidated balance sheets. F-6 2. LIQUIDITY AND FINANCING The Company has experienced a significant downturn in its operating results over the past three years and at the end of fiscal 2000, was out of compliance with covenants under its bank credit facility. In February 2001, the Company entered into an amendment to its bank credit facility agreement, wherein the lenders agreed to forbear from exercising their rights and remedies under the facility in connection with such non-compliance until February 15, 2002, at which time the facility was to mature. In addition, as further disclosed under Note 11 "Long-term Debt," this amendment to the bank credit facility called for reductions in the outstanding balance during calendar 2001 and modified the interest rates charged. The amendment required additional collateral, effectively all of the assets of the Company, and reporting requirements, as well as the addition of a covenant requiring minimum operating profits. The amendment also required the suspension of principal and interest payments on subordinated debt, with an aggregate outstanding balance of $2.1 million as of October 28, 2001. Furthermore, the amendment to the facility prohibits the payment of preferred or common stock dividends and prohibits the purchase of the Company's stock. Beginning in August 2001, the Company was out of compliance with its minimum operating profit covenant. In February 2002, the Company entered into a further amendment to the facility, which extended the maturity date to December 31, 2002. That amendment called for further reductions in the outstanding balance based on expected future asset sales, increases the interest rate charged and requires minimum EBITDA. In December 2002, the Company entered into a further amendment to the facility, which extends the maturity date to December 31, 2003. This amendment calls for further reductions in outstanding balance based on expected future asset sales and cash flow generated from operations and requires minimum EBITDA. Borrowings under the facility are charged interest at the Prime Rate plus 2.75% (7.5% at October 27, 2002). Management intends to dispose of or liquidate additional non-operating assets during fiscal 2003, including real estate at the Company's former Cramer and Snowmax subsidiaries and various notes receivable which arose from previous asset divestitures. Proceeds from these sales, which are expected to be between $1.5 and $2.5 million net of taxes, will be utilized to further reduce the Company's bank credit facility. Management believes that, along with the sale of assets, available cash and cash equivalents, cash flows from operations and available borrowings under the Company's bank credit facility will be sufficient to fund the Company's operating activities, investing activities and debt maturities for fiscal 2003. In addition, management believes that the Company will be in compliance with its bank covenant requirements throughout fiscal 2003. It is management's intent to refinance the Company's bank credit facility prior to its maturity in December 2003. However, there can be no assurance that management's plans will be successfully executed. The accompanying consolidated financial statements have been prepared on a going concern basis of accounting and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company's recurring losses from operations, working capital deficiency, default under the terms of its bank credit facility and inability to comply with debt and other bank covenants raise substantial doubt about the Company's ability to continue as a going concern. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation - The consolidated financial statements of the Company include the accounts of Owosso Corporation and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Fiscal Year - The Company's fiscal year includes 52 or 53 weeks ending on the last Sunday in October. Fiscal years 2002, 2001 and 2000 consisted of 52-week years. F-7 Cash and Cash Equivalents - Cash and cash equivalents consist of cash and highly liquid investments with an original maturity of three months or less. Inventories - Inventories of the Company are recorded at cost, which is not in excess of market. At October 27, 2002, 100% of the cost of inventories were determined on a first-in, first-out (FIFO) basis. At October 28, 2001, and October 29, 2000, cost for 28% and 30%, respectively, of the inventories were determined on the last-in, first-out (LIFO) basis, and the remainder on the FIFO basis. Information related to the FIFO method may be useful in comparing operating results to those of companies not on LIFO. If the FIFO method of inventory, which approximates replacement cost, had been used by the Company for all inventories, inventories would have been approximately $746,000 higher than reported at October 28, 2001, and $790,000 higher than reported at October 29, 2000. Accordingly, income from operations would have decreased by approximately $44,000 and $13,000, in 2001 and 2000, respectively. 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 Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions. Intangible Assets - Intangibles are amortized on a straight-line basis over their estimated useful lives as follows: Customer lists 20 years Goodwill 20-25 years Asset Impairment - 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. Revenue Recognition - Revenue is recognized at the time the product is shipped and title of ownership has passed. An allowance for doubtful accounts of $49,000, $388,000 and $233,000 has been recorded as of October 27, 2002, October 28, 2001, and October 29, 2000, respectively. Income Taxes - Deferred income taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities. Deferred income tax expense (benefit) represents the change during the reporting period in the deferred tax assets and deferred tax liabilities, net of the effect of acquisitions and dispositions. Deferred tax assets include tax loss and credit carry forwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. F-8 Stock Option Plan - SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost has been recognized. Earnings (loss) per Share - Basic earnings per common share is computed by dividing net earnings (the numerator) by the weighted average number of common shares outstanding during each period (the denominator). The computation of diluted earnings per common share is similar to that of basic earnings per common share, except that the denominator is increased by the dilutive effect of stock options outstanding, computed using the treasury stock method, the diluted effect of convertible preferred stock computed using the "if converted" method, and by the dilutive effect of the put option on common stock, computed using the reverse-treasury stock method. The following table summarizes those securities that could potentially dilute income (loss) for common shareholders per common share in the future that were not included in determining net income (loss) available for common shareholders per common share as the effect was antidilutive:

Comprehensive Income - The Company presents comprehensive income (loss) as a component of shareholders' equity. The components of comprehensive income are as follows:

Derivatives - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 was amended in June 2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS No. 138"), which addressed a limited number of issues causing implementation difficulties. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivative instruments as either assets or liabilities and measure them at fair value. The accounting for changes in fair value depends upon the purpose of the derivative instrument and whether it is designated and qualifies for hedge accounting. To the extent derivative instruments qualify and are designated as hedges of the variability in cash flows associated with forecasted transactions, the effective portion of the gain or loss on such derivative instruments will generally be reported in other comprehensive income and the ineffective portion, if any, will be reported in net income. Such amounts recorded in accumulated other comprehensive income will be reclassified into net income when the forecasted transaction affects earnings. To the extent derivative instruments qualify and are designated as hedges of changes in the fair value of an existing asset, liability or firm commitment, the gain or loss on the hedging instrument will be recognized currently in earnings along with changes in the fair value of the hedged asset, liability or firm commitment attributable to the hedged risk. F-9 The Company was required to adopt the provisions of SFAS No. 133 effective October 30, 2000. The Company's derivative instruments outstanding, variable-to-fixed interest rate swaps, do not qualify for hedge accounting under SFAS No. 133. The adoption of SFAS No. 133 required the Company to mark its interest rate swaps to market. The result was to record a net liability of $101,000 with an offsetting charge to cumulative effect of accounting change. This amount, net of tax of $34,000, is reflected in the consolidated statement of operations as "Cumulative effect of accounting change." In that the Company's derivative instruments outstanding do not meet the stringent requirements for hedge accounting under SFAS 133, future earnings could reflect greater volatility. New Accounting Pronouncements - In July 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations" ("SFAS No. 141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations but, instead, would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001 are required to be adopted for fiscal years beginning after December 15, 2001. The Company has not yet completed its analysis of the effects of adopting these statements on its consolidated financial position or results of operations. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144, which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, supercedes SFAS No. 121 and is effective for fiscal years beginning after December 15, 2001. The Company has not yet completed its analysis of the effects of adopting the statement on its consolidated financial position or results of operations. In April 2002, the Financial Accounting Standards Board issued SFAS No.145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of this Statement related to SFAS No. 13 shall be effective for transactions occurring after May 15, 2002. The Company has not yet completed its analysis of the effects of adopting this statement on its consolidated financial position or results of operation. F-10 In June 2002, the Financial Accounting Standards Board issued SFAS No.146 "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The Company has not yet completed its analysis of the effects of adopting this statement on its consolidated financial position or results of operation. In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation --Transition and Disclosure, an amendment of FASB Statement No. 123". This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. The transition provisions of this statement shall be effective financial statements for fiscal years ending after December 15, 2002. The disclosure provisions of this statement shall be effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Company has not yet completed its analysis of the effects of adopting this statement on its consolidated financial position or results of operation. 4. SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest in 2002, 2001 and 2000 were $1,941,000, $3,594,000 and $4,826,000, respectively. Cash paid (or received) for income taxes was $(4,881,000), $226,000 and $1,952,000 for 2002, 2001 and 2000, respectively. Dividends payable were $2,664,000, $1,316,000 and $142,000 at October 27, 2002, October 28, 2001 and October 29, 2000, respectively. 5. DISPOSITIONS OF BUSINESSES Dura-Bond - On November 2, 2000, the Company completed the sale of the stock of Dura-Bond to a joint venture formed by Melling Tool Company of Jackson, Michigan and Engine Power Components, Inc. of Grand Haven, Michigan (the "Joint Venture"). The Joint Venture acquired the stock of Dura-Bond for approximately $4,600,000, plus the assumption of debt of approximately $5,000,000. Based upon the terms of the sale, the Company recorded, in the fourth quarter of fiscal 2000, a pre-tax charge of $1,200,000 to adjust the carrying value of Dura-Bond's assets to their estimated fair value, reflecting a reduction in goodwill. Net sales attributable to Dura-Bond were $8,184,000 for 2000. Income from operations before the allocation of corporate expenses and the charge to adjust the carrying value of the assets from Dura-Bond was $1,539,000 for 2000. Cramer - On December 4, 2000, the Company completed the sale of the assets associated with the timer and switch line of Cramer to Capewell Components, LLC of South Windsor, Connecticut for cash of approximately $2,000,000, plus the assumption of approximately $400,000 in liabilities. In connection with the sale, the name of the Company was changed from M.H. Rhodes, Inc. to Cramer Company. In connection with the sale of the timer and switch line and the anticipated sale of the remaining assets of Cramer, the Company recorded, in the fourth quarter of fiscal 2000, a pre-tax charge of $1,600,000 to adjust the carrying value of Cramer's assets to their estimated fair value, based upon an estimated sales price of the assets. On September 23, 2001, the Company sold substantially all of the remaining assets of Cramer to the Chestnut Group of Wayne, Pennsylvania for cash proceeds of $565,000, plus the assumption of $317,000 in liabilities. In connection with such sale, the Company recorded a further adjustment to the carrying value of the Cramer assets resulting in a pre-tax charge of $1,100,000, recorded in the third fiscal quarter of 2001. F-11 At October 27, 2002, Net Assets Held for Sale of $800,000 represents the carrying value of the Cramer building, the only remaining Cramer asset. Motor Products - On July 30, 2002, Owosso Corporation, (the "Company") completed the sale of all of the outstanding stock of Motor Products Owosso Corporation, and Motor Products Ohio Corporation, (together, "Motor Products"), manufacturers of fractional and integral horsepower motors. The purchase price paid by Hathaway Motion Control Corporation (the "Buyer") for the outstanding stock of Motor Products consisted of $11.5 million in cash and a promissory note in the principal amount of $300,000, payable six months after closing. Net cash proceeds of $10.7 million from the sale, after payment of certain transaction costs, were utilized to reduce outstanding bank debt. The Company has reported a gain of $6,055,000 on the sale of this business in the accompanied consolidated statements for the year ended October 27, 2002. As a result of this transaction, the Company presently has only one operating subsidiary, Stature. 6. DISCONTINUED OPERATIONS Sooner - On January 24, 2001, the Company completed the sale of the stock of Sooner Trailer to the McCasland Investment Group and certain members of Sooner Trailer's management for cash of $11,500,000, subject to certain post-closing adjustments based on changes in working capital, plus the assumption of debt of approximately $670,000. In May 2001, the Company received approximately $2,000,000 related to such post-closing adjustments. In connection with the anticipated sale, the Company recognized a loss of $8,600,000 in the fourth quarter of 2000 to adjust the carrying value of Sooner Trailer's assets to their estimated fair value based on an expected sales price. No additional gain or loss was recorded upon completion of the sale. Coils Segment - On May 9, 2001, the Company completed the sale of substantially all of the assets of Astro Air UK to ACR Heat Transfer, Ltd., of Norfolk, England for cash of (pound)450,000 (approximately $643,000). Based upon the terms of the sale, the Company recorded, in the second quarter of 2001, a pretax charge of $700,000 to adjust the carrying value of Astro UK's assets to their estimated realizable value. No additional gain or loss was recorded upon completion of the sale. On October 26, 2001, the Company completed the sale of the assets of its Coils segment, which included Astro Air and Snowmax (together, the "Coils Subsidiaries"). The sale of the Coils Subsidiaries was effectuated pursuant to an Asset Purchase Agreement, dated as of October 26, 2001, by and among the Coils Subsidiaries, Astro Air, Inc. (the "Buyer"), and Rex Dacus, the manager of the Coils segment and the person from whom the Company acquired the assets and operations of Astro Air Coils, Inc. in 1998. Proceeds from the sale were $5,600,000 of cash and the assumption of approximately $3,700,000 of liabilities. The Company recorded a pretax charge of $9,340,000 related to this sale in the fourth quarter of 2001. Revenues from discontinued operations were $35,608,000 for 2001. F-12 For financial reporting purposes, the assets and liabilities attributable to Sooner and the Coils segment have been classified in the consolidated balance sheets as Net Assets of Discontinued Operations Held for Sale. At October 27, 2002, Net Assets of Discontinued Operations Held for Sale were $350,000 and represent the carrying value of the Snowmax building, the only remaining Coil segment asset. The following unaudited pro forma financial information presents the consolidated results of operations of the Company as if the dispositions of Motor Products had occurred at the beginning of fiscal year 2001 and Sooner Trailer, the Coils Segment, Cramer and Dura-Bond (see Note 5) had occurred at the beginning of fiscal year 2001 after giving effect to certain adjustments, including the reduction of interest expense as a result of the utilization of the net proceeds of the sales to reduce the Company's bank credit facility. The unaudited pro forma information is presented for comparative purposes only and does not purport to be indicative of the results of operations of the Company had these transactions been made at the beginning of fiscal year 2001 and 2000.

7. INVENTORIES

8. PROPERTY, PLANT AND EQUIPMENT

Depreciation expense from continuing operations was approximately $2,454,000, $2,798,000 and $3,700,000 for 2002, 2001 and 2000, respectively. F-13 9. GOODWILL AND OTHER INTANGIBLE ASSETS

Amortization expense from continuing operations related to goodwill and other intangible assets was approximately $1,390,000, $1,069,000 and $1,325,000 for 2002, 2001 and 2000, respectively. 10. RELATED PARTY DEBT As of October 27, 2002 there was no related party debt. Related party debt had consisted of a promissory note to a preferred shareholder, payable on demand but no later than October 2005, with an outstanding balance of $400,000 as of October 28, 2001. Interest on the note was paid quarterly at 8%. 11. LONG-TERM DEBT

F-14 On January 22, 1999, the Company entered into a new bank credit facility with the Company's two primary banks, originally expiring in December 2002. The agreement included financial and other covenants, including fixed charge, cash flow and net worth ratios and restrictions on certain asset sales, mergers and other significant transactions. The Company was not in compliance with such covenants at October 29, 2000. In February 2001, the Company entered into an amendment to its bank credit facility agreement, wherein the lenders agreed to forbear from exercising their rights and remedies under the facility in connection with such non-compliance until February 15, 2002, at which time the facility was to mature. This amendment to the bank credit facility called for reductions in the outstanding balance during calendar 2001 and modified the interest rates charged. The amendment required additional collateral, effectively all of the assets of the Company, and reporting requirements, as well as the addition of a covenant requiring minimum operating profits. The amendment also required the suspension of principal and interest payments on subordinated debt, with an aggregate outstanding balance of $2.1 million as of October 28, 2001. Furthermore, the amendment to the facility prohibits the payment of preferred or common stock dividends and prohibits the purchase of the Company's stock. Beginning in August 2001, the Company was out of compliance with its minimum operating profit covenant. In February 2002, the Company entered into a further amendment to the facility, which extended the maturity date to December 31, 2002. That amendment calls for further reductions in the outstanding balance based on expected future asset sales, increased the interest rate charged and requires minimum EBITDA. In December 2002, the Company entered into a further amendment to the facility, which extends the maturity date to December 31, 2003. This amendment calls for further reductions in outstanding balance based on expected future asset sales and cash flow generated from operations and requires minimum EBITDA. Borrowings under the facility are charged interest at the Prime Rate plus 2.75% (7.5% at October 27, 2002). At October 27, 2002, $6,900,000 was outstanding under the Company's bank credit facility and $1,074,000 was available for additional borrowing. The average amount outstanding in 2002 was $17,384,000 and the weighted average interest rate was 6.9%. Repayment of the Industrial Revenue Bonds of Stature Electric has been guaranteed by the Company and its subsidiaries. Derivative Interest Rate Contracts - The Company has an interest rate swap agreement with one of its banks with a notional amount of $4,550,000. The agreement requires the Company to make quarterly fixed payments on the notional amount at 4.22% through October 2003 in exchange for receiving payments at the BMA Municipal Swap Index (2.09% at October 27, 2002). The Company entered into the interest rate swap agreement to change the fixed/variable interest rate mix of its debt portfolio to reduce the Company's aggregate risk to movements in interest rates. Such swap agreements do not meet the stringent requirements for hedge accounting under SFAS No. 133. Accordingly, changes in the fair value of such agreements are recorded in the Consolidated Statement of Operations as a component of interest expense. The fair market value of the swap agreement liability was $110,000 at October 27, 2002, resulting in a charge to interest expense of $589,000. The aggregate amount of required payments on long-term debt is as follows: Year ending October: 2003 $ 8,951,000 2004 854,000 2005 816,000 2006 993,000 2007 981,000 Thereafter 950,000 ----------- Total $13,545,000 =========== F-15 12. 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 $4,850,000 and were in a liability position of $110,000 at October 27, 2002. 13. PENSION PLAN Pension Plans - The Company sponsors a defined contribution 401(k) plan covering substantially all of its employees. 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. Pension expense related to this plan was $333,000, $895,000 and $1,314,000 for 2002, 2001 and 2000 respectively. 14. COMMITMENTS AND CONTINGENCIES The Company leases office space and certain production facilities and equipment under operating leases. Operating lease expense was approximately $285,000, $623,000 and $880,000 for 2002, 2001 and 2000, respectively, net of sublease rentals and reimbursements of utilities of $119,000, $119,000 and $50,000 for 2002, 2001 and 2000, respectively. The lease on the former corporate headquarters office space expires in September 2006 with a base rent of approximately $305,000. Future minimum rental payments under non-cancelable operating leases are as follows: Year ending October: 2003 210,000 2004 198,000 2005 186,000 2006 186,000 Thereafter -- -------- $780,000 ======== The above minimum lease payments are net of anticipated sublease income of $119,000 in each of the years 2002 through 2006. At October 27, 2002, outstanding letters of credit totaled approximately $6,426,000 and primarily guarantee industrial revenue bonds. F-16 The Company is subject to federal, state and local environmental regulations with respect to its operations. The Company believes that it is operating in substantial compliance with applicable environmental regulations. Manufacturing and other operations at the Company's facilities may result, and may have resulted, in the discharge and release of hazardous substances and waste from time to time. The Company routinely responds to such incidents as deemed appropriate pursuant to applicable federal, state and local environmental regulations. In connection with the Company's divestitures of its operating businesses over the past four years, it has agreed to indemnify buyers from and against certain known and unknown environmental liabilities. In addition, the Company may be liable for the costs of removal or remuneration of hazardous or toxic substances on, in, under or discharged from it's current or previously owned real property under applicable federal, state and local environmental laws, ordinances and regulations. A subsidiary of the Company is a party to a consent decree with the State of Connecticut pursuant to which it has agreed to complete its environmental investigation of the site on which its Old Saybrook facility was previously located and conduct any remedial measures which may be required. In the second quarter of 2000, the Company revised its estimate of the cost to complete the remedial measures required at the site. The revision to the estimate resulted in a reduction in the liability of $260,000. Based upon the amounts recorded as liabilities, the Company believes that the ultimate resolution of this matter will not have a material adverse effect on the consolidated financial results of the Company. In addition to the matters reported herein, the Company is involved in litigation dealing with certain aspects of its business operations. The Company believes that settlement of such litigation will not have a material adverse effect on its consolidated financial position or results of operations. 15. MAJOR CUSTOMERS A significant portion of the Company's sales are concentrated among a small number of customers. Sales to the two largest customers represented approximately 14%, 15%, and 12%, of total sales from continuing operations for 2002, 2001 and 2000, respectively. 16. INCOME TAX EXPENSE The income tax provision consists of the following:

A reconciliation of the income tax provision as presented in the consolidated statements of operations is as follows: F-17

The reconciliation of the statutory federal income tax rate and the effective rate, for continuing operations, is as follows:

The difference between the statutory federal rate and the reported amount of income tax expense attributable to continuing operations is primarily due to non-deductible goodwill and change in the valuation allowance resulting from the utilization of the capital loss carryforward and the five year carryback of net operating losses related to the changes in tax laws. The components of the Company's net deferred tax assets and liabilities are as follows:

F-18 These amounts are included in the accompanying consolidated financial statements as follows: 2002 2001 Current deferred tax assets $ 295,000 $ 2,453,000 Non-current deferred tax liabilities (1,900,000) (2,766,000) ----------- ----------- Net deferred tax liability $(1,605,000) $ (313,000) =========== =========== The Company has recorded valuation allowances which management has determined are sufficient to reduce its deferred tax assets to an amount which is more likely than not to be realized. The Company's valuation allowances relate primarily to intangible assets, federal and state net operating loss carry-forwards, and other state deferred tax assets. The Company has approximately $2,349,000 of net operating loss carry forwards as of October 27, 2002 for federal income tax reporting purposes and which expire between 2007 and 2012. A portion of these net operating losses are subject to annual utilization limitations under Section 382 of the Internal Revenue Code. The Company also has approximately $11,800,000 of capital loss carry forwards as of October 17, 2002 for federal income tax reporting purposes and which expire in 2006. 17. COMMON STOCK PUT OPTION During 2001 the Company received notice from a former employee and shareholder requesting payment of $8.00 per share for 75,000 shares of common stock of the Company owned by him under a conditional put right that a subsidiary of the Company had granted to such shareholder. The shareholder in question renewed his request in late 2002. Neither the Company nor the subsidiary of the Company that had granted the conditional put right believes that the shareholder has a contractual right to require the purchase of his shares at this time, principally due to a negative covenant in the Company's bank credit facility precluding the Company and its subsidiaries from making any payments or other distributions with respect to the Company's common stock. The Company believes that it has complied with all terms associated with the put right, including those excusing performance when payment is precluded by financing documents, as in the present case. 18. CONVERTIBLE PREFERRED STOCK In connection with the acquisition of Stature in October 1995, the Company issued 1,071,428 of its 10,000,000 authorized preferred shares of Class A convertible preferred stock with a stated value of $14.00 per share. Such preferred stock was convertible into the Company's common stock on a one-for-one basis, at the holders' option, through October 2000, at which time, the Company had the right, but was not obligated, to redeem the preferred stock for cash at its stated value of $14.00 per share. Neither the option to convert the preferred stock into the Company's common stock, nor the Company's right to redeem the preferred stock, has been exercised. The Company's option to redeem the preferred stock continues after October 2000, with the redemption price increasing annually until it reaches $21.00 in 2009 for a maximum liquidation amount of $22,500,000. The Company has accreted the value of its preferred stock to its stated value of $14.00 per share over the period ending in October 2000, when the conversion feature of the stock expired, using the effective interest method at a rate of 7.6%. F-19 The preferred stock earns quarterly cash dividends as a percentage of the stated value of $15,000,000 at a rate of 5% per annum through October 2000. Thereafter, the dividend percentage rate increases 1% each year to its maximum rate of 10% in November 2004 and thereafter. Since the preferred stock was not converted by October 2000, the increasing rate dividend is accounted for by the accrual of amounts in excess of the cash dividend through the consolidated statements of operations using the effective interest method, at a rate of 8.7%. Dividends accrued but not paid on the preferred stock were $2,664,000 and $1,316,000 for 2002 and 2001, respectively. Dividends paid on the preferred stock were $750,000 for 2000. The Company may not pay any common stock dividends unless all preferred dividend requirements have been met. The convertible preferred stockholders are entitled to vote as a class to elect one member of the Board of Directors of the Company, provided at least 40% of the originally issued Class A preferred stock is outstanding. The convertible preferred stock has liquidation priority over common stock. In certain circumstances, the issuance of other classes of securities require the approval of the Class A preferred stockholders. In connection with the amendment to the Company's bank credit facility in February 2001, the Company is prohibited from making future preferred stock dividend payments. 19. STOCK-BASED COMPENSATION PLANS In 1998, the Company adopted a long-term incentive plan (the "Incentive Plan") which permits the granting of Stock Options, Stock Appreciation Rights, Restricted Stock, Long-Term Performance Awards, Performance Shares and Performance Units. Officers, other employees and directors of the Company are eligible to receive awards under the Incentive Plan. The maximum number of shares of Common Stock of the Company that may be made the subject of awards granted under the Incentive Plan is 500,000. Stock options granted under the Incentive Plan generally vest over five years and are exercisable for periods up to ten years from the date of grant at a price which equals fair value at the date of grant. The Company also maintains a stock option plan (the "1994 Plan"), designed to serve as an incentive for retaining valuable employees and directors. All employees and directors of the Company are eligible to participate in the 1994 Plan. The 1994 Plan provides for the granting of options to purchase an aggregate of up to 500,000 shares of common stock of the Company. Options granted generally vest over five years and are exercisable for periods up to ten years from the date of grant at a price which equals fair market value at the date of grant. The 1994 Plan provides for the automatic acceleration of the exercisability of all outstanding options upon the occurrence of a change in control (as defined) and for the cancellation of options and cash payment to the holders of such canceled options upon the occurrence of certain events constituting a change in control. The 1994 Plan may be amended, altered or discontinued at any time, but no amendment, alteration or discontinuation will be made which would impair the rights of an optionee with respect to an outstanding stock option without the consent of the optionee. The following schedule summarizes stock option activity and status: F-20

The following table summarizes information about stock options outstanding at October 27, 2002:

The Company accounts for the 1994 Plan and stock options granted under the Incentive Plan in accordance with APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for the 1994 Plan and the Incentive Plan been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share would have been reduced by $59,000 and $0.01 per share, respectively for 2002, and net loss per share would have increased by $138,000 and $0.02 per share, respectively for 2001 and $274,000 and $0.05 per share, respectively for 2000. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to October 30, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The weighted average fair value of options granted during 2001 and 2000 was $48,000 and $246,000, respectively. The Company did not grant options in 2002. The fair value of the options granted were estimated on the date of grant using the Binomial option-pricing model with the following assumptions for grants in 2001 and 2000: risk-free interest rate of 4.51% and 5.02%, respectively, expected volatility of 59% and 40%, respectively, dividend yield of 0.0% and 0.0%, respectively, and an expected life of five years in 2001 and 2000. F-21 20. SEGMENT INFORMATION The Company prepares its financial statements in accordance with Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosure About Segments of an Enterprise and Related Information. SFAS No. 131 requires companies to define and report financial and descriptive information about its operating segments. The Company is organized based upon the products and services it offers. Under this organizational structure, the Company has historically operated in four business segments: Motors, Coils, Agricultural Equipment, and Other. The Motors segment, the Company's only remaining business segment, is comprised of Stature Electric, Inc., established in 1974 in Watertown, New York. Stature is a custom designer and manufacturer of motors and gear motors, including AC, DC and Universal. Significant markets for Stature, or the Motors segment, include commercial products and equipment, healthcare, recreation and non-automotive transportation. Stature's component products are sold throughout North America and in Europe, primarily to original equipment manufacturers who use them in their end products. Prior to July 30, 2002, the Motors segment also included the operations of Motor Products - Owosso Corporation and Motor Products - Ohio Corporation. The Company's historical Coils segment manufactured heat exchange coils primarily for non-automotive transportation, refrigeration and commercial and residential HVAC markets. The businesses included in this segment were sold during 2001. Accordingly, the Company has reported the results of this segment as discontinued operations for all periods presented in the consolidated statements of operations. The net assets of the Coils segment are included as Assets of Discontinued Operations for purposes of disclosure of identifiable assets. During the fourth quarter of fiscal 2000, the Company adopted a plan to dispose of Sooner Trailer, which manufactured all-aluminum trailers, primarily horse and livestock trailers. The Company completed the sale of Sooner Trailer on January 24, 2001. Sooner Trailer had been included in the Company's historical Agricultural Equipment segment (formerly known as the Trailers and Agricultural Equipment segment). The Company has reported the results of Sooner Trailer as discontinued operations for all periods presented in the consolidated statements of operations. The net assets of Sooner Trailer are included as Assets of Discontinued Operations for purposes of disclosure of identifiable assets. The Company's historical Other segment included Dura-Bond and Cramer. Dura-Bond, which was sold on November 2, 2000, manufactured replacement camshaft bearings, valve seats and shims for the automotive after-market. Cramer manufactured timers and subfractional horsepower motors for use in commercial applications. The Company completed the sale of the assets associated with the timer and switch line of Cramer on December 4, 2000 and, in connection with the sale, changed the name of the company from M.H. Rhodes, Inc. to Cramer Company. The Company disposed of substantially all of the remaining Cramer assets (excluding real property) in a separate transaction completed on September 23, 2001. The Company derives substantially all of its revenues from within the United States. Information about interest expense, other income and income taxes is not provided on a segment level. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. F-22 The following table reflects, from continuing operations, net sales, income (loss) from operations, capital additions, and depreciation and amortization expense for the fiscal years ended October 2001, 2000 and 1999 and identifiable assets as of October 2001, 2000 and 1999 for each segment:

(1) Includes write-down of net assets held for sale of $381,000 in 2002, $1,100,000 in 2001 and $2,800,000 in 2000. (2) Includes unallocated corporate expenses, primarily salaries and benefits, information technology, and other administrative expenses. F-23 21. QUARTERLY INFORMATION (UNAUDITED)

The above information has been restated to reflect the results of Sooner Trailer and the Coils segment as discontinued operations. Loss from continuing operations for the third quarter of 2001 included $1,100,000 for the write-down of assets held for sale. For the fourth quarter of 2001, loss from continuing operations included $650,000 for severance costs incurred and expensed in the quarter. Loss from continuing operations for the fourth quarter of 2002 included $381,000 for the writedown of assets held for sale. Income (loss) from discontinued operations for the fourth quarter of 2002 and 2001 included $520,000 and $9,340,000 respectively, for the write-down of assets held for sale. ****** F-24

-------------------------------------------------------- (a) Reflects reclassification to Net Assets Held for Sale (b) As to accounts receivable and inventory, primarily represents amounts written off against related assets. F-25

OWOSSO CORP 10-K