UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2002
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number 1-448
Mestek, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0661650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
260 North Elm Street, Westfield, MA 01085
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 413-568-9571
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock - No Par Value New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
(Title of class)
(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 xx No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) 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. xx
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No xx
The aggregate market value of voting common shares held by non-affiliates of the
registrant as of April 1, 2003, based upon the closing price for the
registrant's common stock as reported in The Wall Street Journal as of such
date, was $55,343,152. The aggregate market value of voting common shares held
by non-affiliates of the registrant as of June 28, 2002, the last business day
of the second quarter of 2002, based upon the closing price for the registrant's
common stock as reported in The Wall Street Journal as of such date was
$58,058,117. The number of shares of the registrant's common stock issued and
outstanding as of April 1, 2003 was 8,721,603.
PART I
Item 1 - BUSINESS
GENERAL
Mestek, Inc. ("Mestek") was incorporated in the Commonwealth of
Pennsylvania in 1898 as Mesta Machine Company. It changed its name to Mestek,
Inc. in October 1984, and merged with Reed National Corp. on July 31, 1986.
"The Company", as referred to herein, refers to Mestek and its subsidiaries,
collectively.
The Company is comprised of two distinct businesses (Operating
Segments): (1) the HVAC segment which manufactures heating, ventilating, and air
conditioning equipment, and (2) the Metal Forming segment which manufactures
metal-forming equipment. Both segments operate in industries which historically
have been highly fragmented. In recent years, both industries, and in particular
the HVAC industry, have undergone a gradual "roll-up" or consolidation process.
The Company's recent history therefore is one of acquisition:
On January 31, 1997, the Company acquired ninety-one and one hundredths
percent (91.01%) of the issued and outstanding common stock of Hill Engineering,
Inc. (Hill) of Villa Park, Illinois and Danville, Kentucky. Hill is a leading
producer of precision tools and dies for the gasket manufacturing and roll
forming industries and other specialty equipment. The purchase price paid for
the acquired stock was $5,141,000. The Company has accounted for this
acquisition under the purchase method of accounting.
On November 3, 1997 the Company acquired one hundred percent (100%) of
the issued and outstanding common stock of CoilMate, Inc. (CoilMate) of
Southington, Connecticut. CoilMate is the leading producer of pallet de-coiling
equipment for the metal stamping and roll forming industries. The purchase price
paid was $3,521,000. The Company has accounted for this acquisition under the
purchase method of accounting.
On April 29, 1998, the Company, through a Canadian subsidiary, acquired
100 percent of the outstanding common stock of Ruscio Brothers Refractory Ltd.
(RBR) and 988721 Ontario, Inc. (988721), both of Mississauga, Ontario, Canada.
RBR and 988721 manufacture and distribute commercial and residential
finned-copper tube boilers and water heaters under the name Ruscio Brothers
Industries, (RBI), primarily in Canada. Finned-copper tube boilers and water
heaters are complementary to the Company's other hydronic products and the
Company now distributes RBI's products in the United States. The purchase price
paid for the acquired stock was approximately $2,877,000 (U.S.) and included
goodwill of approximately $1,807,000 (U.S.)
On November 2, 1998, the Company exchanged its forty-six and eight
tenths percent (46.8%) interest in Eafco, Inc. for ninety-three and six tenths
percent (93.6%) of the common stock of Boyertown Foundry Company (BFC) of
Boyertown, PA. BFC received one hundred percent (100%) of the foundry and
machining operations of Eafco on that same date pursuant to "a split-up" of
Eafco structured as a tax-free reorganization. The Company has accounted for
this transaction under the purchase method of accounting. Accordingly, the
carrying value of the Company's equity investment in Eafco, $8,778,000 at
November 2, 1998, was treated as the purchase price for accounting purposes. The
assets acquired by BFC included substantially all of the real estate and
equipment owned by Eafco in Boyertown and used in the foundry, machining and
boiler assembly operations and certain other assets and liabilities. BFC
operates principally as a cast-iron foundry, supplying cast iron sections and
related machining services to both the Company's Westcast subsidiary and to
various third parties, including Peerless Heater Company, Inc. In connection
with this transaction the Company loaned Eafco, Inc. $1,500,000 and also assumed
and paid $650,000 of Eafco's then outstanding bank indebtedness. The $1,500,000
loan bears interest at Fleet Bank's prime rate less one, is payable over 42
months beginning on May 1, 2000, and is secured by substantially all of Eafco's
assets. BFC has also leased a portion of its facilities in Boyertown to Eafco,
Inc. which will continue to assemble and warehouse boilers in Boyertown for
Peerless Heater Company, Inc.
On March 26, 1999, the Company acquired substantially all of the
operating assets of the Anemostat Products and Anemostat-West divisions of
Dynamics Corporation of America, (collectively, Anemostat), a wholly owned
subsidiary of CTS Corporation. Anemostat manufactures commercial air
distribution products (grilles, registers, diffusers and VAV boxes); security
air distribution products; and door and vision frame products for the HVAC and
commercial building industries at locations in Scranton, Pennsylvania (Anemostat
Products) and Carson, California (Anemostat-West). The Anemostat products are
complementary to the Company's existing air control product businesses. The
purchase price paid for the assets acquired was approximately $25,360,000,
including assumed liabilities of approximately $3,577,000. The Company accounted
for this acquisition under the purchase method of accounting and, accordingly,
recorded goodwill of approximately $6,800,000.
On April 26, 1999, an order was entered in the Bankruptcy Court for the
Southern District of Ohio, whereby the Company's offer to acquire certain of the
operating assets of ACDC, Inc. of New Milford, Ohio, a manufacturer of
industrial dampers for the power generation market, was approved. The Company
closed this transaction on May 7, 1999 for $2,554,000. The Company has accounted
for this acquisition under the purchase method of accounting.
On January 28, 2000, the Company acquired substantially all of the
operating assets of Wolfram, Inc. d/b/a Cesco Products, a manufacturer of air
control products for approximately $6,425,000, as more fully explained in Note 2
to the accompanying Consolidated Financial Statements. The Company has accounted
for this acquisition under the purchase method of accounting.
On February 10, 2000, the Company acquired certain assets of B & K
Rotary Machinery International Corporation, a manufacturer of metal processing
lines, for approximately $3,018,000, as more fully explained in Note 2 to the
accompanying Consolidated Financial Statements.
On March 7, 2000, the Company completed the spin-off and subsequent
merger of its wholly owned subsidiary, MCS, Inc. with and into Simione Central
Holdings, Inc., as more fully explained in Note 3 to the accompanying
Consolidated Financial Statements.
On June 3, 2000, the Company acquired 100% of the stock of Met-Coil
Systems Corporation, (Met-Coil) for approximately $33.6 million, as more fully
explained in Note 2 to the accompanying Consolidated Financial Statements.
Met-Coil manufactures advanced sheet metal forming equipment, fabricating
equipment, and computer-controlled fabrication systems for the global market in
its Cedar Rapids, Iowa, and Lisle, Illinois, manufacturing facilities.
Met-Coil's products are complementary with those of the Company's Metal Forming
Segment. The Company accounted for the acquisition under the purchase method of
accounting and, accordingly, recorded goodwill of approximately $23,000,000.
On June 30, 2000 the Company acquired substantially all of the
operating assets of Louvers and Dampers, Inc. (L & D) located in Florence,
Kentucky. L & D manufactures louver and damper products for the HVAC industry.
The purchase price paid for the assets acquired was $3,000,000 and included
$699,000 of goodwill. The Company accounted for the acquisition under the
purchase method of accounting.
On August 25, 2000 the Company, through a subsidiary, Airtherm, LLC,
acquired substantially all of the operating assets of Airtherm Manufacturing
Company, a Missouri corporation, and Airtherm Products, Inc., an Arkansas
corporation, except the real property owned by these companies, for
approximately $3,815,000, including assumed liabilities of
$101,000.Subsequently, in September 2001, the company exercised an option to
purchase the membership interest of a minority member of Airtherm, LLC for $2.0
million subject to certain adjustments. The Company now owns 100% of the
membership interests of Airtherm, LLC. The amount paid for the purchases of the
minority membership interest was recorded as goodwill in connection with the
acquisition of Airtherm assets.
On July 2, 2001 the Company, through its wholly owned subsidiary,
Formtek, Inc., acquired of 100% of the outstanding common stock of SNS
Properties, Inc. (SNS), an Ohio corporation based in Warrensville Heights, Ohio.
SNS, through its Yoder, Krasny Kaplan and Mentor AGVS businesses, manufactures
sophisticated metal forming equipment, tube mills, pipe mills, custom engineered
material handling equipment, and automated guided vehicle systems for the global
market. The purchase price paid for the stock was $12.5 million and included
$7.7 million in goodwill. The Company also acquired a related manufacturing
plant in Bedford Heights, Ohio for $1.1 million.
On December 31, 2001, the Company acquired substantially all of the
operating assets and certain liabilities of King Company, (King), a subsidiary
of United Dominion Industries, based in Bishopville, South Carolina, and
Owatonna, Minnesota. King manufactures industrial heating and specialty
refrigeration products complementary to certain of the Company's other
industrial HVAC product lines. The purchase price paid, net of liabilities
assumed, was $4 million and included no goodwill. The Company has accounted for
this acquisition under the purchase method of accounting.
The Company's executive offices are located at 260 North Elm Street,
Westfield, Massachusetts 01085. The Company's phone number is 413-568-9571. The
Company's Website address is www.mestek.com. Our Annual Report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
these reports are available, without charge, on our website as soon as
reasonably practical after they are filed electronically with the Securities and
Exchange Commission. Also contained on our website are our Code of Business
Ethics and our Corporate Governance Guidelines as well as a listing of our Board
of Directors, Audit Committee Members, Nominating/Governance Committee Members
and Compensation Committee Members.
OPERATIONS OF THE COMPANY
The Company operates in two continuing business segments: Heating,
Ventilating, and Air Conditioning ("HVAC") and Metal Forming equipment
manufacturing. Each of these segments is described below.
The Company and its subsidiaries together employed approximately 2,825
persons as of December 31, 2002.
HEATING, VENTILATING AND AIR CONDITIONING EQUIPMENT
The Company, through certain divisions of Mestek, Inc. and various of
its wholly or majority owned subsidiaries, (collectively, the "HVAC Segment")
manufactures and distributes products in the HVAC industry. These products
include residential, commercial and industrial hydronic heat distribution
products, commercial and industrial gas-fired heating and ventilating equipment,
commercial and industrial air control and distribution, commercial and
residential gas and oil-fired boilers, air conditioning units, refrigeration and
ventilating equipment for the food processing industry, and related products
used in heating, ventilating and air conditioning systems. These products may be
used to heat, ventilate and/or cool structures ranging in size from large office
buildings, industrial buildings, warehouses, stores and residences, to such
small spaces as add-on rooms in residences. The HVAC Segment sells its products
to independent wholesale supply distributors, mechanical, sheet metal and other
contractors and, in some cases, to other HVAC manufacturers under original
equipment manufacture (OEM) and national account agreements. The HVAC segment is
comprised of five interrelated HVAC product groups: Hydronic Products, Gas
Products, Cooling Products, Industrial Products, and Air Control and
Distribution Products, described in more detail as follows:
Hydronic Products consist of residential baseboard heating products,
commercial finned tube heating products, residential boilers, commercial
boilers, convectors, kickspace heaters, fan coil units, steam & hot water unit
heaters, finned-copper tube boilers and water heaters. These products are sold
principally under the "Sterling", "Vulcan", "Heatrim", "Kompak", "Petite",
"Suntemp", "Beacon Morris", "Hydrotherm", "Airtherm", "Westcast", "RBI", and "L.
J. Wing" brand names. Gas and oil-fired boilers are sold primarily under the
"RBI" and "Hydrotherm" brand names operated by subsidiaries of the Company.
Westcast, Inc., a wholly owned subsidiary, is a distributor of gas and oil fired
boilers in the commercial and residential markets sold principally under the
name "Smith Cast Iron Boilers". Boyertown Foundry Company (BFC), approximately
97% owned by the Company, operates a cast-iron foundry in Boyertown, PA, which
manufactures products used principally in the manufacture of oil and gas fired
boilers. The hydronic products are made in manufacturing facilities, in some
cases shared with other HVAC Segment Divisions, in Westfield, MA; South Windsor,
CT; Mississauga, Ontario, Canada; Wrens, GA; Farmville, NC; Forrest City, AR;
Dundalk, MD; and Dallas, TX.
Gas Products consist of commercial gas-fired heating and ventilating
equipment and corrugated stainless steel gas tubing sold principally under the
"Sterling" and "TracPipe(R)", brand names. The products are made in
manufacturing facilities in Farmville, NC and Exton, PA. Omega Flex, Inc.
(Omega), a wholly owned subsidiary of Mestek, manufactures corrugated flexible
stainless steel hose for use in a wide variety of industrial applications. Its
products include annular, helical and braided metal hose and hose fabrications
and are sold primarily through industrial hose distributors and original
equipment manufacturers. In January of 1997, Omega introduced TracPipe(R), a
corrugated stainless steel tubing developed for use in piping gas appliances.
The Company has realized significant synergies by distributing TracPipe(R)
through its extensive HVAC distribution network. International distribution of
the TracPipe(R) product began in 2002 and is expected to contribute to segment
operating profits in 2003.
Cooling Products consist of residential and commercial air conditioning
products principally sold under the "Spacepak" and "Koldwave" brand names. The
products are made in manufacturing facilities in Wrens, GA and Dundalk, MD.
Industrial Products consist of commercial and industrial indoor and
outdoor heating and air conditioning products sold principally under the
"Applied Air", "King", "L. J. Wing", "Temprite", "Alton" and "Aztec" brand
names. The products are made in manufacturing facilities in Dallas, TX and
Bishopville, SC.
Air Control and Distribution Products consist of fire, smoke and air
control dampers, louvers, grilles, registers, VAV boxes and diffusers sold
principally under the "American Warming and Ventilating", "Air Balance",
"Arrow", "Air Clean Damper", "Louvers and Dampers", "Cesco" and "Anemostat"
brand names. Air control and distribution products are devices designed to
facilitate the ventilation of buildings, tunnels and other structures or to
control the movement of air through building ductwork in the event of fire or
smoke. The products are made in manufacturing facilities in Bradner, OH;
Waldron, MI; San Fernando, CA; Wyalusing, PA; Milford, OH; Florence, KY; Wrens,
GA; Scranton, PA; and Carson, CA.
Collectively, the HVAC Segment's products provide heating, cooling,
ventilating, or some combination thereof, for a wide range of residential,
commercial and/or industrial applications.
Through its design and application engineering groups, the HVAC Segment
often-custom designs and manufactures many HVAC products to meet unique customer
needs or specifications not met by existing products. Such custom designs often
represent improvements on existing technology and often are incorporated into
the HVAC Segment's standard line of products.
The HVAC Segment sells its HVAC products primarily through a diverse
group of independent representatives throughout the United States and Canada,
many of whom sell several of the segment's products. These independent
representatives usually handle various HVAC products made by manufacturers other
than the Company. These representatives usually are granted an exclusive right
to solicit orders for specific HVAC Segment products from customers in a
specific geographic territory. Because of the diversity of the HVAC Segment's
product lines, there is often more than one representative in a given territory.
Representatives work closely with the HVAC Segment's sales managers and its
technical personnel to meet customers' needs and specifications. The independent
representatives are compensated on a commission basis, but also at times
purchase such products for resale. HVAC products are sold primarily to
contractors, installers, and end users in the construction industry, wholesale
distributors and original equipment manufacturers. While the HVAC Segment's HVAC
products are distributed throughout the United States and Canada, sales in the
northeast, mid-Atlantic and upper mid-west states are somewhat higher than would
be suggested by unadjusted construction statistics in any given year due to the
relative popularity of hydronic products in these areas. The sale of heating and
cooling products is sensitive to climatic trends in that relatively warm winters
and/or cool summers can adversely affect sales volumes.
The HVAC Segment sells gas-fired and hydronic heating and ventilating
products, boilers and other HVAC equipment in Canada and also sells its products
in other foreign markets from time to time. Total export sales did not exceed
ten percent of total revenues, nor did foreign assets exceed ten percent of
total assets, in any of the most recent five years ending December 31, 2002.
The HVAC Segment uses a wide variety of materials in the manufacture of
its products, such as copper, aluminum and steel, as well as electrical and
mechanical components (controls, motors) and other products. Management believes
that it has adequate sources of supply for its raw materials and components and
has not had significant difficulty in obtaining the raw materials, component
parts or finished goods from its suppliers. No industry segment of the Company
is dependent on a single supplier, the loss of which would have a material
adverse effect on its business.
The businesses of the HVAC segment are highly competitive. The Company
believes that it is the largest manufacturer of hydronic baseboard heating for
residential and commercial purposes and is one of the three leading
manufacturers of commercial and industrial gas-fired heating and air control
products. The Company has established a substantial market position in the
cast-iron boiler business through its acquisitions in 1991, 1992, and 1998. The
Company has expanded its portfolio of air control and distribution products
substantially over the last several years, largely by acquisition. Nevertheless,
in all of the industries in which it competes, the Company has competitors with
substantially greater manufacturing, sales, research and financial resources
than the Company. Competition in these industries is based mainly on product
offering, merchandising capability, service, quality, price and ability to meet
customer requirements. The HVAC Segment believes that it has achieved and
maintained its position as a substantial competitor in the HVAC industry largely
through the strength of its extensive distribution network, the breadth of its
product line and its ability to meet customer delivery and service requirements.
Most of its competitors offer their products in some but not all of the
industries served by the HVAC Segment.
The HVAC industry in which the HVAC Segment operates has been
characterized for many years by a gradual consolidation or "roll-up" process in
which smaller companies, typically built around one or two niche products, are
subsumed into the larger product family of more established HVAC companies. The
HVAC Segment has grown incrementally over many years by internal growth and by
adding complementary HVAC product lines via acquisition on a regular basis. The
HVAC Segment has acquired in this manner 21 companies since 1986 at an average
transaction size of approximately $ 5 million. By design, the HVAC Segment's
acquisition strategy has been to acquire complementary HVAC products in order to
exploit specific marketing, distribution, manufacturing, product development and
purchasing synergies. Management, accordingly, views and operates the HVAC
Segment as a single cohesive business made up of a large number of mutually
reinforcing HVAC product lines acquired over a number of years.
All of the segment's HVAC Products described above share common
customers, common distribution channels, common manufacturing methods (and in
many cases shared manufacturing facilities), common manufacturing services,
common purchasing services, common executive and financial management, and
common engineering and product development resources. Key strategic business
decisions regarding Sales, Marketing, Operations, Engineering, and Product
Development are made on a centralized basis by the Segment's core management
group.
Common Sales/Marketing Management: Executive sales/marketing management
is provided for substantially all of the HVAC product groups from the HVAC
Segment's headquarters in Westfield, MA. Most, if not all, of the HVAC Segment's
customers are current customers or potential future customers for more than one
of the Segment's product groups. As explained above, the HVAC Segment's
acquisitions are typically based in fact upon just such cross-selling and common
distribution synergy opportunities.
The HVAC industry's most significant trade association, ASHRAE,
(American Society of Heating, Refrigeration, and Air conditioning Engineers),
hosts an annual trade show at which all of the HVAC Segment's products and brand
names are represented at a single consolidated physical location under the
Mestek name. Representatives of the HVAC industry customer base--independent
manufacturers representatives, contractors, engineers, wholesale distributors
etc.--are all typically in attendance at this event which underscores the
interrelated nature of the HVAC industry.
Common Manufacturing Management. Substantially all of the products made
at the HVAC Segment's 20 manufacturing locations involve sheet metal
fabrication, paint, packing and assembly. As such, they share many common
characteristics and, in fact, a centralized Manufacturing Services Group serving
the Segment based in Westfield, MA provides a wide variety of manufacturing
related services to these locations. Opportunities to combine similar
manufacturing operations are commonplace and the HVAC Segment routinely
undertakes such consolidations resulting in numerous instances where several
HVAC product groups share a single manufacturing facility.
Common Purchasing Management. The HVAC Segment, composed primarily of
HVAC sheet metal fabrication and assembly operations, presents a great deal of
common purchasing opportunities. A centralized Purchasing Department serving the
HVAC Segment based in Westfield, MA, therefore serves all of the 20
manufacturing locations in the Segment by aggregating the more significant
purchasing opportunities. Common items purchased include copper tube, aluminum
fin stock, cold rolled steel, pre-painted steel, motors, controls, and freight,
among many others.
Common Financial Management. Income statements are prepared at the HVAC
Segment's Westfield, MA headquarters each month for substantially all of the
products made at the 20 HVAC locations mentioned above with further breakdown
among specific product lines, and these are reviewed by a single Chief Operating
Decision Maker.
The quarterly results of the HVAC segment are affected by the
construction industry's demand for heating equipment, which generally peaks in
the last four months of each year (the "heating season"). Accordingly, sales are
usually higher during the heating season, and such higher levels of sales may in
some years continue into the following calendar year. As a result of these
seasonal factors, the Company's inventories of finished goods reach higher
levels during the heating season and are generally lower during the balance of
the year.
Management does not believe that backlog figures relating to the HVAC
segment are material to an understanding of its business because most equipment
is shipped promptly after the receipt of orders.
The Company owns a number of United States and foreign patents.
Although the Company usually seeks to obtain patents where appropriate, it does
not consider any segment materially dependent upon any single patent or group of
related patents.
The HVAC Segment has a number of trademarks important to its business,
including those relating to its "Sterling", "Vulcan", "Beacon-Morris",
"Heatrim", "Petite", "L. J. Wing", "Alton", "Applied Air", "Arrow",
"Hydrotherm", "Temprite", "Anemostat", "Omega Flex", "TracPipe(R)", "Air Clean
Damper", "Cesco", "Louvers and Dampers", and "Airtherm" product lines.
Expenditures for research and development for the HVAC segment in 2002,
2001, and 2000, were $4,410,000, $4,266,000, and $2,551,000, respectively.
Product development efforts are necessary and ongoing in all product markets.
METAL FORMING
The Metal Forming Segment, operating under the umbrella name "Formtek,"
is comprised of four closely related subsidiaries, all manufacturers of
equipment used in the Metal Forming industry (the uncoiling, straightening,
leveling, feeding, forming, bending, notching, stamping, cutting, stacking,
bundling or moving of metal in the production of metal products, such as steel
sheets, office furniture, appliances, vehicles, buildings, and building
components, among many others).
The four subsidiaries are: (1.) Formtek Maine, a division of Formtek,
Inc. including the Cooper-Weymouth, Petersen; Rowe, and
CoilMate/Dickerman product lines; (2.) Formtek Cleveland, Inc., a
subsidiary of Formtek, - including the Yoder, Dahlstrom, B & K,
Krasny-Kaplan and Mentor product lines; (3.) Hill Engineering Inc.,
providing tools and dies complementary to the other subsidiaries
product lines; and (4.) Met-Coil Systems Corporation, comprised of the
Lockformer and Iowa Precision (IPI) product lines.
The Metal Forming segment's products are sold through factory direct
sales and independent dealers, in most cases to end-users and in some cases to
other original equipment manufacturers. The core technologies are processing
equipment for roll forming, coil processing (for stamping, forming and
cut-to-length applications), metal duct fabrication and tube and pipe systems.
The products include roll formers, roll forming systems, wing benders, presses,
servo-feeds, straighteners, cradles, reels, cut-to-length lines, specialty dies,
tube cut-off systems, hydraulic punching, blanking and cutoff systems, rotary
punching, flying cut-off saws, plasma cutting equipment, tube mills, pipe mills
and sophisticated material handling systems. The primary customers for such
metal handling and metal forming equipment include sheet metal and mechanical
contractors, steel service centers, contract metal-stampers, contract roll
formers, and manufacturers of large and small appliances, commercial and
residential lighting fixtures, automotive parts and accessories, office
furniture and equipment, tubing and pipe products, metal construction products,
doors, window and screens, electrical enclosures, shelves and racks and metal
duct work. The Segment's products are manufactured in facilities having
approximately 380,000 square feet of manufacturing space, located in Clinton,
Maine; Bedford Heights, Ohio; Warrensville Heights, Ohio; Villa Park, Illinois;
Lisle, Illinois; Danville, Kentucky and Cedar Rapids Iowa. The Segment closed
and consolidated into the Cleveland, Ohio area facilities its Schiller Park,
Illinois facility in 2001. A centralized office for marketing, market
development and international sales was opened in Itasca, Illinois in late 2002.
In 1997, this Segment added two additional units: Hill Engineering,
Inc. a leading producer of precision tools and dies for the gasket manufacturing
and roll forming industries, and CoilMate, Inc., a leading producer of pallet
de-coiling equipment for the metal stamping and roll forming industries. The
CoilMate product has been combined with a former CWP Division, Dickerman, and
this "low-end" line is now marketed as CoilMate/Dickerman.
In 2000, this Segment added Iowa Precision Industries and The
Lockformer Company (collectively, Met-Coil Systems Corporation), as more fully
explained in Note 2 to the accompanying Consolidated Financial Statements.
Met-Coil manufactures advanced sheet-metal-forming equipment, fabricating
equipment and computer-controlled fabrication systems for HVAC sheet metal
contractors, steel service centers and custom roll formers in the global market.
On July 2, 2001 the Company, through its wholly owned subsidiary,
Formtek, Inc., acquired 100% of the outstanding common stock of SNS Properties,
Inc. (SNS), an Ohio corporation based in Warrensville Heights, Ohio. SNS,
through its Yoder, Krasny Kaplan and Mentor AGVS businesses, manufactures
sophisticated metal forming equipment, tube mills, pipe mills, custom engineered
material handling equipment, and automated guided vehicle systems for the global
market. The purchase price paid for the stock was $12.5 million and included
$7.7 million in goodwill. The Company also acquired a related manufacturing
plant in Bedford Heights, Ohio for $1.1 million.
The Company believes it has improved its competitive position within
the metal forming marketplace by developing high quality equipment with
electronic and software controls, affording diagnostic, performance and
operational features, as well as by the strategic acquisitions made in 1996,
1997, 2000, and 2001, which broadened the Segment's overall product offerings,
created cross-selling opportunities, afforded synergies in sales/marketing and
field service and allows the Segment to offer sophisticated metal forming
solutions that reduce scrap, improve quality, increase throughput, shorten set
up or changeover time, reduce downtime, reduce operator involvement and allow a
wider variety of products to be processed.
Many products made by these units are custom designed and manufactured
to meet unique customer needs or specifications not currently met by existing
products. These products, developed by the Segment's design and application
engineering groups, often represent improvements on existing technology and are
often then incorporated into the standard product line.
The primary customers for such metal handling and metal forming
equipment include sheet metal and mechanical contractors, steel service centers,
contract metal stampers, contract roll formers, and manufacturers of large and
small appliances, commercial and residential lighting fixtures, automotive parts
and accessories, office furniture and equipment, tubing and pipe products, metal
construction products, doors, window and screens, electrical enclosures, shelves
and racks and HVAC equipment.
The businesses of Formtek are highly competitive and, due to the nature
of the products, are somewhat more cyclical (due to changes in manufacturing
capacity utilization and the cost and availability of financing) than the
Company's other operating segment. CWP, Rowe, CoilMate/Dickerman, and IPI have a
strong presence in the manufacture of coil processing equipment through their
broad and competitive product lines, together with Formtek's customer-driven
application engineering and ability to meet customer delivery and service
requirements through separate extensive distribution networks. Dahlstrom, B & K,
Yoder and Lockformer are well-established names in the roll-former market place.
The Company believes that the critical mass created by the recent acquisitions
of Met-Coil Systems Corporation and SNS Properties (now known as Formtek
Cleveland, Inc.) will allow it to more fully leverage its large installed
customer base in the sale of equipment and repair parts.
The units comprising this segment own a number of United States and
foreign patents, but the Segment does not consider itself materially dependent
upon any single patent or group of related patents. The Lockformer and IPI units
have lost in 2001 and 2002 certain patent protections, but do not expect a
significant decrease in sales. The B & K unit expects to capitalize on recently
issued patents for its Supermill, Rotary Punch and Rotary Shear products that
the Company believes will be a productivity breakthrough for the steel framing
segment of the metal building market.
The companies acquired by the Metal Forming Segment in the past were
selected for their synergies with the existing metal forming franchises:
complementary products and distribution channels, potential manufacturing
synergies, shared technologies and engineering skills, potential purchasing
synergies, common field service skills and organizations, and shared customer
bases. The most significant synergistic theme has been the real and potential
common customer base. To a large degree, any historical customer of one of the
companies is a potential customer for any of the others. Exploiting this cross
selling opportunity is a central factor in the creation of the Formtek family of
metal forming products and underscores the Segment's goal of creating a single
integrated metal forming and fabricating solution provider for the metal forming
and fabricating marketplace worldwide. Accordingly, there is a substantial
degree of inter-company sales among the four formerly separate metal forming
companies.
Notwithstanding the interrelation of these subsidiaries, separate
income statements and balance sheets are maintained for each of the four
entities and the Chief Operating Decision Maker reviews each of them separately
on a monthly basis. The four entities are contained in four separate
corporations, each a legally distinct entity in its own right.
Common Sales/Marketing Management. Corporate sales/marketing support is
provided for all four of the Segment's entities from a central office in Itasca,
Illinois, which focuses on promoting Formtek as a family of integrated products
for the metal forming marketplace.
Common Manufacturing Management. Substantially all of the products made
at the Segment's four entities involve the manufacture of metal forming
equipment. As such, the entities share many common characteristics and in fact a
centralized Manufacturing Services Group serving the Segment based in Westfield,
Massachusetts provides a wide variety of manufacturing related services to these
locations. Opportunities to combine similar manufacturing operations are
commonplace and the Segment routinely undertakes such consolidations.
Common Purchasing Management. The Segment, composed of four
manufacturers of metal forming equipment presents numerous common purchasing
opportunities. A centralized Purchasing Department serving the Segment based in
Westfield, MA, therefore serves the Segment by aggregating these purchasing
opportunities.
Common Financial Management. Income statements are prepared at the
Segment's Westfield, MA headquarters each month for all of the products made at
the four entities mentioned above and these are reviewed by a single Chief
Operating Decision Maker, Mestek's Chief Operating Officer in Westfield, MA.
Separate general ledgers and balance sheets for the four entities are maintained
as they are legally distinct subsidiaries necessitating this level of detail.
The Metal Forming Segment sells equipment in Canada, Mexico and other
foreign markets. Total export sales did not exceed ten percent (10%) of the
total revenues, nor did foreign assets exceed ten percent (10%) of total assets
in any of the most recent five years ending December 31, 2002.
The backlog relating to the Metal Forming Segment at December 31, 2002
was approximately $23,118,000, compared to approximately $21,539,000 at December
31, 2001.
Expenditures for research and development for this segment in 2002,
2001, and 2000, were $ 922,000, $711,000, and $931,000, respectively.
SEGMENT INFORMATION
Selected financial information regarding the operations of each of the
above segments, consistent with statement of Financial Accounting Standard No.
131 and Section 101 (d) of Regulations S-K, is presented in Note 14 to the
Consolidated Financial Statements.
Item 2 - PROPERTIES
The HVAC segment of the Company manufactures equipment at plants that
the Company owns in Waldron, Michigan; Bradner, Ohio; Wyalusing, Pennsylvania;
Scranton, Pennsylvania; Dundalk, Maryland; Wrens, Georgia; Milford, Ohio;
Dallas, Texas; Boyertown, Pennsylvania and Bishopville, South Carolina. It
operates plants that it leases from entities owned directly or indirectly by
certain officers and directors of the Company in Westfield, Massachusetts;
Farmville, North Carolina; and South Windsor, Connecticut. The HVAC segment
leases manufacturing space from unrelated parties in Mississauga, Ontario,
Canada; Carson, California; San Fernando, California; Florence, Kentucky; St.
Louis, Missouri; Forrest City, Arkansas; and Exton, Pennsylvania; as well as a
regional distribution facility in Mississauga, Ontario, Canada.
The Metal Forming segment manufactures products at plants the Company
owns in Clinton, Maine; Villa Park, Illinois; Schiller Park, Illinois (closed in
2001, sold in 2002); Danville, Kentucky; Cedar Rapids, Iowa; Lisle, Illinois and
Bedford Heights, Ohio and leases manufacturing space in Warrensville Heights,
Ohio.
The Company's principal executive offices in Westfield, Massachusetts
are leased from an entity beneficially owned by an officer and director of the
Company. The Company also owns an office building in Holland, Ohio.
In addition, the Company and certain of its subsidiaries lease other
office space in various cities around the country for use as sales offices.
Certain of the owned facilities are pledged as security for certain
long-term debt instruments. See Property and Equipment, Note 5 to the
Consolidated Financial Statements. See Note 18 relative to the plant closing
announced in April, 2003.
Item 3 - LEGAL PROCEEDINGS
The Company is not presently involved in any litigation that it
believes could materially and adversely affect its financial condition or
results of operations except as follows:
The following proceedings involve claims related to the discharge
of trichloroethylene (TCE) onto or into the soil of The Lockformer
Company site in Lisle, Illinois and are discussed in Item 7 hereof,
Management's Discussion and Analysis of Financial Condition and Results
of Operations, and in Note 13 to the Consolidated Financial Statements:
LeClercq, et al. v. The Lockformer Company - Case No. 00 C 7164
(U.S.D.C. for N.D. Ill.)
Filed November 14, 2000
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Mestek, Inc., Allied Signal, Inc.
and Honeywell International, Inc.
Mejdrech, et al. v. The Lockformer Company - Case No. 01 C 6107
(U.S.D.C. for N.D. Ill.)
Filed August 9, 2001
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Mestek, Inc., Allied Signal, Inc.
and Honeywell International, Inc.
DeVane, et al. v. The Lockformer Company - Case No. 01 L 377
(18th Judicial Circuit Court, Dupage County, Ill.)
Filed April 12, 2001
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Allied Signal, Inc. and Honeywell
International, Inc.
Daniel Pelzer, et al. v. Lockformer - Case No. 01 C 6485
(U.S.D.C. for N.D. Ill.)
Filed August 21, 2001
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Mestek, Inc. and Honeywell
International, Inc.
Deborah Meyer, et al v. The Lockformer Company - Case No. 02C2672
(U.S.D.C. for N.D. Ill.)
Filed April 12, 2002
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Mestek, Inc. and Honeywell
International, Inc.
Anne Schreiber v. The Lockformer Company - Case No. 02C6097
(U.S.D.C. for N.D. Ill.)
Filed August 27, 2002
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Met-Coil Systems Corporation, Mestek,
Inc. and Honeywell International, Inc.
Virginia Hallmer v. The Lockformer Company - Case No. 02C7066
(U.S.D.C. for N.D. Ill.)
Filed August 28, 2002
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Mestek, Inc. and Honeywell
International, Inc., Carlson Environmental, Inc.
Denise Ann Ehrhart v. The Lockformer Company - Case No. 02C7068
(U.S.D.C. for N.D. Ill.)
Filed August 28, 2002
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Mestek, Inc. and Honeywell
International, Inc., Carlson Environmental, Inc.
Laura Wroble v. The Lockformer Company - Case No. 02C4992
(U.S.D.C. for N.D. Ill.)
Filed July 15, 2002
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Mestek, Inc. and Honeywell
International, Inc.
People of the State of Illinois, et al. v. The Lockformer Company -
Case No. 00 CH 62 (18th Judicial Circuit Court, Dupage County, Ill.)
Filed January 19, 2001
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation and Honeywell International, Inc.
In the Matter of: Lockformer Site, Docket No. V-W-02-C-665.
Administrative Order issued by the United States Environmental Protection
Agency, Region 5 on October 4, 2002.
Respondents: The Lockformer Company, division of Met-Coil Systems
Corporation
For a discussion of these proceedings, see section entitled
"Environmental Disclosure" in Part II, Item 7 below.
The Company has also been named in 28 outstanding asbestos-related
products lawsuits. All of these suits seek to establish liability against the
Company as successor to companies that may have manufactured, sold or
distributed products containing asbestos materials or because the Company
currently sells and distributes boilers, an industry that has been historically
associated with asbestos-related products. However, the Company has never
manufactured, sold or distributed any product containing asbestos materials. In
addition, the Company believes it has valid defenses to all of the pending
claims and vigorously contests that it is a successor to companies that may have
manufactured, sold or distributed any product containing asbestos materials.
However, the results of asbestos litigation have been unpredictable, and
accordingly, an adverse decision or adverse decisions in these cases,
individually or in the aggregate, could materially adversely affect the
financial position and results of operation of the Company. The total requested
damages in theses cases is approximately $3.2 billion. Thus far, however, the
Company has had over 30 asbestos-related cases dismissed without any payment and
it settled a group of ten asbestos-related cases for a de minimis value. Through
December 31, 2002, the total costs of defending the approximately 50 current and
previously dismissed cases has totaled less than $200,000.
Item 4 - SUBMISSION OF MATTER TO A VOTE OF THE SECURITY HOLDERS
No matters were submitted to the security holders of the Company for a
vote during the fourth quarter of 2002.
PART II
Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange,
under the symbol MCC. The number of shareholders of record as of April 1, 2003
based on inquiries of the registrant's transfer agent was 981. For this purpose,
shareholders whose shares are held by brokers on behalf of such shareholders
(shares held in "street name") are not separately counted. The price range of
the Company's common stock between January 1, 2002 and April 1, 2003 was between
$17.40 and 18.37, and the closing price on April 1, 2003 was $18.37.
The quarterly price ranges of the Company's common stock during 2002
and 2001 as reported in the consolidated transaction reporting system were as
follows:
PRICE RANGE
2002 2001
---- ----
high low high low
First Quarter $23.55 $22.18 $19.80 $16.56
Second Quarter $23.00 $18.27 $27.13 $19.50
Third Quarter $19.45 $17.99 $26.02 $19.90
Fourth Quarter $18.30 $17.80 $24.60 $23.11
The Company has not paid any cash dividends on its common stock since
1979.
No securities issued by the Company, other than common stock, are
listed on a stock exchange or are publicly traded.
The remaining information called for in the item relating to
"Securities Authorized for Issuance under Equity Compensation Plans" is reported
in Note 17 to the Consolidated Financial Statements and Supplementary Data (Item
8). With respect to 2002, no equity compensation plans have been or currently
are submitted for stockholder approval.
Item 6 - SELECTED FINANCIAL DATA
Selected financial data for the Company for each of the last five
fiscal years is shown in the following table. Selected financial data reflecting
the operations of acquired businesses is shown only for periods following the
related acquisition. (2)
SUMMARY OF FINANCIAL POSITION as of December 31,
(dollars in thousands except per share data)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total Assets $220,301 $259,511 $293,489 $242,253 $205,143
Working capital 52,141 45,978* 25,442* 63,340* 49,309*
Long-term debt,
including current portion 11,666 30,182 63,658 34,791 13,188
Shareholders' equity 137,714 168,623* 162,872* 148,225* 133,192*
======= ======== ========= ======== ========
Shareholders' equity
per common share (1) $15.79 $19.33* $18.63* $16.92* $14.98*
====== ======= ======= ======= =======
SUMMARY OF OPERATIONS - for the year ended December 31,
(dollars in thousands except per share data)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenues from
Continuing Operations $373,874 $394,103 $375,987 $328,145 $291,164
Income (Loss) from
Continuing Operations (1,071) (2,633)* 15,984* 17,381* 13,467*
Cumulative Effect of a Change in Accounting
Principle-Goodwill Impairment (29,334) --- --- --- ---
Discontinued Operations --- 8,947 666 251 2,504
-------- --------- -------- --------- --------
Net income ($30,405) $6,314* $16,650* $17,632* $15,971*
========= ====== ======= ======= =======
Earnings (Loss) per common share:
Basic Earnings (Loss) per Common Share:
Continuing Operations ($0.12) ($0.30)* $1.83* $1.96* $1.51*
Cumulative Effect of a Change in Accounting
Principle-Goodwill Impairment (3.36) --- --- --- ---
Discontinued Operations --- 1.02 0.07 0.03 0.28
------ ------- ------ ------ ------
Net (Loss) Income ($3.48) $0.72* $1.90* $1.99* $1.79*
======= ======= ====== ====== ======
Diluted Earnings (Loss) Per Common Share
Continuing Operations ($0.12) ($0.30)* $1.82* $1.96* $1.51*
Cumulative Effect of a Change in Accounting
Principle-Goodwill Impairment (3.36) --- --- --- ---
Discontinued Operations --- 1.02 0.08 0.03 0.28
------- ------- ------ ------ ------
Net (Loss) Income ($3.48) $0.72* $1.90* $1.99* $1.79*
======= ====== ====== ====== =======
* as restated to reflect subsidiary stock options - Note 17 to the
Consolidated Financial Statements.
(1) Equity per common share amounts are computed using the common shares
outstanding as of December 31, 2002, 2001, 2000, 1999, and 1998.
(2) Includes the results of acquired companies or asset acquisitions from
the date of such acquisition, as follows:
King Company from December 31, 2001 Formtek Cleveland from July 2, 2001
Airtherm LLC from August 25, 2000 Louvers & Dampers, Inc. from June 30,
2000 Met-Coil Systems Corporation from June 3, 2000 B & K Rotary
Machinery from February 10, 2000 Cesco Products from January 28, 2000 Air
Clean Dampers from May 7, 1999 Anemostat from March 26, 1999 Boyertown
Foundry Company from November 2, 1998
Ruscio Brothers Industries, (RBI), from April 29, 1998
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION
This report contains forward-looking statements, which are subject to
inherent uncertainties. These uncertainties include, but are not limited to,
variations in weather, changes in the regulatory environment, customer
preferences, general economic conditions, and increased competition. All of
these are difficult to predict, and many are beyond the ability of the Company
to control.
Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, that are not historical facts but rather reflect
the Company's current expectations concerning future results and events. The
words "believes", "expects", "intends", "plans", "anticipates", "hopes",
"likely", "will", and similar expressions identify such forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company (or entities in which the Company has
interests), or industry results, to differ materially from future results,
performance or achievements expressed or implied by such forward-looking
statements.
Readers are cautioned not to place undue reliance on these
forward-looking statements which reflect management's view only as of the date
of this Form 10-K. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements which may be made to
reflect events or circumstance after the date hereof or to reflect the
occurrence of unanticipated events, conditions or circumstances.
RETURN ON AVERAGE NET ASSETS EMPLOYED
2002, 2001, 2000
The following analysis of the Company's Results of Operations focuses
on the relationship of "Core Operating Profits", as defined below, (rather than
Net Income) to Average Net Assets Employed, as defined below (rather than
Shareholders' Equity). Management believes this focus, which is essentially an
"enterprise value" point of view, is more useful to investors as it isolates and
relates the Company's ongoing pre-tax, pre-interest, operating earnings to the
total capital invested, whether debt or equity capital.
The Company's Operating Profits in 2002 and 2001, as reflected in the
accompanying Consolidated Financial Statements, include disproportionately large
Environmental Charges of $18,046,000 and $2,000,000 relating to a particular
matter in 2002 and 2001, respectively, which are discussed separately herein and
which are therefore excluded from the definition of "Core Operating Profits" as
used herein. Core Operating Profits as used herein is defined as Operating
Profits determined in accordance with Generally Accepted Accounting Principles,
as reflected in the accompanying financial statements, plus the aforementioned
Environmental Charges. Core Operating Profits are intended to be representative
of the ongoing historical pretax, pre-interest, operating earnings stream
contained in the Company's HVAC and Metal Forming businesses. The Environmental
Charges which are excluded from the definition of Core Operating Profits relate
to an isolated circumstance involving a release of pollutants at a location
owned by a subsidiary prior to the acquisition of that subsidiary by the
Company. Although comparable events could theoretically occur in the future,
management believes that an analysis of the Company's results of operations
independent of the costs related to this particular matter are beneficial to the
reader. Management's intent in defining Core Operating Profits in this manner is
to assist shareholders and other investors by separating the underlying
operating earnings from "unusual" or otherwise anomalous events. The Company
operates as a manufacturer in the HVAC (heating, ventilating, and air
conditioning) and Metal Forming equipment market places. While subject to the
effects of the business cycle, these are nonetheless mature industries
characterized historically by evolutionary rather than sudden technological
change and management believes therefore that its "Core Operating Profits" have
historically been somewhat more predictable in nature than has been the case in
other industries. It is not Management's intent to suggest that "unusual" or
anomalous events will not in some form recur in the future, or that such
prospects are not relevant to valuation, only that the isolation of "Core
Operating Profits" in such mature industries is useful to investors in their
evaluation of the Company's performance.
"Core Operating Profits", as defined, represents a "Non-GAAP financial
measure" which is reconcilable with the "Comparable GAAP financial measure",
Operating Profits, as follows:
2002 2001 2000
---- ---- ----
(in thousands)
Core Operating Profits (Non GAAP financial measure) $ 18,751 $ 13,592 $ 26,655
Less Environmental Charges $ 18,046 $ 2,000 ---
-------- -------- ------------
Operating Profits (Comparable GAAP financial measure) $ 705 $ 11,592 * $ 26,655 *
---------- ---------- ----------
The Company's Return on Average Net Assets Employed, defined as Core
Operating Profits, over Average Net Assets Employed From Continuing Operations
(Total Assets less Current and Non Current Liabilities-other than Current and
Non Current Portions of Long-Term Debt-averaged over 12 months) for the years
2002, 2001, and 2000 was as follows:
2002 2001 2000
---- ---- ----
(in thousands)
Core Operating Profits (Non GAAP financial measure) $ 18,751 $ 13,592 $ 26,655
Average Net Assets Employed from Continuing Operations $ 167,440 $ 201,676 $ 186,398
--------- --------- ---------
Return on Average Net Assets Employed 11.2% 6.7% 14.3%
========== ============ ============
* restated to reflect effect of subsidiary stock options - see Note 17 to the
accompanying Consolidated Financial Statements.
Average Net Assets Employed from Continuing Operations in 2002 was reduced
relative to 2001 due to the effect of the $29,334,000 net goodwill impairment
charge recorded in accordance with FAS 142, as more fully described in Note 1 to
the accompanying Consolidated Financial Statements, as of January 1, 2002.
The improvement in overall Return on Average Net Assets Employed from
6.7% in 2001 to 11.2% in 2002 reflected two significant themes:
1. Successful efforts in 2002 in both the HVAC and Metal Forming
segments to rationalize overhead costs in a declining marketplace
while preserving essential product development programs.
2. Completion of certain manufacturing relocation projects undertaken
in 2001 and 2002. These themes are explained in more detail in the
analysis following
ANALYSIS: 2002 VS. 2001
HVAC SEGMENT:
The Company's HVAC segment reported comparative results from continuing
operations for 2002 and 2001 as follows:
2002 2002 2001 2001
---- ---- ---- ----
($000) % ($000) %
------ ------- ------ -------
Net Sales 307,585 100.00% $313,726 100.00%
Gross Profit 93,176 30.29% 89,226 28.44%
Operating Profits 21,801 7.08% 21,020 * 6.70%
Average Net Assets Employed (ANAE) 130,150 135,816 *
Return on ANAE 16.75% 15.47%
* restated to reflect the effect of subsidiary stock options - see Note 17 to
the accompanying Consolidated Financial Statements.
For the year as a whole, excluding the effects of The King Company
(King) which was acquired on December 31, 2001, the HVAC Segment's revenues were
down 4.79%, from $313,726,000 in 2001 to $298,674,000 in 2002, reflecting
reduced sales of certain air conditioning, industrial, gas fired heating and air
distribution products. The reduced revenues reflect the continuing downturn in
the industrial, and to a lesser extent commercial, construction marketplace, the
effects of certain factory relocations completed in 2002, and, in some cases,
circumstances related to managerial changes made in 2002.
The HVAC Segment's Air Control and Distribution Group continued to
incur additional training and other costs in its Florence, Kentucky facility in
2002 after relocating certain products to that location in 2001. Significant
product development programs, including laboratory work, remained ongoing in
2002 relative to the Anemostat and Applied Air business units as well
contributing to higher engineering costs in the HVAC segment.
Operating Profits for the Segment were reduced in 2001 by $636,000 of
goodwill amortization. "Comparable" Operating Profits for the two years,
therefore, were up only slightly. The improvement in "Comparable" Operating
Profits, however occurred despite reduced Net Sales (after adjusting for the
acquisition of King on December 31, 2001 as noted above) reflecting the HVAC
Segment's success in 2002 in its efforts to reduce overhead in all areas, and
control its investment in working capital.
Sales of Omega Flex, Inc.'s TracPipe(R) flexible gas piping product and
its patented connection system continued to grow in 2002 sustained by relatively
strong single family and multi-family residential construction activity.
TracPipe(R) is a corrugated stainless steel tubing product developed especially
for use in the piping and installation of gas appliances.
The businesses of the HVAC segment are highly competitive. The Company
believes that it is the largest manufacturer of hydronic baseboard heating for
residential and commercial purposes and is one of the three leading
manufacturers of commercial and industrial gas-fired heating and air control
products. The Company has established a substantial market position in the
cast-iron boiler business through its acquisitions in 1991, 1992, and 1998. The
Company has expanded its portfolio of air control and distribution products
substantially over the last several years, largely by acquisition. Nevertheless,
in all of the industries in which it competes, the Company has competitors with
substantially greater manufacturing, sales, research and financial resources
than the Company. Competition in these industries is based mainly on product
offering, merchandising capability, service, quality, price and ability to meet
customer requirements. The HVAC Segment believes that it has achieved and
maintained its position as a substantial competitor in the HVAC industry largely
through the strength of its extensive distribution network, the breadth of its
product line and its ability to meet customer delivery and service requirements.
Most of its competitors offer their products in some but not all of the
industries served by the HVAC Segment.
The HVAC industry in which the HVAC Segment operates has been
characterized for many years by a gradual consolidation or "roll-up" process in
which smaller companies, typically built around one or two niche products, are
subsumed into the larger product family of more established HVAC companies. The
HVAC Segment has grown incrementally over many years by internal growth and by
adding complementary HVAC product lines via acquisition on a regular basis The
HVAC Segment has acquired in this manner 21 companies since 1986 at an average
transaction size of approximately $ 5 million. By design, the HVAC Segment's
acquisition strategy has been to acquire complementary HVAC products in order to
exploit specific marketing, distribution, manufacturing, product development and
purchasing synergies. Management, accordingly, views and operates the HVAC
Segment as a single cohesive business made up of a large number of mutually
reinforcing HVAC product lines acquired over a number of years. Management views
the present unsettled economic climate as an opportunity to acquire
complementary products and believes the Company, as described in more detail in
the Liquidity and Capital Structure section, is well positioned in this regard.
METAL FORMING SEGMENT:
The Company's Metal Forming segment includes Cooper-Weymouth, Peterson,
(CWP), Rowe Machinery and Manufacturing, (Rowe), a leading manufacturer of
press-feeding and cut-to-length equipment, acquired in 1996, Dahlstrom
Industries, (Dahlstrom), a leading manufacturer of roll-forming equipment, also
acquired in 1996, Hill Engineering, (Hill), a leading producer of tools and dies
for the gasket manufacturing and roll-forming industries acquired on January 31,
1997, CoilMate, Inc., (CoilMate), a leading producer of pallet de-coiling
equipment for the metal stamping and roll forming industries acquired on
November 3, 1997 and The Lockformer Company (Lockformer) and Iowa Precision,
Inc. (IPI), the operating units of Met-Coil Systems Corporation, which was
acquired on June 3, 2000. This segment's results also include the operations of
SNS Properties, Inc. (SNS) (recently renamed Formtek Cleveland, Inc.) which was
acquired on July 2, 2001 and includes the Yoder, Krasny Kaplan and Mentor AGVS
businesses which manufacture sophisticated metal forming equipment, roll-forming
equipment, tube mills, pipe mills, custom engineered material handling
equipment, and automated guided vehicle systems.
The Company's Metal Forming segment reported comparative results from
continuing operations for 2002 and 2001 as follows:
2002 2002 2001 2001
---- ---- ---- ----
($000) % ($000) %
------ ------- ------ -------
Net Sales $65,855 100.00% $79,755 100.00%
Gross Profit 15,975 24.25% 14,419 18.08%
Core Operating (Loss)
(Non GAAP financial measure) (2,492) (3.78%) (5,659) (7.10%)
Average Net Assets Employed (ANAE) 36,943 65,598
Return on ANAE (6.75%) (8.63%)
Core Operating (Loss), a non-GAAP financial measure, is reconcilable
with Operating (Loss), the most directly comparable GAAP financial measure, as
follows:
2002 2001
---- ----
($000) ($000)
------ --------
Core Operating (Loss) (Non GAAP financial measure) ($2,492) ($5,659)
Less Environmental Charges (18,046) (2,000)
-------- -------
Operating (Loss) Profits (Comparable GAAP financial measure) ($20,538) ($7,659)
========= ========
The Metal Forming segment's products are capital goods used in the
handling, forming and fabrication of sheet metal in various manufacturing
applications including those in the auto, steel mill, steel service center,
stamping and metal appliance and metal office furniture manufacturing
industries, among others. As such, the segment's products are particularly
susceptible to cyclical economic downturns such as that which continued
throughout 2002. In addition, the events of September 11, 2001, in the opinion
of management, have exacerbated the normal recessionary effects of the business
cycle by virtue of their impact on consumer confidence which ultimately impacts
the demand for capital goods. Reflecting these effects, Net Sales for the
segment were down 17.4% from 2001 despite having a full year of operations at
Formtek Cleveland, Inc. (f/k/a SNS Properties) which was acquired on July 2,
2001. If Net Sales were adjusted to incorporate Formtek Cleveland, Inc.'s 2001
pre-acquisition sales, Net Sales would be seen to have dropped 25.4%.
Core Operating Profits (Loss) for the Segment in 2001 included
$1,526,000 in goodwill amortization charges. "Comparable" Core Operating Profits
(Loss) therefore reflected an improvement from ($4,133,000) in 2001 to
($2,492,000) in 2002. The reduction in operating losses, despite substantially
reduced sales, reflects the Metal Forming Segment's progress in 2002 in its
efforts to rationalize overhead in all areas in order to adapt to the current
market place for metal forming products worldwide.
The backlog relating to the Metal Forming Segment at December 31, 2002
was approximately $23,118,000, compared to approximately $21,539,000 at December
31, 2001.
The businesses of Formtek are highly competitive and, due to the nature
of the products, are somewhat more cyclical (due to changes in manufacturing
capacity utilization and the cost and availability of financing) than the
Company's other operating segment. CWP, Rowe, CoilMate/Dickerman, and IPI have a
strong presence in the manufacture of coil processing equipment through their
broad and competitive product lines, together with Formtek's customer-driven
application engineering and ability to meet customer delivery and service
requirements through separate extensive distribution networks. Dahlstrom, B & K,
Yoder and Lockformer are well-established names in the roll-former market place.
The Company believes that the critical mass created by the recent acquisitions
of Met-Coil Systems Corporation and SNS Properties (now known as Formtek
Cleveland, Inc.) will allow it to more fully leverage its large installed
customer base in the sale of equipment and repair parts.
The companies acquired by the Metal Forming Segment in the past were
selected for their synergies with the existing metal forming franchises:
complementary products and distribution channels, potential manufacturing
synergies, shared technologies and engineering skills, potential purchasing
synergies, common field service skills and organizations, and shared customer
bases. The most significant synergistic theme has been the real and potential
common customer base. To a large degree, any historical customer of one of the
companies is a potential customer for any of the others. Exploiting this cross
selling opportunity is a central factor in the creation of the Formtek family of
metal forming products and underscores the Segment's goal of creating a single
integrated metal forming solution provider for the metal forming marketplace
worldwide. While the present economic downturn has significantly effected demand
for the Segment's products, the Company remains committed to the strategic
vision underlying the creation of the "Formtek Family of Metal-Forming
Products."
CONSOLIDATED RESULTS:
As a whole, the Company reported comparative results as follows:
2002 2002 2001 2001
---- ---- ---- ----
($000) % ($000) %
------ ------- ------ -------
Net Sales 373,874 100.00% $394,103 100.00%
Gross Profit 109,331 29.24% 103,676 26.30%
Core Operating Profits
(Non GAAP financial measure) 18,751 5.00% 13,592 * 3.45%
Average Net Assets Employed (ANAE) 167,440 201,676
Return on ANAE 11.2% 6.7%
* restated to give effect to subsidiary stock options -see Note 17 to the
accompanying Consolidated Financial Statements.
The improvement in Gross Profit margins overall reflects the successful
efforts of the HVAC and Metal Forming segments to rationalize manufacturing
overhead, as noted above.
Sales expense for the Company as a whole, as a percentage of revenues,
increased from 13.62% to 14.34% and General and Administrative expenses, as a
percentage of revenues, increased slightly from 5.46% to 5.89%. In both cases
spending was relatively flat in absolute terms with the percentage increases
traceable to the 5.1% drop in Net Sales on a consolidated basis. Engineering
expense, as a percentage of continuing revenues, increased from 3.31% to 4.00%
reflecting increased product development costs, as noted above.
Interest Expense decreased substantially in 2002, reflecting
principally the effects of (1) reduced investments in inventory and accounts
receivable as a result of reduced sales and ongoing inventory control efforts
and (2) positive cash flow from operations which reduced debt overall, as
discussed in more detail in the Liquidity and Capital Structure section herein.
Income Tax Expense (Benefit) for 2002 on Income from Continuing
Operations, as a percentage of pretax income (loss), differed substantially from
the "expected" income tax expense due to the state income tax effects of losses
in certain subsidiaries where state tax benefits from such losses are not
available.
ANALYSIS: 2001 VS. 2000
HVAC SEGMENT:
The Company's HVAC segment reported comparative results from continuing
operations for 2001 and 2000 as follows:
2001 2001 2000 2000
---- ---- ---- ----
($000) % ($000) %
------ ------- ------ -------
Net Sales $313,726 100.00% $311,734 100.00%
Gross Profit 89,226 28.44% 92,405 29.64%
Operating Profits 21,020 * 6.70% 22,831 * 7.32%
Average Net Assets Employed (ANAE) 135,816 158,441
Return on ANAE 15.47% 14.41%
* restated to give effect to subsidiary stock options -see Note 17 to the
accompanying Consolidated Financial Statements.
For the year as a whole, excluding the effects of Airtherm, LLC which
was acquired on August 25, 2000, the HVAC segment's revenues were up 1.3%, from
$305,453,000 in 2000 to $309,405,000 in 2001, reflecting flat sales in most HVAC
products, reduced sales of certain air conditioning, industrial and gas fired
heating products and increased sales in boiler and air distribution products.
Fourth quarter 2001 sales for the HVAC segment, however, were down 6.75%,
reflecting the overall effect of "September 11, 2001" and underscoring the fact
that total revenues for the HVAC segment had been down only 1%, excluding the
effects of Airtherm, LLC, for the nine months ended September 30, 2001. Reduced
sales of certain industrial and commercial gas-fired heating products reflected
both a downturn in the market for these products--as distributors worked to
reduce inventory levels--and disruptions traceable to technology changes in the
design of gas-fired heating products.
The HVAC segment's Air Distribution Group undertook the consolidation
in 2001 of the manufacturing operations of its Cesco Products (acquired January
28, 2000) and Louvers and Dampers (acquired June 28, 2000) franchises into one
upgraded facility in Florence, Kentucky, as well as undertaking a number of
related product redesign initiatives, all in furtherance of its long term cost
reduction and product improvement goals. These efforts were necessarily
disruptive and contributed to reduced margins in 2001 in the Air Distribution
Group. Management believes the costs associated with these programs have been
substantially absorbed as of December 31, 2001, although additional training is
required to bring the Florence, Kentucky facility up to satisfactory
manufacturing efficiencies. Significant product development programs, including
laboratory work, remained ongoing in 2001 relative to the Anemostat and Applied
Air business units as well contributing to higher engineering costs in the HVAC
segment.
As a result of the factors mentioned above, the HVAC segment reported
operating income of $21,020,000 in 2001, down 7.9% from the comparable figure in
2000.
Sales of Omega Flex, Inc.'s TracPipe(R) flexible gas piping product and
its patented connection system continued to grow in 2001 sustained by relatively
strong single family and multi-family residential construction activity.
TracPipe(R) is a corrugated stainless steel tubing product developed especially
for use in the piping and installation of gas appliances.
METAL FORMING SEGMENT:
The Company's Metal Forming segment includes Cooper-Weymouth, Peterson,
(CWP), Rowe Machinery and Manufacturing, (Rowe), a leading manufacturer of
press-feeding and cut-to-length equipment, acquired in 1996, Dahlstrom
Industries, (Dahlstrom), a leading manufacturer of roll-forming equipment, also
acquired in 1996, Hill Engineering, (Hill), a leading producer of tools and dies
for the gasket manufacturing and roll-forming industries acquired on January 31,
1997, CoilMate, Inc., (CoilMate), a leading producer of pallet de-coiling
equipment for the metal stamping and roll forming industries acquired on
November 3, 1997 and The Lockformer Company (Lockformer) and Iowa Precision,
Inc. (IPI), the operating units of Met-Coil Systems Corporation, which was
acquired on June 3, 2000. This segment's results also include the operations of
SNS Properties, Inc. (SNS) (recently renamed Formtek Cleveland, Inc.) which was
acquired on July 2, 2001 and includes the Yoder, Krasny Kaplan and Mentor AGVS
businesses which manufacture sophisticated metal forming equipment, roll-forming
equipment, tube mills, pipe mills, custom engineered material handling
equipment, and automated guided vehicle systems.
The Company's Metal Forming segment reported comparative results from
continuing operations for 2001 and 2000 as follows:
2001 2001 2000 2000
---- ---- ---- ----
($000) % ($000) %
------ ------- ------ -------
Net Sales $79,755 100.00% $63,424 100.00%
Gross Profit 14,419 18.10% 16,408 25.87%
Core Operating (Loss) Profits
(Non GAAP financial measure) (5,659) (7.10%) 4,143 6.53%
Average Net Assets Employed (ANAE) 65,598 43,235
Return on ANAE (8.63%) 9.58%
Core Operating (Loss) Profits, a non GAAP financial measure, is
reconcilable with Operating (Loss) Profits, the most directly comparable GAAP
financial measure as follows:
2001 2000
---- ----
($000) ($000)
------ --------
Core Operating (Loss) Profits (Non GAAP financial measure) ($ 5,659) $ 4,143
Less Environmental Charges (2,000) ----
------- --------
Operating (Loss) Profits (Comparable GAAP financial measure) ($7,659) $4,143
======== ======
The Metal Forming segment's products are capital goods used in the
handling and forming of metal in various manufacturing applications including
those in the auto, steel mill, steel service center, stamping and metal
appliance and metal office furniture manufacturing industries. As such, the
segment's products are particularly susceptible to cyclical economic downturns
such as that which occurred throughout 2001. In addition, the events of
September 11, 2001, in the opinion of management, exaggerated the normal
recessionary effects of the business cycle in an unprecedented way. Exclusive of
the effects of the Met-Coil and SNS acquisitions, revenues were down 31.8% for
the year and 58.6% in the fourth quarter of 2001, illustrating an effect of the
recession and the events of "September 11, 2001". Operating losses for the first
three quarters of 2001 accounted for only approximately 5% of the segment's full
year Operating Loss.
The segment's Met-Coil business unit, in contrast to the other business
units in this segment, reported only slightly reduced revenues in 2001 compared
with the 12 months ended December 31, 2000 but reported substantially reduced
gross profit margins reflecting in part significant pricing pressures in the
marketplace for its products.
During 2001, the Metal Forming segment undertook the consolidation of
its Dahlstrom and B & K roll-forming businesses into the newly acquired SNS
Properties, Inc. (recently renamed to Formtek Cleveland, Inc.) business. In
connection with the consolidation, the segment incurred direct equipment and
inventory moving expense, employee severance expense and other transition costs
of approximately $813,000 related to the consolidation. In addition, operating
losses (including effects related to the factors cited above, unexpected cost
overruns, loss related to disposal of excess inventory, warranty expenses,
employee incentive expense and unabsorbed burden and overhead) of approximately
$1,577,000 were recorded in the Dahlstrom business. The industrial building in
Schiller Park, Illinois formerly occupied by Dahlstrom was sold in 2002 at a
nominal gain.
The segment's backlog of approximately $21.6 million at December 31,
2001, was down from over approximately $39.0 million (including Formtek
Cleveland as if acquired at December 31, 2000) at December 31, 2000.
CONSOLIDATED RESULTS:
As a whole, the Company reported comparative results as follows:
2001 2001 2000 2000
---- ---- ---- ----
($000) % ($000) %
------ ------- ------ -------
Net Sales $394,103 100.00% $375,987 100.00%
Gross Profit 103,676 26.30% 108,802 28.94%
Core Operating Profits
(Non GAAP financial measure) 13,592 3.45% 26,655 7.09%
Average Net Assets Employed (ANAE) 201,676* 186,398*
Return on ANAE 6.7% 14.3%
Core Operating Profits, a non GAAP financial measure, is reconcilable
with Operating Profits, the most directly comparable GAAP financial measure as
follows:
2001 2000
---- ----
($000) ($000)
------ ------
Core Operating Profits (Non GAAP financial measure) $13,592 $26,655
Less Environmental Charges (2,000) ---
------- --------
Operating Profits (Comparable GAAP financial measure) $11,592* $26,665*
======== ========
* restated to give effect to subsidiary stock options -see Note 17 to the
accompanying Consolidated Financial Statements.
Gross Profit and Core Operating Profit margins overall reflect the
various negative effects of the product development, and factory relocation
costs described above, as well as the dampening effect on demand for the
Company's products resulting from the events of "September 11, 2001".
Sales expense for the Company as a whole, as a percentage of continuing
revenues, increased slightly from 13.24% to 13.62%. General and Administrative
expenses, as a percentage of continuing revenues, increased slightly from 5.51%
to 5.46% and Engineering expense, as a percentage of continuing revenues, also
increased slightly from 3.10% to 3.31%. In all three cost areas these relatively
small percentage increases are traceable to "top line" revenue shortfalls
connected with the events of "September 11, 2001", among other reasons, as
discussed above.
Interest Expense decreased substantially in 2001, reflecting
principally the effect of the divestiture of National Northeast Corporation on
January 9, 2001, as more fully described in Note 3 to the Consolidated Financial
Statements.
Income Tax Expense (Benefit) for 2001 on Income from Continuing
Operations, as a percentage of pretax income (loss), decreased from 37.8% to
35.7% due to the effects of losses in certain subsidiaries where state tax
benefits from such losses are not available and also due to certain amortization
charges reported in 2001 which are not deductible for tax purposes, as more
fully explained in Note 10 to the Consolidated Financial Statements.
ANALYSIS: LIQUIDITY AND CAPITAL STRUCTURE
Despite reporting a Net Loss of $30,405,000 for the year ended December
31, 2002, the Company's Working Capital improved from $45,978,000 at December
31, 2001 to $52,141,000 at December 31, 2002. This result is traceable most
particularly to the reduction in Current Portion of Long Term Debt from $30
million at December 31, 2001 to $6.8 million at December 31, 2002, which in turn
is traceable to (1) positive operating cash flows in 2002 and (2) reduced
investments in Accounts Receivable (down by $4.4 million) and Inventory (down by
$4 million), reflecting the downturn in revenues in the construction and capital
goods marketplaces which affected the Company in 2002.
The following summarizes the principal changes in Working Capital in 2002:
Working Capital
(in thousands)
Balance at December 31, 2001 $45,978*
Increased Environmental Reserves (net) (5,700)
Debt reduction in excess of inventory and accounts receivable
effects ( i.e. Positive cash flow) 14,800
Other non-cash effects net (2,937)
--------
Balance at December 31, 2002 52,141
=========
* restated to give effect to subsidiary stock options -see Note 17 to the
accompanying Consolidated Financial Statements.
While Long Term Debt increased in 2002 from $180,000 at December 31,
2001 to $4,891,000 at December 31, 2002, this is traceable largely to the $5.5
million Industrial Development Bond issued in April of 2002, as more fully
explained in Note 8 to the accompanying Consolidated Financial Statements, to
undertake a planned upgrade of the foundry equipment at the Company's subsidiary
in Boyertown, Pennsylvania. The Company's Long-Term Debt to Equity ratio at
December 31, 2002 is 3.6%, up from 0.1% at December 31, 2001. The Company
regards its present relatively underleveraged capital structure as well suited
to current business conditions. The Company believes it is well positioned to
take advantage of any strategic acquisition opportunities which may become
available in the present unsettled market conditions in the HVAC or Metal
Forming industries.
Management regards the Company's current capital structure and banking
relationships as fully adequate to meet foreseeable future needs. The Company
has not paid cash dividends on its common stock since 1979.
As of December 31, 2002, the Company had approximately $60 million in
remaining untapped credit capacity under its commercial bank lines of credit.
The Company's interest coverage ratio for 2002, defined as operating earnings
before interest, taxes, depreciation, amortization, and impairment charges
(EBITDA) divided by gross interest expense was approximately 10.0 (ten times).
The ratio of the Company's Funded Debt (Long-Term Debt plus Current Portion of
Long-Term Debt) to Shareholders' Equity was 8.47% at December 31, 2002. The
ratio of the Company's Funded Debt at December 31, 2002 to its 2002 EBITDA was
122.5% (1.225 times).
The Company believes its liquidity position at December 31, 2002 is
adequate to meet any foreseeable future needs. Nonetheless, as more fully
explained in Note 8 to the Consolidated Financial Statements, the Company's
commercial bank line with Fleet Bank is subject to a "review" in April 2003, and
expires in April 2004. Its credit line with Chase-Morgan Bank is an
"uncommitted" facility. Based upon its earning power and balance sheet position,
however, the Company expects that it will renew its credit facilities on
favorable terms as they mature, as it has done in the past.
The Company has a number of contingent obligations which can be
summarized as follows:
The Company has guaranteed the obligations of CareCentric, Inc. to
Wainwright Bank under its $6 million credit line agreement with the bank, as
more fully described in Notes 6 and 13 to the Consolidated Financial Statements.
The outstanding balance under CareCentric's credit line agreement at December
31, 2002 was $4,525,000. John E. Reed, the Company's Chairman and Chief
Executive Officer is a shareholder and director of Wainwright Bank & Trust
Company.
The Company is obligated under Indemnity Agreements executed on behalf
of 21 of the Company's Officers and Directors. Under the terms of the Agreement,
the Company is contingently liable for costs which may be incurred by the
Officers and Directors in connection with claims arising by reason of these
individuals' roles as Officers and Directors.
The Company is contingently liable under standby letters of credit
totaling $5,375,000 issued principally in connection with its commercial
insurance coverages. The level of insurance risk which the Company absorbs under
its workers compensation and comprehensive general liability (including products
liability) insurance programs increased substantially after October 1, 2001,
largely as a result of the effects of "September 11, 2001" on the commercial
insurance marketplace. For the policy year ending October 1, 2003 the Company
retained liability for the first $500,000 per occurrence of comprehensive
general liability claims (including products liability claims), subject to an
agreed aggregate. In addition, the Company retained liability for the first
$250,000 per occurrence of workers compensation coverage, subject to an agreed
aggregate. The Company also retained liability for the first $10,000,000 of
"excess" liability, on an occurrence and aggregate basis, with respect to both
comprehensive general liability (including products liability) and workers
compensation coverage.
Adverse developments in any of the areas mentioned above could
materially affect the Company's results of operations in any given year.
The Company leases several manufacturing facilities and its corporate
headquarters from Related Parties, as more fully disclosed in Note 11 to the
Consolidated Financial Statements.
Contractual Obligation and Commercial Commitments
The Company's contractual obligations under debt agreements and lease
agreements are summarized in the following table and are more fully explained in
Notes 8, 11, and 13 to the Consolidated Financial Statements.
Payments Due by Period
Contractual Obligations Total Less than 1-3 4-5 After 5
1 year years years year
Long-Term Debt $11,666 $6,775 $1,094 $1,074 $2,723
Operating Leases 11,839 3,382 4,437 2,434 1,586
-------- ----- ------- ------- -------
Total Contractual Cash Obligations $23,505 $10,157 $5,531 $3,508 $4,309
======= ======= ====== ====== ======
The Company's commercial commitments under letters of credit and
guarantees are illustrated in the following table. The letters of credit
totaling $5,375,000 at December 31, 2002 related principally to the Company's
commercial insurance programs, as are more fully explained above and in Note13
to the Consolidated Financial Statements. The guarantee of $6,000,000 relates to
the Company's guarantee of the obligations of CareCentric, Inc., under its
commercial bank secured line of credit, as more fully explained in Note 13 to
the Consolidated Financial Statements. These Standby Letters of Credit are
reflected in the `Over 5 Years' column as they are open-ended commitments not
subject to a fixed expiration date. All guarantees may be extended by the
Company for longer periods.
Payments Due by Period
Other Commercial Commitments Total Less than 1-3 4-5 After 5
1 year years years year
Standby Letters of Credit $5,375,000 $0 $0 $0 $5,375,000
Guarantee 6,000,000 6,000,000 0 0 0
--------- --------- - - -----------
Total Commercial Commitments $11,375,000 $6,000,000 $0 $0 $5,375,000
=========== ========== == == ==========
Recent Accounting Pronouncements
The FASB issued FAS No. 145, Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections, effective for
fiscal years beginning May 15, 2002 or later that rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, FASB Statement No. 64,
Extinguishments of Debt made to satisfy sinking-fund requirement, and FASB
Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This
Statement amends FAS No. 4 and FAS No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for 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 Company does not
believe adopting FAS 145 will have a material impact on its Consolidated
Financial Statements.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. FAS No. 146 is based on the
fundamental principle that a liability for a cost associated with an exit or
disposal activity should be recorded when it (1) is incurred, that is, when it
meets the definition of a liability in FASB Concepts Statement No. 6, Elements
of Financial Statements, and (2) can be measured at fair value. The principal
reason for issuing FAS No. 146 is the Board's belief that some liabilities for
costs associated with exit or disposal activities that entities record under
current accounting pronouncements, in particular EITF Issue 94-3, do not meet
the definition of a liability. FAS No. 146 nullifies EITF Issue 94-3; thus, it
will have a significant effect on practice because commitment to an exit or
disposal plan no longer will be a sufficient basis for recording a liability for
costs related to those activities. FAS No. 146 is effective for exit and
disposal activities initiated after December 31, 2002. Early application is
encouraged; however, previously issued financial statements may not be restated.
An entity would continue to apply the provisions of EITF Issue 94-3 to an exit
activity that is initiated under an exit plan that met the criteria of EITF
Issue 94-3 before the entity initially applied FAS No. 146. The Company does not
believe adopting FAS No. 146 will have a material impact on its Consolidated
Financial Statements.
In November 2002, FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5,
57, and 107 and Rescission of FASB Interpretation No. 3 (FIN 45). FIN 45
clarifies the requirement of FAS No. 5, Accounting for Contingencies, relating
to the guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it
assumes under that guarantee. FIN 45 covers guarantee contracts that have any of
the following four characteristics: (a) contracts that continently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying that is related to an asset, a liability, or an equity security of
the guaranteed party (e.g., financial and market value guarantees), (b) contract
that contingently require the guarantor to make payments to the guaranteed party
based on another entity's failure to perform under an obligation agreement
(performance guarantees), (c) indemnification agreements that contingently
require the indemnifying party (guarantor) to make payments to the indemnified
party (guaranteed party) based on changes in an underlying that is related to an
asset, a liability, or an equity security of the indemnified party, such as an
adverse judgment in a lawsuit or the imposition of additional taxes due to
either a change in the tax law or an adverse interpretation of the tax law, and
(d) indirect guarantees of the indebtedness of others. FIN 45 specifically
excludes certain guarantee contracts from its scope. Additionally, certain
guarantees are not subject to FIN 45's provisions for initial recognition and
measurement but are subject to its disclosure requirements. The initial
recognition and measurement provisions are effective for guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
our annual financial statements for the year ended December 31, 2002. See Note
13 to the accompanying Consolidated Financial Statements.
In December 2002, the FASB issued FAS No. 148, Accounting for Stock
Based Compensation--Transition and Disclosure, an amendment to FASB Statement
No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Finally, FAS No. 148 amends APB Opinion No. 28, Interim Financial Reporting, to
require disclosure about those effects in interim financial reporting. For
entities that voluntarily change to the fair value based method of accounting
for stock-based employee compensation, the transition provisions are effective
for fiscal years ending after December 15, 2002. For all other companies, the
disclosure provisions and the amendment to APB No. 28 are effective for interim
periods beginning after December 15, 2002. The Company is currently reviewing
this statement to determine its effect on its Consolidated Financial Statements.
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns, or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company is currently evaluating the impact
of FIN 46 on its equity investments described in Note 6 to the accompanying
Consolidated Financial Statements.
ENVIRONMENTAL DISCLOSURE
The Company is subject to numerous laws and regulations that govern the
discharge and disposal of materials into the environment. Except as described
below, the Company is not aware, at present, of any material administrative or
judicial proceedings against the Company arising under any federal, state or
local environmental protection laws or regulations ("Environmental Laws").
Permitting Activities
The Company is engaged in various matters with respect to obtaining,
amending or renewing permits required under Environmental Laws to operate each
of its manufacturing facilities. Based on the information presently available to
it, management does not believe that the denial of any currently pending permit
application will have a material adverse effect on the Company's financial
position or the results of operations.
Claims Alleging Releases of Hazardous Materials
As disclosed in previous filings, the Lockformer Company
("Lockformer"), a division of the Company's second tier subsidiary, Met-Coil
Systems Corporation ("Met-Coil"), announced on May 22, 2002, that it had reached
a settlement with members of the class of plaintiffs in a suit filed in the
United States District Court for the Northern District of Illinois entitled
LeClercq, et al. vs. The Lockformer Company, et al. The case involved property
damages asserted on behalf of a group of approximately 187 homeowners within the
class area, due to the presence of trichloroethylene (TCE) contamination in the
immediate vicinity of Lockformer's manufacturing facility in Lisle, Illinois.
Without admitting liability, Lockformer agreed to pay class members
approximately $10 million to resolve the matter. The settlement incorporates the
terms of a previously announced Interim Agreed Order between Lockformer and the
Attorney General for the State of Illinois under which Lockformer agreed to pay
for the costs of hookup to a public water supply for each of the homes of Class
members who have, or otherwise would have, incurred such costs. The Company
accrued a $1.3 million liability as of March 31, 2002 in respect of this portion
of the settlement, and an offsetting insurance recovery receivable of this same
amount. The balance of the May 22, 2002, $10,000,000 settlement, $8,700,000, was
reflected in results of operations for the three months ended June 30, 2002.
Met-Coil is pursuing an action in the United States District Court for the
Northern District of Illinois for contribution from 11 other known industrial
users of TCE in the vicinity, whose disposal practices may have contributed to
the contamination experienced by some or all of the members of the plaintiff
class.
As disclosed in previous filings, a second class of residents, in a
neighborhood not located in the immediate vicinity of Lockformer's manufacturing
facility, has filed a class action complaint against Mestek and its subsidiary,
Met-Coil, (Mejdrech, et al. v. The Lockformer Company, filed in the United
States District Court for the Northern District of Illinois) on grounds similar
to those alleged in the LeClercq action described above. The Mejdrech class was
certified on August 12, 2002. Based upon the evidence currently available to
them, Mestek and Met-Coil believe they have valid defenses to the above action
and are therefore vigorously contesting the Mejdrech claim. Management believes
that this case is different from the LeClercq action by reason of, among other
things; the absence, to management's knowledge, of any concentrations of TCE in
private wells in the Mejdrech class area equal to or greater than 5 parts per
billion, the TCE contamination limit set forth by the United States
Environmental Protection Agency (the "EPA"), and also by reason of the greater
distance this class is from the Lockformer facility, and the presence of
numerous other potential TCE sources in closer proximity to the Mejdrech class
area. The Mejdrech class seeks damages for diminution of property values and
nuisance, as well as punitive damages, and both Mestek and Met-Coil expect to be
able to present expert testimony refuting allegations of significant property
damages or nuisance, as well as lack of punitive conduct. Other than an
allegation of damages in excess of the Federal Court diversity jurisdictional
amount of $75,000, no specific demand for monetary relief has been made.
In another action, owners of eight homes not included in the LeClercq
or Mejdrech actions have filed suit against Met-Coil, alleging property damage
and nuisance by reason of alleged contamination of their properties and drinking
water wells and seeking punitive damages as well. In each of these cases with
the exception of one, no TCE has, to management's knowledge, been detected in
any of plaintiffs' wells, and in the single case of TCE detection (in a well
serving a home a considerable distance away from the other plaintiffs'
residences and located in the LeClercq Class area discussed above) it is
management's understanding that the detected TCE concentrations were below the
maximum TCE contamination level specified by the EPA. In addition, Met-Coil
expects to be able to present expert testimony refuting allegations of
significant property damages or nuisance or punitive conduct. Other than an
allegation of damages in excess of the State Superior Court jurisdictional
amount of $50,000, no specific demand for monetary relief has been made in any
pleading.
In six separate actions, ten individual plaintiffs have filed suits
against Mestek and Met-Coil (collectively, the "Defendants") alleging in each
case personal injury and/or fear of future illness (and, in one case, wrongful
death) related to the release of TCE into drinking water and seeking punitive
damages as well. In each of these cases, TCE concentrations in alleged sources
of ingestion allegedly causing illness were to the best of management's
knowledge, either not detected at all (with respect to three plaintiffs) or
detected in low concentrations below the maximum TCE contamination level
specified by the EPA. Also, in all of these cases, Defendants' initial
discussions with scientific experts (toxicologists and physicians) lead
Defendants to the conclusions that valid and persuasive defenses as to a lack of
causal connection between the TCE exposure, if any, and the alleged illnesses of
plaintiffs can be presented. None of these lawsuits, except for Schreiber v. The
Lockformer Company, et al, described below, contain any "ad damnum" or specific
damages demands, other than to state that the amount in controversy exceeds the
statutory requirement of $75,000 in the Federal court cases, and in those cases
initially brought in state court, in excess of an Illinois statutory requirement
of damages in excess of $50,000 to gain access to the jurisdiction of the
Superior Court of DuPage County. The case of Schreiber v. The Lockformer
Company, et al, alleges compensatory damages "in excess of $1,000,000" and asks
for punitive damages "in excess of $1,000,000."
In accordance with SAB Topic 5Y, with respect to all of the above
described pending cases, management believes that a material loss, while
possible, cannot be estimated in amount at this time, due to the complexity and
uncertainty of the litigation proceedings and remediation procedures. As
additional information becomes available to the Company, the Company may be
better able to either estimate a range of exposure, with appropriate reserves
taken, or continue to believe that no such estimation is either appropriate or
possible.
In general, with respect to all of the above described pending cases
Mestek, to the extent that it is a defendant, and Met-Coil believe they have
valid defenses to all of the pending claims and are contesting them vigorously.
However, the results of litigation are inherently unpredictable, and
accordingly, in any of the above actions, if the plaintiffs were to obtain a
verdict of liability against Met-Coil or Mestek from a court of competent
jurisdiction and assessments of significant damages, including punitive damages,
such decisions, or a settlement to avoid such a decision, could, individually or
in the aggregate, materially adversely affect the financial position and results
from operations of Met-Coil, and, conceivably, the financial position and
results of operations of the Company.
In addition, there can be no assurance that future claims for personal
injury or property damage will not be asserted by other plaintiffs against
Met-Coil and Mestek with respect to the Lockformer site and facility.
Met-Coil borrowed $5.5 million from a commercial bank on July 26, 2002,
as more fully disclosed in Note 8 to the Consolidated Financial Statements to
partially fund the $10 million LeClerq settlement described above. Met-Coil is
presently pursuing additional bank financing to fund the remediation efforts
required at its Lisle, Illinois site as described further herein. While such
efforts are being undertaken, Mestek has made available to Met-Coil a $4,500,000
secured term credit facility for purposes of site remediation and a $2,500,000
secured revolving line of credit for operational requirements. There can be no
assurance however, that Met-Coil will be able to meet its obligations in
relation to the remediation Work Plan, as described further herein, or to fund
other costs related to the various actions described herein as they occur
without additional financing. There can be no assurance that Met-Coil will be
able to obtain such financing on terms that are acceptable to it, or at all.
Met-Coil has settled its insurance coverage issues with a number of its
historic insurers as to the above claims. Met-Coil is pursuing additional
insurance coverage litigation against several other carriers in an effort to
recoup additional un-reimbursed defense costs and settlement amounts incurred in
the above-described matters. Included in Other Current Assets as of December 31,
2002 is a $625,000 receivable from one of these insurers relating to the
settlement of certain coverage litigation. At least three other carriers remain
as potentially having liability for defense or indemnification costs, two of
whom have agreed, under reservation of rights, to reimburse Met-Coil for a
portion of the defense costs of the Mejdrech action described above. Another
carrier has agreed, also under reservation of rights, to reimburse Met-Coil for
a portion of the defense cost of certain of the personal injury cases. However,
these insurers continue to contest their liability, and the outcome of the
coverage litigation remains uncertain at this time. As of December 31, 2002
insurance settlements covered approximately 58 percent of Met-Coil's costs of
defense and settlement in these related matters. There is no assurance that this
level, or any level, of insurance contribution will be sustained going forward.
Consistent with EITF 93-5, the Company has treated insurance recoveries, whether
of defense costs or in relation to indemnity obligations, on a cash basis -
except where settlements that are not subject to further litigation have been
reached with insurance carriers as of quarter end or year end, in which cases
receivables have been appropriately accrued. Such recoveries have been applied
to reduce the net environmental expense recorded in the related period.
Met-Coil recorded expenses in 2002 related to the environmental matters
affecting its Lisle, Illinois manufacturing facility totaling $18,046,000. These
expenses are made up of the following:
Settlement of property damage litigation (LeClerq et al) $10,000,000
Charges related to the remediation of the Lisle, Illinois site 7,000,000
Legal, Environmental Consulting, and other costs incurred
net of insurance recoveries 1,046,000
------------
Total $18,046,000
===========
Potentially Responsible Parties (PRP) Actions
Lisle, Illinois:
Met-Coil has received final approval of the Work Plan for remediation
of the Lisle, Illinois site from the United State Environmental Protection
Agency ("EPA") and awaits approval from the Illinois Environmental Protection
Agency ("IEPA"). On the basis of the EPA approved Work Plan and a better
understanding of the costs related to achieving that Plan, Met-Coil added $3.5
million to its remediation reserve in relation to this matter, as of December
31, 2002, bringing the balance to $7,700,000, reflecting gross cumulative
accruals of $10,000,000 less cumulative spending through December 31, 2002 of
$2,300,000. In light of the remaining uncertainties surrounding the
effectiveness of the available remediation technologies and the future potential
changes in remedial objectives and standards, still further reserves may be
needed in the future with respect to the remediation of the Lisle site. The
complexity of aforementioned factors makes it impossible to further estimate any
additional costs.
Having paid for public water supply hook-up for houses in the immediate
vicinity of the Lisle manufacturing facility, remediation going forward will
consist primarily of on-site, soil-related work in two designated areas,
principally by means of electric resistive heating and soil vapor extraction,
based upon the Work Plan submitted to the EPA and the IEPA, (and conditionally
approved as of the date of this report by the EPA only), and soil and
groundwater remediation in a third area, also on-site, by means of soil vapor
extraction and groundwater filtration. Based on current proposals from
contractors for Areas 1 and 2, electric resistive heating and soil vapor
extraction, and based on environmental consultant estimates for Area 3, Soil
Vapor Extraction, Groundwater Remediation and overall site air monitoring,
miscellaneous construction, electricity, filtering and sampling, Met-Coil has
reserved, as noted above, an estimate of $7,700,000 as of December 31, 2002 for
this on-site work to be performed by third party contractors. The remediation in
Areas 1 and 2 is intended to achieve a "technologically feasible" target level
of remediation which is subject to continuing re-evaluation. The IEPA has not
agreed, as of the date of this report, to any specific target level of
remediation.
Any additional off-site remediation costs are not determinable at this
time and remain a contingency pending the resolution of the issue of whether
Met-Coil has liability for TCE contamination beyond areas for which settlement
has already been reached
The Illinois Attorney General, in an action disclosed in previous
filings and brought in the Superior Court of DuPage County, Illinois, on behalf
of the State of Illinois, the IEPA and other governmental agencies, is seeking
to have Met-Coil pay for the cost of connecting approximately 175 households in
the Mejdrech class action area (discussed below) to public water supplies, and
pay for the State's response and investigatory costs in this action and civil
penalties. No specific monetary claim for damages or relief is made in the
pleadings in this action. Met-Coil is in negotiations with the Illinois Attorney
General on this matter. There is insufficient information available to
management at this time to provide an opinion as to the outcome of these
discussions. In accordance with SAB Topic 5Y, and based on recent discussions
and estimations by the Attorney General's office as to its current and future
costs of litigation (which Met-Coil agreed to reimburse in an Agreed Order),
Met-Coil has reserved $1,000,000, as of December 31, 2002, in the accompanying
Consolidated Financial Statements. As additional information and expert opinions
become available to Met-Coil, it may be better able to either revise its
estimate of the range of exposure, with appropriate revision to reserves taken,
or continue to believe that no such revision is either required or estimate
possible.
In addition to the Lisle, Illinois site, the Company has been named or
contacted by state authorities and/or the EPA regarding the Company's liability
as a PRP for the remediation of two other sites described below. The potential
liability of the Company is based upon records that show the Company or other
corporations from whom the Company acquired assets used the sites for the
disposal of hazardous waste pursuant to third party agreements with the
operators of such sites, which sites were authorized to accept hazardous wastes
for disposal in compliance with applicable regulations. Such PRP actions
generally arise when the operator of a site lacks the financial ability to
address compliance with environmental laws and with decisions and orders
affecting the site in a timely and effective manner and the governmental
authority responsible for the site then looks to the past users of the facility
and their successors to address the costs of remediation of the site.
In High Point, North Carolina, the Company has been named as a PRP with
regard to the clean up of groundwater contamination allegedly due to dumping at
a landfill. The Company believes that its activity at the site represented less
than one percent of all activity at the site. State authorities have received
for review a report on the Remedial Investigation of the site, a base-line Risk
Assessment, and a Feasibility Study of the alternative remedial options for
treating groundwater contamination at or near the site. The North Carolina
Department of Environment and Natural Resources ("DENR") has not issued its
remaining formal comments on these documents, nor has a final remedial
alternative yet been selected or approved. Supplemental remedial investigation
has been requested and the final Site Investigation Report should be completed
during the first quarter of 2003. The Company continues to participate in a
joint defense group to help define and limit its liabilities and may be required
to contribute to the remediation of groundwater contamination.
The Company (along with many other corporations) is involved in PRP
actions for the remediation of a site in Southington, Connecticut, as a result
of the EPA's preliminary assignment of derivative responsibility for the
presence of hazardous materials attributable to two other corporations from whom
the Company purchased assets after the hazardous materials had been disposed of
at the Southington site. The Company participated as part of a joint defense
group in a "de minimis settlement" with EPA concerning soil remediation at the
Southington, Connecticut site, while the issue of further ground water
investigation at the site was postponed by the EPA in 1998, pending the soil
remediation. Currently, Monitored Natural Attenuation ("MNA") and a landfill cap
are being evaluated as remedial alternatives for groundwater contamination at
the site. The landfill cap has been installed, but its effectiveness has not yet
been determined. Likewise, more study must be performed by the environmental
consultant hired by the joint defense group to support the evaluation of the
potential for MNA to control future dissolved volatile organic compound
migration at this site. The Company paid its eighth assessment to the joint
defense group in the amount of $300 in the first quarter of 2003.
The Company continues to investigate both of these matters. Given the
information presently known, no estimation can be made of any liability which
the Company may have with respect to these matters. Based on the information
presently available to it, the Company does not believe that either matter will
be material to the Company's financial position or results of operations.
Critical Accounting Policies
Financial Reporting Release No. 60, released by the Securities and
Exchange Commission, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
Note 1 of the Notes to the Consolidated Financial Statements includes a summary
of the significant accounting policies and methods used in the preparation of
our Consolidated Financial Statements. The following is a brief discussion of
the Company's more significant accounting policies.
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 the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates and assumptions related to
revenue recognition, accounts receivable valuations, inventory valuations,
goodwill valuation, intangible asset valuations, warranty costs, product
liability costs, environmental reserves, investments, and accounting for income
taxes. Actual amounts could differ significantly from these estimates.
Our critical accounting policies are described in more detail as
follows:
Revenue Recognition
The company's revenue recognition activities relate almost
entirely to the manufacture and sale of heating, ventilating and air
conditioning (HVAC) equipment and metal forming equipment. Under generally
accepted accounting principles, revenues are considered to have been earned when
the company has substantially accomplished what it must do to be entitled to the
benefits represented by the revenues. With respect to sales of the Company's
HVAC or metal forming equipment, the following criteria represent preconditions
to the recognition of revenue:
Persuasive evidence of an arrangement must exist. Delivery has
occurred or services rendered. The sales price to the customer
is fixed or determinable. Collection is reasonably assured.
Environmental Reserves
As discussed more fully in Note 13 to the Consolidated
Financial Statements, Mestek and its subsidiary, Met-Coil Systems Corporation
(Met-Coil), are defendants in various environmental litigation matters relating
to alleged releases of pollutants by Met-Coil prior to its acquisition by the
Company on June 3, 2000. These matters require the Company to establish
estimates related to the outcome of various litigation matters as well as
estimates related to soil and groundwater remediation costs, both of which are
inherently judgmental and subject to change on an ongoing basis.
Investments
As discussed more fully in Note 6 to the Consolidated Financial Statements, the
Company has certain investments in CareCentric, Inc. (CareCentric) which it has
historically accounted for on the equity method. On March 29, 2002, the Company
transferred certain voting rights to John E. Reed, its Chairman and CEO, in the
context of a refinancing transaction under which both the Company and John E.
Reed invested additional monies in CareCentric. As a result of the transfer of
votes the Company determined that it no longer had "significant influence"
relative to CareCentric, as defined in APB 18 and EITF 98-13, and, accordingly,
adopted the cost method of accounting for its investments in CareCentric
subsequent to that date.
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. The estimated allowance for uncollectible amounts
is based primarily on specific analysis of accounts in the receivable portfolio
and historical write-off experience. While management believes the allowance to
be adequate, if the financial condition of the Company's customers were to
deteriorate, resulting in impairment of their ability to make payments,
additional allowances may be required.
Product Liability Reserves
As explained in more detail in Note 13 to the Consolidated Financial Statements,
the Company has absorbed significantly higher levels of insurance risk
subsequent to September 11, 2001 due to the effects of September 11, 2001 on
pricing in the commercial insurance marketplace. As a result, the Company must
establish estimates relative to the outcome of various product liability and
general liability matters which are inherently judgmental and subject to ongoing
change.
Inventory
The Company values its inventory at the lower of cost to purchase and/or
manufacture the inventory, principally determined on the LIFO method, or the
current estimated market value of the inventory. The Company periodically
reviews inventory quantities on hand and records a provision for excess and/or
obsolete inventory based primarily on its estimated forecast of product demand,
as well as based on historical usage. A significant decrease in demand for the
Company's products or technological changes in the industries in which the
Company operates could result in an increase of excess or obsolete inventory
quantities on hand requiring adjustments to the value of the Company's
inventories.
Goodwill and Intangible Assets
Effective January 1, 2002, the Company adopted the provisions of FAS No. 142,
"Goodwill and Other Intangible Assets". This statement affects the Company's
treatment of goodwill and other intangible assets. The statement required that
goodwill existing at the date of adoption be reviewed for possible impairment
and that impairment tests be periodically repeated, with impaired assets written
down to fair value. Additionally, existing goodwill and intangible assets must
be assessed and classified within the statement's criteria. Intangible assets
with finite useful lives will continue to be amortized over those periods.
Amortization of goodwill and intangible assets with indeterminable lives will
cease.
The Company completed the first step of the transitional
goodwill impairment test during the six months ended June 30, 2002 based on the
amount of goodwill as of the beginning of fiscal year 2002, as required by FAS
No. 142. The Company performed a valuation to determine the fair value of each
of the reporting units. Based on the results of the first step of the
transitional goodwill impairment test, the Company determined that goodwill
impairment existed as of January 1, 2002, in the Company's Metal Forming
segment, which the Company has determined constitutes a "reporting unit" under
FAS 142. The Company completed undertaking the second step of the transitional
goodwill impairment test and reported a charge for goodwill impairment as
explained more fully in Note 1 to the accompanying Consolidated Financial
Statements, net of a related tax benefit, of $29,334,000.
Warranty
The Company provides for the estimated cost of product warranties at the time
revenue is recognized based upon estimated costs historical and industry
experience, and anticipated in-warranty failure rates. While the Company engages
in product quality programs and processes, the Company's warranty obligation is
affected by product failure rates, and repair or replacement costs incurred in
correcting a product failure. Should actual product failure rates and repair or
replacement costs differ from estimates based on historical experience,
revisions to the estimated warranty liability may be required.
Accounting for Income Taxes
The preparation of the Company's Consolidated Financial
Statements requires it to estimate its income taxes in each of the jurisdictions
in which it operates, including those outside the United States which may be
subject to certain risks that ordinarily would not be expected in the United
States. The income tax accounting process involves estimating its actual current
exposure together with assessing temporary differences resulting from differing
treatment of items, such as depreciation and equity method gains and losses, for
tax and accounting purposes. These differences result in the recognition of
deferred tax assets and liabilities. The Company must then record a valuation
allowance to reduce its deferred tax assets to the amount that is more likely
than not to be realized. Significant management judgment is required in
determining its provision for income taxes, its deferred tax assets and
liabilities and any valuation allowance recorded against deferred tax assets. In
the event that actual results differ from these estimates or the company adjusts
these estimates in future periods it may need to adjust its valuation allowance
which could materially impact its financial position and results of operations.
Item 7A. QUANTITIVE AND QUALITATIVE MARKET RISKS
The Company's operations are sensitive to a number of market factors, any one of
which could materially adversely effect its results of operations in any given
year:
Construction activity--The Company's largest segment, its Heating,
Ventilating, and Air Conditioning (HVAC) segment, is directly affected and its
other segment, Metal Forming, is indirectly affected by commercial construction
projects and residential housing starts. Relatively lower interest rates in 2002
and strong institutional activity helped prevent what might otherwise have been
a more pronounced recessionary effect. Significant increases in interest rates
or reductions in construction activity in future periods, however, could be
expected to adversely effect the Company's revenues, possibly materially.
Manufacturing Activity--The Company's Metal Forming segment, as a
manufacturer of capital goods used in other manufacturing processes, is subject
to significant cyclicality based upon factory utilization. The Company's Metal
Forming segment provides equipment used to hold, uncoil, straighten, form, bend,
cut, and otherwise handle metal used in manufacturing operations; all activities
likely to be adversely effected in recessionary periods. The level of
manufacturing activity in the automotive, steel processing, metal furniture, and
stamping industries, are particularly relevant to this segment since its
products are typically purchased to upgrade or expand existing equipment or
facilities. Expectations of future business activity are also particularly
relevant. Activity in this segment continues to be significantly effected by the
events of September 11, 2001, as be discussed more fully in Note 14 to the
accompanying Consolidated Financial Statements.
Credit Availability--Although interest rates trended lower in 2002,
reflecting the Federal Reserve's more liberal monetary policy during this
period, credit availability has, in management's view, somewhat tightened for
marginal business borrowers. As the Company's customer base includes many small
to medium sized businesses, this has adversely effected the Company's sales.
Technological changes--Although the HVAC industry has historically been
impacted by technology changes in a relatively incremental manner, it cannot be
discounted that radical changes--such as might be suggested by fuel cell
technology, burner technology and/or other developing technologies--could
materially adversely effect the Company's results of operations and/or financial
position in the future.
Environmental Laws Affecting Operations and Product Design--The
Company's operations and its HVAC products that involve combustion as currently
designed and applied entail the risk of future noncompliance with the evolving
landscape of Environmental Laws. The cost of complying with the various
Environmental Laws is likely to increase over time, and there can be no
assurance that the cost of compliance, including changes to manufacturing
processes and design changes to current HVAC product offerings that involve the
creation of carbon dioxide or other currently unregulated compounds emitted in
atmospheric combustion, will not over the long-term and in the future have a
material adverse effect on the Company's results of operations.
Weather Conditions--The Company's core HVAC segment manufactures
heating, ventilating and air conditioning equipment with heating products
representing the bulk of the segment's revenues. As such, the demand for its
products depends upon colder weather and benefits from extreme cold. Severe
climatic changes, such as those suggested by the "global warming" phenomenon,
could over time adversely effect the Company's results of operation and
financial position.
Purchasing Practices--It has been the Company's policy in recent years
for high value commodities to aggregate volumes with a sole source to achieve
maximum cost reductions while maintaining quality and service. This policy has
been effective in reducing costs but has introduced additional risk which could
potentially result in short-term supply disruptions or cost increases from time
to time in the future.
Supply Disruptions--The Company uses a wide variety of materials in the
manufacture of its products, such as copper, aluminum and steel, as well as
electrical and mechanical components, controls, motors and other products.
Management believes at present that it has adequate sources of supply for its
raw materials and components (subject to the "sole source" risks described above
under Purchasing Practices) and has not had significant difficulty in obtaining
the raw materials, component parts or finished goods from its suppliers. No
industry segment of the Company is dependent on a single supplier, the loss of
which would have a material adverse effect on its business.
Commodity Risks--The purchase raw material commodities and is at risk
for fluctuations in the market price of those commodities. In connection with
the purchase of major commodities, principally copper and aluminum for
manufacturing requirements, The Company enters into commodity forward agreements
to effectively hedge the cost of the commodity. This forward approach is done
for a portion of the Company's requirements, while the balance of the
transactions required for these two commodities are conducted in the cash
market. The forward agreements require the Company to accept delivery of the
commodity in the quantities committed, at the agreed upon forward price, and
within the timeframe specified. The cash market transactions are executed at the
Company's discretion and at current market prices. In addition to the raw
material cost strategy described above, the Company enters into fixed pricing
agreements for the fabrication charges necessary to convert these commodities
into useable product.
Interest Rate Sensitivity--The Company's borrowings are largely Libor
or Prime Rate based. The Company believes that a 100 basis-point increase in its
cost of funds would not have a material affect on the Company's financial
statements taken as a whole. Interest rates are nonetheless significant to the
Company as a participant in the construction and capital goods industries. (See
Construction Activity, Manufacturing Activity and Credit Availability above.)
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of Mestek, Inc.
We have audited the accompanying consolidated balance sheets of Mestek,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity and comprehensive
loss, and cash flows for each of the years in the three year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements 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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Mestek,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the consolidated
results of their operations and their consolidated cash flows for each of the
years in the three year period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" on January 1, 2002. As discussed in Note 17, the
Company's consolidated financial statements have been restated to reflect the
application of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" to its subsidiary, Omega Flex Inc.'s stock option plan.
We have also audited Schedule II of Mestek, Inc. and subsidiaries for
each of the three years in the period ended December 31, 2002. In our opinion,
this schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
/s/ Grant Thornton LLP
Boston, Massachusetts
March 7, 2003 (except for Note 18, as to which the date is April 9, 2003)
MESTEK, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
2002 2001
---- ----
As Restated - see Note 17
(Dollars in thousands)
ASSETS
Current Assets
Cash and Cash Equivalents $ 2,675 $ 2,315
Accounts Receivable - less allowances of,
$3,230 and $4,239 respectively 53,503 57,944
Inventories 60,587 64,588
Deferred Tax Asset 6,087 3,131
Other Current Assets 5,285 7,609
---------- ----------
Total Current Assets 128,137 135,587
Property and Equipment - net 56,605 58,334
Deferred Tax Asset 3,701 2,314
Other Assets and Deferred Charges - net 5,786 5,844
Excess of Cost over Net Assets of Acquired Companies-net 26,072 57,432
---------- ----------
Total Assets $ 220,301 $ 259,511
========= =========
See Accompanying Notes to Consolidated Financial Statements
MESTEK, INC.
CONSOLIDATED BALANCE SHEETS (continued)
As of December 31,
2002 2001
---- ----
As Restated - see Note 17
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 6,775 $ 30,002
Accounts Payable 16,643 17,687
Accrued Compensation 8,614 6,904
Accrued Commissions 2,011 2,307
Reserve for Equity Investment Losses 6,000 6,000
Customer Deposits 6,763 5,177
Accrued Employee Benefits 8,456 7,276
Environmental Reserves 7,700 2,000
Other Accrued Liabilities 13,034 12,256
-------- --------
Total Current Liabilities 75,996 89,609
Long-Term Debt 4,891 180
Pension Obligation 558 ---
Other Liabilities 45 14
----------- ----------
Total Liabilities 81,490 89,803
-------- --------
Minority Interests 1,097 1,085
---------- ----------
Shareholders' Equity:
Common Stock - no par, stated value $0.05 per share,
9,610,135 shares issued 479 479
Paid in Capital 15,434 15,434
Retained Earnings 133,796 164,201
Treasury Shares, at cost, 888,532 common shares (10,101) (10,101)
Other Comprehensive Loss (1,894) (1,390)
--------- ---------
Total Shareholders' Equity 137,714 168,623
-------- --------
Total Liabilities and Shareholders' Equity $ 220,301 $ 259,511
========= =========
See Accompanying Notes to Consolidated Financial Statements.
MESTEK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
2002 2001 2000
---- ---- ----
(As Restated (As Restated
see Note 17) see Note 17)
(Dollars in thousands, Except Earnings Per Common Share)
Net Sales $ 373,874 $ 394,103 $ 375,987
Cost of Goods Sold 264,543 290,427 267,185
------- ------- -------
Gross Profit 109,331 103,676 108,802
Selling Expense 53,566 53,693 49,782
General and Administrative Expense 22,022 21,549 20,707
Engineering Expense 14,992 13,068 11,658
Environmental Charges 18,046 2,000 ---
Restructuring and Other Charges --- 1,774 ---
--------- ------------- -----------
Operating Profit 705 11,592 26,655
Equity Loss in Investee --- (14,908) ---
Interest Income 404 674 792
Interest Expense (964) (1,396) (1,912)
Other Income (Expense), Net (350) (60) 149
---------- --------- --------
Income (Loss) from Continuing Operations Before Income Taxes (205) (4,098) 25,684
Income Taxes (Expense) Benefit (866) 1,465 (9,700)
---------- ------- ---------
Income (Loss) from Continuing Operations (1,071) (2,633) 15,984
--------- --------- ------
Discontinued Operations (see Note 3):
Gain on Sale of Discontinued Operation --- 16,446 ---
Applicable Income Tax Expense --- (7,499) ---
----------- --------- -----------
Net Gain on Sale of Discontinued Operation --- 8,947 ---
----------- -------- -----------
Income from Operations of
Discontinued Segments Before Taxes --- --- 1,227
Applicable Income Tax Expense --- --- (561)
----------- ------- -----
Income from Operations of Discontinued Segments --- --- 666
----------- ------- ---
Cumulative Effect of a Change in Accounting Principle: (See Notes 1 and 7)
Gross Impairment (Expense) (31,633) --- ---
Tax Benefit 2,299 --- ---
-------- ------- -------
Net Impairment (Expense) (29,334) --- ---
-------- ------- -------
Net (Loss) Income ($30,405) $ 6,314 $ 16,650
========== ======== =========
Basic (Loss) Earnings per Common Share:
Continuing Operations ($ 0.12) ($ 0.30) $ 1.83
Discontinued Operations --- 1.02 0.07
Cumulative Effect of a Change in Accounting Principle (3.36) --- ---
--------- ----------- ---------
Net (Loss) Income ($ 3.48) $ 0.72 $ 1.90
========== ========= =========
Basic Weighted Average Shares Outstanding 8,722 8,723 8,744
========= ========= =========
Diluted (Loss) Earnings Per Common Share
Continuing Operations ($ 0.12) ($ 0.30) $ 1.82
Discontinued Operations --- 1.02 0.08
Cumulative Effect of a Change in Accounting Principle (3.36) --- ---
--------- ----------- ---------
Net (Loss) Income ($ 3.48) $ 0.72 $ 1.90
========== ========= =========
Diluted Weighted Average Shares Outstanding 8,722 8,765 8,760
========= ========= ==========
See Accompanying Notes to Consolidated Financial Statements.
MESTEK, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
For the years ended December 31, 2002, 2001, and 2000
Accumulated Other
Common Paid In Retained Treasury Comprehensive
(Dollars in Thousands) Stock Capital Earnings Shares (Loss) Total
---------------------- ------ ------- -------- --------- ------ ------
(As Restated
see Note 17)
Balance - December 31, 1999 $479 $15,434 $142,788 ($9,393) ($1,083) $148,225
Net Income 16,650 16,650
Cumulative Translation Adjustment (112) (112)
----------
Net Comprehensive Income 16,538
----------
Dividends Paid in MCS, Inc. Common Stock (1,551) (1,551)
Common Stock Repurchased (340) (340)
----- -------- --------- --------- ---------- ----------
Balance - December 31, 2000 $479 $15,434 $157,887 ($9,733) ($1,195) $162,872
Net Income 6,314 6,314
Cumulative Translation Adjustment (195) (195)
----------
Net Comprehensive Income 6,119
----------
Common Stock Repurchased (368) (368)
----- -------- -------- --------- -------- ----------
Balance - December 31, 2001 $479 $15,434 $164,201 ($10,101) ($1,390) $168,623
Net (Loss) (30,405) (30,405)
Additional Minimum Liability
Defined Benefit Plan--Net of Tax (559) (559)
Cumulative Translation Adjustment 55 55
----------
Net Comprehensive (Loss) (30,909)
----- -------- --------- --------- -------- ----------
Balance - December 31, 2002 $479 $15,434 $133,796 ($10,101) ($1,894) $137,714
===== ======== ========= ========= ======== ==========
See Accompanying Notes to Consolidated Financial Statements
MESTEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
2002 2001 2000
---- ---- ----
(As Restated (As Restated
see Note 17) see Note 17)
(Dollars in thousands)
Cash Flows from Operating Activities:
Net Income ($ 30,405) $ 6,314 $ 16,650
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Cumulative Effect of Change in Accounting Principle 29,334 --- ---
Depreciation and Amortization 8,818 9,269 12,779
Provision for Losses on Accounts
Receivable, net of write-offs (1,009) 735 119
Net Change in Minority Interests net of
effects of acquisitions and dispositions 12 47 (171)
Equity Loss in Investee --- 14,908 ---
Gain on Sale of National Northeast --- (16,446) ---
Changes in assets and liabilities net of
effects of acquisitions and dispositions:
Accounts Receivable 5,450 4,788 5,909
Inventory 4,001 5,708 (2,922)
Accounts Payable (1,044) (2,928) (166)
Other Liabilities 12,987 (10,011) 2,079
Other Assets (2,582) (1,136) 460
------------ ----------- ---------
Net Cash Provided by Operating Activities 25,562 11,248 34,737
---------- --------- --------
Cash Flows from Investing Activities:
Disposition of National Northeast, Inc. (see Note 3) --- 44,619 ---
Capital Expenditures (7,526) (2,692) (6,979)
Proceeds from sale of fixed assets 785 --- ---
Acquisition of Businesses and Other
Assets, Net of Cash Acquired --- (17,600) (45,636)
Investment in CareCentric, Inc. --- (1,638) (6,850)
--------- --------- ----------
Net Cash (Used in) Provided by Investing Activities (6,741) 22,689 (59,465)
--------- -------- ----------
Cash Flows from Financing Activities:
Net (Payments) Borrowings Under
Revolving Credit Agreement (22,747) (33,454) 28,959
Principal Payments Under Long
Term Debt Obligations (1,281) (22) (5,830)
Proceeds from Issuance of Long Term Debt 5,512 --- ---
Repurchase of Common Stock --- (368) (340)
--------- --------- ----------
Net Cash (Used In) Provided by Financing Activities (18,516) (33,844) 22,789
---------- ----------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 305 93 (1,939)
Translation effect on cash 55 (195) (112)
Cash and Cash Equivalents - Beginning of Year 2,315 2,417 4,468
-------- -------- ---------
Cash and Cash Equivalents - End of Year $ 2,675 $ 2,315 $ 2,417
========= ========= =========
See Accompanying Notes to Consolidated Financial Statements.
MESTEK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements include the accounts of Mestek,
Inc. (Mestek) and its wholly owned subsidiaries (collectively the "Company").
All material inter-company accounts and transactions have been eliminated in
consolidation. In the opinion of management, the financial statements include
all material adjustments, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows.
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 the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates and assumptions related to
revenue recognition, accounts receivable valuations, inventory valuations,
goodwill valuation, intangible asset valuations, warranty costs, environmental
reserves, investments, and accounting for income taxes. Actual amounts could
differ significantly from these estimates.
Revenue Recognition
The Company's revenue recognition activities relate almost entirely to
the manufacture and sale of heating, ventilating and air conditioning (HVAC)
equipment and metal forming equipment. Under generally accepted accounting
principles, revenues are considered to have been earned when the Company has
substantially accomplished what it must do to be entitled to the benefits
represented by the revenues. With respect to sales of the Company's HVAC or
metal forming equipment, the following criteria represent preconditions to the
recognition of revenue:
Persuasive evidence of an arrangement must exist. Delivery has occurred
or services rendered. The sales price to the customer is fixed or
determinable. Collection is reasonably assured.
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of 90 days or less at the time of purchase to be cash equivalents. Cash
equivalents include investments in an institutional money market fund, which
invests in U.S. Treasury bills, notes and bonds, and/or repurchase agreements,
backed by such obligations.
Inventories
Inventories are valued at the lower of cost or market. Cost of
inventories is principally determined by the last-in, first-out (LIFO) method.
Approximately 84% and 82% of the cost of inventories were determined on the
basis of the LIFO method for the years ended December 31, 2002 and 2001,
respectively.
Property and Equipment
Property and equipment are carried at cost. Depreciation and
amortization are computed using the straight-line and accelerated methods over
the estimated useful lives of the assets or, for leasehold improvements, the
life of the lease, if shorter. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is reflected in income for the period. The cost of
maintenance and repairs is charged to income as incurred; significant
improvements are capitalized.
Excess of Cost Over Net Assets of Acquired Companies (Goodwill)
Through December 31, 2001, the Company amortized Goodwill on the
straight-line basis over the estimated period to be benefited, typically 25
years. The Company continually evaluated the carrying value of Goodwill in
accordance with FAS 121 prior to December 31, 2001. Any impairments are
recognized in accordance with the appropriate accounting standards.
The Financial Accounting Standards Board (FASB) issued FAS 141,
Business Combinations and FAS 142, Goodwill and Intangible Assets in 2001. FAS
141 is effective for all business combinations completed after June 30, 2001.
FAS 142 is effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of FAS
142. Major provisions of these Statements and their effective dates for the
Company are as follows: (i) all business combinations initiated after June 30,
2001 must use the purchase method of accounting (the pooling of interest method
of accounting is prohibited except for transactions initiated before July 1,
2001) (ii) intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal rights or
are separable from the acquired entity and can be sold, transferred, licensed,
rented or exchanged, either individually or as part of a related contract, asset
or liability, (iii) goodwill and intangible assets with indefinite lives
acquired after June 30, 2001 will not be amortized, (iv) effective January 1,
2002, all previously recognized goodwill and intangible assets with indefinite
lives are no longer be subject to amortization, (v) effective January 1, 2002,
goodwill and intangible assets with indefinite lives will be tested for
impairment annually and whenever there is an impairment indicator, and (vi) all
acquired goodwill must be assigned to reporting units for purposes of impairment
testing and segment reporting.
Accordingly, the Company ceased recording amortization of goodwill and
intangible assets with indefinite lives effective January 1, 2002. In addition,
the Company completed the first step of the transitional goodwill impairment
test during the three months ended June 30, 2002 based on the amount of goodwill
as of the beginning of fiscal year 2002, as required by FAS 142. The Company
performed a valuation to determine the fair value of each of the reporting
units. Based on the results of the first step of the transitional goodwill
impairment test, the Company determined that goodwill impairment existed as of
January 1, 2002, in the Company's Metal Forming segment, which the Company
determined constituted a "reporting unit" under FAS 142.
The Company's analysis under Step Two of FAS 142 indicated that the
Metal Forming segment's goodwill was impaired as of January 1, 2002 in the
amount of $31,633,000 as reflected in the accompanying Statement of Operations
for the year ended December 31, 2002. The effect of the impairment is treated in
the accompanying financial statements as relating to the three-month period
ending March 31, 2002. The related tax benefit, $2,299,000, is substantially
lower than what would be expected on the basis of statutory rates due to the
fact that the majority of the goodwill impaired has a zero basis for tax
purposes as a result of having been acquired in stock rather than asset purchase
transactions. See Note 10.
The acquisition of the stock of SNS Properties, Inc. on July 2, 2001,
as more fully described in Note 2, resulted in Goodwill of approximately
$7,668,000, which, in accordance with FAS 142, is not being amortized.
Accumulated amortization (including goodwill impairments) of goodwill and other
intangibles was $40,083,000 and $8,098,000 at December 31, 2002 and 2001,
respectively. See Note 7.
Advertising Expense
Advertising costs are charged to operations as incurred. Such charges
aggregated $5,039,000, $5,184,000, and $4,337,000, for the years ended December
31, 2002, 2001, and 2000, respectively.
Research and Development Expense
Research and development expenses are charged to operations as
incurred. Such charges aggregated $5,332,000, $4,977,000, and $3,482,000, for
the years-ended December 31, 2002, 2001, and 2000, respectively.
Treasury Shares
Common stock held in the Company's treasury has been recorded at cost.
Earnings per Common Share
Basic earnings per share have been computed using the weighted average
number of common shares outstanding. Common stock options of the Company, as
more fully described in Note 17, were considered in the computation of diluted
earnings per share, except when such effect would be antidilutive.
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, ("FAS No.
123"). As permitted by the statement, the Company has chosen to continue to
account for stock-based compensations using the intrinsic value method as
prescribed by Accounting Principles Board Opinion No. 25. Accordingly, no
compensation expense has been recognized for its stock-based compensation plan.
Had the fair value method of accounting been applied to the Company's
stock option plan, with compensation cost for the Plan determined on the basis
of the fair value of the options at the grant date, the Company's net income and
earnings per share would have been as follows (in thousands except EPS data):
Years Ended
December 31, December 31, December 31
2002 2001 2000
Net (loss) income - as reported ($30,405) $6,314* 16,650*
Net (loss) income - pro forma ($30,541) $6,215* 16,475*
Basic (Loss) Earnings per share - as reported ($3.48) $0.72* $1.90*
(Loss) Earnings per share - pro forma ($3.50) $0.71* $1.88*
* restated to reflect cost of subsidiary stock options - See Note 17
The application of FAS 123 for pro forma disclosure may not be
representative of future effects of applying the statement.
Currency Translation
Assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at exchange rates prevailing on the balance sheet date. The
Statement of Operations is translated at average exchange rates. Net foreign
currency transactions are reported in the results of operations in U.S. dollars
at average exchange rates. Adjustments resulting from the translation of
financial statements are excluded from the determination of income and are
accumulated in a separate component of shareholders' equity.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided for
deferred tax assets if it is more likely than not that these items will either
expire before the Company is able to realize the benefit, or that future
deductibility is uncertain.
Other Comprehensive (Loss) Income
For the years ended December 31, 2002, 2001, and 2000, respectively,
the components of Other Comprehensive (Loss) Income consisted of foreign
currency translation adjustments and an additional minimum liability from a
defined benefit pension plan, as more fully explained in Note 12.
Reclassification
Reclassifications are made periodically to previously issued financial
statements to conform to the current year presentation.
New Accounting Pronouncements
The FASB issued FAS No. 145, Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections, effective for
fiscal years beginning May 15, 2002 or later that rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, FASB Statement No. 64,
Extinguishments of Debt made to satisfy sinking-fund requirement, and FASB
Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This
Statement amends FAS No. 4 and FAS No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for 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 Company does not
believe adopting FAS 145 will have a material impact on its Consolidated
Financial Statements.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which relates to accounting for
plant shutdowns, restructuring and other such costs. FAS No. 146 is based on the
fundamental principle that a liability for a cost associated with an exit or
disposal activity should be recorded when it (1) is incurred, that is, when it
meets the definition of a liability in FASB Concepts Statement No. 6, Elements
of Financial Statements, and (2) can be measured at fair value. The principal
reason for issuing FAS No. 146 is the Board's belief that some liabilities for
costs associated with exit or disposal activities that entities record under
current accounting pronouncements, in particular EITF Issue 94-3, do not meet
the definition of a liability. FAS No. 146 nullifies EITF Issue 94-3; thus, it
will have a significant effect on practice because commitment to an exit or
disposal plan no longer will be a sufficient basis for recording a liability for
costs related to those activities. FAS No. 146 is effective for exit and
disposal activities initiated after December 31, 2002. Early application is
encouraged; however, previously issued financial statements may not be restated.
An entity would continue to apply the provisions of EITF Issue 94-3 to an exit
activity that is initiated under an exit plan that met the criteria of EITF
Issue 94-3 before the entity initially applied FAS No. 146. The Company does not
believe adopting FAS No. 146 will have a material impact on its Consolidated
Financial Statements.
In November 2002, FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5,
57, and 107 and Rescission of FASB Interpretation No. 3 (FIN 45). FIN 45
clarifies the requirement of FAS No. 5, Accounting for Contingencies, relating
to the guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it
assumes under that guarantee. FIN 45 covers guarantee contracts that have any of
the following four characteristics: (a) contracts that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying obligation that is related to an asset, a liability, or an equity
security of the guaranteed party (e.g., financial and market value guarantees),
(b) contracts that contingently require the guarantor to make payments to the
guaranteed party based on another entity's failure to perform under an
obligation agreement (performance guarantees), (c) indemnification agreements
that contingently require the indemnifying party (guarantor) to make payments to
the indemnified party (guaranteed party) based on changes in an underlying
obligations that is related to an asset, a liability, or an equity security of
the indemnified party, such as an adverse judgment in a lawsuit or the
imposition of additional taxes due to either a change in the tax law or an
adverse interpretation of the tax law, and (d) indirect guarantees of the
indebtedness of others. FIN 45 specifically excludes certain guarantee contracts
from its scope. Additionally, certain guarantees are not subject to FIN 45's
provisions for initial recognition and measurement, but are subject to its
disclosure requirements. The initial recognition and measurement provisions are
effective for guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for the Company's annual financial
statements for the year ended December 31, 2002. See Note 13.
In December 2002, the FASB issued FAS No. 148, Accounting for Stock
Based Compensation--Transition and Disclosure, an amendment to FASB Statement
No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of FASB Statement 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Finally, FAS No. 148 amends APB Opinion No. 28, Interim Financial
Reporting, to require disclosure about those effects in interim financial
reporting. For entities that voluntarily change to the fair value based method
of accounting for stock-based employee compensation, the transition provisions
are effective for fiscal years ending after December 15, 2002. For all other
companies, the disclosure provisions and the amendment to APB No. 28 are
effective for interim periods beginning after December 15, 2002. The Company is
currently reviewing this statement to determine its effect on its Consolidated
Financial Statements.
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns, or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company is currently evaluating the impact
of FIN 46 on its equity investments described in Note 6.
2. BUSINESS ACQUISITIONS
On December 31, 2001, the Company acquired substantially all of the
operating assets and certain liabilities of The King Company, (King), a
subsidiary of United Dominion Industries, based in Bishopville, South Carolina,
and Owatonna, Minnesota. King manufactures industrial heating and specialty
refrigeration and ventilation products complementary to certain of the Company's
other industrial HVAC product lines. The purchase price paid, net of liabilities
assumed, was $4 million and included no goodwill. The Company accounted for the
transaction under the purchase method of accounting.
On July 2, 2001 the Company, through its wholly owned subsidiary,
Formtek, Inc., acquired of 100% of the outstanding common stock of SNS
Properties, Inc. (SNS), an Ohio corporation based in Warrensville Heights, Ohio.
SNS, through its Yoder, Krasny Kaplan and Mentor AGVS businesses, manufactures
sophisticated metal forming equipment, tube mills, pipe mills, custom engineered
material handling equipment, and automated guided vehicle systems for the global
market. The purchase price paid for the stock was $12.5 million and included
$7.7 million in goodwill. The Company also acquired a related manufacturing
plant in Bedford Heights, Ohio for $1.1 million. The Company accounted for the
transaction under the purchase method of accounting.
On August 25, 2000 the Company, through a 75% owned subsidiary,
Airtherm LLC, acquired substantially all of the operating assets of Airtherm
Manufacturing Company, a Missouri corporation, and Airtherm Products, Inc., an
Arkansas corporation, except the real property owned by these companies, for
approximately $3,815,000, including assumed liabilities of $101,000. No goodwill
was recorded in the transaction. The Company accounted for the transaction under
the purchase method of accounting. The Company acquired an option at that time
to acquire the remaining 25% of Airtherm LLC membership interests it did not own
for $2,000,000, subject to certain downward adjustments. The Company exercised
its option to acquire the membership interests in September of 2001 and the
amount paid was recorded as goodwill in connection with the acquisition of
Airtherm. In connection with the transaction, the Company also loaned $1,550,000
to an unrelated company, which acquired two manufacturing facilities owned by
the sellers. The loan was evidenced by a $750,000 promissory note, which bore
interest at 7% and was scheduled to mature on August 31, 2002 and an $800,000
promissory note which bore interest at 7% and was scheduled to mature on August
31, 2002. The notes were secured in each case by the related manufacturing
facilities and were included in other current assets and other assets,
respectively, as of December 31, 2000. The notes were paid off in September of
2001.
On June 30, 2000 the Company acquired substantially all of the
operating assets of Louvers and Dampers, Inc. (L & D) located in Florence,
Kentucky. L & D manufactures louver and damper products for the HVAC industry.
The purchase price paid for the assets acquired was $3,000,000 and included
$699,000 of in intangible assets. The Company accounted for the acquisition
under the purchase method of accounting.
On June 3, 2000, the Company and Met-Coil Systems Corporation
("Met-Coil") completed its previously announced merger agreement under which
Met-Coil was merged into a wholly owned subsidiary of the Company. Immediately
thereafter, in accordance with the terms of the merger agreement, the Met-Coil
shareholders were redeemed for a total cash consideration of approximately
$33,600,000. Met-Coil manufactures advanced sheet-metal-forming equipment,
fabricating equipment and computer-controlled fabrication systems for the global
market. The Company employs approximately 270 people, principally in its Cedar
Rapids, Iowa and Lisle, Illinois manufacturing facilities, and had revenues for
the fiscal year ended May 31, 2000 of $48.3 million (unaudited). Met-Coil's
products are complementary with those of the Company's Metal Forming Segment.
The Company accounted for the merger under the purchase method of accounting
and, accordingly, the total purchase price allocated to the assets acquired was
approximately $49,400,000, including assumed liabilities of approximately
$15,800,000. Goodwill of approximately $23,000,000 was recorded.
Pro forma unaudited results of operations for 2000, reflecting a
hypothetical acquisition date for Met-Coil of January 1, 2000 are as follows:
2000
(dollars in thousands)
Total Revenues $395,238
Net Income * 17,096
Diluted Earnings Per Share * $1.95
* restated to reflect cost of subsidiary stock options - See Note 17
On February 10, 2000, the Company, through a wholly owned subsidiary,
acquired the designs, intellectual property and certain physical assets of B & K
Rotary Machinery International Corporation ("B & K") of Brampton, Ontario,
Canada. B & K is a well-known and experienced manufacturer of highly engineered
metal processing lines. B & K equipment is found in steel processing centers,
tube/pipe production plants and roll-forming facilities around the world. The B
& K Supermill(TM), Rotary Shear(TM), and Rotary Pierce(TM) designs are the
technology of choice among leading producers of light gauge steel framing used
in building construction. The purchase price paid for the assets acquired was
approximately $3,018,000. The Company accounted for this acquisition under the
purchase method of accounting and accordingly recorded goodwill of approximately
$2,200,000.
On January 28, 2000, the Company acquired substantially all of the
operating assets of Wolfram, Inc. d/b/a Cesco Products ("Cesco") located in
Minneapolis, Minnesota. Cesco manufactured vertical and horizontal louvers;
controls and fire/smoke dampers; gravity ventilators, louver penthouses and
walk-in access doors for the HVAC industry at its location in Minneapolis,
Minnesota. The Cesco products are complementary to the Company's existing louver
and damper businesses. The purchase price paid for the assets acquired was
approximately $6,425,000, including assumed liabilities of approximately
$1,051,000. The Company accounted for this acquisition under the purchase method
of accounting and accordingly recorded goodwill of approximately $2,700,000.
3. BUSINESS DISPOSITIONS
National Northeast Corporation
On January 9, 2001 the Company completed the sale of its subsidiary,
National Northeast Corporation ("National"), an aluminum extruder and heat sink
fabricator, to Alpha Technologies Group, Inc. ("Alpha") for a total cash
consideration of $49.9 million. The Company's net pre-tax gain, after accounting
for the minority interest and related costs of sale, was approximately $16.4
million. The Income Tax Expense recorded in respect of the gain is higher than
would be suggested by applying statutory rates to the gain recorded for
accounting purposes due principally to the fact that, as part of the agreement
for sale, the Company agreed to make on behalf of Alpha an election under
Internal Revenue Code Section 338(h)10 which requires that the Company treat the
transaction for tax purposes as a deemed sale of 100% of National's assets, the
negative tax consequences of which inure to the Company. The Company has
accounted for the transaction as a Gain on Disposal of Discontinued Operations
in accordance with APB30.
The operations of National are separately reported in accordance with
APB30 in the accompanying Consolidated Statements of Income for the years 2001
and 2000, under the heading Income From Discontinued Operations. National was
formerly included in the Company's Metal Products segment. Interest expense has
been allocated to the operations of National based on indebtedness related to
the Company's investment in National during 2001 and 2000. Corporate General &
Administrative expenses originally allocated to National totaling $428,000 for
the year 2000 have been reallocated to the Company's continuing operations in
accordance with APB30. Revenues for National were $37,474,000 for the year 2000.
Summarized financial information for the discontinued National
operations is as follows:
Year ended
2000
(in thousands)
Operating Revenues $37,474
Income before Provision for Income Taxes $1,705
Income from Discontinued Operations
Net of Income Tax $977
Year ended
2000
(in thousands)
Current Assets $9,736
Total Assets $34,453
Current Liabilities $2,495
Total Liabilities $4,572
Net Assets of Discontinued Operations $29,881
MCS, Inc.
On May 26, 1999 the Company entered into an agreement (the Agreement)
to merge its wholly owned subsidiary, MCS, Inc. (MCS) into Simione Central
Holdings, Inc., now known as CareCentric, Inc. (Simione). Simione is a provider
of information systems and services to the home health care industry supplying
information systems, consulting and agency support services to customers
nationwide. Simione provides freestanding, hospital based and multi-office home
health care providers (including certified, private duty, staffing, HME, IV
therapy, and hospice) with information solutions that address all aspects of
home care operations. Simione maintains offices nationwide and is headquartered
in Atlanta, Georgia.
Under the terms of the Agreement, for every share of outstanding
Simione common stock, Simione would issue .85 shares of its common stock to the
Company. As a result, the Company would own, based on the number of Simione
common shares outstanding at the date of the Agreement, approximately 46% of
Simione after the merger is completed. On August 12, 1999, Simione, with the
Company's consent, acquired all of the outstanding common stock of CareCentric
Solutions, Inc. for $200,000 and acquired all of the Preferred Stock of
CareCentric Solutions, Inc. in return for 3.1 million newly issued shares of
Simione Series A Preferred Stock, which were convertible on a one for one basis
into Simione common shares after shareholder approval upon consummation of the
merger. As a result, the Company ownership percentage would drop to
approximately 37% of Simione. Under the terms of the Agreement, MCS's
ProfitWorks segment would remain with the Company.
On September 9, 1999, Mestek, Inc. ("Mestek") announced that it had
entered into an amendment to the Plan and Agreement of Merger dated May 26, 1999
(the "Amendment") between Simione, Mestek, and its wholly-owned subsidiary, MCS,
Inc. ("MCS"), whereby the shares of common stock of MCS would be distributed to
the Mestek common shareholders in a spin-off transaction (the Spin-off), and MCS
would then be merged with and into Simione, (the Merger). The Spin-off and the
Merger were completed on March 7, 2000, after shareholder approval.
In connection with the Amendment, Mestek loaned to Simione a total of
$4,000,000 on a short-term basis. Upon the closing of the above-mentioned
merger, the $4,000,000 loan was canceled, and Mestek contributed an additional
$2,000,000 to the capital of Simione in return for newly issued Series B
Preferred Stock of Simione. The Series B Preferred Stock issued to Mestek had
super-voting rights equivalent to 2.2 million shares of Simione common stock. On
June 12, 2000 Mestek agreed to reduce such voting rights by half to comply with
NASDAQ's voting rights policy, in exchange for a three-year warrant to acquire
up to 490,396 shares at an exercise price of $3.21 of Simione Common Stock.
Mestek also received as part of its capital contribution to Simione a warrant
for the subsequent purchase of 400,000 shares of Simione common stock at an
exercise price of $10.875. The Amendment also provided, upon consummation of the
merger, for the appointment to the Simione Board of Directors of six individuals
designated by the Mestek Major Shareholders (as defined in the Amendment) and
the obligation of the Mestek Major Shareholders to vote for the nominees to the
Simione Board of Directors for eighteen months after the effective date of the
merger.
Mestek also loaned Simione $850,000 on November 11, 1999 on a
short-term basis. Upon consummation of the merger, the loan was converted to
$850,000 of newly issued Series C Preferred Stock. The Series C Preferred stock
has voting rights equal to 170,000 shares of Simione common stock.
On March 6, 2000, the Company completed the Spin-off and on March 7,
2000, the merger of MCS, Inc. into Simione was completed. The net book value of
the assets of MCS, Inc. of approximately $1,551,000 has been treated as a
dividend to the shareholders of the Company. The Company has accounted for the
operations of MCS prior to that date (with the exception of its ProfitWorks
division which was retained by the Company under the terms of the Agreement) as
a discontinued operation in accordance with APB30.
The company's continuing investments in CareCentric subsequent to March
7, 2000 are described in Note 6, Equity Investments.
Summarized financial information for the discontinued MCS operations, is as
follows:
Year ended
2000
(in thousands)
Operating Revenues $1,701
Income (Loss) from Discontinued Operations
before Provision for Income Taxes (Benefit) ($478)
Income from Discontinued Operations
Net of Income Tax ($310)
4. INVENTORIES
Inventories consisted of the following at December 31:
2002 2001
---- ----
(in thousands)
Finished Goods $16,699 $18,664
Work-in-progress 18,908 17,910
Raw materials 32,236 34,790
------ ------
67,843 71,364
Less provision for LIFO
method of valuation (7,256) (6,776)
------- -------
$60,587 $64,588
======== =======
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
Depreciation and
Amortization Est.
2002 2001 Useful Lives
---- ----
(in thousands)
Land $4,577 $4,899
Buildings 26,027 26,582 19-39 Years
Leasehold Improvements 4,879 4,843 15-39 Years
Equipment 95,671 90,285 3-10 Years
------- -------
131,154 126,609
Accumulated Depreciation (74,549) (68,275)
-------- --------
$56,605 $58,334
======= =======
The above amounts include $1,340,000 and $2,511,000 at December 31,
2002 and 2001, respectively, in assets that had not yet been placed in service
by the Company. No depreciation was recorded in the related periods for these
assets.
Depreciation and amortization expense related to continuing operations
was $8,818,000 $9,269,000, and $9,985,000 for the years ended December 31, 2002,
2001, and 2000, respectively.
6. EQUITY INVESTMENTS
CareCentric, Inc. (CareCentric):
In March of 2002, the Company made an offer proposing to make available
to CareCentric up to $1.1 million of short-term financing to assist CareCentric
with its near term working capital needs. Coincident with Mestek's offer, John
E. Reed, the Company's Chairman and CEO, made an offer proposing to make
available to CareCentric approximately $900,000 of short-term financing as well.
In connection with these offers the Company transferred to John E. Reed,
effective March 29, 2002, certain of its voting and other rights associated with
the Series B Preferred Stock of CareCentric held by the Company. As a result of
this transfer, the Company no longer has significant influence over CareCentric
and, accordingly, has discontinued accounting for this investment under the
Equity Method of Accounting subsequent to March 29, 2002.
Pursuant to the offer made by the Company in March, on July 1, 2002,
the Company exchanged certain investments in CareCentric, Inc. (CareCentric) for
certain other securities pursuant to a Re-capitalization and Refinancing
Transaction (the Transaction) approved by the shareholders of CareCentric on
June 6, 2002 and the Board of Directors of Mestek on April 15, 2002. As a result
of the Transaction, the Company agreed to extend its guaranty of CareCentric's
$6.0 million line of credit from Wainwright Bank and Trust Company until June
30, 2003 and surrendered or canceled the following:(i) a Warrant to purchase
104,712 shares of common stock of CareCentric; (ii) two short term notes
totaling $884,883 from CareCentric; (iii) two interest notes totaling
$1,059,059; (iv) 850,000 shares of CareCentric Series C Preferred stock with
170,000 votes attributable thereto; (v) the obligation to repay $1,092,000
advanced to CareCentric; (vi) the obligation to repay $114,117 advanced to
CareCentric; and (vii) options to purchase up to 159,573 shares of common stock
of CareCentric. In exchange for the foregoing, the Company received the
following: (i) a secured, subordinated, convertible term promissory note (the
"Note") in the amount of $4,000,000 convertible into common stock of
CareCentric, Inc. at $1.00 per share and bearing interest a 6.25% and maturing
on July 1, 2007; (ii) a convertibility feature on the Company's existing
5,600,000 shares of CareCentric Series B Preferred Stock, convertible at an
exchange rate of 1.072 shares of common stock for each share of Series B
Preferred Stock; and (iii) 890,396 existing warrants re-priced to purchase Care
Centric common stock at $1.00 per share, for a period extended until June 15,
2004. Except for cash advances made in the second quarter of 2002 totaling
$963,000, and $129,000 advanced on July 1, 2002, (which advances have now been
re-financed as part of the Note), the above assets were carried on the Company's
balance sheet as of June 30, 2002 at a zero valuation reflecting the effect of
cumulative equity method losses. Accordingly, the Note will be carried for
accounting purposes at a basis of $1,092,000, reflecting the cash advances noted
above. The Company will continue to monitor these advances for collectibility
and make any valuation adjustments appropriate in accordance in the with FAS
114, Accounting by Creditors for Impairment of a Loan. See also Note 13.
Pursuant to the offer made by John E. Reed in March of 2002, on July 1,
2002, John E. Reed exchanged certain investments in CareCentric, Inc. for
certain other securities pursuant to the Re-capitalization and Refinancing
Transaction (the Transaction) described above. As a result of the transaction,
John E. Reed surrendered certain notes receivable and other advances totaling
approximately $3.555 million and received in return a $3.555 million secured
convertible note maturing on July 1, 2007 and bearing interest at 6.25%. The
conversion feature reflects an exercise price of $1 per share of CareCentric
common. In addition, 398,406 shares of CareCentric's Series D Preferred Stock
held by Mr. Reed were made convertible into CareCentric common at an exchange
rate of 2.51 shares of common stock per share of Series D Preferred Stock. The
Company's Note, described in the previous paragraph, is subordinated to the
$3,555,000 facility owed by CareCentric to John E. Reed and also to a $600,000
Note Payable to an unrelated third party.
The H. B. Smith Company, Inc. (HBS):
The Company's investment in HBS common stock through a subsidiary is
carried at a zero balance reflecting the Company's equity in HBS' cumulative
losses in prior years. The Company has a note receivable from HBS carried at a
value of $1,264,000 as of December 31, 2002, which bears interest at 5.5% and
matures on December 31, 2005. The face value of the note is $1,659,000 and is
secured by a second security interest in substantially all of HBS's operating
assets and certain real property of HBS. The Company has no obligation to fund
future HBS operating losses. The Company purchases certain products under a
Supply Agreement and purchases certain services under a Manufacturing Agreement,
both through a subsidiary.
7. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF FAS 142
As explained more fully in Note 1, the Company ceased amortization of
goodwill and intangible assets with indefinite lives effective January 1, 2002.
The following table presents net income on an adjusted basis by adding back
goodwill amortization, which had primarily been recorded as a cost of sale item,
to get Adjusted Net Income, and then adding back the Cumulative Effect of a
Change in Accounting Principle to derive Adjusted Net (Loss) Income before
Cumulative Effect of a change in Accounting Principle for both periods.
For the Period Ended
December 31
2002 2001
---- ----
(dollars in thousands, except for earnings per share amounts)
Reported Net (Loss) Income ($30,405) $6,314 *
Add back: Goodwill Amortization --- 1,340
---------- -------
Adjusted Net (Loss) Income (30,405) 7,654
Cumulative Effect of a Change
in Accounting Principle 29,334 ----
------ ---------
Adjusted Net (Loss) Income before Cumulative Effect of a Change
in Accounting Principle ($1,071) $7,654
======== =========
Basic (Loss) Earning per Share ($3.48) $0.72 *
Add back: Goodwill Amortization --- 0.15
---------- ----
Adjusted Net (Loss) Income ($3.48) $0.87
Cumulative Effect of a Change
in Accounting Principle 3.36 ---
-------- ---------
Adjusted Net (Loss) Income before Cumulative Effect of a Change
in Accounting Principle ($0.12) $0.87
======= -----
Diluted (Loss) Earning per Share ($3.48) $0.72 *
Add back: Goodwill Amortization --- 0.15
----------- ----
Adjusted Net (Loss) Income ($3.48) $0.87
Cumulative Effect of a Change
in Accounting Principle 3.36 ---
------- --------
Adjusted Net (Loss) Income before Cumulative
Effect of a Change in Accounting Principle ($0.12) $0.87
======= -----
Accumulated amortization of goodwill and other intangibles was $40,083,000 and
$8,098,000 at December 31, 2002 and December 31, 2001, respectively.
* restated to reflect cost of subsidiary stock options - See Note 17
8. LONG TERM DEBT
Long-Term Debt consisted of the following at December 31:
2002 2001
---- ----
(in thousands)
Revolving Loan Agreement $763 $23,510
Notes Payable 5,500 6,000
Industrial Development Bond 5,403 ---
Other Bonds and Notes Payable --- 672
------------ ---------
11,666 30,182
Less Current Maturities (6,775) (30,002)
------ -------
$ 4,891 $ 180
=========== =========
Revolving Loan Agreement - The Company has a Revolving Loan Agreement
and Letter of Credit Facility (the Agreement) with a commercial bank. The
Agreement has been amended and extended through April 30, 2004, subject,
however, to lender reviews as of April 30, 2003. The Agreement as amended
provides $50 million of unsecured revolving credit including $10 million of
standby letter of credit capacity. Borrowings under the Agreement bear interest
at a floating rate based on the bank's prime rate less one and three quarters
percent (1.75%), approximately 3% at December 31, 2002, or, at the discretion of
the borrower, LIBOR plus a quoted market factor or, alternatively, in lieu of
the prime based rate, a rate based on the overnight Federal Funds Rate. The
Revolving Loan Agreement contains financial covenants, which require that the
Company maintain ratios, relating to interest coverage and leverage. This
Agreement also contains restrictions regarding the creation of indebtedness, the
occurrence of mergers or consolidations, the sale of subsidiary stock and the
payment of dividends in excess of 50 percent of net income. The Company expects
to renew the Agreement on substantially equivalent terms before its expiration.
The Company has outstanding at December 31, 2002 $ 5,375,000 in standby letters
of credit issued principally in connection with its commercial insurance
programs.
Notes Payable - The Company has an unsecured uncommitted Demand Loan
Facility with a second commercial bank, JPMorgan Chase Bank, which expires on
June 30, 2003 under which the Company can borrow up to $25,000,000 on a LIBOR
basis. On August 16, 2002, the Company paid off the $6 million outstanding
balance. No balance was outstanding under the Demand Loan Facility as of
December 31, 2002. The Company's subsidiary, Met-Coil Systems Corporation,
borrowed $5.5 million from MB Financial Corporation, a commercial bank, on July
26, 2002 in connection with the settlement of an environmental litigation
matter, as more fully described in Note 13. Fleet Bank has provided a letter of
credit in support of this loan. The note bears interest at Prime minus one-half
percent (0.5%) and matures on July 26, 2003.
Industrial Development Bond - On April 19, 2002, the Company's
subsidiary, Boyertown Foundry Company, Inc. (BFC) borrowed $5,512,490 under a
Note issued through the Berks County Industrial Development Authority in Berks
County, Pennsylvania in connection with a project to upgrade BFC's foundry
equipment in Boyertown, Pennsylvania. The Note bear interest at 4.93% matures on
April 19, 2012, and is payable in equal monthly payments of principal and
interest over the term of the loan. The Note is secured by a Loan and Security
Agreement under which the equipment purchased by BFC with the loan proceeds is
pledged as security for the Note. The Note is expected to be a `Qualified small
Issue Bond' under Section 144 (a)(12) of the Internal Revenue Code entitling the
holder to tax exempt treatment on the interest. In the event the Note is found
to be not in compliance with Section 144 (a)(12), the interest rate on the Note
may be increase.
Maturities of long-term debt in each of the next five years and
thereafter are as follows in thousands:
2003 $ 6,775
2004 535
2005 559
2006 524
2007 550
Thereafter 2,723
-----
Total $11,666
=======
The fair value of the Company's long-term debt is estimated based on
the current interest rates offered to the Company for debt of the same remaining
maturities. Management believes the carrying value of debt and the contractual
values of the outstanding letters of credit approximate their fair values as of
December 31, 2002.
Cash paid for interest was $969,000, $1,396,000, and $2,644,000, during
the years ended December 31, 2002, 2001, and 2000, respectively.
9. SHAREHOLDERS' EQUITY
The Company has authorized common stock of 20,000,000 shares with no
par value, and a stated value of $0.05 per share. As of December 31, 2002, John
E. Reed, Chairman and CEO of the Company and Stewart B. Reed, a director of the
Company and son of John E. Reed, together beneficially own a majority of the
outstanding shares of the Company's common stock.
By a vote of its shareholders at its annual meeting of shareholders on
May 22, 1996, the Company amended its Articles of Incorporation to authorize
10,000,000 shares of a new class (or classes) of preferred stock (the Preferred
Stock) and to eliminate both its $5.00 convertible, non-cumulative, non-voting,
$100 par, preferred stock (the Convertible Preferred) and its $6.00, $100 par,
redeemable preferred stock (the Redeemable Preferred). As of December 31, 2002
no shares of the Preferred Stock have been issued.
10. INCOME TAXES
Income tax expense from discontinued operations was $7,499,000 and
$561,000, for 2001 and 2000, respectively. There were no discontinued operations
in 2002. Discontinued operations are discussed at greater length in Note 3.
Income tax benefit from a change in accounting method in 2002 was $2,299,000.
The change in accounting method for goodwill is discussed at greater length in
Note 1. Income from Continuing Operations before income taxes included foreign
income of $1,689,000, $1,505,000, and $1,559,000, in 2002, 2001, and 2000,
respectively. Income tax expense from continuing operations consisted of the
following:
2002 2001 2000
---- ---- ----
(in thousands)
Federal Income Tax:
Current $784 $2,325 $5,694
Deferred (1,386) (4,240)* 2,226*
State Income Tax:
Current 902 552 831
Deferred (41) (948)* 232*
Foreign Income Tax:
Current 633 557 18
Deferred (26) 289 699
---------- --------- --------
Income Tax Expense (Benefit) $866 ($1,465)* $9,700*
====== ========== =========
* restated to reflect cost of subsidiary stock options - See Note 17
Total income tax expense from continuing operations differed from
"expected " income tax expense, computed by applying the U.S. federal income tax
rate of 35% to earnings before income tax, as follows:
2002 2001 2000
---- ---- ----
(in thousands)
Computed "expected" income tax (benefit) expense ($ 72) ($ 1,434) * $ 8,989 *
State income tax, net of federal tax benefit 767 (11) * 808 *
Foreign tax rate differential (186) 47 47
Valuation Allowance 0 0 (119)
Other - net 357 (67) * (25) *
------ --------- ----------
Income Tax Expense (Benefit) $ 866 ($ 1,465) * $ 9,700 *
====== ========== =========
* restated to reflect cost of subsidiary stock options - See Note 17
A deferred income tax (expense) benefit results from temporary timing
differences in the recognition of income and expense for income tax and
financial reporting purposes. The components of and changes in the net deferred
tax assets (liabilities) which give rise to this deferred income tax (expense)
benefit for the year ended December 31, 2002 are as follows:
Change
December 31, (Expense) December 31,
2001 Benefit 2002
(in thousands)
Deferred Tax Assets:
Warranty Reserve $ 796 $301 $1,097
Remediation Reserve 608 2,396 3,004
Compensated Absences 989 39 1,028
Inventory Valuation 451 371 822
Equity Losses in Investee 5,734 --- 5,734
Accounts Receivable Valuation 1,129 (115) 1,014
Federal Tax Credit Carryforward --- 401 401
State Tax Operating Loss/Credit
Carryforward 458 187 645
Deferred Income on Sale of Assets
to Non-consolidated Investees 159 --- 159
Other 172 649 821
------ ------ ------
Total Gross Deferred Tax Assets 10,496 4,229 14,725
Deferred Tax Liabilities:
Prepaid Expenses (828) (191) (1,019)
Depreciation and Amortization (4,223) 305 (3,918)
------- ------ ----------
Deferred Tax Liabilities (5,051) 114 (4,937)
------- ------ ----------
Net Deferred Tax Benefit $5,445 $4,343 $9,788
At December 31, 2002, the Company has state tax operating loss carry
forwards of approximately $9,892,000, which are available to reduce future
income taxes payable, subject to applicable "carry forward" rules and
limitations. These losses begin to expire after the year 2007.
Cash paid for income taxes was $3,532,000, $10,711,000, and $7,756,000,
for the years ended December 31, 2002, 2001, and 2000, respectively.
11. LEASES
Related Party Leases
The company leases various manufacturing facilities and equipment from
companies owned by certain officers and directors of the Company, either
directly or indirectly, through affiliates. The leases generally provide that
the Company will bear the cost of property taxes and insurance.
Details of the principal operating leases with related parties as of
December 31, 2002 including the effect of renewals and amendments executed
subsequent to December 31, 2002 are as follows:
Basic Minimum
Date of Annual Future
Lease Term Rent Rentals
(in thousands) (in thousands)
Sterling Realty Trust
Land and Building-Main 01/01/00 5 years $282 $846
Land and Building-Engineering 07/01/98 5 years 42 25
Land and Building-South Complex 01/01/94 14 years 215 1,289
Land and Building Torrington * 07/01/99 5 years 186 328
Rudbeek Realty Corp. 07/01/97 13.5 years 436 3,485
(Farmville Location)
MacKeeber 01/01/97 8 years 325 650
(South Windsor, CT)
* On July 1,1999, a portion of this building was leased for 5 years at a
monthly rent expense of $6,292. On October 1, 2000 additional space on the first
floor was leased for 5 years at a monthly rent expense of $2,053.
All Leases
Rent expense for operating leases, including those with related
parties, was $3,728,000, $3,527,000, and $3,066,000 for the years ended December
31, 2002, 2001, and 2000, respectively. Rents to related parties was
approximately $1,562,000 in 2002, 2001, and 2000
Future minimum lease payments under all non-cancelable leases as of
December 31, 2002 are as follows:
Year Ending December 31, Operating
Leases
(in thousands)
2003 3,382
2004 2,618
2005 1,819
2006 1,415
2007 1,019
Thereafter 1,586
-----
Total Minimum Lease payments 11,839
======
12. EMPLOYEE BENEFIT PLANS
The Company maintains a qualified non-contributory profit-sharing plan
covering all eligible employees. Contributions to the plan were $1,513,000,
$1,383,000, and $1,296,000, for the years ended December 31, 2002, 2001, and
2000, respectively. Contributions to the Plan are defined as three percent (3%)
of gross wages up to the current Old Age, Survivors, and Disability (OASDI)
limit and six percent (6%) of the excess over the OASDI limit, subject to the
maximum allowed under the Employee Retirement Income Security Act, (ERISA). The
plan's vesting terms are twenty percent (20%) vesting after 3 years of service,
forty percent (40%) after 4 years, sixty percent (60%) after 5 years, eighty
percent (80%) after 6 years, and one hundred percent (100%) vesting after 7
years.
The Company maintains a Retirement Savings Plan qualified under Internal
Revenue Code Section 401(k) for employees covered under certain collective
bargaining agreements. Service eligibility requirements differ by division and
collective bargaining agreement. Participants may elect to have up to fifty
percent (50%) of their compensation withheld, up to the maximum allowed by the
Internal Revenue Code. Participants may also elect to make nondeductible
voluntary contributions up to an additional ten percent (10%) of their gross
earnings each year within the legal limits. The Company contributes differing
amounts depending upon the division's collective bargaining agreement.
Contributions are funded on a current basis. Contributions to the Plan were
$393,000, $328,000, and $330,000, for the years ended December 31, 2002, 2001,
and 2000, respectively.
The Company maintains a separate qualified 401(k) Plan for salaried
employees not covered by a collective bargaining agreement who choose to
participate. Participants may elect to have up to fifteen percent (15%) of their
compensation withheld, up to the maximum allowed by the Internal Revenue Code.
Participants may also elect to make nondeductible voluntary contributions up to
an additional ten percent (10%) of their gross earnings each year within the
legal limits. The Company contributes $0.25 of each $1.00 deferred by
participants and deposited to the Plan not to exceed one and one half percent
(1.5%) of an employee's compensation. The Company does not match any amounts for
withholdings from participants in excess of six percent (6%) of their
compensation or for any nondeductible voluntary contributions. Contributions are
funded on a current basis. Contributions to the Plan were $643,000, $528,000,
and $490,000, for the years ended December 31, 2002, 2001, and 2000,
respectively.
The Company's second-tier subsidiary, Met-Coil Systems Corporation
(Met-Coil), maintained, prior to its acquisition by the Company's subsidiary,
Formtek Inc. on June 3, 2000, several defined benefit pension plans (the Plans)
covering certain of its employees. The Plans were "frozen" and merged prior to
the acquisition, "locking in" retirement benefits earned to that date and
precluding any further benefits for future service. Due to recent adverse
investment performance and reduced expectations of future investment earnings,
the combined Plans' administrator has determined that the Accumulated Benefit
Obligation, the present value of future pension obligations to Plan
participants, exceeds the fair market value of the Plan's assets as of December
31, 2002. In accordance with the requirements of FAS 87 Employers' Accounting
for Pensions, the Company has therefore reported a charge, net of related tax
benefit, to the Shareholders' Equity section of the consolidated Balance Sheet
contained herein of $559,000 under the heading "Additional Minimum
Liability-Defined Benefit Plan". Pension expense under this plan was
approximately $0, for the year ended December 31, 2002.
In connection with the acquisition of the assets of Airtherm
Manufacturing Company and Airtherm Products, Inc., as more fully described in
Note 2, the Company assumed certain obligations related to the defined benefit
plan maintained by Airtherm prior to the acquisition date. The Airtherm plan was
"frozen" prior to acquisition in a manner similar to the Met-Coil plan described
above. The Company recorded a pension expense under the Airtherm Plan in 2002 of
$164,000.
The Company maintains bonus plans for its officers and other key
employees. The plans generally allow for annual bonuses for individual employees
based upon the operating results of related profit centers in excess of a
percentage of the Company's investment in the respective profit centers. The
Company maintains an employment agreement with its chief executive officer.
Approximately (41%) of the Company's employees are covered under
collective bargaining agreements, of which thirty percent (30%) of these
employees are covered under agreements expected to be renewed in 2003.
13. COMMITMENTS AND CONTINGENCIES
The Company is obligated under Indemnity Agreements executed on behalf
of 21 of the Company's Officers and Directors. Under the terms of the Agreement,
the Company is contingently liable for costs which may be incurred by the
Officers and Directors in connection with claims arising by reason of these
individuals' roles as Officers and Directors.
The Company is contingently liable under standby letters of credit
totaling $5,375,000 issued principally in connection with its commercial
insurance coverages. The level of insurance risk which the Company absorbs under
its workers compensation and comprehensive general liability (including products
liability) insurance programs increased substantially after October 1, 2001,
largely as a result of the effects of "September 11, 2001" on the commercial
insurance marketplace. For losses occurring in the policy year ending October 1,
2003 the Company retained liability for the first $500,000 per occurrence of
comprehensive general liability claims (including products liability claims),
subject to an agreed aggregate. In addition, the Company retained liability for
the first $250,000 per occurrence of workers compensation coverage, subject to
an agreed aggregate. The Company also retained liability for the first
$10,000,000 of "excess" liability, on an occurrence and aggregate basis, with
respect to both comprehensive general liability (including products liability)
and workers compensation coverage.
The Company is obligated as guarantor with respect to the debt of
MacKeeber Associates Limited Partnership, a Connecticut limited partnership, a
related party, under an Industrial Development Bond issued in 1984 by the
Connecticut Development Authority. The balance outstanding under the bond as of
December 31, 2002 was $255,000. Mr. John E. Reed, the Company's Chairman and
Chief Executive Officer, is both the general partner and a limited partner of
Mackeeber.
The Company is obligated as a guarantor with respect to certain debt of
CareCentric, Inc. (formerly Simione Central Holdings, Inc. - see Note 6) to
CareCentric's primary commercial bank, Wainwright Bank & Trust Company, in the
amount of $6 million. The $6 million Wainwright credit line is secured by
substantially all of CareCentric's assets. The balance outstanding under
CareCentric's credit line with Wainwright Bank & Trust Company as of December
31, 2002 was $4,525,000, a reduction of $1,047,000 since December 31, 2001.
Under the Equity Method of Accounting, in December 2001, the Company accrued
this guarantee of $6 million as a reserve for Equity Investment Losses as more
fully described in Note 6. John E. Reed, the Company's Chairman and Chief
Executive Officer, is a shareholder and director of Wainwright Bank & Trust
Company.
The Company is subject to several legal actions and proceedings in
which various monetary claims are asserted. Management, after consultation with
its corporate legal department and outside counsel, does not anticipate that any
ultimate liability arising out of all such litigation and proceedings will have
a material adverse effect on the financial condition of the Company except as
set forth below.
The Company has been named in 28 outstanding asbestos-related products
lawsuits. All of these suits seek to establish liability against the Company as
successor to companies that may have manufactured, sold or distributed products
containing asbestos materials or because the Company currently sells and
distributes boilers, an industry that has been historically associated with
asbestos-related products. However, the Company has never manufactured, sold or
distributed any product containing asbestos materials. In addition, the Company
believes it has valid defenses to all of the pending claims and vigorously
contests that it is a successor to companies that may have manufactured, sold or
distributed any product containing asbestos materials. However, the results of
asbestos litigation have been unpredictable, and accordingly, an adverse
decision or adverse decisions in these cases, individually or in the aggregate,
could materially adversely affect the financial position and results of
operation of the Company. The total requested damages of theses cases is
approximately $3.2 billion. Thus far, however, the Company has had over 30
asbestos-related cases dismissed without any payment and it settled a group of
ten asbestos-related cases for a de minimis value. Through December 31, 2002,
the total costs of defending the approximately 50 current and previously
dismissed cases has totaled less than $200,000.
Claims Alleging Releases of Hazardous Materials
As disclosed in previous filings, the Lockformer Company
("Lockformer"), a division of the Company's second tier subsidiary, Met-Coil
Systems Corporation ("Met-Coil"), announced on May 22, 2002, that it had reached
a settlement with members of the class of plaintiffs in a suit filed in the
United States District Court for the Northern District of Illinois entitled
LeClercq, et al. vs. The Lockformer Company, et al. The case involved property
damages asserted on behalf of a group of approximately 187 homeowners within the
class area, due to the presence of trichloroethylene (TCE) contamination in the
immediate vicinity of Lockformer's manufacturing facility in Lisle, Illinois.
Without admitting liability, Lockformer agreed to pay class members
approximately $10 million to resolve the matter. The settlement incorporates the
terms of a previously announced Interim Agreed Order between Lockformer and the
Attorney General for the State of Illinois under which Lockformer agreed to pay
for the costs of hookup to a public water supply for each of the homes of Class
members who have, or otherwise would have, incurred such costs. The Company
accrued a $1.3 million liability as of March 31, 2002 in respect of this portion
of the settlement, and an offsetting insurance recovery receivable of this same
amount. The balance of the May 22, 2002, $10,000,000 settlement, $8,700,000, was
reflected in results of operations for the three months ended June 30, 2002.
Met-Coil is pursuing an action in the United States District Court for the
Northern District of Illinois for contribution from 11 other known industrial
users of TCE in the vicinity, whose disposal practices may have contributed to
the contamination experienced by some or all of the members of the plaintiff
class.
As disclosed in previous filings, a second class of residents, in a
neighborhood not located in the immediate vicinity of Lockformer's manufacturing
facility, has filed a class action complaint against Mestek and its subsidiary,
Met-Coil, (Mejdrech, et al. v. The Lockformer Company, filed in the United
States District Court for the Northern District of Illinois) on grounds similar
to those alleged in the LeClercq action described above. The Mejdrech class was
certified on August 12, 2002. Based upon the evidence currently available to
them, Mestek and Met-Coil believe they have valid defenses to the above action
and are therefore vigorously contesting the Mejdrech claim. Management believes
that this case is different from the LeClercq action by reason of, among other
things; the absence, to management's knowledge, of any concentrations of TCE in
private wells in the Mejdrech class area equal to or greater than 5 parts per
billion, the TCE contamination limit set forth by the United States
Environmental Protection Agency (the "EPA"), and also by reason of the greater
distance this class is from the Lockformer facility, and the presence of
numerous other potential TCE sources in closer proximity to the Mejdrech class
area. The Mejdrech class seeks damages for diminution of property values and
nuisance, as well as punitive damages, and both Mestek and Met-Coil expect to be
able to present expert testimony refuting allegations of significant property
damages or nuisance, as well as lack of punitive conduct. Other than an
allegation of damages in excess of the Federal Court diversity jurisdictional
amount of $75,000, no specific demand for monetary relief has been made.
In another action, owners of eight homes not included in the LeClercq
or Mejdrech actions have filed suit against Met-Coil, alleging property damage
and nuisance by reason of alleged contamination of their properties and drinking
water wells and seeking punitive damages as well. In each of these cases with
the exception of one, no TCE has, to management's knowledge, been detected in
any of plaintiffs' wells, and in the single case of TCE detection (in a well
serving a home a considerable distance away from the other plaintiffs'
residences and located in the LeClercq Class area discussed above) it is
management's understanding that the detected TCE concentrations were below the
maximum TCE contamination level specified by the EPA. In addition, Met-Coil
expects to be able to present expert testimony refuting allegations of
significant property damages or nuisance or punitive conduct. Other than an
allegation of damages in excess of the State Superior Court jurisdictional
amount of $50,000, no specific demand for monetary relief has been made in any
pleading.
In six separate actions, ten individual plaintiffs have filed suits
against Mestek and Met-Coil (collectively, the "Defendants") alleging in each
case personal injury and/or fear of future illness (and, in one case, wrongful
death) related to the release of TCE into drinking water and seeking punitive
damages as well. In each of these cases, TCE concentrations in alleged sources
of ingestion allegedly causing illness were to the best of management's
knowledge, either not detected at all (with respect to three plaintiffs) or
detected in low concentrations below the maximum TCE contamination level
specified by the EPA. Also, in all of these cases, Defendants' initial
discussions with scientific experts (toxicologists and physicians) lead
Defendants to the conclusions that valid and persuasive defenses as to a lack of
causal connection between the TCE exposure, if any, and the alleged illnesses of
plaintiffs can be presented. None of these lawsuits, except for Schreiber v. The
Lockformer Company, et al, described below, contain any "ad damnum" or specific
damages demands, other than to state that the amount in controversy exceeds the
statutory requirement of $75,000 in the Federal court cases, and in those cases
initially brought in state court, in excess of an Illinois statutory requirement
of damages in excess of $50,000 to gain access to the jurisdiction of the
Superior Court of DuPage County. The case of Schreiber v. The Lockformer
Company, et al, alleges compensatory damages "in excess of $1,000,000" and asks
for punitive damages "in excess of $1,000,000."
In accordance with SAB Topic 5Y, with respect to all of the above
described pending cases, management believes that a material loss, while
possible, cannot be estimated in amount at this time, due to the complexity and
uncertainty of the litigation proceedings and remediation procedures. As
additional information becomes available to the Company, the Company may be
better able to either estimate a range of exposure, with appropriate reserves
taken, or continue to believe that no such estimation is either appropriate or
possible.
In general, with respect to all of the above described pending cases
Mestek, to the extent that it is a defendant, and Met-Coil believe they have
valid defenses to all of the pending claims and are contesting them vigorously.
However, the results of litigation are inherently unpredictable, and
accordingly, in any of the above actions, if the plaintiffs were to obtain a
verdict of liability against Met-Coil or Mestek from a court of competent
jurisdiction and assessments of significant damages, including punitive damages,
such decisions, or a settlement to avoid such a decision, could, individually or
in the aggregate, materially adversely affect the financial position and results
from operations of Met-Coil, and, conceivably, the financial position and
results of operations of the Company.
In addition, there can be no assurance that future claims for personal
injury or property damage will not be asserted by other plaintiffs against
Met-Coil and Mestek with respect to the Lockformer site and facility.
Met-Coil borrowed $5.5 million from a commercial bank on July 26, 2002,
as more fully disclosed in Note 8 to partially fund the $10 million LeClerq
settlement described above. Met-Coil is presently pursuing additional bank
financing to fund the remediation efforts required at its Lisle, Illinois site
as described further herein. While such efforts are being undertaken, Mestek has
made available to Met-Coil a $4,500,000 secured term credit facility for
purposes of site remediation and a $2,500,000 secured revolving line of credit
for operational requirements. There can be no assurance however, that Met-Coil
will be able to meet its obligations in relation to the remediation Work Plan,
as described further herein, or to fund other costs related to the various
actions described herein as they occur without additional financing. There can
be no assurance that Met-Coil will be able to obtain such financing on terms
that are acceptable to it, or at all.
Met-Coil has settled its insurance coverage issues with a number of its
historic insurers as to the above claims. Met-Coil is pursuing additional
insurance coverage litigation against several other carriers in an effort to
recoup additional un-reimbursed defense costs and settlement amounts incurred in
the above-described matters. Included in Other Current Assets as of December 31,
2002 is a $625,000 receivable from one of these insurers relating to the
settlement of certain coverage litigation. At least three other carriers remain
as potentially having liability for defense or indemnification costs, two of
whom have agreed, under reservation of rights, to reimburse Met-Coil for a
portion of the defense costs of the Mejdrech action described above. Another
carrier has agreed, also under reservation of rights, to reimburse Met-Coil for
a portion of the defense cost of certain of the personal injury cases. However,
these insurers continue to contest their liability, and the outcome of the
coverage litigation remains uncertain at this time. As of December 31, 2002
insurance settlements covered approximately 58 percent of Met-Coil's costs of
defense and settlement in these related matters. There is no assurance that this
level, or any level, of insurance contribution will be sustained going forward.
Consistent with EITF 93-5, the Company has treated insurance recoveries, whether
of defense costs or in relation to indemnity obligations, on a cash basis -
except where settlements that are not subject to further litigation have been
reached with insurance carriers as of quarter end or year end, in which cases
receivables have been appropriately accrued. Such recoveries have been applied
to reduce the net environmental expense recorded in the related period.
Met-Coil recorded expenses in 2002 related to the environmental matters
affecting its Lisle, Illinois manufacturing facility totaling $18,046,000. These
expenses are made up of the following:
Settlement of property damage litigation (LeClerq et al) $10,000,000
Charges related to the remediation of the Lisle, Illinois site 7,000,000
Legal, Environmental Consulting, and other costs incurred
net of insurance recoveries 1,046,000
------------
Total $18,046,000
===========
Potentially Responsible Parties (PRP) Actions
Lisle, Illinois:
Met-Coil has received final approval of the Work Plan for remediation
of the Lisle, Illinois site from the United State Environmental Protection
Agency ("EPA") and awaits approval from the Illinois Environmental Protection
Agency ("IEPA"). On the basis of the EPA approved Work Plan and a better
understanding of the costs related to achieving that Plan, Met-Coil added $3.5
million to its remediation reserve in relation to this matter, as of December
31, 2002, bringing the balance to $7,700,000, reflecting gross cumulative
accruals of $10,000,000 less cumulative spending through December 31, 2002 of
$2,300,000. In light of the remaining uncertainties surrounding the
effectiveness of the available remediation technologies and the future potential
changes in remedial objectives and standards, still further reserves may be
needed in the future with respect to the remediation of the Lisle site. The
complexity of aforementioned factors makes it impossible to further estimate any
additional costs.
Having paid for public water supply hook-up for houses in the immediate
vicinity of the Lisle manufacturing facility, remediation going forward will
consist primarily of on-site, soil-related work in two designated areas,
principally by means of electric resistive heating and soil vapor extraction,
based upon the Work Plan submitted to the EPA and the IEPA, (and conditionally
approved as of the date of this report by the EPA only), and soil and
groundwater remediation in a third area, also on-site, by means of soil vapor
extraction and groundwater filtration. Based on current proposals from
contractors for Areas 1 and 2, electric resistive heating and soil vapor
extraction, and based on environmental consultant estimates for Area 3, Soil
Vapor Extraction, Groundwater Remediation and overall site air monitoring,
miscellaneous construction, electricity, filtering and sampling, Met-Coil has
reserved, as noted above, an estimate of $7,700,000 as of December 31, 2002 for
this on-site work to be performed by third party contractors. The remediation in
Areas 1 and 2 is intended to achieve a "technologically feasible" target level
of remediation which is subject to continuing re-evaluation. The IEPA has not
agreed, as of the date of this report, to any specific target level of
remediation.
Any additional off-site remediation costs are not determinable at this
time and remain a contingency pending the resolution of the issue of whether
Met-Coil has liability for TCE contamination beyond areas for which settlement
has already been reached
The Illinois Attorney General, in an action disclosed in previous
filings and brought in the Superior Court of DuPage County, Illinois, on behalf
of the State of Illinois, the IEPA and other governmental agencies, is seeking
to have Met-Coil pay for the cost of connecting approximately 175 households in
the Mejdrech class action area (discussed below) to public water supplies, and
pay for the State's response and investigatory costs in this action and civil
penalties. No specific monetary claim for damages or relief is made in the
pleadings in this action. Met-Coil is in negotiations with the Illinois Attorney
General on this matter. There is insufficient information available to
management at this time to provide an opinion as to the outcome of these
discussions. In accordance with SAB Topic 5Y, and based on recent discussions
and estimations by the Attorney General's office as to its current and future
costs of litigation (which Met-Coil agreed to reimburse in an Agreed Order),
Met-Coil has reserved $1,000,000, as of December 31, 2002, in the accompanying
Consolidated Financial Statements. As additional information and expert opinions
become available to Met-Coil, it may be better able to either revise its
estimate of the range of exposure, with appropriate revision to reserves taken,
or continue to believe that no such revision is either required or estimate
possible.
In addition to the Lisle, Illinois site, the Company has been named or
contacted by state authorities and/or the EPA regarding the Company's liability
as a PRP for the remediation of two other sites described below. The potential
liability of the Company is based upon records that show the Company or other
corporations from whom the Company acquired assets used the sites for the
disposal of hazardous waste pursuant to third party agreements with the
operators of such sites, which sites were authorized to accept hazardous wastes
for disposal in compliance with applicable regulations. Such PRP actions
generally arise when the operator of a site lacks the financial ability to
address compliance with environmental laws and with decisions and orders
affecting the site in a timely and effective manner and the governmental
authority responsible for the site then looks to the past users of the facility
and their successors to address the costs of remediation of the site.
In High Point, North Carolina, the Company has been named as a PRP with
regard to the clean up of groundwater contamination allegedly due to dumping at
a landfill. The Company believes that its activity at the site represented less
than one percent of all activity at the site. State authorities have received
for review a report on the Remedial Investigation of the site, a base-line Risk
Assessment, and a Feasibility Study of the alternative remedial options for
treating groundwater contamination at or near the site. The North Carolina
Department of Environment and Natural Resources ("DENR") has not issued its
remaining formal comments on these documents, nor has a final remedial
alternative yet been selected or approved. Supplemental remedial investigation
has been requested and the final Site Investigation Report should be completed
during the first quarter of 2003. The Company continues to participate in a
joint defense group to help define and limit its liabilities and may be required
to contribute to the remediation of groundwater contamination.
The Company (along with many other corporations) is involved in PRP
actions for the remediation of a site in Southington, Connecticut, as a result
of the EPA's preliminary assignment of derivative responsibility for the
presence of hazardous materials attributable to two other corporations from whom
the Company purchased assets after the hazardous materials had been disposed of
at the Southington site. The Company participated as part of a joint defense
group in a "de minimis settlement" with EPA concerning soil remediation at the
Southington, Connecticut site, while the issue of further ground water
investigation at the site was postponed by the EPA in 1998, pending the soil
remediation. Currently, Monitored Natural Attenuation ("MNA") and a landfill cap
are being evaluated as remedial alternatives for groundwater contamination at
the site. The landfill cap has been installed, but its effectiveness has not yet
been determined. Likewise, more study must be performed by the environmental
consultant hired by the joint defense group to support the evaluation of the
potential for MNA to control future dissolved volatile organic compound
migration at this site. The Company paid its eighth assessment to the joint
defense group in the amount of $300 in the first quarter of 2003.
The Company continues to investigate both of these matters. Given the
information presently known, no estimation can be made of any liability which
the Company may have with respect to these matters. Based on the information
presently available to it, the Company does not believe that either matter will
be material to the Company's financial position or results of operations.
14. SEGMENT INFORMATION
Description of the types of products and services from which each reportable
segment derives its revenues:
As described in Note 3, the Company completed the sale of National
Northeast Corporation, (National) on January 9, 2001. National historically
represented the largest division in the Company's Metal Products segment. The
Company elected to incorporate the Metal Products segment's remaining units,
Omega-Flex, Inc. and Boyertown Foundry Company into the Heating, Ventilating,
and Air Conditioning segment (HVAC) January 1, 2001. Effective January 1, 2001,
therefore, the Company has two reportable segments: the manufacture of heating,
ventilating and air-conditioning equipment (HVAC) and the manufacture of metal
handling and metal forming machinery (Metal Forming).
The Company's HVAC Segment manufactures and sells a variety of
complementary residential, commercial and industrial heating, cooling and air
control and distribution products. The HVAC Segment sells its products to
independent wholesale supply distributors, mechanical, sheet metal and other
contractors and, in some cases, to other HVAC manufacturers under original
equipment manufacture (OEM) and national account agreements The HVAC segment is
comprised of five interrelated HVAC product groups: Hydronics Products, Gas
Products, Cooling Products, Industrial Products, and Air Distribution Products,
described in more detail as follows:
Hydronics Products consist of residential baseboard heating products,
commercial finned tube heating products, residential boilers, commercial
boilers, convectors, kickspace heaters, fan coil units, steam & hot water unit
heaters, finned-copper tube boilers and water heaters. These include the brand
names "Sterling", "Vulcan", "Heatrim", "Kompak", "Petite", "Suntemp", "Beacon
Morris", "Hydrotherm", "Airtherm", "Westcast", "RBI", and "L. J. Wing". The
products are made in manufacturing facilities, in some cases shared with other
HVAC product groups in Westfield, MA; South Windsor, CT; Mississauga, Ontario,
Canada; Wrens, GA; Farmville, NC; Boyertown, PA; Forrest City, AR; Dundalk, MD;
and Dallas, TX.
Gas Products consist of commercial gas fired heating and ventilating
equipment and corrugated stainless steel gas tubing sold principally under the
"Sterling" and "Trac-pipe" brand names. The products are made in manufacturing
facilities in Farmville, NC and Exton, PA.
Cooling Products consist of residential and commercial air conditioning
products principally sold under the "Spacepak" and "Koldwave" brand names. The
products are made in manufacturing facilities in Wrens, GA; and Dundalk, MD.
Industrial Products consist of commercial and industrial indoor and
outdoor heating and air conditioning products principally sold under the
"Applied Air", "King", "L.J. Wing", "Temprite", "Alton" and "Aztec" brand names.
The products are made in manufacturing facilities in Dallas, TX; and
Bishopville, SC.
Air Control and Distribution Products consist of fire, smoke and air
control dampers, louvers, grilles, registers, VAV boxes and diffusers
principally sold under the brand names "American Warming and Ventilating", "Air
Balance", "Arrow", "Air Clean Damper", "Louvers and Dampers", "Cesco" and
"Anemostat". The products are made in manufacturing facilities in Bradner, OH;
Waldron, MI; San Fernando, CA; Wyalusing, PA; Milford, OH; Florence, KY; Wrens,
GA; Scranton, PA; and Carson, CA.
Collectively, the HVAC Segment's products provide heating, cooling,
ventilating, or some combination thereof, for residential, commercial and/or
industrial building applications.
The Metal Forming Segment, operating under the umbrella name "Formtek,"
is comprised of four closely related subsidiaries, all manufacturers of
equipment used in the Metal Forming industry (the uncoiling, straightening,
leveling, feeding, forming, bending, notching, stamping, cutting, stacking,
bundling or moving of metal in the production of metal products, such as steel
sheets, office furniture, appliances, vehicles, buildings, and building
components, among many others).
The four subsidiaries are: (1.) Formtek Maine, a division of Formtek,
Inc. including the Cooper-Weymouth, Petersen; Rowe, and
CoilMate/Dickerman product lines; (2.) Formtek Cleveland, Inc., a
subsidiary of Formtek, - including the Yoder, Dahlstrom, B & K,
Krasny-Kaplan and Mentor product lines; (3.) Hill Engineering Inc.,
providing tools and dies complementary to the other subsidiaries
product lines; and (4.) Met-Coil Systems Corporation, comprised of the
Lockformer and Iowa Precision (IPI) product lines.
The Metal Forming segment's products are sold through factory direct
sales and independent dealers, in most cases to end-users and in some cases to
other original equipment manufacturers. The core technologies are processing
equipment for roll forming, coil processing (for stamping, forming and
cut-to-length applications), metal duct fabrication and tube and pipe systems.
The products include roll formers, roll forming systems, wing benders, presses,
servo-feeds, straighteners, cradles, reels, cut-to-length lines, specialty dies,
tube cut-off systems, hydraulic punching, blanking and cutoff systems, rotary
punching, flying cut-off saws, plasma cutting equipment, tube mills, pipe mills
and sophisticated material handling systems. The primary customers for such
metal handling and metal forming equipment include sheet metal and mechanical
contractors, steel service centers, contract metal-stampers, contract roll
formers, and manufacturers of large and small appliances, commercial and
residential lighting fixtures, automotive parts and accessories, office
furniture and equipment, tubing and pipe products, metal construction products,
doors, window and screens, electrical enclosures, shelves and racks and metal
duct work. The Segment's products are manufactured in facilities having
approximately 380,000 square feet of manufacturing space, located in Clinton,
Maine; Bedford Heights, Ohio; Warrensville Heights, Ohio; Villa Park, Illinois;
Lisle, Illinois; Danville, Kentucky and Cedar Rapids, Iowa.
Measurement of segment profit or loss and segment assets:
The Company evaluates performance and allocates resources based on
profit or loss from operations before interest expense and income taxes, (EBIT)
not including non-operating gains and losses. The accounting policies of the
reportable segments are the same as those described in the significant
accounting policies. Inter-segment sales and transfers are recorded at prices
substantially equivalent to the Company's cost; inter-company profits on such
inter-segment sales or transfers are not material.
Factors management used to identify the enterprise's reportable segments:
The factors which identify the HVAC Segment as a reportable segment are
as follows:
The HVAC industry in which the HVAC Segment operates has been
characterized for many years by a gradual consolidation or "roll-up" process in
which smaller companies, typically built around one or two niche products, are
subsumed into the larger product family of more established HVAC companies. The
HVAC Segment has grown incrementally over many years by internal growth and by
adding complementary HVAC product lines via acquisition on a regular basis. The
HVAC Segment has acquired in this manner 21 companies since 1986 at an average
transaction size of approximately $ 5 million. By design, the HVAC Segment's
acquisition strategy has been to acquire complementary HVAC products in order to
exploit specific marketing, distribution, manufacturing, product development and
purchasing synergies. Management, accordingly, views and operates the HVAC
Segment as a single cohesive business made up of a large number of mutually
reinforcing HVAC product lines acquired over a number of years.
All of the segment's HVAC Products described above share common
customers, common distribution channels, common manufacturing methods (and in
many cases shared manufacturing facilities), common manufacturing services,
common purchasing services, common executive and financial management, and
common engineering and product development resources. The business decisions
regarding Sales, Marketing, Operations, Engineering, and Product Development are
made on a centralized basis by the Segment's core management group.
Common Sales/Marketing Management: Executive sales/marketing management
is provided for substantially all of the HVAC product groups from the HVAC
Segment's headquarters in Westfield MA. Most, if not all, of the HVAC Segment's
customers are current customers or potential future customers for more than one
of the Segment's product groups. As explained above, the HVAC Segment's
acquisitions are typically based in fact upon just such cross-selling and common
distribution synergy opportunities.
The HVAC industry's most significant trade association, ASHRAE,
(American Society of Heating, Refrigeration, and Air conditioning Engineers),
hosts an annual trade show at which all of the HVAC Segment's products and brand
names are represented at a single consolidated physical location under the
Mestek name. Representatives of the HVAC industry customer base--independent
manufacturers representatives, contractors, engineers, wholesale distributors
etc.--are all typically in attendance at this event which underscores the
interrelated nature of the HVAC industry.
Common Manufacturing Management. Substantially all of the products made
at the HVAC Segment's 20 manufacturing locations involve sheet metal
fabrication, paint, packing and assembly. As such, they share many common
characteristics and, in fact, a centralized Manufacturing Services Group serving
the Segment based in Westfield, MA provides a wide variety of manufacturing
related services to these locations. Opportunities to combine similar
manufacturing operations are commonplace and the HVAC Segment routinely
undertakes such consolidations resulting in numerous instances where several
HVAC product groups share a single manufacturing facility.
Common Purchasing Management. The HVAC Segment, composed primarily of
HVAC sheet metal fabrication and assembly operations, presents a great deal of
common purchasing opportunities. A centralized Purchasing Department serving the
HVAC Segment based in Westfield, MA, therefore serves all of the 20
manufacturing locations in the Segment by aggregating the more significant
purchasing opportunities. Common items purchased include copper tube, aluminum
fin stock, cold rolled steel, pre-painted steel, motors, controls, and freight,
among many others.
Common Financial Management. Income statements are prepared at the HVAC
Segment's Westfield MA headquarters each month for substantially all of the
products made at the 20 HVAC locations mentioned above with further breakdown
among specific product lines, and these are reviewed by the appropriate Chief
Operating Decision Maker.
The factors which identify the Metal Forming segment as a reportable
segment are as follows:
The companies acquired by the Metal Forming Segment in the past were
selected for their synergies with the existing metal forming franchises:
complementary products and distribution channels, potential manufacturing
synergies, shared technologies and engineering skills, potential purchasing
synergies, common field service skills and organizations, and shared customer
bases. The most significant synergistic theme has been the real and potential
common customer base. To a large degree, any historical customer of one of the
companies is a potential customer for any of the others. Exploiting this cross
selling opportunity is a central factor in the creation of the Formtek family of
metal forming products and underscores the Segment's goal of creating a single
integrated metal forming solution provider for the metal forming marketplace
worldwide. Accordingly, there is a substantial degree of inter-company sales
among the four formerly separate metal forming companies.
Notwithstanding the interrelation of these subsidiaries, separate
income statements and balance sheets are maintained for each of the four
entities and the appropriate Chief Operating Decision Maker reviews each of them
separately on a monthly basis. The four entities are contained in four separate
corporations, each a legally distinct entity in its own right.
Common Sales/Marketing Management: Corporate sales/marketing support is
provided for all four of the Segment's entities from a central office in Itasca,
Illinois, which focuses on promoting Formtek as a family of integrated products
for the metal forming marketplace.
Common Manufacturing Management. Substantially all of the products made
at the Segment's four entities involve the manufacture of metal forming
equipment. As such, the entities share many common characteristics and in fact a
centralized Manufacturing Services Group serving the Segment based in Westfield,
Massachusetts provides a wide variety of manufacturing related services to these
locations. Opportunities to combine similar manufacturing operations are
commonplace and the Segment routinely undertakes such consolidations.
Common Purchasing Management. The Segment, composed of four
manufacturers of metal forming equipment presents numerous common purchasing
opportunities. A centralized Purchasing Department serving the Segment based in
Westfield, MA, therefore serves the Segment by aggregating these purchasing
opportunities.
Common Financial Management. Income statements are prepared at the
Segment's Westfield, MA headquarters each month for all of the products made at
the four entities mentioned above and these are reviewed by the appropriate
Chief Operating Decision Maker. Separate general ledgers and balance sheets for
the four entities are maintained as they are legally distinct subsidiaries
necessitating this level of detail.
Information presented in the following tables relates to continuing
operations only.
Year ended
December 31, 2002
(in thousands)
Metal All
HVAC Forming Other Totals
Revenues from External Customers $307,585 $65,855 $434 $373,874
Intersegment & Intrasegment Revenues $15,299 $4,997 --- $20,296
Interest Expense $746 $218 --- $964
Depreciation Expense $6,812 $1,657 --- $8,469
Amortization Expense $126 $223 --- $349
Segment Operating Profit $21,801 ($20,538) ($558) $705
Segment Assets $170,217 $49,737 $347 $220,301
Expenditures for
Long-lived Assets (1) $7,079 $447 --- $7,526
(1) Excludes long-lived assets acquired via business acquisition.
Year ended
December 31, 2001
(in thousands)
Metal All
HVAC Forming Other Totals
Revenues from External Customers $313,726 $79,755 $622 $394,103
Intersegment & Intrasegment Revenues
$13,607 $3,647 --- $17,254
Interest Expense $938 $457 $1 $1,396
Depreciation Expense $5,015 $1,652 $84 $6,751
Amortization Expense $990 $1,528 --- $2,518
Segment Operating Profit (Loss) $21,020 * ($7,659) ($1,769) $11,592 *
Segment Assets $174,201 $85,047 $263 $259,511
Expenditures for
Long-lived Assets (1) $2,667 $25 --- $2,692
* restated to reflect cost of subsidiary stock options - See Note 17
Year ended
December 31, 2000
(in thousands)
Metal All
HVAC Forming Other Totals
Revenues from External Customers $311,734 $63,424 $829 $375,987
Intersegment & Intrasegment Revenues
$13,528 $221 --- $13,749
Interest Expense $1,294 $618 --- $1,912
Depreciation Expense $6,627 $1,420 11 $8,058
Amortization Expense $933 $994 --- $1,927
Segment Operating Profit (Loss) $22,831 * $4,143 ($319) $26,655 *
Segment Assets $188,009 $70,776 $251 $259,036
Expenditures for $6,290 $689 --- $6,979
Long-lived Assets (1)
* restated to reflect cost of subsidiary stock options - See Note 17
HVAC Segment Revenues by HVAC Product Group: 2002 2001 2000
-------------------------------------------- ---- ---- ----
(dollars in thousands)
Hydronic Products $ 115,160 $ 114,455 $ 105,460
Air Distribution and Cooling Products 90,502 103,877 103,621
Gas and Industrial Products 101,923 95,394 102,653
----------- --------- ----------
Total Consolidated Revenues $ 307,585 $ 313,726 $ 311,734
========= ========= =========
RECONCILIATION WITH CONSOLIDATED DATA:
Revenues 2002 2001 2000
-------- ---- ---- ----
(dollars in thousands)
Total External Revenues For Reportable Segments $ 373,874 $ 394,103 $ 375,987
Inter & Intrasegment Revenues For Reportable Segments 20,296 17,254 13,749
Elimination Of Inter & Intrasegment Revenues (20,296) (17,254) (13,749)
------------ ----------- -----------
Total Consolidated Revenues $ 373,874 $ 394,103 $ 375,987
========= ========= =========
Profit or Loss
Total Profit Or Loss For Reportable Segments $ 705 $ 11,592 * $ 26,655 *
Interest Expense-Net (560) (722) (1,120)
Other Income (Expense) Net (350) (60) 149
Equity Loss In Investee --- (14,908) ---
------------ -------- ----------
Income (Loss) Before Income Taxes ($205) ($4,098) $ 25,684
===== ======= ========
Assets:
Total Assets For Reportable Segments $ 220,301 $ 259,511 $ 259,036
Discontinued Operations Assets:
National Northeast Assets --- --- 34,453
------------- ------------- -----------
Total Consolidated Assets $ 220,301 $ 259,511 $ 293,489
========= ========= =========
* restated to reflect cost of subsidiary stock options - See Note 17
GEOGRAPHIC INFORMATION:
2002 2001 2000
Revenues:
United States $ 352,993 $ 368,735 $ 353,736
Canada 13,385 15,233 14,958
Other Foreign Countries 7,496 10,135 7,293
--------- ---------- -----------
Consolidated Total $373,874 $394,103 $ 375,987
======== ======== =========
Long Lived Assets:
United States $81,057 $115,386 $128,325
Canada 1,712 1,672 1,829
Other Foreign Countries --- --- ---
---------- -------------- --------------
Consolidated Total $82,769 $117,058 $130,154
======= ======== ========
15. SELECTED QUARTERLY INFORMATION (UNAUDITED)
The table below sets forth selected quarterly information for each full
quarter of 2002 and 2001.
(Dollars in thousands except per common share amounts).
2002 1st 2nd 3rd 4th
----------------------------------------------------------------------------------------------------------------
Quarter Quarter Quarter Quarter
Total Revenues 89,061 90,630 95,305 98,878
Gross Profit 24,967 26,605 27,878 29,881
Net Income (Loss) (1) (27,818)* (4,481)* 1,884 10
Per Common Share:
Basic (3.19)* (0.51)* 0.22 ---
Diluted (3.19)* (0.51)* 0.22 ---
(1) reflects goodwill impairment charge of $29,334,000 as of January 1, 2002 in
accordance with FAS 142. See Note 1 and 7.
The Company recorded after tax charges of $ 4.4 million in the fourth quarter of
2002 related to the Lisle, Illinois environmental matter, described in more
detail in Note 13.
2001 1st 2nd 3rd 4th
----------------------------------------------------------------------------------------------------------------
Quarter Quarter Quarter Quarter
Total Revenues $96,294 $94,579 $104,353 $ 98,877
Gross Profit $25,112 $26,571 $27,183 $ 24,810
Net Income (Loss) $ 11,116 * $ 2,566 * $ 2,093 * ($ 9,461) *
Per Common Share:
Basic $ 1.27 * $ 0.29 * $ 0.24 * ($ 1.08) *
Diluted $ 1.27 * $ 0.29 * $ 0.24 * ($ 1.08) *
* restated to reflect cost of subsidiary stock options - See Note 17.
The Company recorded an Equity Loss in Investee of $14.9 million in 2001 as more
fully described in Note 6 of which $13.9 million was recorded in the fourth
quarter of 2001.
16. COMMON STOCK BUYBACK PROGRAM
In 2002 the Company did not purchase any shares under its program of
selective "open-market" purchases. The Company acquired 21,500 shares in 2001.
All such shares are accounted for as treasury shares.
17. STOCK OPTION PLANS
On March 20, 1996, the Company adopted a stock option plan, the Mestek,
Inc. 1996 Stock Option Plan, (the Plan), which provides for the granting of
options to purchase 500,000 shares of the Company's common stock. The Plan
provides for the awarding of incentive and non-qualified stock options to
certain employees of the Company and other persons, including directors, for the
purchase of the Company's common stock at fair market value on the grant date.
The Plan was approved by the Company's shareholders on May 22, 1996. Options
granted under the plan vest over a five-year period and expire at the end of ten
years.
A summary of transactions for the years ended December 31, 2002, 2001,
and 2000, are as follows:
Weighted
Number of Average
Options Exercise Price
Balance - December 31, 1999 175,000 $16.79
Balance - December 31, 2000 175,000 $16.79
Granted 25,000 $23.25
Balance - December 31, 2001 200,000 $17.60
Balance - December 31, 2002 200,000 $17.60
======= =======
Options exercisable for the years ended December 31, 2002, 2001, and
2000, were 141,000, 124,000, and 89,000, respectively. The weighted average
exercise price for all exercisable options as of December 31, 2002 was $16.26.
The weighted average fair value at the date of grant for options
outstanding as of December 31, 2002, 2001, and 2000 were $8.64, $8.64, and
$8.32, respectively. The fair value of options at the date of grant was
estimated using the Black-Scholes model with the following weighted average
assumptions:
Options
Granted in
2001
Expected life (years) 10
Interest 4.39%
Volatility 22.52%
Dividend yield 0%
The Company accounts for stock-based compensation under the intrinsic
value method in accordance with APB 25. Pro forma disclosure of net income and
earnings per share on the basis of the fair value method is included in Note 1.
Effective July 1, 1996, the Company's subsidiary, Omega Flex, Inc.
(Omega) adopted a stock option plan (Plan) which provides for the granting of
both Incentive and Non-Qualified Stock Options (as those terms are defined in
the Internal Revenue Code) of up to 200 shares of stock to certain employees of
Omega for the purchase of Omega's common stock at fair market value as of the
date of grant. The Plan was approved as of July 1, 1996 by John E. Reed,
representing Mestek, the sole shareholder of Omega, pursuant to authority vested
in him by vote of the Board of Directors of Mestek dated May 22, 1996. Options
to purchase an aggregate of 140 shares of the common stock of Omega,
representing a 14% equity share were granted, to two Omega executives effective
July 1, 1996. The options vest over a five-year period commencing May 1, 1999
and ending on May 1, 2003 and expire on July 1, 2006. None of the options
granted have been exercised. Through a separate agreement, the option holders
currently have a put right after exercise which allows them to sell their option
shares to Omega at a figure based upon book value and Omega currently has a
corresponding call option at a figure based upon of book value. In accordance
with APB 25 the Company has reflected a pre-tax charge to earnings in 2002 of
$635,000 for the compensation value in that period of the options granted. The
Company has restated, for purposes of comparability, the 2001 and 2000 Income
Statements included herein to reflect after-tax charges of $412,000, ($0.05 per
share basic and diluted), and $418,000, ($0.05 per share basic and diluted),
respectively, for the compensation value in those periods for the options
granted. The consolidated Balance Sheet at December 31, 2001 as presented herein
has also been restated to give cumulative effect to the compensation value of
the options granted in 1996, increasing Accrued Compensation by $1,319,000,
reducing Other Accrued Liabilities by $97,000, and reducing Retained Earnings by
$1,222,000. As the effect on previously filed financial statements was not
material, the Company has not amended previous filings.
18. SUBSEQUENT EVENTS
On April 9, 2003 the Company announced plans to close its Scranton,
Pennsylvania (Anemostat) manufacturing operations and relocate the products made
in Scranton to several of the Company's existing facilities. On April 8, 2003
the Company announced plans to close its Bishopville, South Carolina (King
Company) manufacturing operations and relocate the products made in Bishopville
to the Company's Dallas, Texas facility. The Company will account for the costs
related to these product relocations in accordance with FAS 146, Accounting for
Costs Associated With Exit or Disposal Activities. Accordingly, no costs have
been accrued in the accompanying financial statements in relation to these
activities. Management expects that the costs incurred in relation to these
activities will be reflected in the Company's results of operations for the
second and third quarters of 2003. The Company does not expect that the sum of
any such costs will materially adversely effect the Company's financial position
or results of operations.
PART III
With respect to items 10 through 13, the Company will file with the
Securities and Exchange Commission, within 120 days of the close of its fiscal
year, a definitive proxy statement pursuant to Regulation 14A.
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held June 3, 2003, and to the extent required and except as set forth therein,
is incorporated herein by reference. Information regarding executive officers of
the Company is set forth under the caption "Executive Officers".
Item 11 - EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held June 3, 2003, and, to the extent required and except as set forth therein,
is incorporated herein by reference.
The report of the Compensation Committee of the Board of Directors of
the Company shall not be deemed incorporated by reference by any general
statement incorporating by reference the proxy statement into any filing under
the Securities Exchange Act of 1934, and shall not otherwise be deemed filed
under such Act.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management will be set forth in the Company's proxy statement relating to
the annual meeting of shareholders to be held June 3, 2003, and, to the extent
required and except as set forth therein, is incorporated herein by reference.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
will be set forth in the Company's proxy statement relating to the annual
meeting of shareholders to be held June 3, 2003, and, to the extent required and
except as set forth therein, is incorporated herein by reference.
ITEM 14. - CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
Subsequent to the enactment in 2002 of the Sarbanes-Oxley Act, the
Company established a Disclosure Committee comprised of its Chief Legal
Officer, Chief Operating Officer and Chief Financial Officer. The
Disclosure Committee on a quarterly basis reviews written
sub-attestations obtained from key financial and operating personnel,
consults with outside technical advisers as needed, and meets with the
Company's CEO, among other steps. Within the 90-day period prior to the
filing of this report, Company Management, including the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation
of the effectiveness of the design and operation of the Company's
Disclosure Controls and procedures as defined in the Securities
Exchange Act of 1934 Rule 13 Section 14(c). Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective as of
the date of that evaluation.
(b) Changes in Internal Controls.
Subsequent to the enactment in 2002 of the Sarbanes-Oxley Act, the
Company undertook a review of its internal controls, including its
internal accounting controls. This process resulted in an expanded
Internal Control & Accounting Policy & Procedures Manual which has now
been widely disseminated within the Company. While numerous policies
were clarified as a result, and some formerly informal policies were
formalized, the Company does not believe that any such changes
represented corrective actions taken with regard to significant
deficiencies and material weaknesses. Accordingly, the Company believes
there have been no significant changes in internal controls or in
factors that could significantly affect internal controls, subsequent
to the date the Chief Executive Officer and Chief Financial Officer
completed their evaluation.
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
INDEX
Pages of
this report
------------------------------------------------------------------------------
Independent Auditors' Reports Page 33
Financial Statements:
(a)(1) Consolidated Balance Sheets as of
December 31, 2002 and 2001 Pages 34 and 35
Consolidated Statements of Operations for the Years
Ended December 31, 2002, 2001, and 2000 Page 36
Consolidated Statements of Shareholders' Equity and
Comprehensive Loss for the Years Ended
December 31, 2002, 2001, and 2000 Page 37
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2002, 2001, and 2000 Page 38
Notes to the Consolidated Financial Statements Pages 39 through 66
(a)(2) Financial Statement Schedules Page 68
II. Valuation and Qualifying Accounts Page 69
All other financial statement schedules required by Item 14(a)(2) have been
omitted because they are inapplicable or because the required information has
been included in the Consolidated Financial Statements or notes thereto.
(a)(3) Exhibits
The Exhibit Index is set forth on Pages 70 through 71
No annual report to security holders as of December 31, 2002 has been sent
to security holders and no proxy statement, form of proxy or other proxy
soliciting material has been sent by the registrant to more than ten of the
registrant's security holders with respect to any annual or other meeting of
security holders held or to be held in 2002. Such annual report to security
holders, proxy statement or form of proxy will be furnished to security holders
subsequent to the filing of this Annual Report on Form 10-K.
Schedule II
MESTEK, INC.
Valuation and Qualifying Accounts
Years ended December 31, 2002, 2001, and 2000
(Credited)
Bal. at Charged Bad Debt Bal. at Beg. to Other
Write-offs at end
Year Description of Year expense (1) of Year
-------------------------------------------------------------------------------------------------------------
(dollars in thousands)
2002 Allowance
for doubtful
accounts $ 4,239 (397) 6 (618) 3,230
2001 Allowance
for doubtful
accounts $ 3,746 $ 1,108 ($ 218) ($ 397) $ 4,239
2000 Allowance
for doubtful
accounts $ 3,627 $ 1,426 $ 70 ($ 1,377) $ 3,746
(1) Includes recoveries of amounts previously written-off, allowances for
doubtful accounts of acquired companies, and deletions of allowances
for doubtful accounts of disposed of companies.
EXHIBIT INDEX
Those documents followed by a parenthetical notation are incorporated
herein by reference to previous filings with the Securities and Exchange
Commission as set forth below.
Exhibit No.
Description
*************
3.1 Articles of Incorporation of Mestek, Inc., as amended (F)
3.2 Amended and Restated By-laws of Mestek, Inc. as
amended through December 12, 2000 (B)
10.1 Employment Agreement dated January 1, 1982 between Mestek
and John E. Reed (A)
10.2 Lease Agreement dated January 1, 2000 between Mestek (lessee) and
Sterling Realty Trust (lessor); 260 North Elm (B)
10.3 Lease dated January 1, 1994 between Mestek (lessee) and
Sterling Realty Trust (lessor); South Complex (D)
10.4 Amended and Restated Lease Agreement dated as of July 1, 1997
between Mestek, Inc. (lessee) and Rudbeek Realty Corp. (lessor) (H)
10.5 Amended and Restated Lease Agreement dated as of January 1, 1997
between Vulcan Radiator Division, Mestek, Inc. (lessee) and
MacKeeber Associates Limited Partnership (lessor). (F)
10.6 Loan Agreement dated as of May 1, 1984 among the Connecticut
Development Authority (the "CDA"), MacKeeber Limited Partnership,
Vulcan Radiator Corporation and the Promissory Notes thereunder;
Guaranty of Vulcan Radiator Corporation and Reed National Corp.
to the Connecticut Bank and Trust Company, NA (A)
10.7 Indemnification Agreements entered into between Mestek, Inc. and
its Directors and Officers and the Directors of its wholly-owned
subsidiaries incorporated by reference as provided herein, except
as set forth in the attached schedule (C)
10.8 Lease Agreement dated July 1, 1998 between Mestek (lessee) and
Sterling Realty Trust (lessor); 161 Notre Dame (I)
10.9 1996 Mestek, Inc. Stock Option Plan. (E)
10.10 Amended and Restated Revolving Loans and Foreign Exchange Facilities
Agreement between Mestek, Inc. and
Bank Boston dated July 15, 1997. (G)
10.11 Second Amendment dated May 31, 2001 to Amended and Restated Revolving
loans and Foreign Exchange facilities Agreement between
Mestek, Inc. and Fleet National Bank (K)
10.12 Supplemental Executive Retirement Agreements entered into between
Mestek, Inc. and certain of its officers. (G)
10.13 Lease dated July 1, 1999 between Mestek (Lessee) and
Sterling Realty Trust (Lessor) for 1st
Floor - Torrington Building. (J)
10.14 Lease dated July 1, 1999 between Mestek (Lessee) and
Sterling Realty Trust (Lessor) for 3rd & 4th
Floor - Torrington Building. (J)
10.15 Lease dated October 1, 2000 between Mestek (Lessee) and
Sterling Realty (Lessor); 1st Floor Torrington Building (B)
10.16 Participation Agreement dated as of December 31, 2001 by
and among John E. Reed, Mestek, Inc. and CareCentric, Inc. (K)
11.1 Schedule of Computation of Earnings per Common Share.
22.1 Subsidiaries of Mestek, Inc.
(A) Filed as an Exhibit to the Registration Statement
33-7101,effective July 31, 1986
(B) Filed as an Exhibit to the Annual Report on Form 10-K for the
year ended December 31, 2000
(C) Filed as an Exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1987
(D) Filed as an Exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1993
(E) Filed as an Exhibit to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996.
(F) Filed as an Exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1996.
(G) Filed as an Exhibit to the Quarterly Report on Form 10-Q for
the quarter ended September 31, 1997.
(H) Filed as an Exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1997.
(I) Filed as an Exhibit to the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999.
(J) Filed as an Exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1999.
(K) Filed as an Exhibit to the Annual Report a Form 10-K for the year ended
December 31, 2001.
23.1 Consent of Grant Thornton LLP
Exhibit 11.1
MESTEK, INC.
Schedule of Computation of Earnings Per Common Share
Years Ended December 31,
2002 2001 2000
---- -----------------
(As Restated (As Restated
see Note 17) see Note 17)
(dollars in thousands, except earnings per share)
---------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations ($ 1,071) ($ 2,633) $ 15,984
Income from Discontinued Segments 8,947 666
Cumulative Effect of a Change in Accounting Principle ($ 29,334) --- ---
---------------------- -----------
Net Income ($30,405) $ 6,314 $ 16,650
========== ======== =========
Basic Earnings (Loss) per Common Share:
Continuing Operations ($ 0.12) ($ 0.30) $ 1.83
Discontinued Operations --- 1.02 0.07
Cumulative Effect of a Change in Accounting Principle (3.36) --- ---
--------- ----------- --------
Net Income ($ 3.48) $ 0.72 $ 1.90
========== ========= =========
Basic Weighted Average Shares Outstanding 8,722 8,723 8,744
========= ========= =========
Diluted Earnings (Loss) Per Common Share
Continuing Operations ($ 0.12) ($ 0.30) $ 1.82
Discontinued Operations --- 1.02 0.08
Cumulative Effect of a Change in Accounting Principle (3.36) --- ---
--------------------- ------------
Net Income ($ 3.48) $ 0.72 $ 1.90
======== ========= =========
Diluted Weighted Average Shares Outstanding 8,722 8,765 8,760
========= ========= =========
LIST OF SUBSIDIARIES
As of March 31, 2002
Jurisdiction of
Name Formation
Advanced Thermal Hydronics, Inc. Delaware
Anemostat, Inc. Delaware
Boyertown Foundry Company Pennsylvania
Deltex Partners, Inc. Delaware
Formtek, Inc. Delaware
Met-Coil Systems Corporation Delaware
Hill Engineering, Inc. Illinois
Formtek Cleveland, Inc. (f/k/a SNS Properties, Inc.) Ohio
Krasny-Kaplan, Inc. (sub of Formtek Cleveland) Ohio
Formtek Metalforming Integration, LLC Delaware
Iowa Rebuilders, Inc. Iowa
Gentex Partners, Inc. Texas
Mestex, Ltd. (Texas limited partnership) Texas
Yorktown Properties, Ltd. (Texas limited partnership) Texas
HBS Acquisition Corporation Delaware
Keyser Properties, Inc. Delaware
Lexington Business Trust (Massachusetts business trust) Massachusetts
1470604 Ontario, Inc. Ontario
Mestek Canada, Inc. Ontario
Mestek Foreign Sales Corporation U.S. Virgin Islands
Omega Flex, Inc. Pennsylvania
Omega Flex Limited England
Pacific/Air Balance, Inc. California
Westcast, Inc. Massachusetts
Exhibit 10.12
SCHEDULE OF DIRECTORS/OFFICERS
Indemnification Agreements
The Indemnification Agreement entered into by the Directors and/or Officers
of Mestek, Inc. and certain Directors of Mestek's wholly owned subsidiaries are
identical in all respects, except for the name of the indemnified director or
officer and the date of execution.
Set forth below is the identity of each director and officer of Mestek,
Inc. and the date upon which the above Indemnification Agreement was executed by
the Director or Officer.
Director and/or Officer Year of Execution
William J. Coad 1987
David M. Kelly 1996
Winston R. Hindle, Jr. 1995
David W. Hunter 1987
John E. Reed 1987
Stewart B. Reed 1987
James A. Burk 1987
R. Bruce Dewey 1990
Jack E. Nelson 1996
William S. Rafferty 1990
Stephen M. Shea 1987
Charles J. Weymouth 1995
Kevin R. Hoben 1996
Stephen M. Schwaber 1997
Phil K. LaRosa 1997
Robert P. Kandel 1997
Richard E. Kessler 1997
Timothy P. Scanlan 1997
George F. King 2002
J. Nicholas Filler 2002
Edward J. Trainor 2002
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 7, 2003 (except for Note 18, as
to which the date is April 9, 2003), accompanying the consolidated financial
statements included in the Annual Report of Mestek, Inc. and subsidiaries on
Form10-K for the year ended December 31, 2002. We hereby consent to the
incorporation by reference of said report in the Registration Statements of
Mestek, Inc. on Form S-8 (File Numbers 333-06429, effective July 9, 1996 and
333-82067, effective July 1, 1999).
/s/ Grant Thornton LLP
Boston, Massachusetts
April 10, 2003
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report be signed on its
behalf by the undersigned, thereunto duly authorized.
MESTEK, INC.
Date: April 15, 2003 By: /S/ John E. Reed
-------------------------------------------
John E. Reed, Chairman of the Board
and Chief Executive Officer
Date: April 15, 2003 By: /S/ Stephen M. Shea
-------------------------------------------
Stephen M. Shea, Senior Vice President
Finance, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: April 15, 2003 By: /S/ William J. Coad
-------------------------------------------
William J. Coad, Director
Date: April 15, 2003 By: /S/ Winston R. Hindle, Jr.
-------------------------------------------
Winston R. Hindle, Jr., Director
Date: April 15, 2003 By: /S/ David W. Hunter
-------------------------------------------
David W. Hunter, Director
Date: April 15, 2003 By: /S/ David M. Kelly
-------------------------------------------
David M. Kelly, Director
Date: April 15, 2003 By: /S/ George F. King
-------------------------------------------
George F. King, Director
Date: April 15, 2003 By: /S/ John E. Reed
-------------------------------------------
John E. Reed, Director
Date: April 15, 2003 By: /S/ Stewart B. Reed
-------------------------------------------
Stewart B. Reed, Director
CERTIFICATIONS ( under Section 302 of the Sarbanes-Oxley Act of 2002)
I, John E. Reed, Chief Executive Officer of Mestek, Inc. certify that:
1. I have reviewed this annual report on Form 10-K of Mestek, Inc.;
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. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) 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 us 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 date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or 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 weaknesses 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. The registrant's other certifying officers and 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 our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/S/ John E. Reed
John E. Reed
Chairman of the Board and Chief Executive Officer
I, Stephen M. Shea, Chief Financial Officer of Mestek, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Mestek, Inc.;
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. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) 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 us 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 date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or 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 weaknesses 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. The registrant's other certifying officers and 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 our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/S/ Stephen M. Shea
Stephen M. Shea
Senior Vice President and Chief Financial Officer
Mestek, Inc.
260 North Elm Street
Westfield, Massachusetts 01085
(Certification Issued Pursuant 18 U. S. C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
I, Stephen M. Shea, certify that in connection with the Annual Report of
Mestek, Inc. on Form 10-K for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof, and pursuant to 18 U.
S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002:
1. I am the Chief Financial Officer of Mestek, Inc.
2. I have read the Annual Report of Mestek, Inc. filed on Form 10-K
for the year ending December 31, 2002 (the "Report"), including
the financial statements contained in the Report.
3. The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and the
information contained in this Annual Report fairly presents, in
all material respects, the financial condition and results of
operations of Mestek, Inc. for and as of the period described.
Date: April 15, 2003
/S/ Stephen M. Shea
Stephen M. Shea
Mestek, Inc.
260 North Elm Street
Westfield, Massachusetts 01085
(Certification Issued Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
I, John E. Reed, certify that:
4. I am the Chief Executive Officer of Mestek, Inc.
5. I have read the Annual Report of Mestek, Inc. filed on Form 10-K
for the year ending December 31, 2002 (the "Report"), including
the financial statements contained in the Report.
6. The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and the
information contained in this Annual Report fairly presents, in
all material respects, the financial condition and results of
operations of Mestek, Inc. for and as of the period described.
Date: April 15, 2003
/S/ John E. Reed
John E. Reed