SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: June 30, 2002
Commission file number: 1-448
MESTEK, INC.
Pennsylvania Corporation
I.R.S. Employer Identification No.
25-0661650
260 North Elm Street
Westfield, Massachusetts 01085
Telephone: (413) 568-9571
The Registrant 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 and has
been subject to such filing requirements for the past 90 days.
The number of shares of Common Stock outstanding as of August 6, 2002, was
8,721,603.
MESTEK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 2002
INDEX
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1:
Condensed consolidated balance sheets at June 30, 2002
and December 31, 2001 3 - 4
Condensed consolidated statements of income for the three months ended June 30,
2002 and 2001 and the six months ended June 30, 2002 and 2001 5
Condensed consolidated statements of cash flows for the six
months ended June 30, 2002 and 2001 6
Condensed consolidated statement of changes in shareholders' equity
for the period from January 1, 2001 through June 30, 2002 7
Notes to the condensed consolidated financial statements 8-19
Management's Discussion and Analysis of Financial Condition
and Results of Operations 20-29
PART II - OTHER INFORMATION
Item 3 - Legal Proceedings 30
Item 5 - Other Information 31
Item 6 - Exhibits and Reports on Form 8-K 31
Item 7 - Submission of Matters to a Vote of Security Holders 31
Statement of Computation of Per share Earnings 32
SIGNATURE 32
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair statement of such operations. All such adjustments are of a normal
recurring nature.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MESTEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31,
2002 2001
-------- --------
(Dollars in thousands)
(Unaudited) (Audited)
ASSETS
Current Assets
Cash and Cash Equivalents $6,636 $2,315
Accounts Receivable - less allowances of,
$4,920 and $4,239 respectively 57,426 57,944
Inventories 59,047 64,588
Other Current Assets 18,126 10,740
------- --------
Total Current Assets 141,235 135,587
Property and Equipment - net 58,189 58,334
Other Assets and Deferred Charges - net 9,345 8,158
Excess of Cost over Net Assets of Acquired Companies 57,737 57,432
------- --------
Total Assets $266,506 $259,511
======== ========
See the Notes to Condensed Consolidated Financial Statements
Continued on next page
MESTEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
June 30, Dec. 31,
2002 2001
-------- --------
(Dollars in thousands)
(Unaudited) (Audited)
LIABILITIES, AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt $23,126 $30,002
Accounts Payable 16,186 17,687
Accrued Compensation 4,095 5,585
Accrued Commissions 2,052 2,307
Reserve for Equity Investment Losses 6,000 6,000
Customer Deposits 8,215 5,177
Other Accrued Liabilities 33,256 21,629
------- ------
Total Current Liabilities 92,930 88,387
Long-Term Debt 5,180 180
Other Liabilities 32 14
------- ------
Total Liabilities 98,142 88,581
------- ------
Minority Interests 1,143 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 162,661 165,423
Treasury Shares, at cost, (888,532 common shares) (10,101) (10,101)
Cumulative Translation Adjustment (1,252) (1,390)
-------- -------
Total Shareholders' Equity 167,221 169,845
-------- -------
Total Liabilities, and Shareholders' Equity $266,506 $259,511
======== ========
See the Notes to Condensed Consolidated Financial Statements.
MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands,
except earnings per common share)
Net Sales $90,528 $94,402 $179,473 $190,520
Net Service Revenues 102 177 218 353
------ ------ ------- --------
Total Revenues 90,630 94,579 179,691 190,873
Cost of Goods Sold 63,963 67,867 127,985 138,907
Cost of Service Revenues 62 141 134 283
------ ------ ------- --------
Gross Profit 26,605 26,571 51,572 51,683
Selling Expense 13,485 13,990 26,784 26,622
General and Administrative Expense 5,849 4,563 10,930 9,468
Engineering Expense 3,950 3,357 7,424 6,470
Environmental Charges 9,473 --- 9,473 ---
Restructuring Charges --- --- --- 774
-------- ------- -------- -------
Operating (Loss) Profit (6,152) 4,661 (3,039) 8,349
Interest Income (Expense) (219) (164) (494) (357)
Other Income (Expense) - net (193) (206) (398) (319)
-------- ------ -------- -------
(Loss) Income from Continuing
Operations Before Income Taxes (6,564) 4,291 (3,931) 7,673
Income Taxes (Benefit) (2,192) 1,665 (1,169) 2,949
-------- ------ -------- -------
(Loss) Income from Continuing
Operations (4,372) 2,626 (2,762) 4,724
-------- ------ -------- -------
Discontinued Operations:
Gain on Sale of Discontinued
Operations --- --- --- 16,572
Applicable Income Tax Expense --- --- --- 7,482
-------- ------ -------- -------
Net Gain on Sale of Discontinued
Operations --- --- --- 9,090
-------- ------ -------- -------
Net (Loss) Income ($4,372) $2,626 ($2,762) $13,814
-------- ------ -------- --------
Basic (Loss) Earnings Per Common Share
Continuing Operations ($0.50) $0.30 ($0.32) $0.54
Discontinued Operations --- --- --- 1.04
------- ----- ------- -----
Net (Loss) Income ($0.50) $0.30 ($0.32) $1.58
======= ===== ======= =====
Basic Weighted Average Shares Outstanding 8,722 8,722 8,722 8,726
===== ===== ===== =====
Diluted (Loss) Earnings Per Common Share
Continuing Operations ($0.50) $0.30 ($0.32) $0.54
Discontinued Operations --- --- --- 1.04
------- ----- ------- -----
Net (Loss) Income ($0.50) $0.30 ($0.32) $1.58
======= ===== ======= =====
Diluted Weighted Average Shares Outstanding 8,759 8,752 8,763 8,751
===== ===== ===== =====
See the Notes to Condensed Consolidated Financial Statements.
MESTEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2002 2001
-------- --------
(Dollars in thousands)
Cash Flows from Operating Activities:
Net (Loss) Income ($2,762) $13,814
Adjustments to Reconcile Net (Loss) Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 3,826 4,772
Provision for Losses on Accounts Receivable 681 788
Change in Assets & Liabilities:
Cash Flows Provided by (Used in) Changes In:
Accounts Receivable (163) 2,192
Inventory 5,541 (2,755)
Other Assets (8,929) 938
Accounts Payable (1,501) (17)
Accrued Expenses and Other Liabilities 12,938 (4,497)
------- -------
Net Cash Provided by Operating Activities 9,631 15,235
------- -------
Cash Flows from Investing Activities:
Capital Expenditures (3,630) (1,034)
Disposition of National Northeast --- 31,438
------- ------
Net Cash (Used in) Provided by Investing Activities (3,630) 30,404
-------- ------
Cash Flows from Financing Activities:
Net Repayments
Issuance of Long Term Debt 5,512 ---
Under Line of Credit Agreements (7,388) (42,882)
Increase (Decrease) in Minority Interests 58 (1,661)
Repurchase of Common Stock --- (368)
------- -------
Net Cash Used in Financing Activities (1,818) (44,911)
------- --------
Cumulative Translation Adjustments 138 (42)
Net Increase in Cash and Cash Equivalents 4,321 686
Cash and Cash Equivalents - Beginning of Period 2,315 2,417
------- ------
Cash and Cash Equivalents - End of Period $6,636 $3,103
======= =======
See the Notes to Condensed Consolidated Financial Statements.
MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the period January 1, 2001 through June 30, 2002
Cumulative
Common Paid In Retained Treasury Translation
Stock Capital Earnings Shares Adjustment Total
Balance - January 1, 2001 (audited) $479 $15,434 $158,697 ($9,733) ($1,195) $163,682
Net Income 6,726 6,726
Common Stock Repurchased (368) (368)
Cumulative Translation Adjustment (195) (195)
---- ------- --------- --------- -------- ---------
Balance - December 31, 2001 (audited) $479 $15,434 $165,423 ($10,101) ($1,390) $169,845
==== ======= ========= ========= ======== =========
Net Loss (2,762) (2,762)
Cumulative Translation Adjustment 138 138
---- ------- --------- --------- -------- ---------
Balance - June 30, 2002 (unaudited) $479 $15,434 $162,661 ($10,101) ($1,252) $167,221
==== ======= ======== ========= ======== =========
See the Notes to Condensed Consolidated Financial Statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of Mestek,
Inc. (Mestek) and its wholly owned subsidiaries (collectively the "Company"). In
the opinion of management, the financial statements include all material
adjustments, consisting solely of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position, results of operations and
cash flows. The results of this interim period are not necessarily indicative of
results for the entire year. Certain financial information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principle have been condensed or omitted.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto as of December 31, 2001 appearing in the
Company's Report on Form 10-K for the year ended December 31, 2001.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment.
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.
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 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 January 1, 2002 and continues to do so in 2002
in accordance with FAS 142. Any impairments are recognized in accordance with
the appropriate accounting standards. See Note 7.
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 are considered in the
computation of diluted earnings per share.
Currency Translation
Assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at exchange rates prevailing on the balance sheet date. Net
foreign currency transactions are reported in the results of operations in U.S.
dollars at average exchange rates. Adjustments resulting from balance sheet
translations 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. Cash paid for income taxes was
$2,196,000 and $6,321,000 during the six months ended June 30, 2002 and 2001,
respectively.
Comprehensive (Loss) Income
For the three and six months ended June 30, 2002 and 2001,
respectively, the components of other comprehensive income were immaterial and
consisted solely of foreign currency translation adjustments. Comprehensive
income (loss) was ($4,234,000) and $2,654,000 for the three months ended June
30, 2002 and 2001, respectively, and ($2,624,000) and $4,682,000 for the six
month ended June 30, 2002 and 2001, respectively
Reclassification
Reclassifications are made periodically to previously issued financial
statements to conform to the current year presentation.
Adoption of SFAS 141, SFAS 142 and SFAS 144
The Financial Accounting Standards Board (FASB) issued FAS 141,
Business Combinations and FAS 142, Goodwill and Intangible Assets in 2001. FAS
141 was effective for all business combinations completed after June 30, 2001.
FAS 142 was effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this Statement applied also 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 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 SFAS 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 has 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
is presently undertaking the second step of the transitional goodwill impairment
test.
On October 3, 2001, FASB issued FAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," that replaced FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of."
The primary objectives of this pronouncement were to develop one accounting
model based on the framework established in FAS 121 for long-lived assets to be
disposed of by sales and to address significant implementation issues. The
accounting model for long-lived assets to be disposed of by sale applies to all
long-lived assets, including discontinued operations, and replaces the
provisions of Account Principles Board (APB) Opinion No. 30, Reporting Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, for
the disposal of segments of a business. FAS 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
The provisions of FAS 144 became effective January 1, 2002 and did not have a
material effect upon the Company's Financial Statement.
Note 2 - Inventories
Inventories consisted of the following at:
June 30, December 31,
2002 2001
---- ----
Finished Goods $20,973 $18,664
Work-in-progress 16,246 17,910
Raw materials 28,755 34,790
------ ------
65,974 71,364
Less provision for LIFO method of valuation (6,927) (6,776)
------- -------
$59,047 $64,588
======== ========
Note 3 - Property and Equipment
June 30, Dec. 31,
2002 2001
-------- ---------
Land $4,437 $4,437
Building 27,290 27,044
Leasehold Improvement 4,879 4,843
Equipment 93,633 90,285
------ ------
130,239 126,609
Accumulated Depreciation (72,050) (68,275)
------- --------
58,189 58,334
====== ======
Note 4 - Long-Term Debt
June 30, Dec. 31,
2002 2001
-------- --------
Revolving Loan Agreement $16,625 $23,510
Note Payable 6,000 6,000
Industrial Development Bond 5,441 ---
Other Bonds and Notes Payable 240 672
-------- ------
28,306 30,182
Less Current Maturities 23,126 (30,002)
------ --------
$5,180 $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. 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%) 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. As a result of the settlement of an
environmental litigation matter, as more fully described in Note 8 to the
Condensed Consolidation Financial Statements, the Company was in technical
violation of one of the aforementioned financial covenants as of June 30, 2002.
The bank has agreed to waive the violation and amend the financial covenants to
preclude future violations relating to this settlement. 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 (50%) of net income. The Company has
outstanding at June30, 2002, $6,392,000 in standby letters of credit issued
principally in connection with its commercial insurance programs.
Note Payable - The Company has an unsecured uncommitted Demand Loan
Facility with a second commercial bank which expires on June 30, 2003 under
which the Company can borrow up to $25,000,000 on a LIBOR basis. A $6 million
note was outstanding under the Demand Loan facility as of June 30, 2002 which
bears interest at 2.69% and matures on August 16, 2002.
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 bears 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 increased.
Other Bonds and Notes Payable - Certain of the Company's property is
pledged as security for certain of these bonds and Notes Payable.
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
June 30, 2002.
Cash paid for interest was $432,000 and $2,058,000 during the six
months ended June 30, 2002 and 2001, respectively.
Note 5 - Interim Segment Information
Description of the types of products and services from which each reportable
segment derives its revenues:
As described in the Company's Form 10-K for 2001, 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 wide variety of
residential, commercial and industrial heating, cooling, and air distribution
products to independent wholesale supply warehouses, to mechanical, sheet metal
and other contractors, and in some cases to other HVAC manufacturers under
original equipment manufacture (OEM) contracts. The products include finned tube
and baseboard radiation equipment gas fired heating and ventilating equipment,
air damper equipment and related air distribution products and commercial and
residential boilers. The products are marketed under a number of franchise names
including Sterling, Beacon Morris, Smith, Hydrotherm, RBI, Vulcan, Applied Air,
Wing, AWV, ABI, Arrow, CESCO, Louvers & Dampers, Airtherm, Koldwave, Anemostat,
Omega Flex, King National, King and Spacepak.
The Company's Metal Forming Segment designs, manufactures and sells a
variety of metal forming equipment and related machinery and repair parts under
names such as Cooper-Weymouth, Peterson, Dahlstrom, B & K, Lockformer, Iowa
Precision (IPI), Hill Engineering, Coilmate/Dickerman, Yoder, Krasny-Kaplan,
Mentor AGVS and Rowe. The products are sold directly and through independent
dealers to end-users and to original equipment manufacturers. The products
include roll formers, wing benders, duct forming systems, plasma and water-jet
cutting equipment, coil feeds, straighteners, cradles, cut-to-length lines,
specialty dies, rotary punching equipment, tube feed and cut-off and flying
cut-off saws, tube mills, pipe mills, and roll forming systems.
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 summary of
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 Company's reportable segments are business units that offer
different products. The reportable segments are each managed separately because
they manufacture and distribute distinct products using distinct production
processes intended for distinct marketplaces.
Three Months ended
June 30, 2002:
- --------------
(in thousands)
Metal All
HVAC Forming Other Totals
Revenues from External Customers $74,146 $16,382 $102 $90,630
Segment Operating Profit (Loss) $4,345 ($10,365)* ($132) ($6,152)
* includes $9,473,000 in costs related to the settlement of an environmental
litigation matter, as more fully described in Note 8.
Three Months ended
June 30, 2001:
- --------------
(in thousands)
Metal All
HVAC Forming Other Totals
Revenues from External Customers $73,441 $20,961 $177 $94,579
Segment Operating Profit (Loss) $4,257 $589 ($185) $4,661
Note 6 - 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
incentive and non-qualified stock options of up to 500,000 shares of stock to
certain employees of the Company and other persons, including directors, for the
purchase of the Company's common stock at fair market value at the date of
grant. 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. Options totaling 200,000 shares have been granted under the
Plan, none of which have been exercised at June 30, 2002. No options were
granted in the second quarter of 2002.
Note 7 - Goodwill and Other Intangible Assets - Adoption of Statement 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 a comparable basis by adding back
goodwill amortization, net of related tax effects, for both periods.
For the Three For the Six
Months Ended Months Ended
June 30 June 30
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands,
except for earnings per share amounts)
Reported Net Income ($4,372) $2,626 ($2,762) $13,814
Add back: Goodwill Amortization --- 365 --- 678
-------- ------ -------- -------
Adjusted Net Income ($4,372) $2,991 ($2,762) $14,492
======== ====== ======== =======
Basic and Diluted Earning per Share ($0.50) $0.30 ($0.32) $1.58
Add back: Goodwill Amortization --- 0.04 --- 0.08
-------- ------- ------- -----
Adjusted Net Income ($0.50) $0.34 ($0.32) $1.66
======== ======= ======= =====
Accumulated amortization of goodwill and other intangibles was $8,152,000 and
$8,098,000 at June 30, 2002 and December 31, 2001, respectively.
Note 8 - Commitments & Contingencies
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
June 30, 2002 was $340,000.
The Company is obligated as a guarantor with respect to certain debt of
CareCentric, Inc. (formerly Simione Central Holdings, Inc. - see Note 9) to its
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 June 30, 2002 was $5,882,000. 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 previously disclosed, the Company is subject to several legal
actions and proceedings in which various monetary claims are asserted. The
Company is currently named as a defendant in approximately 20 lawsuits alleging
that the plaintiffs suffered personal injury as a result of exposure to
asbestos. In these lawsuits, the allegations against the Company are generally
that it is liable as a "successor in interest" to another party whose products
or workplace allegedly contained the asbestos to which the plaintiffs claim
exposure. Based upon a thorough examination of the relationship between the
Company and any alleged predecessor, and of the current state of the applicable
law, management and outside counsel retained to defend these cases strongly
believe that the Company has no liability with respect to such claims. The
Company has obtained dismissal in approximately 30 such cases over the past ten
years, and in no case has the Company been ordered to pay damages. To date, the
total costs of defending the approximately 50 current and previously dismissed
cases have been less than $100,000.
Claims Alleging Releases of Hazardous Materials
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. As disclosed previously, 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. Met-Coil is pursuing an action in the United States District Court for
contribution from 11 other known industrial users of TCE in the vicinity, whose
disposal practice may have contributed to the contamination experienced by some
or all of the members of the plaintiff class.
Met-Coil continues to negotiate coverage with its historic insurers as
to the above claims. Met-Coil has tendered these claims to its historic
insurance carriers, and five carriers are reimbursing a substantial portion of
the defense costs. However, certain insurers have contested their liability, and
Met-Coil remains in litigation with certain of the insurers regarding coverage.
The Company has reported a net charge of $9,473,000 in the quarter ended June
30, 2002 in relation to the LeClercq settlement reflecting the $8.7 million
balance of the $10 million settlement, related legal costs incurred through
June 30, 2002, a $2 million increase in the reserve for remediation of the
Lisle, Illinois property, as discussed subsequently herein, less certain
insurance company settlements received or accrued as of June 30, 2002.
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 the Company and its
subsidiary, Met-Coil, (Mejdrech, et al. v. The Lockformer Company) 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 it, the Company and its subsidiary believe they have valid
defenses to the above action and are therefore vigorously contesting the
Mejdrech claim.
The Illinois Attorney General, in an action disclosed previously
brought on behalf of the Illinois Environmental Protection Agency and others, is
seeking to have Met-Coil pay for the cost of connecting approximately 175
households in the Mejdrech class area to public water supplies as well
as pay for the State's response and investigatory costs 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 another action, owners of eight homes not included in the LeClerq or
Mejdrech actions have filed suit against Met-Coil for alleged contamination of
their properties and drinking water wells.
In separate actions, three individual plaintiffs have filed suits
against the Company and its subsidiary alleging in each case personal injury
(and, in one case, wrongful death) related to the release of TCE into drinking
water.
The Company and its subsidiary believe they have valid defenses to the
above claims and are contesting them vigorously. In any of the above pending
actions, if the plaintiffs were to obtain a verdict of liability from a court of
competent jurisdiction and assessments of significant damages, including
punitive damages, such decisions could, individually or in the aggregate,
materially adversely effect the Company's results of operations.
Potentially Responsible Parties (PRP) Actions
Lisle, Illinois:
As reported in previous filings, the Company's second tier subsidiary,
Met-Coil Systems Corporation, has submitted to the USEPA a Work Plan for
remediation of soil containing TCE at its manufacturing facility in Lisle,
Illinois. The Company expects final approval of the Work Plan in the near
future. The Company established a $2 million remediation reserve in relation to
this matter at December 31, 2001 and added $2 million to this reserve on
June 30, 2002. Depending upon the final form of the Work Plan, the
effectiveness of the remediation technologies utilized, the specific bids
received in relation to the estimated work required, and other factors impacting
the efficiency of the remediation effort, this reserve may need to be increased
in the future. As of June 30, 2002, the Company has incurred specific costs in
2002 further against this remediation reserve of approximately $534,000.
Note 9 - Investments
In March of 2002, the Company made an offer proposing to make available
to CareCentric, Inc. (CareCentric) approximately $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 surrendered certain notes receivable and other
advances totaling $3,150,059 plus 850,000 shares of CareCentric Series C
Preferred Stock carrying 170,000 votes on all matters to be voted upon by the
shareholder of the Company. Except for cash advances made in the second quarter
of 2002 totaling $963,000, and $129,000 advanced on July 1, 2002, 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. The Company
will continue to monitor this advance for collectibility. The Company also
surrendered warrants on 104,712 shares of CareCentric common stock and options
to purchase up to 159,573 shares of CareCentric common stock and agreed to
extend for one year, until June 30, 2003, its guarantee of CareCentric's $6
million Wainwright Bank credit facility. In return the Company received on July
1, 2002, a $4 million secured convertible term note from CareCentric bearing
interest at 6.25%, subordinated to the $3.555 million note received on July 1,
2002 by John E. Reed and described in greater detail below, as well as
CareCentric's primary bank debt, and maturing on July 1, 2007. The conversion
feature reflects an exercise price of $1 per share of CareCentric common. In
addition, the 5,600,000 shares of CareCentric Series B Preferred Stock held by
the Company, and carried at a zero valuation as of June 30, 2002, were made
convertible into CareCentric common shares at approximately 1.072 shares of
common per share of Series B Preferred. Also, warrants held by the Company on
890,396 CareCentric common shares were extended until June 15, 2004 and
re-priced at $1.00 per share.
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.
Note 10 - Subsequent Event
On July 22, 2002, the Company completed the sale of an idle
manufacturing facility located in Schiller Park, Illinois for approximately
$1,132,000 and recorded a gain of $59,000 on the transaction.
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
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-Q 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-Q. 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.
Critical Accounting Policies
Financial Reporting Release No. 60, which was recently 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, warranty costs, and accounting for income taxes. Actual
amounts could differ significantly from these estimates.
Our critical accounting policies are described in more detail as follows:
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.
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
SFAS No. 142, Goodwill and Other Intangible Assets. This statement affects the
Company's treatment of goodwill and other intangible assets. The statement
require 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 SFAS
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 has 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 is presently undertaking the second step of the
transitional goodwill impairment test.
Warranty
The Company provides for the estimated cost of product warranties
at the time revenue is recognized based upon estimated costs 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, 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 Untied 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.
Results of Operations
Three months ended June 30, 2002 vs June 30, 2001
Excluding revenues from the King Company, which was acquired on
December 31, 2001, Total Revenues in the Company's HVAC segment decreased by
1.6% during the second quarter of 2002 relative to the second quarter of 2001
due primarily to weakness in the segment's industrial products and air
distribution products divisions. Operating income for this segment increased
slightly, however, from $4,257,000 in the second quarter of 2001 to $4,345,000
in the second quarter of 2002, reflecting principally the effect of the
implementation of FAS 142 in 2002, as more fully described in Note 7.
Excluding revenues from Formtek Cleveland, Inc. (formerly SNS
Properties Ltd) which was acquired on July 2, 2001, Total Revenues in the
Company's Metal Forming segment decreased 32.5% during the second quarter of
2002, owing to a cyclical decline in demand for this segment's products.
Management believes that the events of September 11, 2001 have exacerbated the
effects of an otherwise normal industry-wide cyclical downturn in the demand for
machine tools. The Company believes however, that the mutually reinforcing
franchises it has acquired under the Formtek name, including Cooper Weymouth
Peterson, Rowe, CoilMate, Dickerman, Yoder, Krasny-Kaplan, Mentor AGVS,
Lockformer, Iowa Precision, Hill Engineering, B&K, and Dahlstrom, will allow it
to maintain and expand its core competencies, positioning this segment very well
for the next cyclical upturn in the machine tool industry. As more fully
explained in Note 8 to the Condensed Consolidated Financial Statements, the
Company's Met-Coil subsidiary settled an environmental litigation matter in the
quarter ended June 30, 2002 recording a net charge of $9,473,000. Excluding the
effect of that charge, the segment's operating income (loss) for the quarter was
($892,000) compared to an operating income of $589,000 ($ 964,000 before the
effect of goodwill amortization) in the quarter ended June 30, 2001. The Metal
Forming segment continues to make adjustments in its overhead structure to adapt
to the present cyclical down turn in demand for its products.
For the Company as a whole, Sales, General and Administrative, and
Engineering costs, taken together as a percentage of Total Revenues, increased
from 23.2% to 25.7% due principally to the drop off in revenues described above.
Operating income for the second quarter of 2002 for the Company as a
whole, excluding the $9,473,000 environmental charge described above, decreased
by $1,340,000 or 28.7% reflecting the various factors mentioned above.
The Company's total debt (long-term debt plus current portion of
long-term debt) increased slightly in the second quarter of 2002 from $27.7
million to $28.3 million despite borrowing $5.5 million via an industrial
development bond to fund an expansion at the Company's Boyertown Foundry Company
subsidiary, as more fully explained in Note 4, reflecting the effect of positive
cash flow from operations. The settlement of an environmental litigation matter
in the quarter ended June 30, 2002, as more fully described in Note 8, was
accrued at June 30, 2002 and will require increased borrowings during the third
quarter of 2002. Management regards the Company's current capital structure and
banking relationships as fully adequate to meet foreseeable future needs. The
Company has not paid dividends on its common stock since 1979.
Six months ended June 30, 2002 vs June 30, 2001
Excluding revenues from the King Company, which was acquired on
December 31, 2001, Total Revenues in the Company's HVAC segment decreased by
6.9% during the six months ended June 30, 2002 relative to the six months ended
June 30, 2001 due primarily to weakness in the segment's industrial products and
air distribution products divisions. Operating income for this segment
increased, however, from $7,560,000 in the six months ended June 30, 2001 to
$8,263,000 in the six months ended June 30, 2002, due principally to the effect
of the implementation of FAS 142 in 2002, as more fully described in Note 7.
Excluding revenues from Formtek Cleveland, Inc. (formerly SNS
Properties Ltd) which was acquired on July 2, 2001, Total Revenues in the
Company's Metal Forming segment decreased 29.4% during the six months ended June
30, 2002, owing to a cyclical decline in demand for this segment's products.
Management believes that the events of September 11, 2001 have exacerbated the
effects of an otherwise normal industry-wide cyclical downturn in the demand for
machine tools. The Company believes however, that the mutually reinforcing
franchises it has acquired under the Formtek name, including Cooper Weymouth
Peterson, Rowe, CoilMate, Dickerman, Yoder, Krasny-Kaplan, Mentor AGVS,
Lockformer, Iowa Precision, Hill Engineering, B&K, and Dahlstrom, will allow it
to maintain and expand its core competencies, positioning this segment very well
for the next cyclical upturn in the machine tool industry. As more fully
explained in Note 8 to the Condensed Consolidated Financial Statements, the
Company's Met-Coil subsidiary settled an environmental litigation matter in the
quarter ended June 30, 2002 recording a net charge of $9,473,000. Excluding the
effect of that charge, the segment's operating income (loss) for the six months
ended June 30, 2002 was ($1,572,000) compared to an operating income of
$1,074,000 (or $1,856,000 before the effect of goodwill amortization) in the
quarter ended June 30, 2001. The Metal Forming segment continues to make
adjustments in its overhead structure to adapt to the present cyclical down turn
in demand for its products.
For the Company as a whole, Sales, General and Administrative, and
Engineering costs, taken together as a percentage of Total Revenues, increased
from 22.3% to 25.1% due principally to the drop off in revenues described above.
Operating income for the second quarter of 2002 for the Company as a
whole, excluding the $9,473,000 environmental charge described above, decreased
by $1,915,000, or 22.9%, reflecting the various factors mentioned above.
During the six months ended June 30, 2002, the Company's total debt
(long-term debt plus current portion of long-term debt) decreased from $30.2
million to $28.3 million despite new borrowing of $5.5 million via an industrial
development bond to fund an expansion at the Company's Boyertown Foundry Company
subsidiary, as more fully explained in Note 4, reflecting the effect of positive
cash flow from operations and a reduced investment in inventory owing to reduced
levels of business, as described above. The settlement of an environmental
litigation matter in the quarter ended June 30, 2002, as more fully described in
Note 8, was accrued at June 30, 2002 and will require increased borrowings
during the third quarter of 2002. Management regards the Company's current
capital structure and banking relationships as fully adequate to meet
foreseeable future needs. The Company has not paid dividends on its common stock
since 1979.
The Company's Annual Meeting of Shareholders was held 11 a.m., May 28,
2002 at the Reed Institute adjacent to the Company's headquarters in Westfield,
Massachusetts.
Commitments and Contingencies
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
June 30, 2002 was $340,000.
As previously disclosed, the Company is obligated as a guarantor with
respect to certain debt of CareCentric, Inc. (formerly Simione Central Holdings,
Inc.) to its 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 June 30,
2002 was $5,882,000.
As previously disclosed, the Company is subject to several legal
actions and proceedings in which various monetary claims are asserted. The
Company is currently named as a defendant in approximately 20 lawsuits alleging
that the plaintiffs suffered personal injury as a result of exposure to
asbestos. In these lawsuits, the allegations against the Company are generally
that it is liable as a "successor in interest" to another party whose products
or workplace allegedly contained the asbestos to which the plaintiffs claim
exposure. Based upon a thorough examination of the relationship between the
Company and any alleged predecessor, and of the current state of the applicable
law, management and outside counsel retained to defend these cases strongly
believe that the Company has no liability with respect to such claims. The
Company has obtained dismissal in approximately 30 such cases over the past ten
years, and in no case has the Company been ordered to pay damages. To date, the
total costs of defending the approximately 50 current and previously dismissed
cases have been less than $100,000.
Claims Alleging Releases of Hazardous Materials
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. As disclosed previously, 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. Met-Coil is pursuing an action in the United States District Court for
contribution from 11 other known industrial users of TCE in the vicinity, whose
disposal practice may have contributed to the contamination experienced by some
or all of the members of the plaintiff class.
Met-Coil continues to negotiate coverage with its historic insurers as
to the above claims. Met-Coil has tendered these claims to its historic
insurance carriers, and five carriers are reimbursing a substantial portion of
the defense costs. However, certain insurers have contested their liability, and
Met-Coil remains in litigation with certain of the insurers regarding coverage.
The Company has reported a net charge of $9,473,000 in the quarter ended June
30, 2002 in relation to the LeClercq settlement reflecting the $8.7 million
balance of the $10 million settlement, related legal costs incurred through
June 30, 2002, a $2 million increase in the reserve for remediation of the
Lisle, Illinois property property, as discussed subsequently herein, less
certain insurance company settlements received or accrued as of June 30, 2002.
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 the Company and its
subsidiary, Met-Coil, (Mejdrech, et al. v. The Lockformer Company) 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 it, the Company and its subsidiary believe they have valid
defenses to the above action and are therefore vigorously contesting the
Mejdrech claim.
The Illinois Attorney General, in an action disclosed previously
brought on behalf of the Illinois Environmental Protection Agency and others, is
seeking to have Met-Coil pay for the cost of connecting approximately 175
households in the Mejdrech class area to public water supplies as well
as pay for the State's response and investigatory costs 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 another action, owners of eight homes not included in the LeClerq or
Mejdrech actions have filed suit against Met-Coil for alleged contamination of
their properties and drinking water wells.
In separate actions, three individual plaintiffs have filed suits
against the Company and its subsidiary alleging in each case personal injury
(and, in one case, wrongful death) related to the release of TCE into drinking
water.
The Company and its subsidiary believe they have valid defenses to the
above claims and are contesting them vigorously. In any of the above pending
actions, if the plaintiffs were to obtain a verdict of liability from a court of
competent jurisdiction and assessments of significant damages, including
punitive damages, such decisions could, individually or in the aggregate,
materially adversely effect the Company's results of operations.
Potentially Responsible Parties (PRP) Actions
Lisle, Illinois:
As reported in previous filings, the Company's second tier subsidiary,
Met-Coil Systems Corporation, has submitted to the USEPA a Work Plan for
remediation of soil containing TCE at its manufacturing facility in Lisle,
Illinois. The Company expects final approval of the Work Plan in the near
future. The Company established a $2 million remediation reserve in relation to
this matter at December 31, 2001 and added $2 million to this reserve on
June 30, 2002. Depending upon the final form of the Work Plan the effectiveness
of the remediation technologies utilized, the specific bids received in relation
to the estimated work required, and other factors impacting the efficiency of
the remediation effort, this reserve may need to be increased in the future. As
of June 30, 2002, the Company has incurred specific costs in 2002 further
against this remediation reserve of approximately $534,000.
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
2001, and 2002 to date, 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. The Company's Metal Forming segment provides
equipment used to hold, uncoil, straighten, form, bend 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, is
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 was
significantly effected by the events of September 11, 2001.
Credit Availability--Although interest rates trended lower in 2001, and
2002 to date, reflecting the Federal Reserve's monetary policy during this
period, credit availability has, reportedly, somewhat tightened for marginal
business borrowers. As the Company's customer base includes many small to medium
sized business, a further credit tightening through the commercial banking
system could be expected, at some point, to adversely effect the Company's
sales, as was the case in the "credit crunch" of 1990-1991.
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.
Trade Policy--Tariffs imposed recently by the Bush administration on
imports of certain steel products have adversely affected the Company's prime
costs and margins. Management is unable to ascertain at this time what
proportion of these cost increases can be recovered in the market place for its
products. The imposition of tariffs has also affected the supply of certain
steel products producing shortages of some items. To date this issue has not
effected the Company but could in the future.
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.
Commercial Liability Insurance--The events of September 11, 2001 have
impacted the cost and availability of commercial liability insurance (including
products liability insurance) significantly. As a result, the Company, beginning
on October 1, 2001 as previously disclosed, began absorbing a higher level of
insurance risk. Additional disruptions in the insurance market place, as would
be expected in the event of additional terrorism related claims, or for other
reasons, could reasonably be expected to significantly affect the cost and
availability of commercial insurance in the future.
Investments
In March of 2002, the Company made an offer proposing to make available
to CareCentric, Inc. (CareCentric) approximately $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 surrendered certain notes receivable and other
advances totaling $3,150,059 plus 850,000 shares of CareCentric Series C
Preferred Stock carrying 170,000 votes on all matters to be voted upon by the
shareholder of the Company. Except for cash advances made in the second quarter
of 2002 totaling $963,000, and $129,000 advanced on July 1, 2002, 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. The Company
will continue to monitor this advance for collectibility. The Company also
surrendered warrants on 104,712 shares of CareCentric common stock and options
to purchase up to 159,573 shares of CareCentric common stock and agreed to
extend for one year, until June 30, 2003, its guarantee of CareCentric's $6
million Wainwright Bank credit facility. In return the Company received on July
1, 2002, a $4 million secured convertible term note from CareCentric bearing
interest at 6.25%, subordinated to the $3.555 million note received on July 1,
2002 by John E. Reed and described in greater detail below, as well as
CareCentric's primary bank debt, and maturing on July 1, 2007. The conversion
feature reflects an exercise price of $1 per share of CareCentric common. In
addition, the 5,600,000 shares of CareCentric Series B Preferred Stock held by
the Company, and carried at a zero valuation as of June 30, 2002, were made
convertible into CareCentric common shares at approximately 1.072 shares of
common per share of Series B Preferred. Also, warrants held by the Company on
890,396 CareCentric common shares were extended until June 15, 2004 and
re-priced at $1.00 per share.
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.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Except for the following proceedings which relate to the same matter,
which are discussed in Item 2 Part I to this Form 10 Q, Management Discussion
and Analysis and in Note 8 to the Notes to the Consolidated Financial
Statements, the Company is not presently involved in any litigation that it
believes could materially and adversely affect its financial condition or
results of operations. The following proceedings involve claims related to the
discharge of trichloroethylene (TCE) onto the soil of The Lockformer Company
site in Lisle, Illinois:
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.
Wroble v. The Lockformer Company - Case No. 02 C 4922 (U.S.D.C., N.D. Ill.)
Filed July 15, 2002
Principal Defendants: The Lockformer Company, division of Met-Coil systems
Corporation, Mestek, Inc. and Honeywell
International, Inc.
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.
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
Item 5 -
Our chief executive officer and chief financial officer have furnished to the
SEC the certification with respect to this Report that is required by Section
906 of the Sarbanes-Oxley Act of 2002. A copy of the certifications filed are
attached as Exhibit 99.1.
Item 6 - Exhibits and Reports on Form 8-K
(a) Statement of Computation of Per Share Earnings ... Page 31
Item 7 - Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 28, 2002. Certain
matters voted upon at the meeting and the votes cast with respect to such matter
are as follows:
Election of Directors
Votes Votes
Received Withheld
William J. Coad 7,344,851 34,325
Winston R. Hindle, Jr. 7,344,851 34,325
David W. Hunter 7,344,692 34,484
David M. Kelly 7,344,851 34,325
George F. King 7,344,602 34,574
John E. Reed 7,344,851 34,325
Stewart B. Reed 7,344,851 34,325
Ratification of appointment of independent auditors for 2002
The shareholders voted to affirm the appointment of Grant Thornton LLP as
independent auditors for the Company for the fiscal year ending December 31,
2002.
Broker
For Against Abstain Non-Votes
7,360,867 15,155 3,254 0
MESTEK, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands,
except earnings per common share)
(Loss) Income from Continuing
Operations (4,372) 2,626 (2,762) 4,724
Income from Discontinued Operations --- --- --- 9,090
-------- ------ -------- -------
Net (Loss) Income ($4,372) $2,626 ($2,762) $13,814
Basic (Loss) Earnings Per Common Share
Continuing Operations ($0.50) $0.30 ($0.32) $0.54
Discontinued Operations --- --- --- 1.04
------- ----- ------- -----
Net (Loss) Income ($0.50) $0.30 ($0.32) $1.58
======= ===== ======= =====
Basic Weighted Average Shares Outstanding 8,722 8,722 8,722 8,726
===== ===== ===== =====
Diluted (Loss) Earnings Per Common Share
Continuing Operations ($0.50) $0.30 ($0.32) $0.54
Discontinued Operations --- --- --- 1.04
------- ----- ------- -----
Net (Loss) Income ($0.50) $0.30 ($0.32) $1.58
======= ===== ======= =====
Diluted Weighted Average Shares Outstanding 8,759 8,752 8,763 8,751
===== ===== ===== =====
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MESTEK, INC.
------------
(Registrant)
Date: August 14, 2002 By: /S/ Stephen M. Shea
------------------------------------------------
Stephen M. Shea, Senior Vice President - Finance
and CFO (Chief Financial Officer)