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: September 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 November 2, 2002 was
8,721,603.
MESTEK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed consolidated balance sheets at September 30, 2002
and December 31, 2001 3-4
Condensed consolidated statements of operations for the
three months ended September 30, 2002 and 2001 and
the nine months ended September 30, 2002 and 2001 5
Condensed consolidated statements of cash flows for the nine
months ended September 30, 2002 and 2001 6
Condensed consolidated statement of changes in shareholders' equity
for the period from January 1, 2001 through September 30, 2002 7
Notes to the condensed consolidated financial statements 8-22
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 23-30
Item 3 - Market Risk
Quantiutive and Qualitative Disclosures 30-33
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 33-34
Item 5 - Other Information
Controls and Procedures 34-35
Item 6 - Exhibits and Reports on Form 8-K 35
Statement of Computation of Per share Earnings 36
SIGNATURE 36
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
Sept. 30, Dec. 31,
2002 2001 *
---- ----
(Dollars in thousands)
(Unaudited) (Audited)
ASSETS
Current Assets
Cash $ 3,963 $ 2,315
Accounts Receivable - less allowances of
$5,110 and $4,239 respectively 55,674 57,944
Inventories 57,618 64,588
Other Current Assets 13,331 10,740
--------- ---------
Total Current Assets 130,586 135,587
Property and Equipment - net 57,879 58,334
Other Assets and Deferred Charges - net 11,332 8,158
Excess of Cost over Net Assets of Acquired Companies 26,081 57,432
--------- ---------
Total Assets $225,878 $259,511
========= =========
See the Notes to Condensed Consolidated Financial Statements
(Continued on next page)
* (as restated--see Note 6)
MESTEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
Sept. 30, Dec. 31,
2002 2001 *
---- ----
(Dollars in thousands)
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt $ 20,446 $ 30,002
Accounts Payable 15,544 17,687
Accrued Compensation 6,269 6,904
Accrued Commissions 2,047 2,307
Reserves for Equity Investment Losses 6,000 6,000
Customer Deposits 6,790 5,177
Other Accrued Liabilities 24,963 21,532
--------- ---------
Total Current Liabilities 82,059 89,609
Long-Term Debt 5,006 180
Other Liabilities 6 14
--------- ---------
Total Liabilities 87,071 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 133,771 164,201
Treasury Shares, at cost (888,532 common shares) (10,101) (10,101)
Other Comprehensive Loss (1,873) (1,390)
--------- ---------
Total Shareholders' Equity 137,710 168,623
--------- ---------
Total Liabilities and Shareholders' Equity $225,878 $259,511
========= =========
See the Notes to Condensed Consolidated Financial Statements.
* (as restated--see Note 6)
MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 * 2002 * 2001 *
-------- ------- ------- -------
(Dollars in thousands, except earnings per common share)
Net Sales 95,305 104,353 274,996 295,226
Cost of Goods Sold 67,427 77,170 195,546 216,360
------ ------ ------- -------
Gross Profit 27,878 27,183 79,450 78,866
Selling Expense 13,361 13,343 40,145 39,965
General and Administrative Expense 5,688 5,514 16,858 15,204
Engineering Expense 4,023 3,558 11,447 10,028
Environmental Charges 1,548 --- 11,021 ---
Restructuring Charges --- --- --- 774
-------------- -------------- ------------- ------------
Operating Profit (Loss) 3,258 4,768 (21) 12,895
Gain on Sale of Fixed Assets 59 --- 59 ---
Interest Income (Expense) 69 (241) (425) (598)
Other Income (Expense) - net (60) 42 (458) (277)
---------- ---------- -------------- -----------
(Loss) Income from Continuing
Operations Before Income Taxes 3,326 4,569 (845) 12,020
Income Taxes 1,442 1,819 251 4,752
--------- --------- -------- ----------
Income (Loss) from Continuing Operations Before
Cumulative Effect of a Change in Accounting Principle: 1,884 2,750 (1,096) 7,268
--------- --------- ------------ ----------
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
----------- ----------- ------------ ----------
Income (Loss) Before Cumulative
Effect of a Change in Accounting Principle: 1,884 2,750 (1,096) 16,358
--------- --------- ------------ -----------
Cumulative Effect of a Change in Accounting Principle:
Gross Impairment (Expense) --- --- (31,633) ---
Tax Benefit --- --- 2,299 ---
----------- ----------- ---------- -----------
Net Impairment (Expense) --- --- (29,334) ---
----------- ----------- -------- --------------
Net Income (Loss) $ 1,884 $ 2,750 ($ 30,430) $ 16,358
========= ========= ============ =========
Basic Earnings (Loss) Per Common Share:
Continuing Operations $ 0.22 $ 0.32 ($ 0.13) $ 0.83
Discontinued Operations --- --- --- $ 1.04
Cumulative Effect Of A Change In Accounting Principle --- --- ($ 3.36) ---
------------------------ ------------ -----------
Net Income (Loss) $ 0.22 $ 0.32 ($ 3.49) $ 1.87
=========== =========== =========== ===========
Basic Weighted Average Shares Outstanding 8,722 8,722 8,722 8,725
========== ========== ========== ==========
Diluted Earnings (Loss) Per Common Share:
Continuing Operations $ 0.22 $ 0.31 ($ 0.13) $ 0.83
Discontinued Operations --- --- --- $ 1.04
Cumulative Effect Of A Change In Accounting Principle --- --- ($ 3.35) ---
------------------------ ------------ -----------
Net Income (Loss) $ 0.22 $ 0.31 ($ 3.48) $ 1.87
=========== =========== =========== ===========
Diluted Weighted Average Shares Outstanding 8,745 8,760 8,756 8,754
========== ========== ========== ==========
See the Notes to Condensed Consolidated Financial Statements.
* (as restated - See Note 6)
MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2002 2001 *
---- ----
(Dollars in thousands)
Cash Flows from Operating Activities:
Net (Loss) Income ($30,430) $16,358
Adjustments to Reconcile Net (Loss) Income to
Net Cash Provided by Operating Activities:
Cumulative Effect of Change in Accounting Principles 29,334 ---
Depreciation and Amortization 7,818 7,456
Provision for Losses on Accounts Receivable,
net of write-offs 871 1,138
Changes in Assets and Liabilities 4,087 (9,409)
--------- ---------
Net Cash Provided by Operating Activities 11,680 15,543
--------- --------
Cash Flows from Investing Activities:
Capital Expenditures (5,388) (1,506)
Net Book Value of National Northeast
Assets and Liabilities disposed of --- 31,438
Acquisition of Businesses (net of cash acquired) --- (12,100)
--------- --------
Net Cash (Used in) Provided by Investing Activities (5,388) 17,832
--------- ---------
Cash Flows from Financing Activities:
Net Repayments Under Line of Credit Agreement (9,571) (30,660)
Issuance of Long Term Debt 5,512 ---
Principal Payments Under Long Term Debt Obligations (672) (60)
Repurchase of Common Stock --- (368)
Increase (Decrease) in Minority Interests 11 (1,649)
--------- --------
Net Cash Used In Financing Activities (4,720) (32,737)
--------- --------
Cumulative Translation Adjustments 76 (95)
--------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 1,648 543
Cash and Cash Equivalents - Beginning of Period 2,315 2,417
--------- --------
Cash and Cash Equivalents - End of Period $ 3,963 $ 2,960
--------- ---------
See the Notes to Condensed Consolidated Financial Statements.
* (as restated--see Note 6)
MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
For the period January 1, 2001 through September 30, 2002
Additional Other
Common Paid In Retained Treasury Comprehensive
Stock Capital Earnings * Shares Income Total
Balance - January 1, 2001 $479 $15,434 $157,887 ($9,733) ($1,195) $162,872
Net Income 6,314 6,314
Common Stock Repurchased (368) (368)
Cumulative Translation Adjustment (195) (195)
---- ------- -------- ---------- -------- ---------
Balance - December 31, 2001 479 15,434 164,201 (10,101) (1,390) 168,623
Net Loss (30,430) (30,430)
Additional Minimum Liability--
Defined Benefit Plan - Net of Tax (559) (559)
Cumulative Translation Adjustment 76 76
---- ------- -------- ---------- -------- ---------
Balance - September 30, 2002 $479 $15,434 $133,771 ($ 10,101) ($1,873) $137,710
==== ======= ======== ========== ======== =========
See the Notes to the Condensed Consolidated Financial Statements.
* (as restated see Note 6)
MESTEK, INC.
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 of the Company 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
$2,539,000 and $6,706,000 during the nine-month period ended September 30, 2002
and 2001, respectively.
Other Comprehensive (Loss) Income
For the nine-month periods ended September 30, 2002 and 2001,
respectively, the components of other comprehensive (loss) income consisted of
foreign currency translation adjustments of $76,000 and ($95,000), respectively,
and a charge in the 2002 period of $559,000 related to an additional minimum
liability from a defined benefit pension plan, as more fully explained in Note
11. Comprehensive income (loss) was $1,263,000 and $2,697,000 for the three
months ended September 30, 2002 and 2001, respectively, and ($30,913,000) and
$16,263,000 for the nine month periods ended September 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 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 nine months ended September 30, 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 7.
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:
September 30, December 31,
2002 2001
---- ----
Finished Goods $19,288 $18,664
Work-in-progress 16,477 17,910
Raw materials 28,614 34,790
--------- ---------
64,379 71,364
Less provision for LIFO method of valuation (6,761) (6,776)
--------- ---------
$57,618 $64,588
========= =========
Note 3 - Property and Equipment
September 30, December 31,
2002 2001
---- ----
Land $4,115 $4,437
Building 26,459 27,044
Leasehold Improvements 4,860 4,843
Equipment 96,562 90,285
--------- --------
131,996 126,609
Accumulated Depreciation (74,117) (68,275)
--------- ---------
$57,879 $58,334
========= =========
Note 4 - Long-Term Debt
September 30, December 31,
2002 2001
---- ----
Revolving Loan Agreement $14,439 $23,510
Note Payable 5,500 6,000
Industrial Development Bond 5,333 ---
Other Bonds and Notes Payable 180 672
--------- ---------
25,452 30,182
Less Current Maturities (20,446) (30,002)
--------- ---------
$5,006 $180
========= =========
Revolving Loan Agreement - The Company has a long-standing relationship
with Fleet Bank (the Bank) with whom it has a Revolving Loan Agreement and
Letter of Credit Facility (the Agreement). 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.
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 September 30, 2002, $11,922,682 in
standby letters of credit issued principally in connection with its commercial
insurance programs and certain subsidiary guarantees.
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 $6,000,000 outstanding
balance. No balance was outstanding under the Demand Loan Facility as of
September 30, 2002. The Company's subsidiary, Met-Coil Systems Corporation,
borrowed $5.5 million from a third commercial bank, MB Financial Corp, on July
26, 2002 in connection with the settlement of an environmental litigation
matter, as more fully described in Note 8. Fleet Bank has provided a letter of
credit in support of this loan. The note bears interest at Prime minus one-half
percent, 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 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
September 30, 2002.
Cash paid for interest was $510,000 and $2,330,000 during the nine
months ended September 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 brand
name 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, equipment,
accessories, options, service and repair parts under names such as
Cooper-Weymouth, Peterson, Coilmate/Dickerman and Rowe (manufactured at the
Formtek Maine division); Dahlstrom, B & K, Yoder, Krasny/Kaplan and Mentor AGVS
(manufactured at the Formtek Cleveland subsidiary); Lockformer and Iowa
Precision (the divisions of the Met-Coil Systems division); and , Hill
Engineering, Hill Tool & Die and Hill Tube & Pipe (the divisions of the Hill
Engineering subsidiary). The products are sold directly and through independent
dealers to end-users and to original equipment manufacturers. The products
include roll forming systems, including roll tooling, destacking, pre- and post-
cut presses and dies, flying dies, saws and cut-off systems, rotary punching and
shearing, quad and wing bending and a broad range of rollformers as systems and
stand alone devices; metal process systems, including multi-blanking and
cut-to-length lines; press feeding and coil handling systems, including
turnstiles, coil cradles, coil reels, pallet decoilers, rewind devices, coil
straighteners, electronic roll feeds and related accessories; sheet metal
forming equipment for the HVAC industry, including duct forming systems, plasma
and water jet cutting equipment, duct accessory forming equipment, pipe cutting
machines, and duct tools; progressive, lamination dies and die service and
maintenance for the commercial and automotive gasket industry; products for the
tube and pipe industry including tube and welded shape mills and systems, square
wave welders, tube cut-offs, including the duo-cut system, tube punching and
forming systems, pipe mill cage forming systems for APT pipe, and tube and pipe
handling, bundling and finishing systems; and other material handling and moving
equipment including coil and sheet lifting devices and automated laser-guided
vehicle 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
- -------------------
September 30, 2002:
- -------------------
(in thousands)
Metal All
HVAC Forming Other Totals
Revenues from External Customers $79,667 $15,533 $105 $95,305
Segment Operating Profit (Loss) $6,129 ($2,745)* ($126) $3,258
* includes $1,548,000 in environmental litigation and remediation costs as more
fully explained in Note 8.
Three Months ended
September 30, 2001:
(in thousands)
Metal All
HVAC Forming Other Totals
Revenues from External Customers $83,062 $21,160 $131 $104,353
Segment Operating Profit (Loss) $6,519 ($1,424) ($327) $4,768
Operating profit figures for the three months ended September 30, 2001 have been
restated for purposes of comparability to give effect to subsidiary stock
options, as more fully explained in Note 6.
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 September 30, 2002. No options were
granted in the third quarter of 2002.
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 afigure based upon book value. In accordance
with APB 25 the Company has reflected pre-tax charges to earnings in the current
three-month and nine-month periods of $120,000 and $359,000, respectively, for
the compensation value of the options granted. In addition, the Company has
restated, for purposes of comparability, the 2001 three-month and nine-month
Income Statements included herein to reflect pre-tax charges of $111,000 and
$333,000, respectively, for the compensation value in those periods of 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.
Note 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 a comparable 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 and subtracting a prior period non-recurring
gain, (to derive Comparable Net Income), for both periods.
For the Three Months Ended For the Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands, except for earnings per share amounts)
Reported Net Income (Loss) $1,884 $2,750 ($30,430) $16,358
Add back: Goodwill Amortization --- 324 --- 1,002
-------- -------- --------- --------
Adjusted Net Income 1,884 3,074 (30,430) 17,360
Cumulative Effect of a Change
in Accounting Principle: --- --- 29,334 ---
Prior Period Non-Recurring Gain:
Sale of National Northeast --- --- --- (9,090)
-------- -------- --------- -------
Comparable Net Income $1,884 $3,074 ($1,096) $8,270
======== ======== ========= =======
Basic Earning (Loss) per Share $0.22 $0.32 ($3.49) $1.87
Add back: Goodwill Amortization --- 0.03 --- 0.12
-------- -------- --------- -------
Adjusted Net Income (Loss) $0.22 $0.35 ($3.49) $1.99
Cumulative Effect of a Change
in Accounting Principle: --- --- 3.36 ---
Prior Period Non-Recurring Gain:
Sale of National Northeast --- --- --- (1.04)
-------- -------- --------- -------
Comparable Net Income $0.22 $0.35 ($0.13) $0.95
======== ======== ========= =======
Diluted Earning (Loss) per Share $0.22 $0.31 ($3.48) $1.87
Add back: Goodwill Amortization --- 0.03 --- 0.11
-------- -------- --------- -------
Adjusted Net Income (Loss) $0.22 $0.34 ($3.48) $1.98
Cumulative Effect of a Change
in Accounting Principle: --- --- 3.35 ---
Prior Period Non-Recurring Gain:
Sale of National Northeast --- --- --- (1.04)
-------- -------- --------- -------
Comparable Net Income $0.22 $0.34 ($0.13) $0.94
======== ======== ========= =======
Accumulated amortization of goodwill and other intangibles was $39,914,000 and
$8,098,000 at September 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
September 30, 2002 was $298,000.
The Company is obligated as a guarantor with respect to certain debt of
CareCentric, Inc. (formerly Simione Central Holdings, Inc. - see Note 9) to
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 September
30, 2002 was $5,125,000, a reduction of $447,000 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 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 $200,000.
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. The balance of the settlement 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 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.
Met-Coil has settled its insurance coverage issues with a number of its
historic insurers as to the above claims. Met-Coil is pursuing insurance
coverage litigation against several other carriers to recoup additional
un-reimbursed defense costs and settlement amounts incurred in LeClercq. At
least three carriers remain as potentially having liability for defense or
indemnification costs, one of whom has agreed, under reservation of rights, to
reimburse Met-Coil for a portion of the defense costs of the LeClercq action and
also the Mejdrech action described below. However, these insurers continue to
contest their liability, and the outcome of the coverage litigation remains
uncertain at this time.
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 State, the Illinois Environmental Protection Agency and
other governmental agencies, 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, alleging property damage and
nuisance by reason of alleged contamination of their properties and drinking
water wells.
In six separate actions, ten individual plaintiffs have filed suits
against the Company and its subsidiary 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.
Met-Coil is pursuing insurance coverage for all of these property
damage and personal injury actions from certain of its historic insurers through
a declaratory judgment action pending in Illinois state court. At least one
carrier has agreed to provide reimbursement of certain defense costs relating to
the personal injury actions. The Company also anticipates partial reimbursement
for some of the defense costs relating to the remaining property damage cases.
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 affect the financial position of Met-Coil and, potentially,
the financial position of the Company as a whole.
As explained in Note 4, Met-Coil borrowed $5.5 million from a
commercial bank to partially fund the $10 million settlement described above.
Met-Coil is presently pursing additional bank financing to fund the remediation
efforts required at its Lisle, Illinois site as described further herein.
Met-Coil has received no formal commitment from any of the lenders it has
approached in this matter as of November 11, 2002. There can be no assurance
therefore, that Met-Coil will be able to meet its obligations in relation to the
remediation Work Plan, as described further herein, or fund other costs related
to the various actions described herein as they occur.
Potentially Responsible Parties (PRP) Actions
Lisle, Illinois:
As reported in previous filings, Met-Coil Systems Corporation
(Met-Coil) has submitted to the USEPA a Work Plan for remediation of soil
containing TCE at its Lockformer manufacturing facility in Lisle, Illinois.
Met-Coil has received final approval of the Work Plan from the U.S.
Environmental Protection Agency and awaits approval from the Illinois
Environmental Protection Agency. Met-Coil established a $2 million remediation
reserve in relation to this matter at December 31, 2001, added $2 million to
this reserve on June 30, 2002, and added an additional $1,500,000 to this
reserve as of September 30, 2002. Depending upon the final budget 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 September 30, 2002, Met-Coil has incurred
specific costs in 2002 further against this remediation reserve of approximately
$1,000,000.
Note 9 - Investments
In March of 2002, the Company made an offer proposing to make available
to CareCentric, Inc. (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.
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.
Note 10 - Gain on Sale of Fixed Assets
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.
Note 11 - Additional Minimum Liability--Defined Benefit Plan
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
Plan's 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 September 30, 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".
Note 12 - New Accounting Pronouncements
The FASB issued SFAS 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 SFAS No. 4 and SFAS 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 SFAS 145 will have a material impact on its consolidated
financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 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 SFAS 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. SFAS 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. SFAS 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 SFAS No. 146. The Company does
not believe adopting SFAS No. 146 will have a material impact on its
consolidated financial statements.
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, 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, 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
Revenue from products sales is recognized at the time of
shipment.
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 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, net of 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 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 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 September 30, 2002 vs September 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
6.3% during the third quarter of 2002 relative to the third quarter of 2001 due
primarily to weakness in the segment's industrial products, air distribution
products, and air conditioning products divisions. Operating income for this
segment decreased from $6,519,000 in the third quarter of 2001 (or $6,739,000
after adding back goodwill amortization for purposes of comparability--see Note
7) to $6,129,000 in the third quarter of 2002, reflecting the fall off in sales
and increasing pressure on margins.
Total Revenues in the Company's Metal Forming segment decreased 26.6%
during the third quarter of 2002, owing to an ongoing 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 and placed great pressure on
pricing and costs severely affecting margins. The Company expects these
pressures to remain in place for the foreseeable future with only modest
improvement in 2003. 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. The backlog for the
segment bottomed out in the 4th quarter of 2001 at $21.6 million (off
approximately 50% from recent highs) and has improved to $24.9 million at the
end of the 3rd quarter, and is expected to be only slightly reduced at year end.
As more fully explained in Note 8 to the Condensed Consolidated Financial
Statements, the Company's Met-Coil subsidiary incurred environmental litigation
and remediation costs in the quarter ended September 30, 2002 totaling
$1,548,000, which are reflected in this segment's operating earnings. Excluding
the effect of these charges, the segment's operating (loss) for the quarter
ended September 30, 2002 was ($1,197,000) compared to an operating (loss) of
($1,424,000) (or a (loss) of ($1,113,000) after adding back goodwill
amortization for purposes of comparability--see Note 7) in the quarter ended
September 30, 2001. To address profitability the five units of the Metal Forming
segment have been working to lower breakeven points by making adjustments to
budgets and overhead. Notwithstanding these adjustments, the units have focused
on continuing historical levels of market and product development and
sales/marketing activities. In addition, the units have increased activities of
cooperation to both increase sales and decrease cost. The Company expects that
such activities will continue to grow throughout 2003.
For the Company as a whole, Sales, General and Administrative, and
Engineering costs, taken together as a percentage of Total Revenues, increased
from 21.5% to 24.2% due principally to the drop off in revenues described above.
Operating income for the third quarter of 2002 for the Company as a
whole, excluding the $1,548,000 environmental charge described above, and after
adding back goodwill amortization recorded in the third quarter of 2001,
decreased by $476,000 or 9.0% relative to comparable period in 2001 reflecting
the various factors mentioned above.
The Company's consolidated debt (long-term debt plus current portion of
long-term debt) decreased slightly in the third quarter of 2002 from $28.3
million to $25.4 million despite additional borrowings, principally by the
Company's subsidiary, Met-Coil Systems Corporation, to fund environmental costs,
as described more fully in Note 8, reflecting the effect of positive cash flow
from operations. The Company has not paid dividends on its common stock since
1979.
Nine months ended September 30, 2002 vs September 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
5.7% during the nine months ended September 30, 2002 relative to the nine months
ended September 30, 2001 due primarily to weakness in the segment's industrial
products, air distribution products, and air cooling products divisions.
Operating income for the nine months ended September 30, 2002, decreased by
$349,000 or 2.4%, relative to the nine months ended September 30, 2001, after
adding back goodwill amortization recorded in the nine months ended September
31, 2001, owing principally to the fall off in revenues.
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 29.5% during the nine months ended
September 30, 2002, owing to an ongoing 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 and incurred additional environmental costs of $1,548,000 in the
three months ended September 30, 2002. Excluding the effect of these charges,
the segment's operating (loss) for the nine months ended September 30, 2002 was
($2,769,000) compared to an operating (loss) of ($350,000) (or income of
$623,000 before the effect of goodwill amortization--see Note 7) in the nine
month period ended September 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 22.1% to 24.9% due principally to the drop off in revenues described above.
Operating income for the nine months ended September 30, 2002 for the
Company as a whole, excluding the environmental and restructuring charges for
both periods, and after adding back goodwill amortization recorded in the nine
months ended September 30, 2001, decreased by $4,285,000, or 28.0%, reflecting
the various factors mentioned above.
As more fully explained in Note 1, the Company recorded a pre-tax
charge of $31,633,000, effective January 1, 2002, reflecting the impairment of
goodwill associated with its Metal Forming segment which it determined to be a
reporting unit under FAS 142. After recording this charge the Metal Forming
reporting unit has $5,765,000 of un-amortized goodwill remaining which will be
monitored in accordance with FAS 142. The goodwill write-down reflects the
effects on valuation as of January 1, 2002 of a pronounced cyclical downturn in
the markets for metal forming equipment magnified by the effects of September
11, 2001.
During the nine months ended September 30, 2002, the Company's total
debt (long-term debt plus current portion of long-term debt) decreased from
$30.1 million to $25.4 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, and despite $5.5
million in additional borrowings by the Company's subsidiary, Met-Coil Systems
Corporation, related to an environmental litigation settlement, as more fully
explained in Note 8, reflecting the effect of positive cash flow from
operations, a reduced investment in inventory owing to reduced levels of
business, and improvements in inventory control. The Company has not paid
dividends on its common stock since 1979.
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
September 30, 2002 was $298,000.
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 September
30, 2002 was $5,125,000, a reduction of $447,000 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 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 $200,000.
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. The balance of the settlement was reflected in results of operation for
the three months ended June 30, 2002. 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 practices may have contributed to
the contamination experienced by some or all of the members of the plaintiff
Class.
Met-Coil has settled its insurance coverage issues with a number of its
historic insurers as to the above claims. Met-Coil is pursuing insurance
coverage litigation against several other carriers to recoup additional
un-reimbursed defense costs and settlement amounts incurred in LeClercq. At
least three carriers remain as potentially having liability for defense or
indemnification costs, one of whom has agreed, under reservation of rights, to
reimburse Met-Coil for a portion of the defense costs of the LeClercq action and
also the Mejdrech action described below. However, these insurers continue to
contest their liability, and the outcome of the coverage litigation remains
uncertain at this time.
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 State, the Illinois Environmental Protection Agency and
other governmental agencies, 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, alleging property damage and
nuisance by reason of alleged contamination of their properties and drinking
water wells.
In six separate actions, ten individual plaintiffs have filed suits
against the Company and its subsidiary 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.
Met-Coil is pursuing insurance coverage for all of these property
damage and personal injury actions from certain of its historic insurers through
a declaratory judgment action pending in Illinois state court. At least one
carrier has agreed to provide reimbursement of certain defense costs relating to
the personal injury actions. The Company also anticipates partial reimbursement
for some of the defense costs relating to the remaining property damage cases.
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 affect the financial position of Met-Coil and, potentially,
the financial position of the Company as a whole.
As explained in Note 4, Met-Coil borrowed $5.5 million from a
commercial bank to partially fund the $10 million settlement described above.
Met-Coil is presently pursing additional bank financing to fund the remediation
efforts required at its Lisle, Illinois site as described further herein.
Met-Coil has received no formal commitment from any of the lenders it has
approached in this matter as of November 11, 2002. There can be no assurance
therefore, that Met-Coil will be able to meet its obligations in relation to the
remediation Work Plan, as described further herein, or fund other costs related
to the various actions described herein as they occur.
Potentially Responsible Parties (PRP) Actions
Lisle, Illinois:
As reported in previous filings, Met-Coil Systems Corporation
(Met-Coil) has submitted to the USEPA a Work Plan for remediation of soil
containing TCE at its Lockformer manufacturing facility in Lisle, Illinois.
Met-Coil has received final approval of the Work Plan from the U.S.
Environmental Protection Agency and awaits approval from the Illinois
Environmental Protection Agency. Met-Coil established a $2 million remediation
reserve in relation to this matter at December 31, 2001, added $2 million to
this reserve on June 30, 2002, and added an additional $1,500,000 to this
reserve as of September 30, 2002. Depending upon the final budget 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 September 30, 2002, Met-Coil has incurred
specific costs in 2002 further against this remediation reserve of approximately
$1,000,000.
Item 3 - 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, industrial,
and institutional 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 affected 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.
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. The development of on-line "reverse auction" capabilities
has benefited the Company in pursuing this policy. These same capabilities,
however, pose potential threats to the Company as customers can be expected to
use Internet auctions to drive down prices of products, particularly susceptible
to commoditization.
Trade Policy--Tariffs imposed recently by the U. S. government 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. As of September 30, 2002, Consolidated debt (including
short- and long-term) represented approximately 18% of Shareholders' Equity.
Management does not believe that any foreseeable increase in interest rates in
the near term could materially adversely effect its results of operations, based
on its current level of consolidated debt.
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) 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.
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.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
As more fully explained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, the Company and a wholly owned
second tier subsidiary have been named in several related civil litigation cases
alleging soil and ground water contamination in the area of the subsidiary's
Lisle, Illinois manufacturing facility. The Company and the subsidiary are
vigorously contesting these allegations. However, if the plaintiffs were to
obtain a verdict of liability from a court of competent jurisdiction in any of
these cases, with assessments of significant damages, including punitive damages
such decisions could, individually or in the aggregate, have a material adverse
effect on the Company's results of operations or financial condition. The
following is a list of the Cases relating to the Lockformer Company (division of
Met-Coil Systems Corporation) site and claims of damages and injury relative to
discharge of trichloroethylene (TCE) in Lisle, IL.
Pending Litigation Related to The Lockformer Company and TCE
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; Interim Agreed Order entered May 6, 2002
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
LeClercq, et al. v. The Lockformer Company - Case No. 00 C 7164 (U.S.D.C.
for N.D. Ill.)
Filed November 14, 2000; Class Action Settled May 23, 2002; Third-Party
Complaints filed May 30, 2002
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; Class Action Certified August 12, 2002
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.
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.
Wroble v. The Lockformer Company - Case No. 02 C 4992 (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.
Meyer, et al. v. The Lockformer Company - Case No. 02 C 2672 (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.,
Honeywell International, Inc. and Carlson Environmental Inc.
Schreiber v. Lockformer - Case No. 02C-6097 (U.S.D.C. for N.D. Ill)
Filed August 27, 2002
Principal Defendants: The Lockformer Company, division of Met-Coil Systems
Corporation, Mestek, Inc. and
Honeywell International, Inc.
Hallmer v. Lockformer -- Case No. 02C 7066 (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.,
Honeywell International, Inc. and Carlson Environmental Inc.
Ehrhart v. Lockformer - Case No. 02C 7068 (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.,
Honeywell International, Inc. and Carlson Environmental Inc.
Item 5 - Other Information
Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer
(collectively, the "Certifying Officers") are responsible for establishing and
maintaining disclosure controls and procedures for the Company. Such officers
have concluded (based upon their evaluation of these controls and procedures as
of a date within 90 days of the filing of this report) that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in this report is accumulated and
communicated to the Company's management, including its principal executive
officers as appropriate, to allow timely decisions regarding required
disclosure.
The Certifying Officers also have indicated that there were no
significant changes in the Company's internal controls or other factors that
could significantly affect such controls subsequent to the date of their
evaluation, and there were no corrective actions with regard to significant
deficiencies and material weaknesses.
Item 6 - Exhibits and Reports on Form 8-K
Statement of Computation of Per Share Earnings...Page 36.
(b) Registrant filed no reports on Form 8-K during the quarter for which
this report is filed.
MESTEK, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands, except earnings per common share)
Income (Loss)from Continuing Operations $1,884 $2,750 ($1,096) $7,268
Net Gain on Sale of Discontinued
Operations (net of tax) --- --- --- 9,090
Cumulative Effect of a Change
in Accounting Principle: --- --- (29,334) ---
--------- --------- --------- ---------
Net Income (Loss) $1,884 $2,750 ($30,430) $16,358
--------- --------- --------- ---------
Basic Earnings (Loss) Per Common Share:
Continuing Operations $0.22 $0.32 ($0.13) $ 0.83
Discontinued Operations --- --- --- $1.04
Cumulative Effect Of A Change
In Accounting Principle --- --- ($3.36) ---
--------- --------- --------- ---------
Net Income (Loss) $0.22 $0.32 ($3.49) $1.87
========= ========= ========= =========
Basic Weighted Average Shares Outstanding 8,722 8,722 8,722 8,725
========= ========= ========= ========
Diluted Earnings (Loss) Per Common Share:
Continuing Operations $0.22 $0.31 ($0.13) $0.83
Discontinued Operations --- --- --- $1.04
Cumulative Effect Of A Change
In Accounting Principle --- --- ($3.35) ---
--------- --------- --------- ---------
Net Income (Loss) $0.22 $0.31 ($3.48) $1.87
========= ========= ========= =========
Diluted Weighted Average Shares Outstanding 8,745 8,760 8,756 8,754
========= ========= ========= =========
SIGNATURE
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: November 14, 2002 /S/ STEPHEN M. SHEA
-----------------------------------------------------
Stephen M. Shea, Senior Vice President - Finance
(Chief Financial Officer)
Mestek, Inc.
260 North Elm Street
Westfield, Massachusetts 01085
Certification Issued Pursuant to 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 quarterly report on Form 10-Q of Mestek, Inc.
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 the registrant's board of directors (or
persons performing the equivalent function):
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 quarterly report whether or not 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: November 14, 2002 /S/ JOHN E. REED
--------------------------
John E. Reed
Chief Executive Officer
Mestek, Inc.
Mestek, Inc.
260 North Elm Street
Westfield, Massachusetts 01085
(Certification Issued Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
I, Stephen M. Shea, Chief Financial Officer of Mestek, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mestek, Inc.
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 we 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 quarterly report is being prepared;
c) 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 quarterly report (the "Evaluation
Date"); and
d) presented in this quarterly 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 the registrant's board of directors (or
persons performing the equivalent function):
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
e) 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 quarterly report whether or not 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: November 14, 2002 /S/ STEPHEN M. SHEA
--------------------------
Stephen M. Shea
Chief Financial Officer
Mestek, Inc.
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:
1. I am the Chief Executive Officer of Mestek, Inc.
2. I have read the quarterly report of Mestek, Inc. filed on Form
10-Q for the quarter ending September 30, 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 quarterly 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: November 14, 2002 /S/ JOHN E. REED
--------------------------
John E. Reed
Chief Executive Officer
Mestek, Inc.
Mestek, Inc.
260 North Elm Street
Westfield, Massachusetts 01085
(Certification Issued Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
I, Stephen M. Shea, certify that:
1. I am the Chief Financial Officer of Mestek, Inc.
2. I have read the quarterly report of Mestek, Inc. filed on Form
10-Q for the quarter ending September 30, 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 quarterly 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: November 14, 2002 /S/ STEPHEN M. SHEA
--------------------------
Stephen M. Shea
Chief Financial Officer