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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended Commission file number: 1-448
December 31, 1994
MESTEK, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0661650
(State or(I.R.S Employertion of
incorporation or organization) Identification No.)
260 North Elm Street
Westfield, Massachusetts 01085
(Address of principal executive offices)
Registrant's telephone number, including area code: 413-568-9571
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
Common Stock, No Par Value on which registered
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K/ /
The aggregate market value of voting common shares held by nonaffiliates of the
registrant as of March 31, 1995, based upon the closing price for registrant's
common stock as reported in The Wall Street Journal as of such date was
$31,592,995
The number of shares of the registrant's common stock issued and outstanding as
of March 31, 1995 was 9,022,346.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the annual meeting of shareholders
of the registrant to be held on May 24, 1995 are incorporated by reference into
Part III hereof and the exhibits to filings referenced on Pages 49 thru 51 of
Part IV hereof are incorporated by reference into Part IV hereof.
PART I
Item 1 - BUSINESS
GENERAL
Mestek, Inc. ("Mestek" or the "Company") was incorporated in the
Commonwealth of Pennsylvania in 1898 as Mesta Machine Company. It changed its
name to Mestek, Inc. in October, 1984, and merged with Reed National Corp. on
July 31, 1986.
On November 13, 1989 the Company purchased the assets of Air Fan
Engineered Products, Inc., a small manufacturer of air conditioning, air moving
and heat transfer equipment located in Los Angeles, California. The assets were
subsequently moved to the Company's Dallas facility.
In March of 1990, the Company, through a wholly-owned subsidiary,
purchased a 48.6 percent interest in The H. B. Smith Company, Incorporated, a
Westfield, Massachusetts manufacturer of boilers.
In January, 1991, Keystone Environmental Resources, Inc. ("Keystone"),
a subsidiary of Chester Environmental Group, Inc., ("Chester"), formed
Environmental Technology Applications Company (ETA) in a joint venture with
Beazer Environmental Services, Inc., to market and apply environmental
technologies previously developed by Keystone. ETA was dissolved by mutual
agreement effective March 31, 1992. The Company subsequently sold a majority
interest in Chester, as more fully explained in the Notes to the Consolidated
Financial Statements.
In February 1991 the Company, through Chester acquired the assets of
two corporations: GeoSpatial Solutions, Inc. and NEA, Inc., ("NEA"). GeoSpatial
Solutions, Inc., of Colorado, a satellite imaging concern, sold its assets to
Chester for $120,000. The NEA assets were purchased for $2,600,000, net of
liabilities assumed. NEA's primary lines of business are consulting and
analytical services relative to air quality. The Company subsequently sold a
majority interest in Chester, as more fully explained in the Note to the
Consolidated Financial Statements.
On July 31, 1991 Mestek, through a wholly-owned subsidiary, purchased
substantially all of the assets of Hydrotherm, Inc., ("Hydrotherm"), located in
Northvale, New Jersey, and its wholly-owned subsidiary Hydrotherm (Canada) Inc.,
located in Toronto, Ontario. Hydrotherm is manufacturer of commercial and
residential gas and oil-fired boilers, residential baseboard heating equipment
and residential air conditioning equipment. Management consolidated the
manufacturing operations of Hydrotherm in 1992, closing the Northvale, New
Jersey plant. The Hydrotherm and Hydrotherm Canada assets acquired include
substantially all of Hydrotherm's inventory, receivables and fixed tangible and
intangible assets relating to the commercial and residential gas and oil-fired
boiler business and other product lines mentioned above. The purchase price for
the assets acquired, net of liabilities assumed, was $12,900,000.
On August 9, 1991 Mestek purchased substantially all of the assets of
Dynaforce Corporation, a New York Corporation, and a leading manufacturer of air
curtains, make-up air equipment and related products. The purchase price paid
for the assets was $586,000. The Dynaforce assets were subsequently moved to the
Company's South Windsor facility.
On October 8, 1991 Mestek, through a newly formed Canadian subsidiary,
acquired substantially all of the operating assets of Temprite Industries, Ltd.,
an Ontario Corporation located in Orangeville, Ontario. Temprite manufactures
industrial, institutional, and commercial air handling equipment and make-up air
units. The purchase price for the assets acquired, net of liabilities assumed,
was $1,819,000.
On October 31, 1991 Chester acquired substantially all of the assets of
Kamber Engineering, Inc. (Kamber) of Gaithersburg, Maryland. Kamber's business
involves water and waste projects, federal environmental projects, and corporate
land development projects. The purchase price of the assets acquired, net of
liabilities assumed, was $1,200,000. The Company subsequently sold a majority
interest in Chester, as more fully explained in the Notes to the Consolidated
Financial Statements.
On August 21, 1992, pursuant to the Plan of Reorganization approved by
the United States Bankruptcy Court for the Eastern District of Pennsylvania, the
Company acquired substantially all of the inventory, accounts receivable, and
fixed tangible and intangible assets of Mechanical Specialties, Inc. (MSI), a
manufacturer of heating and ventilating equipment located in Philadelphia,
Pennsylvania. The purchase price for the assets acquired, net of liabilities
assumed, was $6,335,000.
On December 15, 1992, Mestek, through a wholly-owned subsidiary,
Westcast, Inc., purchased certain assets of The H. B. Smith Company,
Incorporated, (HBS), at public auction. Assets acquired included inventory, a
hydronics laboratory, certain foundry and machine-shop machinery and tooling,
certain office equipment, and furniture and certain notes and instruments
secured by other assets of HBS. The purchase price paid for these assets was
$3,115,000. The Company, through another wholly-owned subsidiary, owns 48.6% of
the outstanding common stock of HBS.
On December 22, 1992, Mestek, through a wholly-owned subsidiary,
Peritek, Inc., purchased certain assets of The Trane Company, ("Trane"), a
division of American Standard Inc. and an affiliate, for cash and notes which
totaled, after adjustment, approximately $10.1 million. The Company acquired a
manufacturing facility in Scranton, Pennsylvania and certain inventory and
equipment.
In April of 1993, the Company purchased a 46.8% interest in Eafco, Inc.
Eafco produces cast iron boiler sections for the boiler industry, including
Mestek's boiler subsidiaries. The Company accounts for its investment in Eafco
under the equity method.
On August 17, 1993, the Company sold a 70% interest in its
Environmental Engineering Segment, Chester Environmental, Inc., ("Chester"), to
Duquesne Enterprises, Inc., a Pennsylvania corporation, headquartered in
Pittsburgh, Pennsylvania. The Company has accounted for this transaction as a
Disposal of a Discontinued Segment, as more fully explained in Note 7 to the
consolidated financial statements.
On November 1, 1994, pursuant to a motion approved by the United States
Bankruptcy Court for the District of New Mexico, the Company acquired
substantially all of the inventory, accounts receivable, and fixed tangible and
intangible assets of Aztec Sensible Cooling, Inc. (Aztec) a manufacturer of
evaporative cooling and other custom air handling equipment in Albuquerque, New
Mexico. The purchase price for the assets acquired, was $1,372,000. The
operations of Aztec were relocated to the Company's Dallas, Texas facility in
December of 1994.
The Company's executive offices are located at 260 North Elm Street,
Westfield, Massachusetts 01085. The Company's phone number is 413-568-9571.
OPERATIONS OF THE COMPANY
The Company operates in three continuing business segments: heating,
ventilating, air conditioning equipment ("HVAC") manufacturing; computer
software development and systems design; and coil handling equipment
manufacturing. Each of these segments is described below. The Company and its
subsidiaries together employed 1,962 persons as of December 31, 1994.
HEATING, VENTILATING AND AIR CONDITIONING EQUIPMENT
The Company, through Mestek, Inc. and its wholly-owned subsidiaries,
Pacific/Air Balance, Inc., ("Pacific Air"), The Hydrotherm Corporation, Mestek
Canada, Inc., and Westcast, Inc. (collectively, the "Reed Division")
manufactures and distributes products in the HVAC industry. These products
include residential, commercial and industrial hydronic heat distribution
products, gas- fired heating and ventilating equipment, louver and damper
equipment, commercial and residential gas and oil-fired boilers, air
conditioning units, and related products used in heating, ventilating and air
conditioning systems.
The Reed Division sells finned-tube and baseboard radiation equipment
under the names "Sterling", "Vulcan", "Heatrim", "Petite-7" and "Suntemp", and
other hydronic heat distribution products under the names "Sterling" and
"Beacon- Morris". The division sells gas-fired indoor and outdoor heaters under
the names "Alton", "Applied Air", "Wing", "Air Fan", and "Temprite". Cooling and
air conditioning equipment is sold under the "Alton", "Applied Air", "Space
Pak", "Aztec", and "Nesbitt" names, and gas and oil-fired boilers are sold
primarily under the names "Hydrotherm", "Multi-Pulse", and "Multi-Temp", and
distributed under the name "Smith Cast Iron Boilers" by Westcast, Inc. These
products may be used to heat and/or cool structures ranging in size from large
office buildings, industrial buildings, warehouses, stores and residences, down
to such small spaces as add-on rooms in residences. The Company's products are
manufactured at plants in Westfield, Massachusetts; South Windsor, Connecticut;
Farmville, North Carolina; Dallas, Texas; Orangeville, Ontario; Dundalk,
Maryland; Philadelphia, Pennsylvania; and Wrens, Georgia. The Company
consolidated its Northvale, New Jersey and Dundalk, Maryland plants in Dundalk
in 1992.
The Reed Division sells its many types of fire, smoke, and air control
louvers and dampers, which are devices designed to control or seal off the
movement of air through building ductwork in the event of fire or smoke, under
the names "Air Balance", "Phillips Aire", "Terri", "American Warming and
Ventilating", and "Arrow". These products are manufactured at the Company's
plants in Wrens, Georgia; Los Angeles, California; Bradner, Ohio; Waldron,
Michigan; Springfield, Ohio, and Wyalusing, Pennsylvania. The Reed Division also
manufactures industrial and power plant dampers in Los Angeles, California under
the name "Pacific Air Products".
Through its design and application engineering groups, the Reed
Division custom designs and manufactures many HVAC products to meet unique
customer needs or specifications not met by existing products. Such custom
designs often represent improvements on existing technology and often are
incorporated into the Reed Division's standard line of products.
The Reed division sells its HVAC products primarily through
approximately 350 independent representatives throughout the United States and
Canada, many of whom sell several of Reed's products. These independent
representatives usually handle various HVAC products made by manufacturers other
than the Company. These representatives usually are granted an exclusive right
to solicit orders for specific Reed Division products from customers in a
specific geographic territory, subject to final acceptance of such orders by the
Reed Division. Because of the diversity of the Reed Division's product lines,
there is often more than one representative in a given territory.
Representatives work closely with the Reed Division's sales managers and its
technical personnel to meet customers' needs and specifications. The independent
representatives are compensated on a commission basis and generally they neither
stock Reed Division products nor purchase such products for resale.
The Reed Division, through its representatives, sells its HVAC products
primarily to contractors, installers, and end users in the construction
industry, wholesale distributors and original equipment manufacturers.
The Company sells gas-fired and hydronic heating and ventilating
products, boilers and coil handling equipment in Canada and also sells its
products in other foreign markets from time to time. Total export sales did not
exceed ten percent of consolidated total revenues, nor did foreign assets exceed
ten percent of total assets, in any of the most recent five years ending
December 31, 1994.
The Reed Division uses a wide variety of materials in the manufacture
of its products, such as copper, aluminum and steel, as well as electrical and
mechanical components, controls, motors and other products. Management believes
that it has adequate sources of supply for its raw materials and components and
has not had significant difficulty in obtaining the raw materials, component
parts or finished goods from it suppliers. No industry segment of the Company is
dependent on a single supplier, the loss of which would have a material adverse
effect on its business.
The businesses of the HVAC segment are highly competitive. The Company
believes that it is the largest manufacturer of hydronic baseboard heating for
residential and commercial purposes and is one of the three leading
manufacturers of gas-fired heaters and fire and smoke dampers. The Company has
established a substantial market position in the commercial and residential
cast-iron boiler business through its acquisitions in 1991 and 1992.
Nevertheless, in all of the
industries in which it competes, the Company has competitors with substantially
greater manufacturing, sales, research and financial resources than the Company.
Competition in these industries is based mainly on merchandising capability,
service, quality, price and ability to meet customer specifications. The Reed
Division believes that it has achieved and maintained its position as a
substantial competitor in the HVAC industry largely through the strength of its
extensive distribution network, the breadth of it product line and its ability
to meet customer delivery and service requirements. Most of its competitors
offer their products in some but not all of the industries served by the Reed
Division.
The quarterly results of the HVAC segment are affected by the
construction industry's demand for heating equipment, which generally peaks in
the last four months of each year (the "heating season"). Accordingly, sales are
usually higher during the heating season, and such higher levels of sales may in
some years continue into the following calendar year. As a result of these
seasonal factors, the Company's inventories of finished goods reach higher
levels during the heating season and are generally lower during the balance of
the year.
Management does not believe that backlog figures relating to the HVAC
segment are material to an understanding of its business because most equipment
is shipped promptly after the receipt of orders.
The Company owns a number of United States and foreign patents.
Although the Company usually seeks to obtain patents where appropriate, it does
not consider any segment materially dependent upon any single patent or group of
related patents.
The Reed Division has a number of trademarks important to its business,
including those relating to its Sterling, Vulcan, Beacon-Morris, Heatrim, Wing,
Alton, Applied Air, Arrow, Air Fan, Aztec, Hydrotherm, Temprite and Dynaforce
product lines.
Expenditures for research and development for the HVAC segment in 1994,
1993 and 1992 were $469,000, $438,000, and $620,000, respectively. Product
development efforts are necessary and ongoing in all product markets.
The Company believes that compliance with environmental laws will not
have a financially material effect on its operations in 1995.
COMPUTER SOFTWARE DEVELOPMENT AND SYSTEM DESIGN
The business of Mestek's wholly-owned subsidiary, MCS, Inc. ("MCS") is
primarily related to computer processing and systems development. MCS develops
computer software applications to meet specific industry requirements. Services
to customers include preparation of computer programs and software to meet the
customer needs, providing proper computer hardware when required, installing the
system at the customer's business, and providing continuing support services.
MCS also provides computer processing services to customers on a time-sharing
basis.
The most significant systems which MCS has developed and has available
for sale are MestaMed, a third-party billing, general ledger, accounting and
inventory control system for durable medical equipment suppliers, home health
providers and infusion therapy providers and Profit Works, a system utilized by
lumber, electrical, plumbing, and manufacturer's representatives to manage order
entry, inventory, purchasing, accounts receivable, and reporting. Support
includes software enhancements, diagnostic access, and training seminars. MCS
also has available a Telephone Usage System which analyses usage for
institutions with multiple telephones. The hardware for these and other systems
is supplied primarily by Digital Equipment Corp., for which MCS is an Authorized
Solution Provider.
New enhancements to its software products are continually being
developed by MCS. Recent examples include electronic reimbursement, and medical
records tracking. During 1994, 1993 and 1992 MCS spent approximately $910,000,
$702,000, and $695,000, respectively, for software development. These costs
related primarily to customer sponsored development and improvements to existing
products.
Because of the importance of systems development to MCS, programming
and sales personnel are a primary resource. MCS's main office is in the
Pittsburgh, Pennsylvania area and it has sales offices in other parts of the
country.
The markets for computer processing and systems development are diverse
and very competitive. MCS has many competitors in the markets in which it
operates, both on a regional and national basis. On December 31, 1994, MCS's
backlog was $2,266,000.
MCS's inventory consists primarily of computer hardware and related
equipment which is used in the computer systems sold. MCS attempts to maintain a
sixty-day supply so that delivery of completed systems can be made on a timely
basis.
COIL HANDLING EQUIPMENT
The Company, through its Cooper-Weymouth, Peterson Division,
manufactures various types and sizes of coil stock handling devices at its plant
in Clinton, Maine. These devices consist primarily of metal coil straighteners
and equipment used to feed metal from coils into punch presses and other metal
stamping or shaping equipment. The Company has improved its competitive position
in this industry by developing servo-driven feeders with microprocessor
controls, affording diagnostic and operational features. The Company believes
that its line of coil stock handling products is among the broadest in the
industry.
Certain coil handling products are custom designed and manufactured to
meet unique customer needs or specifications which are not currently met by
existing products. These products, developed by the Company's design and
application engineering groups, often represent improvements on existing
technology and are often then incorporated into the Division's standard product
line.
The primary customers for such coil handling equipment include
manufacturers of large and small appliances, commercial and residential lighting
fixtures, automobile accessories, office equipment and HVAC products. The
Cooper-Weymouth, Peterson Division also acts as a supplier of coil handling
equipment to original equipment manufacturers of metal handling and metal
forming machinery.
The business of the Coil Handling Equipment segment is highly
competitive. The Company has become a substantial competitor in the manufacture
of coil handling equipment through its abilities to meet customer delivery and
service requirements and its extensive distribution network. The Coil Handling
Equipment segment has a number of trademarks important to its business,
including those relating to its Cooper-Weymouth, Peterson, Coil-Matic,
Dickerman, ServoMatic, and ServoMax product lines.
Management does not believe that backlog figures relating to the coil
handling equipment segment are material to an understanding of its business
because most equipment is shipped promptly after the receipt of orders.
Expenditures for research and development for the Coil Handling
Equipment segment in 1994, 1993 and 1992 were $68,000, $52,000, and $23,200,
respectively.
SEGMENT INFORMATION
Selected financial information regarding the operations of each of the
above segments is presented in Note 13 to the Consolidated Financial Statements.
Item 2 - PROPERTIES
The Reed Division of the Company manufactures HVAC equipment at plants
that the Company owns in Waldron, Michigan; Bradner, Ohio; Wyalusing,
Pennsylvania; Dundalk, Maryland, Springfield, Ohio; Wrens, Georgia, and Dallas,
Texas. It operates plants that it leases from entities owned directly or
indirectly by certain officers and directors of the Company in Westfield,
Massachusetts; Farmville, North Carolina; South Windsor, Connecticut and Los
Angeles, California. The Division leases manufacturing space from unrelated
parties in Dallas, Texas; Orangeville, Ontario, Canada; and Philadelphia,
Pennsylvania, as well as warehouse space in Mississauga, Ontario, Canada.
The Cooper-Weymouth, Peterson Division manufactures coil handling
products at a plant the Company owns in Clinton, Maine.
The Company's principal executive offices in Westfield, Massachusetts
are also leased from an entity owned by an officer and director of the Company.
The Company also owns an office building in Holland, Ohio.
MCS leases office space in Monroeville, Pennsylvania, which houses its
principal offices and computer facility used in the computer software
development and system design segments. MCS owns the computer equipment used in
the operations.
In addition, the Company and certain of its subsidiaries lease other
office space in various cities around the country for use as sales offices.
Certain of the owned facilities are pledged as security for certain
long-term debt instruments. See Property and Equipment, Note 4 to the
Consolidated Financial Statements.
The Company relocated the operations of The Hydrotherm Corporation from
Northvale, New Jersey to Dundalk, Maryland in 1992. The Northvale property is
presently for sale. The Company also relocated the operations of its Scranton,
Pennsylvania facility in 1993. This property is also presently for sale.
Management regards the Company's remaining properties generally suitable for the
Company's needs.
Item 3 - LEGAL PROCEEDINGS
The Company is not presently involved in any litigation which it
believes will materially and adversely affect its financial condition or results
of operations.
Item 4 - SUBMISSION OF MATTER TO A VOTE OF THE SECURITY HOLDERS
No matters were submitted to the security holders of the Company for a vote
during the fourth quarter of 1994.
PART II
Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange,
under the symbol MCC. The number of shareholders of record as of April 7, 1995
was 1,789. The price range of the Company's common stock between January 1, 1995
and April 7, 1995 was $9.50 to $10.375 and the closing price on April 7, 1995
was $9.75.
The quarterly price ranges of the Company's common stock during 1994
and 1993 as reported in the consolidated transaction reporting system were as
follows:
PRICE RANGE
1994 1993
---- ----
First Quarter $10-3/8 $ 9-1/2 $ 9-1/4 $ 8-1/2
Second Quarter $10 $ 9-1/4 $ 8-7/8 $ 8-1/4
Third Quarter $10-1/8 $ 9-1/4 $ 9 $ 8-1/2
Fourth Quarter $10 $ 9-3/8 $10-5/8 $ 8-3/8
Mestek is restricted, by the terms of its note agreement with Massachusetts
Mutual Life Insurance Company, from declaring or paying any dividends that would
exceed forty percent of consolidated net income from December 31, 1986 to the
date of such payment. The note agreement matures August 15, 1997. The Company
has not paid any dividends on its common stock since 1979.
No securities issued by the Company, other than common stock, are listed on
a stock exchange or are publicly traded.
Item 6 - SELECTED FINANCIAL DATA
Selected financial data for the Company for each of the last five fiscal years
is shown in the following table. Selected financial data reflecting the
operations of acquired businesses is shown only for periods following the
related acquisition. (Dollars stated in thousands except per share data.)
SUMMARY OF FINANCIAL POSITION as of December 31,
1994 1993 1992 1991 1990
-------- -------- -------- ------- ------
Total assets $120,430 $126,625 $137,158 $120,865 $103,612
Working capital 36,628 37,238 58,279 52,644 44,566
Long-term debt, including
current portion 5,548 20,860 32,104 18,269 13,183
Redeemable Preferred
Stock - - - 765 765
Shareholders' equity 80,732 73,317 70,552 66,397 57,769
Common shareholders'
equity, per common
share (1) $ 8.93 $ 7.96 $ 7.59 $ 7.05 $ 6.14
====== ====== ====== ====== ======
SUMMARY OF OPERATIONS - for the year ended December 31, (2)
1994 1993 1992 1991 1990
-------- -------- -------- -------- ------
Total revenues from
continuing operations (3) $224,018 $231,386 $190,038 $173,852 $162,262
Income from continuing
operations 9,298 7,583 5,410 8,589 8,696
Income before cumulative
effect of change in
accounting method 9,298 4,265 5,393 8,995 10,631
Net income 9,298 4,265 5,823 8,995 10,631
Earnings per common share:
Income from continuing
operations $ 1.02 $ .82 $ .57 $ .91 $ .90
Income before cumulative
effect of change in
accounting method $ 1.02 $ 0.46 $ 0.57 $ 0.95 $ 1.11
Net income $ 1.02 $ 0.46 $ 0.62 $ 0.95 1.11
(1) Equity per common share amounts are computed using the common shares and
common stock equivalents outstanding as of December 31, 1994, 1993, 1992,
1991, and 1990.
(2) Includes the results of acquired companies or asset acquisitions from the
date of such acquisition, as follows:
Aztec Sensible Cooling, Inc. from November 1, 1994.
Mechanical Specialties, Inc. from August 21, 1992 and Westcast, In
from December 15, 1992.
* GeoSpatial Solutions, Inc. and NEA, Inc. from February 1991; Hydrotherm,
Inc., Hydrotherm (Canada), Inc., and Dynaforce Corporation from August
1991; Temprite Industries, Ltd. from October 1991, and Kamber Engineering
from November 1991.
(3) Revenues have been adjusted in 1993, 1992, 1991, and 1990 to reflect the
reclassification of revenues related to the Company's Environmental
Engineering Segment to Discontinued Operations, which are separately
reported in the accompanying financial statements. The Company sold a
70% interest in this segment on August 17, 1993, as more fully explained
in Note 7 to the Financial Statements.
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
On August 17, 1993 the Company sold a substantial portion of its
interest in its Engineering Segment, Chester Environmental, Inc. ("Chester"), to
Duquesne Enterprises, Inc., a Pennsylvania corporation, headquartered in
Pittsburgh Pennsylvania. The Company has accounted for the transaction as a
Disposal of a Discontinued Segment in accordance with APB 30, (reporting the
effects of Disposal of a Segment of a Business), since the Company does not have
the ability to exert significant influence over the operations or financial
policies of Chester. Accordingly, the operations of this Segment are separately
reported in the Company's statements of income for the years 1993 and 1992 under
the heading (Loss) from Operations of Discontinued Segment, and Management's
Discussion and Analysis of Financial Condition and Results of Operations is
therefore divided into Section I, Continuing Operations, and Section II,
Discontinued Operations. The Company accounts for its remaining investment in
Chester on the cost method of accounting.
SECTION I. CONTINUING OPERATIONS
RETURN ON AVERAGE NET ASSETS EMPLOYED - CONTINUING OPERATIONS
1994, 1993, 1992
The Company's Return on Average Net Assets Employed, defined as
operating profits from continuing operations before bonuses, interest expense,
taxes, and other income and (expense), over Average Net Assets Employed (Total
Assets less Current Liabilities other than Current Portion of Long-Term Debt,
averaged over 12 months) for the years 1994, 1993, and 1992 was as follows:
1994 1993 1992
Operating Profits (as defined) $21,538,000 $15,917,000 $11,698,000
Average Net Assets Employed (as
defined) $90,691,000 $90,267,000 $72,875,000
Return on Average Net Assets
Employed 23.8% 17.6% 16.0%
The 1994 return on Average Net Assets Employed improved markedly over
1993 due to strong performances from all three of the Company's remaining
Segments, together with the effect of only limited acquisition activity in 1994.
The Company's sole business acquisition in 1994 was the purchase on November 1,
1994 of substantially all of the assets of Aztec Sensible Cooling, Inc. for
$1,372,000, as more fully described in Note 2 to the Consolidated Financial
Statements.
ANALYSIS: 1994 VS. 1993
The Company's core HVAC Segment benefitted in 1994 from a strong
cyclical recovery in the construction marketplace which allowed it to realize
some of the benefits of its many ongoing market development and new product
development programs.
In 1993 this segment generated $26,347,000 in "one-time" sales at a
very low margin to a major customer in connection with the acquisition of
certain product lines from that customer. Excluding the effect of these "one
time" sales, Total Revenues for this segment increased $13,686,000, or 7.3% in
1994 as indicated in the following table:
Total Total
Revenues Revenues Increase %
1994 1993 (Decrease) Change
$(000) $(000) $(000)
HVAC Segment:
"One Time" 1993 sales $ 0 $ 26,347 $(26,347)
All other Sales 200,445 186,759 13,686 7.3%
200,445 213,106 (12,661) ( 5.9%)
Computer Systems Segment 14,461 12,211 2,250 18.4%
Coil Handling Equipment 9,112 6,069 3,043 50.1%
$224,018 $231,386 $(7,368) ( 3.2%)
The Company's Computer Systems Segment reported substantially higher
revenues and operating profits in 1994 reflecting its very successful product
diversification efforts in the Durable Medical Equipment, Home Infusion Therapy
and Home Health Services markets.
The Company's Coil Handling Equipment Segment also reported
substantially higher revenues and operating profits due to the success of its
new product offerings in the area of "electronic feeds".
Consolidated operating profit from continuing operations increased in
1994 by $4,970,000, or 35.1%, reflecting the improved performances mentioned
above. The HVAC segment reported operating profit of $15,310,000 in 1994, up
24.1% from 1993, for the reasons mentioned above. The Company's Computer Systems
segment reported operating profit of $2,244,000, up 63.3% from 1993, on
relatively unchanged Average Net Assets Employed. The Coil Handling Equipment
segment reported operating profit of $1,583,000, up 345.6% from 1993, also on
relatively unchanged Average Net Assets Employed.
Gross profit margins by segment for continuing operations for 1994 and
1993 were as follows:
Computer Coil Handling
HVAC Systems Equipment
Segment Segment Segment
1994 Gross Profit % 28.3% 38.3% 39.3%
1993 Gross Profit % 26.7% 36.1% 34.6%
Increase/Decrease 1.6% 2.2% 4.7%
The 1993 Gross profit margins for the HVAC segment were adversely
effected by the special "one-time" sales described above. But for these sales,
HVAC margins in 1993 would have been 29.4%, suggesting that HVAC margins, on a
true comparative basis, declined slightly in 1994 (from 29.4% to 28.3%). This
effect is traceable principally to price increases experienced in 1994 on basic
commodities (steel, copper and aluminum) used in the Company's manufacturing
processes.
Sales expense for continuing operations of the Company, as a percentage
of total revenues, was relatively unchanged at 12.6% despite the elimination of
$26,347,000 in "one time" 1993 sales, as described above. General and
Administrative expenses (excluding the effect of corporate and profit-center
bonuses which were increased by 37.1%), as a percentage of revenues decreased
from 5.5% in 1993 to 4.6% in 1994, principally due to the elimination of a
significant one time incremental general and administrative cost associated with
the operation of the Company's Scranton, Pennsylvania facility in 1993.
Engineering expense, as a percentage of total revenues, was unchanged at 2.6%.
Interest expense from continuing operations was reduced by approximately
$522,000 reflecting the effect of substantial reductions in interest bearing
debt during 1994.
Income tax expense for continuing operations for 1994, as a percentage of
pretax income, was 42.1% as compared with 40.2% for 1993, reflecting the effect
of certain subsidiary losses on state and foreign income tax obligations, as
more fully described in Note 9 to the Consolidated Financial Statements.
At December 31, 1994, the Company classified two of its manufacturing
facilities, Northvale, New Jersey and Scranton, Pennsylvania, as Property Held
for Sale. These properties are carried at cost which is less than estimated net
realizable value.
Other Expense increased substantially in 1994, principally due to the
effect of carrying costs related to the properties held for sale and the fact
that 1993's results included a non-recurring $606,000 gain on the disposition of
certain equipment.
ANALYSIS: 1993 VS. 1992
HVAC Net Sales, exclusive of the effect of 1992 and 1993 acquisitions
(which for this purpose include the revenues generated in Scranton in 1993 on
sales to American Standard Inc.) increased $13,856,000, or 8.5%, reflecting the
economic recovery which began to affect the construction industry in 1993.
Total Revenues from continuing operations increased in 1993 by
$41,348,000, an increase of 21.7% as reflected in the following table:
Total Total
Revenues Revenues Increase
1993 1992 (Decrease) %
($000) ($000) ($000) Change
HVAC Segment:
1993 and 1992 Acquisitions $ 35,683 $ 9,336 $ 26,347
All other HVAC Divisions 177,423 163,567 13,856 + 8.5%
Computer Systems Segment 12,211 10,834 1,377 + 12.7%
Coil Handling Equipment 6,069 6,301 ( 232) - 3.7%
$ 231,386 $ 190,038 $ 41,348 + 21.7%
Consolidated operating profit from continuing operations increased in
1993 by $3,869,000, or 37.6%, reflecting the improved performances mentioned
above from the Company's historical HVAC product lines. The HVAC segment
reported increased operating profit, from $8,259,000 in 1992 to $12,335,000 in
1993, or 49.3%, for the reasons mentioned above. The Company's Computer Systems
segment reported operating profit of $1,374,000, down from $1,448,000 in 1992,
on approximately the same Average Net Assets Employed. The Coil Handling
Equipment segment reported operating profit of $458,000, down from $591,000 in
1992, on relatively unchanged Average Net Assets Employed.
Gross profit margins by segment for continuing operations for 1993 were
as follows:
Computer Coil Handling
HVAC Systems Equipment
Segment Segment Segment
1993 Gross Profit % 26.7% 36.1% 34.6%
1992 Gross Profit % 27.3% 39.0% 33.8%
Increase/Decrease 0.6% ( 2.9%) 0.8%
The very slight decline in margins in the HVAC segment reflects the net
effect of improved margins in the Company's historical HVAC divisions, as well
as in Temprite and Hydrotherm, offset by relatively lower margin business
generated by the Company's Scranton, Pennsylvania location, which did not recur
in 1994.
Sales expense for continuing operations of the Company, as a percentage
of total revenues, was reduced from 14.1% in 1992 to 12.4% in 1993, principally
due to the effect of growth in the Company's private label (OEM) business, which
requires relatively less marketing expense per sales dollar, and the positive
economies of scale effect of expanded market shares in other HVAC product lines.
General and Administrative expenses (excluding the effect of corporate and
profit-center bonuses which were increased by 25%), as a percentage of revenues
increased from 5.2% in 1992 to 5.5% in 1993, principally due to the effect of
significant one time incremental general and administrative costs associated
with the operation of the Company's Scranton , Pennsylvania facility, and the
full year effect of MSI. Engineering expense, as a percentage of total revenues,
was reduced from 2.8% in 1992 to 2.6% in 1993, reflecting the same economies of
scale effects which affected sales expense in 1993. Interest expense from
continuing operations increased by approximately $200,000 reflecting the
combined effects of an increased investment in working capital, the investment
in Eafco on April 7, 1993, the investment in assets acquired from American
Standard Inc. on December 22, 1992, and the receipt of $12,000,000 in connection
with the sale of a controlling interest in the Company's Engineering Segment on
August 17, 1993.
Income tax expense for continuing operations for 1992, as a percentage of
pretax income, was 33.6% as compared to 40.2% for 1993, reflecting the effect of
FAS 109, which was adopted in 1992, as more fully described in Note 9 to the
Consolidated Financial Statements.
At December 31, 1993, the Company classified two of its manufacturing
facilities, Northvale, New Jersey and Scranton, Pennsylvania, as Property Held
for Sale. These properties are carried at cost which is less than estimated net
realizable value.
ANALYSIS: LIQUIDITY AND CAPITAL STRUCTURE
The Company's working capital was relatively unchanged in 1994 as
indicated in the following table:
12/31/94 Net Change 12/31/93 Net Change 12/31/92
$(000) $(000) $(000) $(000) $(000)
$ 36,628 $( 610) $ 37,238 $(21,041) $ 58,279
The Company's long-term debt to equity ratio (including deferred
compensation as long-term debt) decreased from .09 at December 31,1993, to .003
at December 31, 1994, reflecting the effect of profitable operations in 1994 and
the resulting decline in long term debt (including deferred compensation as long
term debt) from $6,586,000 at December 31, 1993 to $236,000 at December 31,
1994. Total interest bearing debt was also substantially reduced, from
$20,892,000 at December 31, 1993 to $5,573,000 at December 31, 1994.
The Company's only significant additions to Net Assets Employed during
the year, other than ordinary growth in receivables and inventories, were plant
and equipment spending of $5,160,000, (which included the purchase of the
Company's formerly leased facility in Springfield, Ohio for $598,000), and the
acquisition of the assets of Aztec Sensible Cooling, Inc. for $1,372,000, as
more fully described in Note 2 to the Consolidated Financial Statements.
Management regards the Company's current capital structure and banking
relationships as fully adequate to meet foreseeable future needs. The Company
has not paid dividends on its common stock since 1979.
ENVIRONMENTAL DISCLOSURE
The Company is subject to numerous laws and regulations that govern the
discharge and disposal of materials into the environment. The Company is not
aware, at present, of any material administrative or judicial proceedings
against the Company arising under any federal, state or local environmental
protection laws or regulations ("Environmental Laws"). There are, however, a
number of activities in which the Company is engaged under the Environmental
Laws.
Permitting Activities
The Company is engaged in various matters with respect to obtaining,
amending or renewing permits required under the Environmental Laws to operate
each of its manufacturing facilities. Based on the information presently
available to it, management expects that all permit applications will be
routinely handled and management does not believe that the denial of any
currently pending permit application will have a material adverse effect on the
Company's financial position or the results of operations.
A facility of the Company has recently received a non-governmental demand
that it comply with its water discharge permit. The Company continues to
investigate the demand, but believes that it is currently in compliance with the
terms of its permit.
Potentially Responsible Parties (PRP) Actions
The Company or various of its subsidiaries have been named or contacted
by state authorities and/or the Environmental Protection Agency (the "EPA")
regarding the Company's liability as a potentially responsible party ("PRP") for
the remediation of several sites, none of which actions represent a material
proceeding. The potential liability of the Company is based upon records that
show the Company or other corporations from whom the Company or its subsidiaries
acquired assets used the sites for the lawful disposal of hazardous waste
pursuant to third party agreements with the operators of such sites. Such PRP
actions generally arise when the operator of the site lacks the financial
ability to address compliance with Environmental Laws, decisions and orders
affecting the site in a timely and effective manner. The governmental authority
responsible for the site looks to the past users of the facility and their
successors to address the costs of remediation of the site.
In North Carolina, the company participated in a "de minimis settlement"
in which the Company contributed with numerous other entities to the payment of
funds for the surface remediation at a Superfund site, and for which the Company
received a release from federal and state authorities for all liability relating
to the surface contamination. The Company paid approximately $15,000 as its
share of clean-up costs pursuant to the settlement. State authorities continue
to investigate the extent of and remediation methods for groundwater
contamination at or near the site, and the Company recently joined a joint
defense group to help define and limit its liabilities whereby it may be
required to contribute additional non-material sums as part of the remediation
of groundwater contamination. The Company (along with many other corporations)
is involved in PRP actions for the remediation of two sites in Southington,
Connecticut, as a result of the EPA's preliminary assignments of derivative
responsibility for the presence of hazardous materials at the Southington sites
attributable to two other corporations from whom the Company purchased assets
after the hazardous materials had been disposed of at the Southington sites. As
a mitigation measure, the Company participated in "de minimis settlement"
proceedings at one of the Southington, Connecticut sites. The Company was
reimbursed by one company and has made demand of the other for reimbursement.
The Company is currently participating as part of a joint defense group in
discussions with the EPA for a "de minimis settlement" at the remaining
Southington, Connecticut site. Even if all attempts at reimbursement should
fail, the obligations of the Company in this matter are not expected to be
material to the Company's financial position or the results of operations.
Releases of Hazardous Materials
There have been releases of hazardous materials on a few parcels of
property which are presently owned, leased or operated by the Company. All of
such releases occurred prior to the acquisition or occupation of the properties
by the Company. All releases have been fully remediated or are in the process of
assessment or remediation. In most cases, other parties are responsible for the
costs of remediation and the Company is fully indemnified. Based on the
information presently available to it, management does not believe that the
costs of addressing any of the releases will have a material adverse effect on
the Company's financial position or the results of operations.
Changes to 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
atmospheric combustion, will not over the long-term and in the future have a
material adverse effect on the Company's results of operations.
Section II. Discontinued Operations
ENGINEERING SEGMENT
As described above, the Company's Engineering Segment reported pretax
(Loss) from Discontinued Operations, computed in accordance with APB 30, of
($2,323,000) and ($26,000), for the years 1993 (through August 17, 1993), and
1992, respectively, reflecting the increasing difficulties encountered by this
segment as the recessionary climate affecting the environmental services
(including laboratory services) market place worsened during these years.
Management's decision to sell a substantial portion of this segment to Duquesne
Enterprises, Inc. ("Duquesne") in return for $12,000,000, plus an option to sell
its remaining interest for $6,000,000 at a future date, together with other
contingent considerations, reflected management's judgement at that time that
its investment in this non-core segment could be best realized by aligning the
business with an enterprise more directly connected to the environmental
services market place.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders'
Mestek, Inc.
We have audited the accompanying consolidated balance sheet of Mestek,
Inc. and subsidiaries as of December 31, 1994, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Mestek,
Inc. and subsidiaries as of December 31, 1994, and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.
We have also audited Schedule II of Mestek, Inc. and subsidiaries as of
December 31, 1994 and for the year then ended. In our opinion, the schedule
presents fairly, in all material respects, the information required to be set
forth therein.
Grant Thornton LLP
GRANT THORNTON LLP
Boston, Massachusetts
March 31, 1995
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders'
Mestek, Inc.
We have audited the consolidated balance sheet as of December 31, 1993
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1993 of
Mestek, Inc. and subsidiaries. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedules for
each of the years in a two-year period ended December 31, 1993, as listed in the
accompanying index. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mestek, Inc.
and subsidiaries at December 31, 1993, and the results of their operations and
their cash flows for each of the years in the two-year period ended December 31,
1993 in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Springfield, Massachusetts
April 6, 1994
MESTEK, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
1994 1993
(Dollars in thousands)
ASSETS
Current Assets
Cash and Cash Equivalents $ 4,201 $ 3,573
Accounts Receivable - less allowances of
$1,440 and $1,456 35,306 43,973
Unbilled Accounts Receivable 124 97
Inventories 32,102 30,175
Deferred Tax Benefit 1,088 1,355
Other Current Assets 3,269 4,787
Total Current Assets 76,090 83,960
Property and Equipment - net 18,483 17,299
Equity Investments 8,643 8,643
Property Held for Sale 5,870 6,418
Other Assets and Deferred Charges - net 11,344 10,305
Total Assets $ 120,430 $ 126,625
See Accompanying Notes to Consolidated Financial Statements
(Continued)
MESTEK, INC.
CONSOLIDATED BALANCE SHEETS (continued)
As of December 31,
1994 1993
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 5,337 $ 14,306
Accounts Payable 14,117 10,276
Accrued Salaries and Bonuses 3,008 3,787
Accrued Commissions 1,833 2,618
Progress Billings in Excess of Cost
and Estimated Earnings 2,721 2,108
Other Accrued Liabilities 12,446 13,627
Total Current Liabilities 39,462 46,722
Long-Term Debt 211 6,554
Deferred Compensation 25 32
Total Liabilities 39,698 53,308
Shareholders' Equity:
$5.00 Convertible Preferred Stock - 7,209
Common Stock - no par, stated value $0.05 per
share, 9,610,135 and 7,763,338 shares
issued, respectively 479 387
Paid in Capital 15,434 8,323
Retained Earnings 70,559 61,261
Treasury Shares, at cost (574,424 and
405,224 common shares, respectively) ( 4,808) ( 3,203)
Cumulative Translation Adjustment ( 932) ( 660)
Total Shareholders' Equity 80,732 73,317
Total Liabilities and Shareholders'
Equity $ 120,430 $ 126,625
See Accompanying Notes to Consolidated Financial Statements.
(Continued)
MESTEK, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
1994 1993 1992
In thousands, except Earnings Per Common Share)
Net Sales $ 209,557 $ 219,175 $ 178,947
Net Service Revenues 14,461 12,211 11,091
Total Revenues 224,018 231,386 190,038
Cost of Goods Sold 149,180 160,234 129,746
Cost of Service Revenues 8,928 7,798 6,683
Gross Profit 65,910 63,354 53,609
Selling Expense 28,282 28,742 26,796
General and Administrative
Expense 12,757 14,441 11,187
Engineering Expense 5,734 6,004 5,328
Operating Profit 19,137 14,167 10,298
Interest Expense ( 839) ( 1,361) ( 1,177)
Amortization Expense ( 53) ( 55) ( 86)
Other Income (Expense), Net ( 2,197) ( 61) ( 882)
Income From Continuing Operations
Before Income Taxes 16,048 12,690 8,153
Income Taxes 6,750 5,107 2,743
Income From Continuing
Operations 9,298 7,583 5,410
Discontinued Operations
(Note 7):
(Loss) From Operations of
Discontinued Segment - ( 2,323) ( 26)
Applicable Income Tax Benefit - 793 9
- ( 1,530) ( 17)
Loss on Disposal of Discontinued
Segment - ( 2,425) -
Applicable Income Tax Benefit - 637 -
- ( 1,788) -
Income Before Cumulative
Effect of Change in Accounting
Method 9,298 4,265 5,393
Cumulative Effect of Change in
Accounting Method (Notes 1 and
9) - - 430
Net Income $ 9,298 $ 4,265 $ 5,823
See Accompanying Notes to Consolidated Financial Statements.
(Continued)
MESTEK, INC.
CONSOLIDATED STATEMENTS OF INCOME (Continued)
For the years ended December 31,
1994 1993 1992
(Dollars in thousands)
Earnings (loss) per Common Share:
Income From Continuing Operations $ 1.02 $ .82 $ .57
(Loss) From Operations of
Discontinued Segment (Net of
Applicable Income Tax Benefit) - (.17) -
Loss on Disposal of Discontinued
Segment (Net of Applicable
Income Tax Benefit) - (.19) -
Income Before Cumulative Effect of
Change in Accounting Method 1.02 .46 .57
Cumulative Effect of Change in
Accounting Method (Notes 1 and 9) - - .05
Net Income $ 1.02 $ .46 $ .62
Weighted Average Shares Outstanding
(in thousands) 9,137 9,258 9,405
See Accompanying Notes to Consolidated Financial Statements.
(Continued)
MESTEK, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31,
1994, 1993, and 1992
$5.00
Cumulative
Convertible Cumulative
Preferred Common Paid In Retained Treasury Translation
Stock Stock Capital Earnings Shares Adjustment Total
Balance - December 31, 1991 $ 7,313 $ 386 $ 8,220 $ 51,900 $(1,422) $ - $ 66,397
Net Income 5,823 5,823
Cash Dividends:
Convertible Preferred ($5.00
per share) ( 366) ( 366)
Common Stock Repurchased ( 999) ( 999)
Conversion of $5.00 Convertible
Preferred ( 12) 12
Cumulative Translation Adjustment ( 303) ( 303)
Balance - December 31, 1992 $ 7,301 $ 386 $ 8,232 $ 57,357 $(2,421) $( 303) $ 70,552
Net Income 4,265 4,265
Cash Dividends:
Convertible Preferred ($5.00
per share) ( 361) ( 361)
Common Stock Repurchased ( 782) ( 782)
Conversion of $5.00 Convertible
Preferred ( 92) 1 91 -
Cumulative Translation Adjustment ( 357) ( 357)
Balance - December 31, 1993 $7,209 $ 387 $ 8,323 $ 61,261 $(3,203) $( 660) $ 73,317
Net Income 9,298 9,298
Common Stock Repurchase (1,605) (1,605)
Conversion of $5.00 Convertible
Preferred (7,203) 92 7,111
Redemption of $5.00 Convertible
Preferred ( 6) ( 6)
Cumulativ ation Adjustment ( 272) ( 272)
Balance - December 31, 1994 $ - $ 479 $15,434 $ 70,559 $(4,808) $( 932) $80,732
See Accompanying Notes to Consolidated Financial Statements
(Continued)
MESTEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
1994 1993 1992
(Dollars in thousands)
Cash Flows from Operating Activities:
Net Income $ 9,298 $ 4,265 $ 5,823
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating
Activities:
Depreciation and Amortization 4,712 6,205 6,766
Provision for Losses on Accounts
Receivable, net of write offs ( 16} 462 532
Changes in assets and liabilities net
of effects of acquisitions and
dispositions:
Accounts Receivables 9,353 ( 4,765) 350
Unbilled Accounts Receivable ( 27 ( 590) 79
Inventory ( 1,464 4,416 242
Accounts Payable 3,841 ( 3,492) ( 550)
Other Current Liabilities ( 2,745) 6,102 ( 1,553)
Progress Billings 613 429 498
Deferred Compensation ( 7) ( 63) ( 417)
Other 797 ( 1,616) ( 940)
Net Cash Provided by Operating
Activities 24,355 11,353 10,830
Cash Flows from Investing Activities:
Capital Expenditures ( 5,160) ( 4,293) ( 3,833)
Disposition of Property & Equipment - 853 162
Acquisition of Businesses and Other
Assets Net of Cash Acquired ( 1,372) ( 7,449) ( 19,215)
Disposition of Business Segment - 12,000 -
Net Cash Provided by (Used in)
Investing Activities ( 6,532) 1,111 ( 22,886)
Cash Flows from Financing Activities:
Net Borrowings (Repayments) Under
Revolving Credit Agreement ( 5,866) ( 659) 4,810
Principal Payments Under Long
Term Debt Obligations ( 9,446) ( 13,535) ( 4,884)
Proceeds from Issuance of Long
Term Debt - 3,467 13,909
Redemption of Redeemable Preferred
Stock - - ( 765)
Redemption of $5.00 Convertible
Preferred Stock ( 6) - -
Redemption of Common Stock ( 1,605) ( 782) ( 999)
Dividends Paid - ( 361) ( 366)
Net Cash Provided by (Used in)
Financing Activities ( 16,923) ( 11,870) 11,705
Net Increase (Decrease) in Cash and
Cash Equivalents 900 594 ( 351)
Translation effect on Cash ( 272) ( 414) ( 303)
Cash and Cash Equivalents -
Beginning of Year 3,573 3,393 4,047
Cash and Cash Equivalents -
End of Year $ 4,201 $ 3,573 $ 3,393
See Accompanying Notes to Consolidated Financial Statements.
MESTEK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of Mestek,
Inc. and its wholly-owned subsidiaries, collectively referred to as the Company.
All material intercompany accounts and transactions have been eliminated in
consolidation. As more fully described in Note 7, the Company sold a substantial
portion of its interest in its Environmental Engineering Segment during 1993.
Accordingly, the operations of this segment are separately presented, in
accordance with APB 30, in the accompanying Statements of Income for the years
1993 and 1992, under the heading, (Loss) from Operations of Discontinued
Segment.
Revenue recognition and unbilled receivables
Revenue from product sales is recognized at the time of shipment.
Revenue from the computer processing and software development business is
recognized on the basis of completed contracts.
Unbilled receivables represent revenue earned in the current period but
not billed to the customer until future dates, usually within one month.
Cash equivalents
Cash equivalents consisted principally of overnight investments in U.S.
Treasury securities with original maturities of three months or less.
Inventories
Inventories are valued at the lower of cost or market. Cost of
inventories is determined principally by the last-in, first-out (LIFO) method.
Property and equipment
Property and equipment is carried at cost. Depreciation, including
amortization of capitalized leases, is computed using the straight-line method
(for assets acquired before 1989) and accelerated methods (for assets acquired
after 1988) 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.
Advertising Expense
Advertising costs are charged to operations as incurred, such charges
aggregated $2,426,000, $2,655,000 and $2,192,000 for the years ended December
31, 1994, 1993 and 1992 respectively.
Equity Investments
The Company's 48.6 percent interest in H. B. Smith Company, Incorporated
("HBS") and 46.8 percent interest in EAFCO, Inc., ("EAFCO"), are accounted for
under the equity method.
Research and Development Expense
Research and development expenses are charged to operations as
incurred. Such charges aggregated $537,000, $490,000, and $673,000, for the
years ended December 31, 1994, 1993 and 1992, respectively.
Software development Expenses
The Company's MCS, Inc. subsidiary is in the business of application
software and systems development. Statement of Financial Accounting Standards
No. 86 requires that development costs incurred subsequent to the establishment
of technological feasibility for the product be capitalized, however, the
Company does not believe that such amounts are material to the consolidated
financial statements. Accordingly, all development costs are charged to expense
as incurred. Such charges aggregated $910,000, $702,000, and $695,800, during
1994, 1993, and 1992, respectively.
Treasury shares
Common stock held in the Company's treasury has been recorded at cost.
Earnings per common share
Earnings per share have been computed based upon the average number of
common shares outstanding giving effect, where dilutive, to common shares which
would be issued upon conversion of the $5.00 Convertible Preferred Stock.
Postretirement and Postemployment benefits
In 1990, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The Statement is effective for
fiscal years beginning after December 15, 1992. The Company does not provide
significant postretirement benefits and adoption of the Statement in 1993 did
not have a material effect on the consolidated financial statements.
In 1992, the FASB issued Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Post Employment Benefits". This Statement is
effective for fiscal years beginning after December 15, 1993. The Company does
not provide significant postemployment benefits and adoption of this Statement
on January 1, 1994 did not have a material effect on the consolidated financial
statements.
Currency Translation
Assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at exchange rates prevailing on the balance sheet date.
Results of operations denominated in foreign currencies are translated into U.S.
dollars at average exchange rates. Adjustments resulting from such translations
are excluded from the determination of income and are accumulated in a separate
component of shareholders' equity.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", ("Statement 109"). Under the asset and liability method of Statement
109, 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. Under Statement 109, 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.
Effective January 1, 1992, the Company adopted Statement 109 and has
reported the cumulative effect of that change in the method of accounting for
income taxes in the 1992 consolidated statement of income.
Property Held for Sale
The consolidated financial statements include, under the heading
Property Held for Sale, manufacturing facilities in Northvale, New Jersey and
Scranton, Pennsylvania. These properties are carried at cost which is less than
estimated net realizable values.
2. BUSINESS ACQUISITIONS
On November 1, 1994, pursuant to a motion approved by the United States
Bankruptcy Court for the District of New Mexico, the Company acquired
substantially all of the inventory, accounts receivable, and fixed tangible and
intangible assets of Aztec Sensible Cooling, Inc. (Aztec) a manufacturer of
evaporative cooling and other custom air handling equipment in Albuquerque, New
Mexico. The purchase price for the assets acquired, was $1,372,000.
This acquisition was accounted for as a purchase. Accordingly, the
Company has included the results of this acquired business in its consolidated
statement of operations for the period starting with the acquisition date.
Supplemental proforma information is not deemed meaningful in that the
transaction is not material to the financial statements of the Company taken as
a whole.
3. INVENTORIES
Inventories consisted of the following at December 31:
1994 1993
---- ----
Raw materials $ 17,524,000 $ 17,188,000
Work-in-progress 13,441,000 9,415,000
Finished goods 8,241,000 9,563,000
------------ ------------
39,206,000 36,166,000
Less provision for LIFO
method of valuation 7,104,000 5,991,000
------------ ------------
$ 32,102,000 $ 30,175,000
============ ============
Progress billings exceeded related contract costs by $2,721,000, and
$2,108,000 at December 31, 1994 and 1993, respectively. As such, these amounts
are reported as deferred income in the accompanying consolidated financial
statements.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
Depreciation
and Amortization
Estimated Useful
1994 1993 Lives
---- ---- -----------
Land $ 750,000 $ 750,000
Buildings 10,662,000 9,805,000 15 - 31 years
Leasehold Improvements 2,873,000 2,492,000 10 - 31 years
Equipment 34,442,000 30,456,000 3 - 10 years
------------ ------------
48,727,000 43,503,000
Accumulated Depreciation (30,244,000) (26,204,000)
------------ ------------
$ 18,483,000 $ 17,299,000
============ ============
The above amounts include $1,370,000, and $267,000 at December 31, 1994
and December 31, 1993, respectively, in assets that had not yet been placed in
service by the Company. No depreciation was recorded in the related periods for
these assets.
Of the long-term debt described in Note 6, approximately $2,148,000, and
$2,946,000 was secured by certain of the assets included above as of December
31, 1994 and December 31, 1993, respectively.
Depreciation and leasehold amortization expense for the years ended
December 31, 1994, 1993, and 1992 aggregated $4,669,000, (reduced due to the
effect of Discontinued Operations), $6,205,000, and $6,766,000, respectively.
5. EQUITY INVESTMENTS
H. B. Smith Company Incorporated (HBS)
As of December 31, 1992, the Company's investment in HBS was reduced to
zero reflecting the Company's equity in HBS' cumulative losses. The Company has
no obligation to fund future HBS operating losses.
Eafco, Inc. (EAFCO)
On April 7, 1993, the Company acquired a 46.8% interest in EAFCO, Inc.,
(EAFCO), a Pennsylvania company, located in Boyertown, Pennsylvania in return
for cash, notes and certain items of foundry equipment valued in total at
$8,643,000.
EAFCO produces cast iron boiler sections for the boiler industry. EAFCO
used a portion of the proceeds to modernize its foundry facilities and equipment
and began supplying cast iron boiler sections for use in Mestek's boiler
subsidiaries in 1993. This investment is accounted for in accordance with the
equity method of accounting. The Company reported its share of EAFCO's operating
results, which were not material, in Other Income (Expense) in the consolidated
financial statements in 1994 and 1993.
The Company purchases approximately $18,000,000 on an annualized basis
from Eafco and HBS together. The Company's net receivable from Eafco and HBS
together as of December 31, 1994 was $1,474,000.
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
1994 1993
---- ----
Senior Notes $ 1,000,000 $ 3,000,000
Revolving Loan Agreement - 5,866,000
Note Payable Bank - 5,000,000
Notes Payable American Standard Inc. 1,903,000 4,273,000
Note Payable Eafco, Inc. 2,400,000 2,400,000
Other Bonds and Notes Payable 245,000 321,000
----------- ------------
5,548,000 20,860,000
Less Current Maturities 5,337,000 14,306,000
----------- ------------
$ 211,000 $ 6,554,000
=========== ============
Senior Notes - On July 1, 1987, the Company executed a Note Agreement
with a major insurance company under which the Company issued $10,000,000 of
9.75% unsecured Senior Notes. Interest is payable quarterly. Principal is
payable in ten annual installments of $1,000,000. These funds were used to pay
down the then outstanding balance under the Revolving Loan Agreement.
Revolving Loan Agreement - On January 1, 1992, the Company entered into a
Revolving Loan Agreement and Letter of Credit Facility (the "Agreement") with a
commercial bank. The Agreement, originally set to expire January 1, 1993, was
extended through April 30, 1995. For the period ending April 30, 1995, the
Agreement provides $38 million of unsecured revolving credit and standby letter
of credit capacity. Borrowings under the Agreement bear interest, at the
discretion of the borrower, at a floating rate based on the bank's prime rate
less .75%, or LIBOR plus a negotiated spread, and may be used for working
capital
or acquisition purposes, or to retire previously incurred debt. No borrowings
were outstanding at December 31, 1994. Commitment fees on letters of credit are
3/4% annually. Outstanding letters of credit, principally related to the
Company's insurance programs, aggregated $3,827,000, at December 31, 1994.
Notes Payable American Standard Inc. - On December 22, 1992 the Company
executed several non-interest bearing notes in connection with the purchase of
certain assets from American Standard Inc. The notes, after giving effect to
certain adjustments contemplated there-in, are reflected in the Consolidated
Financial Statements net of imputed interest. The final installment on the notes
of $1,903,000 was paid on January 1, 1995.
The interest rate assumed in computing the imputed interest adjustment
was 5.25%, representing the Company's incremental cost of funds as of December
22, 1992.
Note Payable Eafco, Inc. - On April 7, 1993, the Company executed an
unsecured promissory note in the amount of $2,400,000 in connection with the
acquisition of a 46.8% interest in Eafco as more fully described in Note 5 to
the Consolidated Financial Statements. Borrowings under the note, which matured
and were paid on January 5, 1995, bore interest at the prime rate of interest on
a floating basis.
Other Bonds and Notes Payable - The Company is obligated under the terms
of an Industrial Revenue Bond (the Bond) secured by its facility in Wyalusing,
Pennsylvania. The Bond bears interest at 5% and matures on July 25, 2001. The
outstanding balance under the Bond at December 31, 1994 was $245,000.
The Company is also obligated under outstanding letters of credit at
December 31, 1994 issued by ABN Amro Bank related to the Company's insurance
programs totalling $1,444,178.
The loan agreements related to the Senior Notes, and the Revolving Loan
Agreement, contain financial covenants which require that the Company maintain
certain current ratios, working capital amounts, capital bases and leverage
ratios. These agreements also contain 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% of net income.
Cash paid for interest on borrowings during 1994, 1993 and 1992 amounted
to $839,000, $1,535,000, and $1,608,000, respectively.
Maturities of long-term debt in each of the next five years are as
follows:
1995 - $5,337,000
1996 - $ 36,000
1997 - $ 38,000
1998 - $ 40,000
1999 - $ 42,000
It is management's intention, upon expiration of the Revolving Loan
Agreement on April 30, 1995 to extend or otherwise negotiate a similar financing
agreement for its future capital needs.
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 the debt approximates its
fair value as of December 31, 1994.
7. DISCONTINUED OPERATIONS
On August 17, 1993, the Company completed the sale of 70% of the
outstanding common stock of its Chester Environmental, Inc. subsidiary (Chester)
to Duquesne Enterprises, Inc. (Duquesne), a Pennsylvania corporation
headquartered in Pittsburgh, Pennsylvania. The Company received $12,000,000 plus
certain "put" rights exercisable at various dates through 1999 which enable the
Company, at its option, to sell its remaining 30% interest for a minimum of
$6,000,000. The Company has accounted for the transaction as a disposal of a
business segment in accordance with APB 30. Accordingly, the Company recorded a
loss (Loss on Disposal of Discontinued Segment) on the sale which, together with
the effect of writing its remaining investment down to $6,000,000, amounted to
$1,788,000, net of a related tax benefit of $637,000. The operations of Chester
are separately reported in accordance with APB 30 in the accompanying
Consolidated Statements of Income for the years 1993 and 1992 under the heading
(Loss) from Operations of Discontinued Segment. For this purpose the operations
of Chester are included only through the date of sale, August 17, 1993.
Subsequent to this date, the Company accounts for its remaining investment in
Chester, which is included in Other Assets and Deferred Charges, under the cost
method of accounting, since the Company does not have the ability to exert
significant influence over the operations or financial policies of Chester. The
"put" rights received by the Company also allow the Company, under certain
circumstances, at its option, to sell its remaining interest for $8,000,000. No
value was assigned to this additional consideration in the computation of the
Loss on Disposal of Discontinued Segment. Also, under the terms of the Agreement
of Sale, Duquesne received a "call" right which enables it to purchase, at its
option, the Company's remaining interest for $12,000,000. Interest expense has
been allocated to the Loss from Discontinued Operations for the years 1993 and
1992 based upon the ratio of net assets (defined as average total assets less
average non-interest bearing indebtedness) of the discontinued segment to
consolidated net assets. Corporate general and administrative expenses
originally allocated to the Discontinued Segment totaling $310,000 and $523,000,
for the years 1993 and 1992 respectively, have been reallocated to the HVAC
Segment in the accompanying Consolidated Statements of Income in accordance with
APB 30. Revenues of the discontinued segment totaled $28,147,000 and $52,763,000
for 1993 (through August 17, 1993) and 1992, respectively.
8. SHAREHOLDERS' EQUITY
The Company has authorized common stock of 20,000,000 shares with no par
value, and a stated value of $0.05 per share. As of December 31, 1994, John E.
Reed, Chairman, President and CEO of the Company and Stewart B. Reed, Executive
Vice President of the Company and son of John E. Reed, together beneficially own
a majority of the outstanding shares of the Company's common stock.
The Company has authorized 250,000 shares of $5.00 convertible
noncumulative, nonvoting preferred stock with a par value of $100 per share (the
"Convertible Preferred"). 73,260 shares of the Convertible Preferred were issued
on July 31, 1986. The Convertible Preferred was convertible into a total of
1,878,462 shares of Mestek common stock, subject to certain antidilution
provisions. As of December 31, 1993, 1,170 of the preferred shares had been
converted into 29,993 shares of Mestek common. The remaining Convertible
Preferred was redeemable at the option of the Company at par value plus any
declared but unpaid dividends, any time after July 31, 1993. Pursuant to a
notice of redemption dated April 22, 1994, all but 64 shares of the Convertible
Preferred were converted into 1,838,259 shares of Common Stock of the Company.
The remaining 64 shares of Convertible Preferred were redeemed on June 24, 1994.
9. INCOME TAXES
The Company adopted FAS 109, "Accounting for Income Taxes", as of January
1, 1992. The cumulative benefit of this change in accounting for income taxes,
$430,000, is determined as of January 1, 1992 and is reported separately in the
Consolidated Statements of Income for the year ended December 31, 1992. Income
before income taxes included foreign earnings (losses) of ($606,000), ($449,000)
and ($1,431,000) in 1994, 1993, and 1992, respectively. Income tax expense
(benefit) from continuing operations consisted of the following:
1994 1993 1992
---- ---- ----
Federal income tax:
Current $ 5,298,000 $ 4,052,000 $ 2,657,000
Deferred ( 89,000) ( 249,000) ( 127,000)
State income tax:
Current 1,534,000 1,306,000 937,000
Deferred ( 5,000) ( 36,000) ( 150,000)
Foreign income tax:
Current 12,000 - ( 255,000)
Deferred -0- 34,000 ( 319,000)
------------ ------------ ------------
Income taxes from
Continuing Operations$ 6,750,000 $ 5,107,000 $ 2,743,000
============ ============ ============
Total income tax expense for continuing operations differed from
"expected" income tax expense, computed by applying the U.S. federal income tax
rate of 35 percent (34 percent prior to 1994) to earnings before income tax, as
follows:
1994 1993 1992
---- ---- ----
Computed "expected" income tax $ 5,617,000 $ 4,314,000 $ 2,772,000
State Income tax, net of
federal tax benefit 994,000 838,000 519,000
Benefit of foreign loss not
allocated to income statement 212,000 - -
Foreign tax rate differential ( 82,000) ( 152,000) ( 88,000)
Reduction in prior year over
accrual - - ( 478,000)
Change in beginning year balance
of the valuation allowance for
deferred tax assets allocated
to income tax expense - 195,000 -
Other - net 9,000 ( 88,000) 18,000
----------- ----------- ------------
Income Taxes $ 6,750,000 $ 5,107,000 $ 2,743,000
=========== =========== ===========
A deferred income tax (expense) benefit results from temporary
differences in the recognition of income and expense for income tax and
financial reporting purposes. The components of and changes in the net deferred
tax assets (liability) which give rise to this deferred income tax (expense)
benefit for the year ended December 31, 1994 are as follows:
Change
December 31, (Expense) December 31,
1993 Benefit 1994
---- ------- ----
Deferred Tax Assets:
Warranty Reserve $ 367,000 $ 263,000 $ 630,000
Deferred Compensation 13,000 ( 13,000) -0-
Compensated Absences 418,000 104,000 522,000
Inventory Valuation 281,000 2,000 283,000
Accounts Receivable Valuation 572,000 50,000 622,000
Self-Insurance 140,000 ( 140,000) -0-
Capital Loss Carryforward 494,000 ( 171,000) 323,000
State Tax Operating Loss
Carryforward 155,000 ( 55,000) 100,000
Foreign Tax Operating
Carryforward 480,000 224,000 704,000
Deferred Income on Sale of Assets
to Nonconsolidated Investees 213,000 -0- 213,000
----------- ----------- -----------
Total Gross Deferred Tax Assets 3,133,000 264,000 3,397,000
Less Valuation Allowance ( 195,000) -0- ( 195,000)
Net Deferred Tax Assets 2,938,000 264,000 3,202,000
----------- ----------- -----------
Deferred Tax Liabilities:
Prepaid Expenses ( 449,000) ( 204,000) ( 653,000)
Depreciation ( 588,000) 145,000 ( 443,000)
Other ( 87,000) ( 299,000) ( 386,000)
----------- ----------- -----------
Net Deferred Tax Liabilities (1,124,000) ( 358,000) (1,482,000)
----------- ----------- -----------
Total Deferred Tax Asset $ 1,814,000 $( 94,000) $ 1,720,000
=========== =========== ===========
A valuation allowance of $195,000 was established at December 31, 1993.
This allowance reflects uncertainties as to the realization of a portion of the
foreign tax operating loss carryforward identified above. At December 31, 1994,
no valuation allowance has been established relative to the remaining foreign
tax operating loss carryforward, state tax operating loss carryforward, or
capital loss carryforward. It is management's belief that it is more likely than
not that these carryforwards will be utilized prior to their expiration. The
Company has available to it a number of tax planning opportunities which support
this conclusion.
At December 31, 1994, the Company has state tax operating loss, foreign
tax operating loss and capital loss carryforwards of approximately $2,115,000,
$1,409,000, and $797,000, respectively, which are available to reduce future
income taxes payable, subject to applicable "carryforward" rules and
limitations. These losses begin expiring approximately as follows:
State Foreign Capital
1997 $ 470,000 $ - $ 797,000
2007 1,645,000 1,409,000 -
---------- ---------- ----------
$2,115,000 $1,409,000 $ 797,000
========== ========== ==========
Cash paid for income taxes during 1994, 1993, and 1992, amounted to
$5,990,000, $1,889,000, and $4,026,000, respectively.
10. LEASES
The Company leases various manufacturing facilities and equipment from
companies owned by certain officers and directors of the Company, either
directly or indirectly, through affiliates. The leases generally provide that
the Company will bear the cost of property taxes and insurance.
Details of the principal operating leases with related parties as of
December 31, 1994 are as follows:
Basic
Date Annual Minimum
of Rental Future
Lease Term for 1994 Rentals
----- ---- -------- -------
Sterling Realty Trust
Land and Building - Main 12/17/84 15 years $ 192,000 $ 960,000
Land and Building - Engineering 07/01/83 15 years 42,000 147,000
Land and Building - South Complex 01/01/94 15 years 256,800 3,595,200
Machinery & Equipment 01/01/93 15 years 41,460 124,380
(Westfield, Farmville and Wrens
Locations)
Machinery Rental
Machinery & Equipment 01/01/93 5 years 223,980 671,940
(Westfield, Farmville, Wrens,
South Windsor and Clinton Locations)
Elizabeth C. Reed Trust
Machinery & Equipment 01/01/93 5 years 14,100 42,300
Production Realty
Land and Building N/A monthly 26,400 2,200
Machinery & Equipment N/A monthly 41,400 3,450
Rudbeek Realty Corp.
(Farmville Location) 11/02/92 6 years 324,000 1,296,000
MacKeeber
(South Windsor Location) 07/01/90 14.5 years 554,100 6,468,465
Rent expense for operating leases, including those with related parties,
was $2,433,000, (reduced due to the effect of Discontinued Operations),
$4,699,000, and $5,250,000, for the years ended December 31, 1994, , 1993 and
1992, respectively.
Future minimum lease payments under all noncancelable leases as of December
31, 1994 are as follows:
Operating
Year Ending December 31, Leases
1995 $ 2,140,000
1996 2,093,000
1997 2,060,000
1998 1,738,000
1999 1,429,000
After 1999 5,875,000
-----------
Total minimum lease payments $15,335,000
11. EMPLOYEE BENEFIT PLANS
The Company maintains a non-contributory profit-sharing plan covering all
eligible employees. Contributions to the plan were $789,000, $755,000, and
$685,000, for the years ended December 31, 1994, 1993, and 1992, respectively.
Assets of the plan were $8,286,000, $8,449,000, and $7,271,000, at December 31,
1994, 1993, and 1992, respectively. Contributions to the Plan are defined as
3.0% of gross wages up to the current Old Age, Survivors, and Disability,
(OASDI), limit and 6.0% of the excess over the Old Age, Survivors, and
Disability, (OASDI), limit, subject to the maximum allowed under the Employee
Retirement Income Security Act, (ERISA). The plan's vesting terms are 20%
vesting after 3 years of service, 40% after 4 years, 60% after 5 years, 80%
after 6 years, and 100% vesting after 7 years.
In addition to the profit-sharing plan, the Company also offers the
following defined contribution benefit plans:
A Retirement Savings Plan is offered to employees covered under regional
collective bargaining agreements. Service eligibility requirements differ by
division and collective bargaining agreement. Participants may elect to have up
to 15% of their compensation withheld, up to the maximum allowed by the Internal
Revenue Code. Participants may also elect to make nondeductible voluntary
contributions up to an additional 10% of their gross earnings each year within
the legal limits. The Company contributes differing amounts depending upon the
division's collective bargaining agreement. Contributions are funded on a
current basis. Contributions to the Plan were $176,000, $178,000 and $131,000,
for the years ended December 31, 1994, 1993, and 1992, respectively.
A 401(K) Plan is offered to salaried employees not covered by a
collective bargaining agreement, who chose to participate, and who have at least
one year of 1,000 hours or more of service at the time of participation.
Participants may elect to have up to 15% of their compensation withheld, up to
the maximum allowed by the Internal Revenue Code. Participants may also elect to
make nondeductible voluntary contributions up to an additional 10% of their
gross earnings each year within the legal limits. The Company contributes $.025
of each $1.00 deferred by participants and deposited to the Plan not to exceed
1.50% of an employee's compensation. The Company does not match any amounts for
withholdings from participants in excess of 6.00% of their compensation or for
any nondeductible voluntary contributions. Contributions are funded on a current
basis. Contributions to the Plan were $212,000, $197,000, and $170,000 for the
years ended December 1994, 1993, and 1992, respectively.
One of the Company's subsidiaries maintains a defined contribution target
benefit pension plan which covers substantially all of it's employees. The
Internal Revenue Service has issued a favorable determination letter for this
plan. Pension costs are accrued annually based on contributions earned by
participants under plan provisions as determined by an independent actuary. The
total expense related to this pension plan for the twelve months ended December
31, 1994, 1993, and 1992 was $59,000, $48,000, and $51,000, respectively.
The Company maintains bonus plans for its officers and other key
employees. The plans generally allow for annual bonuses for individual employees
based upon the operating results of related profit centers in excess of a
percentage of the Company's investment in the respective profit centers. The
Company also has employment agreements with certain executive officers.
12. COMMITMENTS AND CONTINGENCIES
Mestek and its subsidiaries are subject to several legal actions and
proceedings in which various monetary claims are asserted. Management, after
consultation with its corporate counsel and outside counsel, does not anticipate
that any ultimate liability arising out of all such litigation and proceedings
will have a material adverse effect on the financial condition of the Company.
David R. Macdonald, a member of the Company's Board of Directors, is a
partner in the law firm of Baker & McKenzie. Management from time to time
retains Baker & McKenzie to perform legal services for the Company. Amounts paid
for such services aggregated $93,000, $378,000, and $659,000, for the years
ended December 31, 1994, 1993, and 1992, respectively.
The Company is obligated as guarantor with respect to the debt of MacKeeber
Associates Limited Partnership, a Connecticut Limited Partnership, under an
Industrial Development Bond issued in 1984 by the Connecticut Development
Authority. The balance outstanding under the bond as of December 31, 1994 was
$1,498,000.
13. SEGMENT INFORMATION
The Company has historically operated in the following segments: heating,
ventilating and air conditioning equipment ("HVAC"); environmental engineering
and consulting services ("Engineering"); computer software development and
system design ("Computer Systems"); and the manufacture of coil handling
equipment ("Coil Handling Equipment").
The HVAC segment includes the design and manufacture primarily of
residential, commercial and industrial hydronic heat distribution products,
including finned-tube and baseboard radiation equipment, gas-fired heating and
ventilating equipment, air damper equipment and related products used in air
distribution.
The Computer Systems segment includes computer processing services, sale
and installation of computer systems including software development and design.
The Coil Handling Equipment segment includes the design and manufacture
of coil stock handling devices such as coil straighteners, feeders and other
shaping equipment.
Intersegment sales are not significant. Operating income is defined as
net sales directly related to a segment's operations, less operating expenses.
Identifiable assets by segments are those assets used in the operations of that
segment. The Company has not identified any of its assets as corporate assets.
The following table presents segment information for the years ended
December 31, 1994, 1993, and 1992. Segment information reflecting the operations
of acquired businesses is shown only for the periods following acquisition.
Segment information for the Engineering segment is excluded from this table due
to the disposition of this segment in 1993, as more fully explained in Note 7.
Also, Operating Profit has been adjusted in 1993 and 1992 to give effect
to the reclassification of corporate overhead originally charged to the
Engineering segment in accordance with APB 30.
1994 1993 1992
---- ---- ----
(Dollars in thousands)
Total Revenues
HVAC $ 200,445 $ 213,106 $ 172,903
Computer Systems 14,461 12,211 10,834
Coil Handling Equipment 9,112 6,069 6,301
--------- --------- ---------
Total Revenues $ 224,018 $ 231,386 $ 190,038
========= ========= =========
Operating Profit
HVAC 15,310 12,335 8,259
Computer Systems 2,244 1,374 1,448
Coil Handling Equipment 1,583 458 591
--------- --------- ---------
Total Operating Profit $ 19,137 $ 14,167 $ 10,298
========= ========= =========
Other information regarding the segments for the years 1994, 1993, and 1992
is as follows:
1994
Identifiable Capital Depreciation
assets expenditures expense
(Dollars in thousands)
HVAC $ 106,011 $ 4,635 $ 4,516
Engineering 6,000 0 0
Computer Systems 4,866 135 62
Coil Handling Equipment 3,553 390 91
--------- --------- ---------
Total $ 120,430 $ 5,160 $ 4,669
========= ========= =========
1993
Identifiable Capital Depreciation
assets expenditures expense
(Dollars in thousands)
HVAC $ 112,963 $ 3,590 $ 4,284
Engineering 6,000 622 1,749
Computer Systems 3,947 39 55
Coil Handling Equipment 3,715 42 65
----------- ------------ -----------
Total $ 126,625 $ 4,293 $ 6,153
=========== ============ ===========
1992
Identifiable Capital Depreciation
assets expenditures expense
(Dollars in thousands)
HVAC $ 102,233 $ 3,535 $ 4,089
Engineering 27,065 207 2,507
Computer Systems 4,444 69 58
Coil Handling Equipment 3,416 22 71
---------- ---------- -----------
Total $ 137,158 $ 3,833 $ 6,725
========== ========== ===========
The Company sells its HVAC products primarily to contractors, installers,
and end users in the construction industry, wholesale distributors, and original
equipment manufacturers. At December 31, 1994 and 1993, accounts receivable, net
of allowances, for the HVAC segment totaled $30,837,000, and $40,900,000,
respectively. These receivables are generally of high quality, and the Company's
history is that losses from bad debts are not excessive. Management believes
that established reserves at December 31, 1994 are adequate to absorb any such
losses.
14. SELECTED QUARTERLY INFORMATION (UNAUDITED)
The table below sets forth selected quarterly information for each full
quarter of 1994 and 1993. (Dollars in thousands except per common share
amounts).
1994 1st 2nd 3rd 4th
- ----
Quarter Quarter Quarter Quarter
Total Revenues $50,043 $46,155 $64,738 $63,082
Gross Profit $14,391 $13,420 $18,267 $19,832
Net Income $ 1,722 $ 1,595 $ 2,829 $ 3,152
Per Common Share:
Net Income $ .19 $ .17 $ .31 $ .35
1st 2nd 3rd 4th
1993 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
Total Revenues $49,925 (1) $47,980 (1) $62,851 $70,630
Gross Profit $13,742 (1) $12,905 (1) $16,865 $19,842
Net Income $ 1,039 $ 1,110 $ 391 $ 1,725
Per Common Share
Net Income $ .11 $ .12 $ .04 $ .19
(1) Total Revenues and Gross Profit for the first and second quarters of 1993
have been restated to reflect the reclassification of operating results of the
Company's Engineering segment to (Loss) From Operations of Discontinued Segment,
as more fully explained in the Note 7 to the Consolidated Financial Statements.
15. COMMON STOCK BUYBACK PROGRAM
In 1994 and 1993 the Company continued its program of selective
"open-market" purchases of common shares, originally announced in 1990. 169,200
and 85,773 of such shares were acquired in 1994 and 1993, respectively. In
addition, in 1993 5,054 shares were acquired by the Company under a common stock
buy back program for holders of fewer than 100 shares. All such shares are
accounted for as treasury shares at December 31, 1994 and 1993, respectively.
16. OTHER TRANSACTIONS
On March 3, 1995, the Company, through its Delaware-based subsidiary, West
Homestead Joint Venture Corporation, concluded the sale of its remaining 30%
partnership interest in Mesta International (formerly Mesta Engineering Company)
to Shougang Mechanical Equipment Co. of Pennsylvania, Inc., a U.S. subsidiary of
a Chinese industrial company, for $850,000 in cash and the assumption of all
liabilities of Mesta International. The Company will report a gain on the
transaction in 1995 of approximately $850,000.
PART III
With respect to items 10 through 13, the company will file with the
Securities and Exchange Commission, within 120 days of the close of its fiscal
year, a definitive proxy statement pursuant to Regulation 14-A.
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held May 24, 1995, and to the extent required, is incorporated herein by
reference. Information regarding executive officers of the Company is forth
under the caption "Executive Officers".
Item 11 - EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held May 24, 1995, and, to the extent required, is incorporated herein by
reference.
The report of the Compensation Committee of the Board of Directors of the
Company shall not be deemed incorporated by reference by any general statement
incorporating by reference the proxy statement into any filing under the
Securities Exchange Act of 1934, and shall not otherwise be deemed filed under
such Act.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management will be set forth in the Company's proxy statement relating to the
annual meeting of shareholders to be held May 24, 1995, and, to the extent
required, is incorporated herein by reference.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will
be set forth in the Company's proxy statement relating to the annual meeting of
shareholders to be held May 24, 1995, and, to the extent required, is
incorporated herein by reference.
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
INDEX
Pages of
this report
Independent Auditors' Report Pages 20 - 21
Financial Statements:
(a)(1) Consolidated Balance Sheets as of December 31, 1994
and 1993 Pages 22 - 23
Consolidated Statements of Income for the Years Ended
December 31, 1994, 1993, and 1992 Pages 24 - 25
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1994, 1993, and 1992 Page 26
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1994, 1993, and 1992 Page 27
Notes to the Consolidated Financial Statements Pages 28 - 44
(a)(2) Financial Statement Schedules
II. Valuation and Qualifying Accounts Page 48 All other financial statement
schedules required by Item 14(a)(2) have been omitted because they are
inapplicable or because the required information has been included in the
consolidated financial statements or notes thereto.
(a)(3) Exhibits
The Exhibit Index is set forth on Pages 49 thru 51
(b) No reports were filed on Form 8-K during the three months ended December
31, 1994.
No annual report to security holders as of December 31, 1994 had been
sent to security holders and no proxy statement, form of proxy or other
proxy soliciting material has been sent by the registrant to more than ten
of the registrant's security holders with respect to any annual or other
meeting of security holders held or to be held in 1995. Such annual report
to security holders, proxy statement or form of proxy will be furnished to
security holders subsequent to the filing of this Annual Report on Form
10-K.
MESTEK, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1994, 1993 and 1992
Charged Charged
Bal. at to cost to other Bal.
at Beg. and Accts. Other Deduct. at end
Year Description of Year expense (Desc.) (Desc.) (Desc.) of Year
---- ----------- ------- ------- ------- ------- ------- -------
1994 Allowance
for doubtful
accounts $1,456 $ 248 $ - $ - $ 264(2) $1,440
1993 Allowance
for doubtful
accounts $1,455 $1,071 $ - $( 350)(1) $ 720(2) $1,456
1992 Allowance
for doubtful
accounts $ 923 $ 788 $ - $ 1,043 (3) $ 1,299(2) $1,455
(1) Includes recoveries of amounts previously written-off and eliminated
reserve due to sale of Chester.
(2) Bad debts written off.
(3) Includes recoveries of amounts previously written-off and allowances for
doubtful accounts of acquired companies.
EXHIBIT INDEX
Those Documents Followed By A Paranthetical Notation Are Incorporated
Herein By Reference To Previous Filings With The Securities And Exchange
Commission As Set Forth Below.
Exhibit No.
Description
****************
3.1 Restated Articles of Incorporation of Mestek, Inc. (A)
3.2 By-laws of Mestek, Inc. as amended through April 1, 1993 (G)
9.1 Agreement dated April 13, 1976 between John E. Reed and
Stewart B. Reed (B)
10.1 Amended and Restated Revolving Loan Agreement and Letter
of Credit facility between Mestek,Inc. and BayBank dated
April 30, 1994
10.2 Mestek, Inc.(formerly Reed National Corp.) Deferred Profit
Sharing Plan (B)
10.3 Employment Agreement dated January 1, 1982 between Mestek
and Stewart B. Reed (B)
10.4 Employment Agreement dated January 1, 1982 between Mestek (B)
and John E. Reed
10.5 Lease dated July 1, 1983 between Sterling Realty Trust(lessor)
and Mestek Inc. (lessee) (G)
10.6 Lease dated December 17, 1984 between Mestek (lessee) and Sterling
Realty Trust(lessor), as amended on November 1, 1991 (G)
10.7 Lease dated January 1, 1994 between Mestek (lessee) and Sterling
Realty Trust(lessor) (G)
10.8 Amended lease dated as of November 2, 1992 between Mestek
(lessee)and Rudbeek Realty Corp. (lessor) (G)
10.9 Amended lease dated as of July 1, 1990 between Vulcan Radiator
Corporation (lessee) and MacKeeber Associates Limited Partnership
(lessor) (G)
10.10 Equipment Lease Agreement dated January 1, 1993, between
Mestek (lessee) and Sterling Realty Trust (lessor) (G)
10.11 Loan Agreement dated as of December 1, 1984 among
Reed National Corp., Rudbeek Realty Corp. and The Pitt
County Industrial Facilities and Pollution Control
Financing Authority and the Promissory Notes thereunder,
two Guaranty Agreements dated as of December 1, 1984
between Reed National Corp., NCNB National Bank of
North Carolina, and Rudbeek Realty Corp. (B)
10.12 Loan Agreement dated as of May 1, 1984 among the
Connecticut Development Authority (the "CDA"), MacKeeber
Limited Partnership, Vulcan Radiator Corporation and the
Promissory Notes thereunder; Guaranty of Vulcan Radiator
Corporation and Reed National Corp. to the Connecticut
Bank and Trust Company, N.A. (B)
10.13 Note Agreement dated as of July 1, 1987 between Mestek,
Inc. and Massachusetts Mutual Life Insurance Company. (C)
10.14 Indemnification Agreements entered into between Mestek,
Inc. and its Directors and Officers and the Directors
of its wholly-owned subsidiaries incorporated by
reference as provided herein, except as set forth in the
attached schedule (F)
10.15 Acquisition Agreement dated July 29, 1993 for the Purchase
of Stock of Chester Environmental, Inc. between Duquesne
Enterprises Inc. and Mestek, Inc. (G)
10.16 Amended Asset Purchase Agreement dated March 26, 1992
between Mestek, Inc. and Mechanical Specialties, Inc. (D)
10.17 Agreement for the Purchase and Sale of Assets dated
December 22, 1992 between Peritek, Inc. and American
Standard Inc.; and Agreement for Purchase and Sale of
Assets between Wabco Standard Trane Inc., and Mestek,
Inc., dated December 22, 1992 (E)
10.18 Subscription and Stock Purchase Agreement dated October
1, 1992 between Mestek, Inc. and Eafco, Inc. (G)
10.19 Variable Interest Rate Cognovit Note dated December 15,
1993 between Mestek, Inc. and The Mary Staebell Trust (G)
10.20 Loan Agreement and Promissory Note between Mestek, Inc.
and ABN Amro Bank, N.V., dated July 9, 1993 (G)
10.21 Loan Agreement and Promissory Note dated June 7, 1993
between The First National Bank of Boston and Mestek, Inc. (G)
10.22 Mortgage Note dated February 1, 1986 between Arrow United
Industries, Inc. and Chemical Bank; said Note assumed by
Mestek, Inc.in the purchase of certain assets of Arrow United
Industries Inc. (G)
10.23 Closing Agreement dated February 10, 1995 between Shougang
Mechanical Equipment of Pennsylvania, Inc. and West Homestead
Joint Venture Corporation.
10.24 Equipment Lease Agreement dated January 1, 1993 between
Machinery Rental Company (Lessor) and Vulcan Radiator
Corporation (Lessee).
10.25 Equipment Lease Agreement dated January 1, 1993 between Machinery
Rental Company (Lessor) and Mestek, Inc. (Lessee).
10.26 Equipment Lease Agreement dated January 1, 1993 between Elizabeth
C. Reed Trust (Lessor) and Mestek, Inc. (Lessee).
10.27 Asset Purchase Agreement dated September 9, 1994 between Mestek,
Inc. and Aztech International, Ltd., debtor-in-possession; and
Aztec Sensible Cooling, Inc., debtor-in-possession, and the
Amendment thereto dated October 31, 1994.
11.1 Schedule of Computation of Earnings per Common Share
21.1 Subsidiaries of Mestek, Inc.
(A) Filed as an Exhibit to the Annual Report on Form 10-Q for the
quarter ended September 30, 1986
(B) Filed as an Exhibit to the Registration Statement 33-7101,
effective July 31, 1986
(C) Filed as an Exhibit to the Current Report on Form 8-K dated
July 2, 1987
(D) Filed as an Exhibit to the Current Report on Form 8-K dated
August 13, 1982
(E) Filed as an Exhibit to the Current Report on Form 8-K dated
December 15, 1992
(F) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1987
(G) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1993
Exhibit 11.1
MESTEK, INC.
Schedule of Computation of Earnings Per Common Share
Years Ended December 31,
1994 1993 1992
---- ---- ----
Net income $ 9,298 $ 4,265 $ 5,823
Less: dividends on Preferred Stock - 361 366
Net income foe common shareholders $ 9,298 $ 3,904 $ 6,189
Add back dividends which would not have
been paid if $5.00 Convertible Preferred
Stock had been converted - 361 366
Net income for earnings per share $ 9,298 $ 4,265 $ 5,823
Weighted average number of common shares
outstanding 8,241 7,395 7,531
Common share equivalents resulting from
conversion of the $5.00 Convertible
Preferred Stock 896 1,863 1,874
Total common shares and common share
equivalents 9,137 9,258 9,405
Earnings per common share $1.02 $ .46 $ .62
Exhibit 22.1
SUBSIDIARIES OF MESTEK, INC.
Jurisdiction
Corporation Name of Incorporation
Alapco Holding Delaware
HBS Acquisition Corporation Delaware
The Hydrotherm Corporation Delaware
MCS, Inc Pennsylvania
Mestek Canada, Inc. Ontario
Pacific/Air Balance, Inc. California
Peritek, Inc. Delaware
TEK Capital Corporation Delaware
Westcast, Inc. Massachusetts
West Homestead Joint Venture Corporation Delaware
Mestek Foreign Sales Corporation U.S. Virgin Islands
Exhibit 10.14
SCHEDULE OF DIRECTORS/OFFICERS
Indemnification Agreements
The Indemnification Agreement entered into by the Directors and/or Officers of
Mestek, Inc. and certain Directors of Mestek's wholly-owned subsidiaries are
indentical in all respects, except for the name of the indemnified director or
officer and the date of execution.
Set forth below is the identity of each director and officer of Mestek, Inc. and
the date upon which the above Indemnification Agreement was executed by the
Director or Officer.
Director Year of Execution
A. Warne Boyce 1987
E. Herbet Burk 1987
William Coad 1987
David R. Macdonald 1987
Peter Glynn-Jones 1993
Winston R. Hindle, Jr. 1995
David W. Hunter 1987
John E. Reed 1987
Stewart B. Reed 1987
James A. Burk 1987
R. Bruce Dewey 1990
Robert G. Dewey 1988
Nicholas Kakavis 1987
Richard J. McKnight 1987
Walter J. Markowski 1990
John F. Melesko, Jr. 1987
William S. Rafferty 1990
Stephen M. Shea 1987
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this report be signed on its behalf by
the undersigned, thereunto duly authorized.
MESTEK, INC.
Date: April 11, 1995 By: John E. Reed
John E. Reed, Chairman
of the Board and Chief
Executive Officer
Date: April 12, 1995 By: Stephen M. Shea
Stephen M. Shea, Senior
Vice President - Finance,
Chief Financial Officer
Pursuant to therequirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: April 10, 1995 By: A. Warne Boyce
A. Warne Boyce, Director
Date: April 10, 1995 By: E. Herbert Burk
E. Herbert Burk, Director
Date: April 7, 1995 By: William J. Coad
William J. Coad, Director
Date: April 11, 1995 By: Peter Glynn-Jones
Peter Glynn-Jones, Director
Date: April 11, 1995 By: Winston R. Hindle, Jr.
Winston R.Hindle, Jr.,
Director
Date: April 7, 1995 By: David W. Hunter
David W. Hunter, Director
Date: April 13, 1995 By: David R. Macdonald
David R. Macdonald, Director
Date: April 12, 1995 By: John E. Reed
John E. Reed, Director
Date: April 7, 1995 By: Stewart B. Reed
Stewart B. Reed, Director