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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, 1998
MESTEK, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0661650
(State or other jurisdiction of (I. R. S Employer
incorporation or organization Identification No.)
260 North Elm Street
Westfield, 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:
Name of each exchange
Title of each class on which registered
Common Stock, no par value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or15(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. /X/
The aggregate market value of voting common shares held by non-affiliated of the
registrant as of March 15, 1999, based upon the closing price for the
registrant's common stock as reported in The Wall Street Journal as of such date
was $56,045,907.
The number of shares of the registrant's common stock issued and outstanding as
of March 15, 1999 was 8,878,105.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the annual meeting of shareholders
of the registrant to be held on May 18, 1999 are incorporated by reference into
Part III hereof and the exhibits to filings referenced on Pages 44 through 47 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 February 2, 1996, the Company acquired all of the issued and outstanding
common stock of Omega Flex, Inc. of Exton, Pennsylvania (Omega). Omega is a
manufacturer of flexible metal hose and related hose fabrications. The purchase
price paid for the acquired stock was $9,119,000. Liabilities assumed were
$833,000. The Company has accounted for this acquisition under the purchase
method of accounting. Omega has leased its manufacturing and office facilities
through December 31, 2001, for $268,000 per year.
On February 5, 1996, the Company acquired certain assets of the press feeding
and cut-tolength line businesses of Rowe Machinery & Automation, Inc. of Dallas,
Texas (Rowe). Rowe is a leading manufacturer of press feeding and cut-to-length
line equipment serving the appliance, office furniture, automotive, and many
other markets. The purchase price paid was $5,495,000, including the assumed
liabilities of $1,900,000. The Company has accounted for this acquisition under
the purchase method of accounting. The Company leased the Rowe facility in
Dallas, including machinery and equipment, on a short-term basis through April
of 1997.
On August 30, 1996, the Company acquired substantially all of the operating
assets of Dahlstrom Industries, Inc. (Dahlstrom) of Schiller Park, Illinois.
Dahlstrom is a leading manufacturer of roll-forming equipment for the metal
fabrication industry. The purchase price paid was $4,288,000 including assumed
liabilities of $2,606,000. The Company has accounted for this acquisition under
the purchase method of accounting.
On January 31, 1997, the Company acquired ninety-one and one hundredths percent
(91.01%) of the issued and outstanding common stock of Hill Engineering, Inc.
(Hill) of Villa Park, Illinois and Danville, Kentucky. Hill is a leading
producer of precision tools and dies for the gasket manufacturing and
roll-forming industries and other specialty equipment. The purchase price paid
for the acquired stock was $5,141,000. The Company has accounted for this
acquisition under the purchase method of accounting.
On November 3, 1997 the Company acquired one hundred percent (100%) of the
issued and outstanding common stock of CoilMate, Inc. (Coilmate) of Southington,
Connecticut. Coilmate is the leading producer of pallet decoiling equipment for
the metal stamping and roll forming industries. The purchase price paid was
$3,521,000. The Company has accounted for this acquisition under the purchase
method of accounting.
On April 29, 1998, the Company, through a Canadian subsidiary, acquired 100
percent of the outstanding common stock of Ruscio Brothers Refractory Ltd. (RBR)
and 988721 Ontario, Inc. (988721), both of Mississauga, Ontario, Canada. RBR and
988721 manufacture and distribute commercial and residential copper-finned
boilers and water heaters under the name Ruscio Brothers Industries, (RBI),
primarily in Canada. Copper-finned boilers and water heaters are complimentary
to the Company's other hydronic products and the Company now distributes RBI's
products in the United States. The purchase price paid for the acquired stock
was approximately $2,877,000 (U.S.) and included goodwill of approximately
$1,807,000 (U.S.)
On November 2, 1998, the Company exchanged its forty-six and eight tenths
percent (46.8%) interest in Eafco, Inc. for ninety-three and six tenths percent
(93.6%) of the common stock of Boyertown
Foundry Company (BFC) of Boyertown, PA. BFC received one hundred percent (100%)
of the foundry and machining operations of Eafco on that same date pursuant to
"a split-up" of Eafco structured for tax purposes as a tax-free reorganization.
The Company has accounted for this transaction under the purchase method of
accounting. Accordingly, the carrying value of the Company's equity investment
in Eafco, $8,778,000 at November 2, 1998, was treated as the purchase price for
accounting purposes. The assets acquired by BFC included substantially all of
the real estate and equipment owned by Eafco in Boyertown and used in the
foundry, machining and boiler assembly operations and certain other assets and
liabilities. BFC will operate principally as a cast-iron foundry, supplying cast
iron sections and related machining services to both the Company's Westcast
subsidiary and to various third parties, including Peerless Heater Company, Inc.
In connection with this transaction the Company loaned Eafco, Inc. $1,500,000
and also assumed and paid $650,000 of Eafco's then outstanding bank
indebtedness. The $1,500,000 loan bears interest at BankBoston's prime rate less
one, is payable over 42 months beginning on May 1, 2000, and is secured by
substantially all of Eafco's assets. BFC has also leased a portion of its
facilities in Boyertown to Eafco, Inc. which will continue to assemble and
warehouse boilers in Boyertown for Peerless Heater Company, Inc.
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 four continuing business segments: Heating,
Ventilating, and Air Conditioning Equipment ("HVAC") manufacturing; Computer
Software Development and Systems Design; Metal Products; and Metal Forming. Each
of these segments is described below.
The Company's former Metal Products Segment has been subdivided for
1998 reporting purposes into the Metal Forming Segment and the Metal Products
Segment.
The Company and its subsidiaries together employed approximately 2,800
persons as of December 31, 1998.
HEATING, VENTILATING AND AIR CONDITIONING EQUIPMENT
The Company, through Mestek, Inc. and various of its wholly owned
subsidiaries, (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", "Hydrotherm", and "Suntemp",
and other hydronic heat distribution products under the names "Sterling" and
"Beacon-Morris". The division sells gas-fired unit heaters under the name
"Sterling", radiant heating under the name "Cox" and gas-fired indoor and
outdoor heating and ventilating equipment 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", "Koldwave", "Air
Fan", and "Nesbitt" names, and gas and oil-fired boilers are sold primarily
under the names "RBI", "Hydrotherm", "Multi-Pulse", and "Multi-Temp", and
distributed under the name "Smith Cast Iron Boilers" by Westcast, Inc. A number
of these trade names are also registered trademarks owned by the Company and its
subsidiaries. These products may be used to heat, ventilate and/or cool
structures ranging in size from large office buildings, industrial buildings,
warehouses, stores and residences, down to such small spaces as add-on rooms in
residences. The division's products are manufactured at plants in Westfield,
Massachusetts; South Windsor, Connecticut; Farmville, North Carolina; Dallas,
Texas; Mississauga, Ontario, Canada; Dundalk, Maryland; and Wrens, Georgia. The
Company closed its
Skokie, Illinois and Ridgeville, Indiana plants in 1996 and relocated these
operations to Dundalk, Maryland and Farmville, North Carolina, respectively.
The Reed Division sells its many types of fire, smoke, and air control louvers
and dampers, which are devices designed to facilitate the ventilation of
buildings or to control or seal off the movement of air through building duct
work in the event of fire or smoke, under the names "Air Balance", "Phillips
Aire", "Pacific Air Balance", "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 2300
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. 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, directly, or through its representatives, sells its HVAC
products primarily to contractors, installers, and end users in the construction
industry, wholesale distributors and original equipment manufacturers.
While the Reed Division's HVAC products are distributed throughout the United
States and Canada, sales in the northeast, mid-Atlantic and upper mid-west
states are somewhat higher than would be suggested by unadjusted construction
statistics in any given year due to the relative popularity of hydronic products
in these areas.
The sale of heating and cooling products is inherently sensitive to climatic
trends in that relatively warm winters and/or cool summers can adversely effect
sales volumes.
The Reed Division sells gas-fired and hydronic heating and ventilating products,
boilers and other HVAC equipment in Canada and also sells its products in other
foreign markets from time to time. Total export sales did not exceed ten percent
of total revenues, nor did foreign assets exceed ten percent of total assets, in
any of the most recent five years ending December 31, 1998.
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 cast-iron boiler business
through its acquisitions in 1991, 1992, and 1998. 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, Aztec Sensible Cooling, Hydrotherm, Temprite and
Dynaforce product lines.
Expenditures for research and development for the HVAC segment in 1998, 1997,
and 1996 were $1,415,000, $941,000, and $814,000 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 1999.
COMPUTER SOFTWARE DEVELOPMENT AND SYSTEM DESIGN
The business of Mestek's wholly owned subsidiary, MCS, Inc. ("MCS") is primarily
related to the sales and service of business applications software for the home
health services information systems marketplace. Services to customers include
preparation of computer programs and software to meet the customer needs,
providing computer hardware when required, installing the system at the
customer's business, and providing continuing support services.
The most significant systems which MCS has available are MestaMed, a third-party
billing, general ledger, accounting and inventory control system for providers
of durable medical equipment, home health care, infusion therapy, rehabilitation
programs, and hospice services, and ProfitWorks, 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. MestaMed is the
only supplier of an integrated solution for providers of home health services.
MestaMed is available on a variety of hardware platforms and operating systems
including UNIX and various Intel based platforms.
MCS's products were developed in what are today regarded as "legacy"
environments. Nevertheless, by the continual application and utilization of
tools developed by others, MCS has been able to sustain and improve the utility
of its products and offer such products on a variety of hardware and operating
systems platforms, including Windows NT. Developments in progress at this time
include a graphical user interface (GUI) for applicable modules and open
database compliant (ODBC) features. At the same time, the Company continues to
look at developing or acquiring new products based upon
third generation tools and modern software languages. The Company is also
studying the use of such tools, as well as Web-based tools, to accomplish the
migration of its current offerings to modern operating systems environments.
New enhancements to its software products are continually being developed by
MCS. Notable developments in 1998 were (1) the introduction of a "point-of-care"
enhancement to MCS's Home Health Care software and (2) the introduction of an
enhanced inventory system for MestaMed. During 1998, 1997, and 1996 MCS spent
approximately $1,992,000, $1,575,000, and $1,338,000, 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 delivery of home health care services is increasingly dominated by hospital
based "integrated delivery systems" (IDS). MCS has not established a
relationship at this time with a supplier of information systems to hospital
based delivery systems. It has, however, recently entered into agreement with
the Volunteer Hospital Association whereby its products will be recommended to
the Association's members as a recommended solution for their home health
services information systems needs.
The markets for business applications software and systems development are
intensely competitive and subject to rapid technological change. For this reason
MCS faces risks and enjoys opportunities, which are somewhat more pronounced
than in the Company's other operating segments. MCS has many competitors in the
markets in which it operates both on a regional and national basis. Foreign
sales are not significant. On December 31, 1998, MCS's backlog was approximately
$1,619,000.
MCS's inventory consists primarily of computer hardware and related equipment,
which is sold together with applications software as a turnkey solution. MCS
attempts to maintain a sixty-day supply so that delivery of completed systems
can be made on a timely basis.
METAL FORMING
The Company's Metal Forming Segment designs, manufactures and sells a variety of
metal handling and metal forming products under names such as
Cooper-Weymouth-Peterson, Dahlstrom, Hill Engineering, CoilMate-Dickerman, and
Rowe (collectively Formtek). The products are sold through independent dealers
in most cases to end-users and in some cases to other original equipment
manufacturers. The products include roll formers, roll forming systems, wing
benders, presses, servofeeds, straighteners, cradles, reels, cut-to-length
lines, specialty dies, tube cut-off systems, hydraulic punching blanking and
cutoff systems, rotary punching, and flying cut-off saws.
In 1997 this Segment added two additional units: Hill Engineering, Inc. a
leading producer of precision tools and dies for the gasket manufacturing and
roll forming industries, and CoilMate, Inc., a leading producer of pallet
decoiling equipment for the metal stamping and roll forming industries. The
CoilMate product has been combined with a former CWP Division, Dickerman, and
this "low-end" line is now marketed as CoilMate-Dickerman.
The Company believes it has improved its competitive position within the metal
forming marketplace by developing servo-driven feeders with microprocessor
controls, and other software controls, affording diagnostic and operational
features, as well as by the strategic acquisitions made in 1996 and 1997 which
broadened the segment's overall product offerings.
Certain products made by these units are custom designed and manufactured to
meet unique customer needs or specifications not currently met by existing
products. These products, developed by
the Company's design and application engineering groups, often represent
improvements on existing technology and are often then incorporated into the
unit's standard product line.
The primary customers for such metal-handling and metal-forming equipment
include contract metal stampers, manufacturers of large and small appliances,
commercial and residential lighting fixtures, automobile accessories, office
furniture and equipment, metal construction and HVAC products.
The businesses of Formtek are highly competitive and, due to the nature of the
products, are significantly more cyclical (due to changes in manufacturing
capacity utilization) than the Company's other operating segments. CWP, Rowe,
and CoilMate-Dickerman have become substantial forces in the manufacture of coil
handling equipment through their broad and competitive product lines, together
with Formtek's customer driven application engineering and ability to meet
customer delivery and service requirements through separate extensive
distribution networks. The Company expects that these strengths will be further
leveraged by the large installed customer bases of its recent acquisitions.
The Metal Forming Segment sells equipment in Canada and other foreign markets.
Total export sales did not exceed ten percent (10%) of the total revenues nor
did foreign assets exceed ten percent (10%) of total assets in any of the most
recent five years ending December 31,1998.
The backlog relating to this segment at December 31, 1998 was approximately
$10,958,000. Expenditures for research and development for this segment in 1998,
1997, and 1996 were $465,000, $298,000, and $53,000, respectively.
METAL PRODUCTS
The Company's Metal Products Segment (consisting of National Northeast
Corporation, OmegaFlex, Inc. and Boyertown Foundry Company) manufactures a
variety of metal products including extruded aluminum heat sinks, flexible metal
hose and grey iron castings. This segment sells cast iron products to the HVAC
industry, including the company's HVAC segment, flexible metal hose products to
the HVAC and industrial metal hose marketplaces, extruded aluminum products for
thermal management, (heat sinks), to the electronics marketplaces, extruded
aluminum products to the architectural products marketplace, and extruded
aluminum products to the Company's HVAC segment.
National Northeast Corporation (National) extrudes aluminum shapes for the
construction and other markets and extrudes and fabricates aluminum based
products and assemblies and high precision aluminum heat sinks (heat dissipation
devices) for use in a wide variety of power control, communications and related
electronic and computer systems applications. Its products are made through an
extrusion process supported by a broad line of secondary machining, stamping and
assembly capabilities. National's application engineering and fabrication
capabilities have helped it become a substantial competitor in the heat sink
market place.
OmegaFlex, Inc. (Omega) manufactures corrugated flexible stainless steel hose
for use in a wide variety of industrial applications. Its products include
annular, helical and braided metal hose and hose fabrications and are sold
primarily through industrial hose distributors. In January of 1997, Omega
introduced Trac-PipeTM, a corrugated stainless steel tubing developed for use in
piping gas appliances. The Company has realized significant synergies by
distributing Trac-PipeTM through its extensive HVAC distribution network.
Boyertown Foundry Company (BFC) operates a cast-iron foundry in Boyertown, PA,
which manufactures products used principally in the HVAC industry.
The Metals Products Segment sells products in Canada and in other foreign
markets. Total export sales, however, did not exceed ten percent of total
revenues, nor did foreign assets exceed ten percent of total assets in any of
the most recent five years ending December 31, 1998.
The backlog relating to this segment at December 31, 1998 was approximately
$3,764,000.
Expenditures for research and development for this segment, independent of
research and development related to specific customer requests, in 1998, 1997,
and 1996 were $256,000, $389,000, and $151,000 respectively.
SEGMENT INFORMATION
Selected financial information regarding the operations of each of the above
segments, consistent with statement of Financial Accounting Standard No. 131 and
Section 101 (d) of Regulations 5-K, is presented in Note 12 to the Consolidated
Financial Statements.
Item 2 - PROPERTIES
The HVAC segment of the Company manufactures equipment at plants that the
Company owns in Waldron, Michigan; Bradner, Ohio; Wyalusing, Pennsylvania;
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 Reed Division leases manufacturing space from unrelated parties
in Mississauga, Ontario, Canada; as well as a regional distribution facility in
Mississauga, Ontario, Canada.
The Metal Forming segment manufactures products at plants the Company
owns in Clinton, Maine, Villa Park, Illinois, Schiller Park, Illinois, and
Danville, Kentucky.
The Metal Products segment manufactures products at plants the Company owns in
Pelham, New Hampshire, Boyertown, Pennsylvania and at leased facilities in
Lawrence, Massachusetts, Winter Haven, Florida, and Exton, Pennsylvania.
During 1998 the Company acquired additional office and manufacturing space in
Dallas, Texas and, as more fully described in Note 2 to the Consolidated
Financial Statements, acquired substantially all of the manufacturing and office
facilities of EAFCO, Inc. in Boyertown, Pennsylvania.
The Company's Computer System's segment (MCS) leases office space in
Monroeville, Pennsylvania, which houses its principal offices and computer
facility used in the computer software development and system design business.
MCS has also recently leased office space in Pleasanton, California. MCS owns
the computer equipment used in its operations
The Company's principal executive offices in Westfield, Massachusetts
are leased from an entity owned by an officer and director of the Company. The
Company also owns an office building in Holland, Ohio.
In addition, the Company and certain of its subsidiaries lease other office
space in various cities around the country for use as sales offices.
Certain of the owned facilities are pledged as security for certain long-term
debt instruments. See Property and Equipment, Note 4 to the Consolidated
Financial Statements.
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 1998.
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 March 15, 1999 based on
inquiries of the registrant's transfer agent was 1337. For this purpose,
shareholders whose shares are held by brokers on behalf of such shareholders
(shares held in "street name") are not separately counted. The price range
of the Company's common stock between January 1, 1999 and March 15, 1999 was
between $21 3/8 and 18 3/4, and the closing price on March 15, 1999 was $18 3/4.
The quarterly price ranges of the Company's common stock during 1998 and 1997 as
reported in the consolidated transaction reporting system were as follows:
PRICE RANGE
1998 1997
---- ----
First Quarter $22 3/8 $18 1/4 $18 1/8 $16 1/8
Second Quarter $22 3/4 $18 9/16 $20 7/8 $16 1/4
Third Quarter $22 $18 $21 3/8 $17 3/4
Fourth Quarter $20 3/4 $17 1/2 $19 3/8 $17 3/8
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.
SUMMARY OF FINANCIAL POSITION as of December 31,
(dollars in thousands except per share data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total Assets $ 205,143 $ 191,117 $ 170,010 $ 141,431 $ 120,430
Working capital 49,415 42,056 59,274 41,626 36,628
Long-term debt, including
current portion 13,188 19,329 15,362 3,031 5,548
Shareholders' equity 133,298 118,007 103,718 91,046 80,732
Shareholders' equity
per common share (1) $ 14.99 $ 13.22 $ 11.61 $ 10.14 $ 8.93
========= ========= ======== ========= =========
SUMMARY OF OPERATIONS - for the year ended December 31, (2) (dollars in
thousands except per share data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total revenues $338,344 $327,778 $299,527 $245,865 $224,018
Net income 16,064 14,405 13,329 10,906 9,298
Earnings per common share:
Net Income
Basic $ 1.80 $ 1.61 $ 1.49 $ 1.21 $ 1.02
Diluted $ 1.80 $ 1.61 $ 1.49 $ 1.21 $ 1.02
1)Equity per common share amounts are computed using the common shares and
common share equivalents outstanding as of December 31, 1998, 1997, 1996, 1995,
and 1994.
(2)Includes the results of acquired companies or asset acquisitions from the
date of such acquisition, as follows:
* Boyertown Foundry Company from November 2, 1998
* Ruscio Brothers Industries, (RBI), from April 29, 1998
* CoilMate, Inc., from November 3, 1997
* Hill Engineering, Inc., from January 31, 1997
* Dahlstrom Industries, Inc. from August 30, 1996.
* Rowe Machinery & Automation,Inc., from February 5, 1996.
* Omega Flex, Inc., from February 2, 1996.
* National Northeast Corporation and National Southeast Corporation
from October 30, 1995.
* Heat Exchangers, Inc., from November 15, 1995.
* Aztec Sensible Cooling, Inc., from November 1, 1994.
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION
This report contains forward-looking statements, which are subject to inherent
uncertainties. These uncertainties include, but are not limited to, variations
in weather, changes in the regulatory environment, the broad economic effect of
the Year 2000 problem, customer preferences, general economic conditions, and
increased competition. All of these are difficult to predict, and many are
beyond the ability of the Company to control.
Certain statements in this Annual Report on Form 10-K constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, that are not historical facts but rather reflect the Company's current
expectations concerning future results and events. The words "believes",
"expects", "intends", "plans", "anticipates", "likely", "will", and similar
expressions identify such forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of the
Company (or entities in which the Company has interests), or industry results,
to differ materially from future results, performance or achievements expressed
or implied by such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements which reflect management's view only as of the date of this Annual
Report on Form 10-K. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstance after the date hereof or to reflect the
occurrence of unanticipated events, conditions or circumstances.
RETURN ON AVERAGE NET ASSETS EMPLOYED
1998, 1997, 1996
The Company's Return on Average Net Assets Employed, defined as operating
profits before bonuses, 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 1998, 1997, and 1996 was as follows:
1998 1997 1996
---- ---- ----
Operating Profits (as defined) $31,497,000 $30,525,000 $25,925,000
Average Net Assets Employed (as defined $147,170,000 $130,419,000 $113,594,000
- ------------- ------------- -------------
Return on Average Net Assets Employed 21.4% 23.4% 22.8%
============ =========== ============
The 1998 return on Average Net Assets Employed decreased slightly from 1997,
despite improvements from the Company's Metal Forming and Metal Products
segments, due to reduced operating incomes from the Company's HVAC and Computer
Software Segments.
ANALYSIS: 1998 VS. 1997
The Company's core HVAC Segment reported comparative results for 1998 and 1997
as follows:
1998 1998 1997 1997
------ ----- ------ -----
($000) % ($000) %
------ ----- ------ -----
Net Sales $229,704 100.00% $229,423 100.00%
Gross Profit 65,485 28.51% 66,178 28.85%
Operating Income 15,668 6.82% 17,846 7.78%
The Company's decision in 1998 to close its Temprite Manufacturing location in
Orangeville, Ontario, Canada, together with the effect of certain transitional
costs associated with the Company's recent HVAC acquisitions and certain other
product re-alignment costs, combined to produce flat HVAC revenues in 1998 and
reduced operating profits. The Company's Computer Systems Segment (MCS, Inc.)
reported reduced sales, margins and operating profits in 1998 as indicated in
the following table:
1998 1998 1997 1997
($000) % ($000) %
------ ----- ------ -----
Net Sales $16,630 100.00% $17,029 100.00%
Gross Profit 6,578 39.56% 7,238 42.5%
Operating Income 2,335 14.04% 3,289 19.31%
Reimbursement restrictions imposed upon Medicare providers (MCS's customers) in
1998 by the Balanced Budget Amendment adversely affected the home health care
information systems marketplace and resulted in reduced revenues for MCS. Also,
costs incurred by MCS relative to its efforts to address Year 2000 functionality
in its products, and other product development initiatives, impacted this
segment's operating costs adversely in 1998.
MCS's products were developed in what are today regarded as "legacy"
environments. Nevertheless, by the continual application and utilization of
tools developed by others, MCS has been able to sustain and improve the utility
of its products and offer such products on a variety of hardware, and operating
systems platforms, including Windows NT. Developments in progress at this time
include a graphical user interface (GUI) for applicable modules and open
database compliant (ODBC) features. At the same time the Company continues to
look at developing or acquiring new products based upon third generation tools
and modern software languages. The Company is also studying the use of such
tools, as well as Web-based tools, to accomplish the migration of its current
offerings to modern operating systems environments.
For 1998 reporting purposes the Company's former Metal Products Segment has been
subdivided into a Metal Forming Segment and a Metal products segment.
The Company's Metal Products Segment includes National Northeast Corporation,
(National), an aluminum extruder and heat sink fabricator acquired in 1995,
Omega Flex, Inc. (Omega), an industrial metal hose fabricator acquired in 1996,
and Boyertown Foundry Company, (BFC), a ninety-three and six tenths percent
(93.6%) owned subsidiary which acquired the foundry and machining operations of
Eafco, Inc. on November 2, 1998. Prior to that date, the Company's forty-six and
eight tenths percent (46.8%) investment in Eafco was accounted for on the equity
method and was not included in this segment. Results of operations for BFC for
the period November 2, 1998 through December 31, 1998, exclusive of intersegment
sales, are included in the this segments' 1998 results. BFC produces cast iron
products and related machining services for the Company's HVAC Segment and
various third parties. Comparative results for 1998 and 1997 were as follows:
1998 1998 1997 1997
($000) % ($000) %
- ------ - ------ -
Net Sales $50,745 100.00% $42,797 100.00%
Gross Profit 14,222 28.03% 10,407 24.35%
Operating Income 5,194 10.24% 2,723 6.36%
The growth in operating profits in 1998 is traceable to significantly improved
results from both National and Omega. National continued to execute its
aggressive expansion plan in 1998, moving its fabricating operations from
Lawrence, MA to its new facility in Pelham, NH, and continued to expand its
presence in the thermal management (heat sink) marketplace. Omega, with
significant 1997 product development and market development costs behind it,
successfully executed its plan in 1998 to greatly expand sales of its new
"Trac-pipe(TM)" flexible gas piping product, a corrugated stainless steel tubing
developed especially for use in the piping and installation of gas appliances.
The Company's Metal Forming Segment includes Copper-Weymouth, Peterson, (CWP),
Rowe Machinery and Automation Inc., (Rowe), a leading manufacturer of
press-feeding and cut-to-length equipment, acquired in 1996, Dahlstrom
Industries, (Dahlstrom), a leading manufacturer of roll forming equipment,
acquired in 1996, Hill Engineering, (Hill), a leading producer of tools and dies
for the gasket manufacturing and roll forming industries acquired on January 31,
1997, and CoilMate, Inc., (Coilmate), a leading producer of pallet decoiling
equipment for the metal stamping and roll forming industries acquired on
November 3, 1997. Comparative results for 1998 and 1997 were as follows:
1998 1998 1997 1997
------ ---- ------ ----
($000) % ($000) %
------ ---- ------ ----
Net Sales $41,265 100.00% $38,529 100.00%
Gross Profit 12,212 29.59% 10,626 27.00%
Operating Income 4,170 10.11% 1,537 3.99%
The relocation of the Rowe manufacturing operation to the Company's Formtek
facility in Clinton, Maine imposed significant direct and indirect costs on this
segment in 1997. With these costs behind it, this segment was able to exploit
the synergies expected from this consolidation and as a result operating income
for 1998 was up considerably on modestly increased revenues. The Coilmate
operations were moved from Southington, Connecticut to Clinton, Maine, in the
fourth quarter to achieve further operating synergies.
As a whole the Company reported comparative results as follows:
1998 1998 1997 1997
------ ---- ------ ----
($000) % ($000) %
------ ---- ------ ----
Net Sale $338,334 100.00% $327,778 100.00%
Gross Profit 98,136 29.00% 94,449 28.81%
Operating Income 27,367 8.09% 25,395 7.75%
Gross Profit and Operating Income percentage margins were relatively unchanged
overall.
Sales Expense for the Company as a whole, as a percentage of total revenues,
increased slightly, from twelve and forty-nine hundredths percent (12.49%) to
twelve and seventy hundredths percent (12.70%), owing to relatively flat
revenues in the Company's HVAC segment. General and Administrative Expenses, as
a percentage of revenues, decreased from six and thirteen hundredths percent
(6.13%) to five and sixty-two hundredths percent (5.62%), principally due to a
decrease in the provision for bonuses. Engineering Expense, as a percentage of
total revenues, increased slightly from two and forty-five hundredths percent
(2.45%) to two and sixty hundredths percent (2.60%). Interest Expense decreased
slightly in 1998, tracking the net reduction in interest bearing indebtedness.
Income Tax Expense for 1998, as a percentage of pretax income, was reduced
slightly from thirty-eight and two tenths percent (38.2%) to thirty-seven and
four tenths percent (37.4%).
ANALYSIS: 1997 VS. 1996
The Company's core HVAC Segment reported comparative results for 1997 and 1996
as follows:
1997 1997 1996 1996
------ ---- ------ ----
($000) % ($000) %
------ ---- ------ ----
Net Sales $229,423 100.00% $228,115 100.00%
Gross Profit 66,178 28.85% 62,164 27.25%
Operating Income 17,846 7.78% 16,142 7.08%
Revenues in this Segment were relatively flat in 1997 as increases in certain of
the Company's historical hydronic and gas-fired heating products were offset by
reductions in certain industrial and air conditioning products which were
traceable to a variety of factors, including the relatively mild summer of 1997.
Gross profit margins were improved overall in 1997 as product relocation costs
were reduced and raw material costs remained well controlled. Operating income
as a percentage of net sales was up slightly, reflecting the improvement in
gross profit margins.
The Company's Metal Products Segment includes National Northeast Corporation,
(National), an aluminum extruder and heat sink fabricator acquired in 1995,
Omega Flex, Inc., (Omega), an industrial metal hose fabricator acquired in 1996.
Comparative results for 1997 and 1996 were as follows:
1997 1997 1996 1996
- ---- ---- ---- ----
($000) % ($000) %
- ------ - ------ -
Net Sales $42,797 100.00% $31,052 100.00%
Gross Profit 10,407 24.35% 6,439 20.74%
Operating Income 2,723 6.36% 2,261 7.28%
Gross Profit and Operating Income for this segment were adversely effected in
1997 by significant new product development and market development costs
undertaken by Omega in connection with its introduction of Trac-PipeTM, a
corrugated stainless steel tubing developed especially for use in the piping and
installation of gas appliances, and also by certain transitional costs incurred
by National related to its planned relocation to Pelham, NH.
The Company's Computer Systems Segment (MCS, Inc.) reported improved revenues,
gross profits and operating profits in 1997 as indicated in the following table:
1997 1997 1996 1996
------ ---- ------ ----
($000) % ($000) %
------ ---- ------ ----
Net Sales $17,029 100.00% $16,114 100.00%
Gross Profit 7,238 42.50% 6,865 42.60%
Operating Income 3,289 19.31% 3,063 19.01%
MCS continued its commitment in 1997 to product enhancement and customer support
in the Durable Medical Equipment, Home Infusion Therapy, and Home Health
Services marketplaces.
The Company's Metal Forming Segment includes Cooper-Weymouth, Peterson, (CWP),
Rowe Machinery and Automation Inc., (Rowe), a leading manufacturer of
press-feeding and cut-to-length equipment, acquired in 1996, Dahlstrom
Industries, (Dahlstrom), a leading manufacturer of roll forming equipment,
acquired in 1996, Hill Engineering, (Hill), a leading producer of tools and dies
for the gasket manufacturing and roll forming industries acquired on January 31,
1997, and CoilMate, Inc., (Coilmate), a leading producer of pallet decoiling
equipment for the metal stamping and roll forming industries acquired on
November 3, 1997.
Comparative results, which, obviously, were affected by these acquisitions, were
as follows:
1997 1997 1996 1996
------ ---- ------ ----
($000) % ($000) %
------ ---- ------ ----
Net Sales $38,529 100.00% $24,246 100.00%
Gross Profit 10,626 27.00% 6,760 27.88%
Operating Income 1,537 3.99% 1,426 5.88%
The relocation of the Rowe manufacturing operation to the Company's Formtek
facility in Clinton, ME, which was completed in 1997, imposed significant direct
and indirect costs on this segment in 1997 and overshadowed otherwise solid
contributions from Cooper-Weymouth, Peterson, and Hill Engineering. Significant
synergies are expected to be derived from this relocation in future years.
As a whole the Company reported comparative results as follows:
1997 1997 1996 1996
------ ---- ------ ----
($000) % ($000) %
------ ---- ------ ----
Net Sales $327,778 100.00% $299,527 100.00%
Gross Profit 94,449 28.81% 82,228 27.45%
Operating Income 25,395 7.75% 22,892 7.64%
Gross Profit and Operating Income percentage margins were slightly improved
reflecting the effects described above.
Sales Expense for the Company as a whole, as a percentage of total revenues,
increased from eleven and eighty-five hundredths percent (11.85%) to twelve and
forty-eight hundredths percent (12.48%) (Sales Expense and General and
Administrative Expense for 1996, as reported in the accompanying financial
statements, have been adjusted to reflect certain reclassifications for purposes
of comparability). General and Administrative Expenses, as a percentage of
revenues, increased from five and forty-one hundredths percent (5.41%) in 1996
to six and thirteen hundredths percent (6.13%) in 1997, principally due to an
increase in the provision for bonuses. Engineering Expense, as a percentage of
total revenues, decreased slightly from two and fifty-five hundredths percent
(2.55%) to two and forty-four hundredths percent (2.44%). Interest Expense was
relatively unchanged in 1997, despite the various acquisitions, due to the
offsetting effect of positive cash flows from operations.
Income Tax Expense for 1997, as a percentage of pretax income, was reduced
slightly from thirty-nine and thirty-nine hundredths percent (39.39%) to
thirty-eight and sixteen hundredths percent (38.16%).
Pretax income for 1996 included gains from the sale of unneeded manufacturing
facilities totaling $1,444,000; there were no comparable transactions in 1997.
ANALYSIS: LIQUIDITY AND CAPITAL STRUCTURE
While working capital increased in 1998, from $42,056,000, at December 31, 1997
to $49,415,000 at December 31, 1998, this reflects principally the reduction in
Current Portion of Long-Term Debt, which occurred in 1998. Total interest
bearing indebtedness was reduced in 1998 by $6,141,000, reflecting the effect of
positive cash flows after all acquisitions and other capital spending.
The Company's funded debt to equity ratio (including deferred liabilities and
minority interests in funded debt) remained under three percent (3%) at December
31, 1998, despite the effect of the Company's 1998 acquisitions and other
capital spending, reflecting the effect of positive cash flows on the Company's
total debt position.
The principal changes to the Company's Net Assets Employed during 1998 were as
follows:
Net Assets Employed 12/31/97 $139,549,000
Acquisition of Ruscio Brothers Industries, Inc. 2,877,000
Added Investment in Boyertown Foundry Company 2,250,000
Capital spending in excess of depreciation 5,328,000
All other (77,000)
- --------
Net Assets Employed 12/31/98 $149,927,000
=============
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.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 130, which was effective for fiscal years beginning
after December 15, 1997. FAS 130 requires the presentation of "comprehensive
income," a more broadly defined measure of income, in addition to conventional
"net income. The Company adopted FAS 130 effective with 1998. The Company's
"comprehensive income" was not materially different from its "net income" as
explained in Note 1 to the Consolidated Financial Statements.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 131, which was effective for fiscal years beginning
after December 15, 1997. FAS 131 requires, in general, a "management approach"
rather than an "industry approach" to the disclosure of segment information. The
Company adopted FAS 131 in 1998 and expanded its segmental reporting accordingly
as reflected in Note 12 to the Consolidated Financial Statements.
YEAR 2000 DISCLOSURE
The following information is being provided as a Year 2000 Readiness Disclosure
Statement, and is subject to the provisions of the Year 2000 Information and
Readiness Disclosure Act.
The Company's risks related to the Year 2000 problem fall into four categories:
1. Information Technology Systems
The Company's principal business applications software packages and related
hardware and operating system environments, and the status of the Company's Year
2000 compliance efforts related thereto are as follows:
HVAC Segment:
The HVAC Segment maintains order entry, billing and manufacturing systems at a
number of locations. The Segment's needs in this area, while specific to each
individual division, have sufficient common ground that commercially available
software packages, suitably customized, have been used in the past rather than
custom written code. As a result, the Company decided in 1996 to address the
Year 2000 problem in this area by upgrading its various manufacturing/order
processing/inventory control/accounts receivable software systems to "Year 2000
Compliant" versions, while at the same time adding enhanced functionality.
The Company began a search at that time for a system which would meet the needs
of as many of its divisions as possible. Friedman Associates, a manufacturing
package with strong "configure to order" capabilities was chosen in 1997. The
majority of the Segment's business is processed through its Westfield,
Massachusetts, and Holland, Ohio, locations which are in the process of
implementing the Friedman Associates system in IBM
AS400 environments. The implementation process began in 1997 and is being
managed on a division by division basis. It is expected that all divisions
scheduled to implement the Friedman system will have completed this task by
October 31, 1999. As of March 23, 1999, approximately fifty percent 50% of the
HVAC divisions, as measured in 1998 revenues, have migrated to the Friedman
system or are otherwise operating in environments believed to be Year 2000
compliant. The Company believes based upon inquiries of the relevant vendors
that the IBM AS400 (model 500) operating system and the Friedman Associates
software are fully Year 2000 compliant. The Company also utilizes at certain
locations a manufacturing and order processing software known as MSS/Costar
which also operates on the IBM AS400 platform. The Company has recently paid to
make the necessary programming changes to make MSS/Costar Year 2000 compliant.
The Company also utilizes at one location a manufacturing and order processing
software known as Profit Key which, based upon representations from its seller,
is also Year 2000 compliant. The Company is presently in the process of
arranging for formal tests to validate its vendors' claims - both as to software
and as to operating systems relative to Year 2000 compliance.
The HVAC Segment performs most of its financial reporting on a centralized basis
in Westfield, MA using general ledger, payroll, payables, and human resources
software packages from Infinium, Inc. which, based upon representations from
Infinium, to the best of the Company's knowledge, are Year 2000 compliant. The
Infinium Software runs in an IBM AS400 mini computer environment. Based upon
representations from IBM, the Company believes the AS400 operating system
environment which it is using for its financial software systems is Year 2000
compliant. Certain of the Company's subsidiaries maintain separate financial
reporting functions using a variety of personal computer based software
solutions. Visual and Syspro, the principal software packages in use at remote
locations for financial accounting purposes are believed, based upon
representations from these vendors, to be Year 2000 compliant at this time. The
Company is presently in the process of arranging for formal testing to validate
the representations received in this regard from its hardware and software
vendors.
Metal Products Segment:
The Metal Products Segment has successfully phased in business application
systems believed to be Year 2000 compliant at this time based upon inquiries of
the relevant vendors. National Northeast Corporation implemented Visual
Manufacturing on a personal computer network running the Windows NT operating
system on January 1, 1999. Omega Flex, Inc. implemented Syspro Systems on a
personal computer network running the Windows NT operating system on January 1,
1998. Boyertown Foundry Company implemented Peachtree Software on a personal
computer network running the Windows NT operating system on November 1, 1998.
The business applications running in these environments include general ledger,
payables, payroll, human resources, order-entry and manufacturing. The Company
is presently in the process of arranging for formal test to validate its
vendors' claims - both as to software and as to operating systems - relative to
Year 2000 compliance.
Metal Forming Segment:
The Clinton, Maine location of the (Cooper-Weymouth, Peterson, Rowe and
CoilMate/Dickerman) Metal Forming Segment is in the process of implementing
Symix Software for its order entry, billing, manufacturing, scheduling,
inventory control and related needs. The system was loaded recently and operator
training is underway. Pilot programs will begin in April. We expect the new
system (less scheduling enhancements) to be operational September 1, 1999. The
Metal Forming Segment has developed a contingency plan to be used in the event
its transition to Symix is not complete as of December 31, 1999 which entails
fixing the Year 2000 problem in its
present MSS/Costar order entry and manufacturing environment. The vendor has
represented that it has a cure and that the cure can be implemented without
disruption prior to July 1, 1999. While the cost and effort required to
implement the Symix system is significant, the Company expects that the benefits
to its business process in addition to resolving Year 2000 functionality - will
be substantial as many enhanced functionalities are expected particularly in the
scheduling and advance planning areas. The Company believes that its contingency
plan for this segment is a realistic alternative which would allow the segment
to function as it does now after December 31, 1999 while it focuses on
completing the Symix implementation. There can be no assurance, however, that
the Company's implementation of the Symix system - or its implementation of its
contingency plan - will be accomplished successfully prior to December 31, 1999.
The Dahlstrom division shut down its non compliant systems in 1998 and in early
1999 completed development of a Year 2000 compliant Windows-based inventory and
costing system which is adequate to current needs. Dahlstrom intends to
implement the Symix system within two (2) years.
The Hill Engineering unit utilizes the Elite system by Informix. Because our
current version of the software, although Year 2000 compliant, will not be
supported by the vendor after June 1999, we will upgrade our software to a
better-supported version in the second quarter. Costs are expected to be
approximately $20,000. Based upon the representations of the vendor and
implementation of our current plan, we expect Hill's system to be compliant in
the third quarter of 1999.
Engineering (CAD/CAM) systems:
The Company uses a variety of commercially available engineering and
manufacturing design tools including AutoCAD, Pro E and Intergraph. Based upon
inquiries of the vendors of these systems, the Company believes that the
versions in use at its various locations are or will be soon Year 2000
compliant. The Company is presently arranging for formal testing to validate the
representations made by vendors in this regard.
2. Suppliers and Customers Year 2000 problems.
Both the Company's customer base and its supplier base are large and diverse. As
a result, the Company does not believe it has a reliable method of accurately
assessing the magnitude of the risk it faces relating to either its customers or
its suppliers. The possibility that one or more key suppliers may be unable for
some period to fulfill their obligations to the Company as a result of Year 2000
related problems cannot be discounted. In such an event, a disruption of the
Company's business, which could be financially material, is quite possible;
although most materials are readily available from other vendors (although lead
times may vary or be unpredictable or inadequate). The Company's core HVAC
segment has conducted a survey of its principal and mission critical suppliers
relative to Year 2000 compliance which covered eighty percent (80%) of the
annual spending done by this segment. Results overall were mixed in that while
responses were generally encouraging they were also in many cases legalistic and
as a result difficult to interpret in terms of genuine readiness. The Company's
Metal Forming Segment and Metal Products Segment are in the process of
conducting similar surveys. The Company will continue to seek assurances and
clarification from its key suppliers on the issue of Year 2000 readiness.
3. Embedded microprocessors.
The Company recognizes that some of its manufacturing equipment and some of its
office equipment (other than computers) include embedded microprocessors which
in some cases may prove to be non-Year 2000 compliant and may disrupt (until
replaced) the Company's operations. The Company's Metal Forming Segment has made
systematic inquiries of the suppliers of its key machinery,
equipment and processes controlled by microprocessors in an effort to establish
the status of embedded microprocessors in its manufacturing operations. The
results of these inquiries have been generally favorable, and based upon the
representations made by vendors, this segment believes its critical pieces of
manufacturing equipment are Year 2000 compliant. The Company's HVAC Segment and
Metal Products Segment are in the process of conducting a similar survey of
their key manufacturing equipment suppliers on the issue of embedded
microprocessors. Accordingly, the Company does not believe at this time that it
can accurately assess the magnitude of the risk it faces in this regard. The
Company intends to further query the suppliers of key machinery, equipment, and
processes to determine their contingency plans available to address any failures
which may occur after January 1, 2000. Management will continue to utilize the
technical resources available to it to manage this exposure.
4. MCS.
The Company's MCS subsidiary, which produces software used in information
systems for the home health care marketplace, released a Year 2000 compliant
version of its principal product, MestaMed, in the fall of 1998. Many of the
users of MestaMed have installed the upgrade, but a large number remain to be
installed. MestaMed runs on a number of different software operating systems
across a wide variety of hardware platforms. MCS has been aware that some older
operating systems used to run MestaMed are not Year 2000 compliant or will not
be supported by their suppliers and it has been working with customers to
encourage operating system upgrades. MCS recently learned that two such
operating systems used in conjunction with MestaMed will not be fully supported
by its developer after October 1999. MCS's preliminary tests indicate that its
products will be Year 2000 compliant while running under these operating
systems. MCS is working with the supplier to determine the extent of the
supplier's support for Year 2000 issues for the affected operating systems. The
Company has confirmed from the supplier that it will offer a Year 2000
date-processing limited warranty on several versions of these operating systems.
MCS is working closely with the supplier to confirm that this warranty will be
extended to the remaining versions of those operating systems. Depending on the
outcome of such discussions, MCS will encourage its customers affected by this
issue to upgrade to more current versions of the operating system prior to
December 31, 1999. A small percentage of MCS products users (generally
customized versions of MestaMed or those not choosing maintenance) are running
versions that are not Year 2000 compliant. The Company intends to encourage
these users to upgrade to the current version of MestaMed prior to December 31,
1999.
The Company's state of readiness:
Relative to its internal business applications systems, the Company believes
that the timetables and plans described above relative to Year 2000 upgrades and
conversions for its various locations are generally realistic. The possibility
that one or more of the Company's other divisions will fail to meet their
respective deadlines relative to the Year 2000 upgrade process cannot be
discounted.
Contingency Plans:
In some locations, the Company's plan to upgrade its business application system
to a Year 2000 compliant version prior to December 31, 1999 may be delayed due
to limited technical resources and/or other implementation challenges. The
Company believes it may be able, in some cases, to fix the Year 2000 problem in
its existing business application softwares in order to mitigate the effect of
such delays. There can be no assurance, however, that such contingency plans
will be effective and, accordingly, the risk that the Company's operations may
be significantly disrupted after December 31, 1999 cannot be discounted. Such
disruptions could be financially material to the Company.
Costs incurred relative to Year 2000 solutions:
The Company estimates that its total cost of addressing the Year 2000 issue,
(excluding costs incurred by MCS relative to its software products), including
software licenses, modifications, training and implementation will be
approximately $2,500,000 over the 4-year period ended December 31, 1999. Of this
total, the Company has incurred approximately $1,400,000 as of December 31,
1998.
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 Environmental Laws.
Permitting Activities
The Company is engaged in various matters with respect to obtaining, amending or
renewing permits required under Environmental Laws to operate each of its
manufacturing facilities. Based on the information presently available to it,
management 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.
Potentially Responsible Parties (PRP) Actions
The Company has 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 a
site lacks the financial ability to address compliance with the 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 High Point, North Carolina, the Company has been named as a PRP with regard
to the clean up of groundwater contamination allegedly due to dumping at a
landfill. The Company's activity at the site represented less than one percent
(1%) of all activity at the site. State authorities continue to investigate the
extent of and remediation methods for groundwater contamination at or near the
site, and the Company 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
a site in Southington, Connecticut, as a result of the EPA's preliminary
assignment of derivative responsibility for the presence of hazardous materials
attributable to two other corporations from whom the Company purchased assets
after the hazardous materials had been disposed of at the Southington site. The
Company is currently participating as part of a joint defense group in
discussions with the EPA for a "de minimis settlement" at the Southington,
Connecticut site. 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.
The Company has received a notice from Pitt County, North Carolina that it may
(along with many others) be a PRP at the Pitt County Landfill but the Company
believes that any material which it shipped to the site was not of a hazardous
nature. The Company has also received a request for
information from the EPA addressed to a predecessor of the Company regarding the
generation, storage, transportation and possible release of hazardous substances
at a superfund site in Coraopolis, Pennsylvania, and the Company has complied
with such request. The Company continues to investigate these matters, but
expects that they will not be material to the Company's financial position or
results of operations.
Releases of Hazardous Materials
There have been releases of hazardous materials on a few parcels of property
which are presently leased or operated by the Company. All such releases
occurred prior to the occupation of the properties by the Company. All releases
are in the process of assessment or remediation. At a site in Massachusetts
leased by the Company the Lessor has received notice from two abutters that
activities on the property prior to the Company's occupation may be the source
of groundwater contamination on the abutters' property. Based upon an
investigation by the Lessor, the claims do not appear to be supportable. 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 it's 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 (especially in
light of the international agreement on the reduction of green house gas
emissions set forth in the Kyoto Protocol).
Item 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 sheets of Mestek, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mestek, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the consolidated results of
their operations and their consolidated cash flows for each of the years in the
three year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
We have also audited Schedule II of Mestek, Inc. and subsidiaries as of December
31, 1998 and for each of the years in the three-year period ended December 31,
1998. In our opinion, the schedule presents fairly, in all material respects,
the information required to be set forth therein.
Boston, Massachusetts
March 5, 1999
(except for Note 16, as to which the date is)
March 30, 1999
MESTEK, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
1998 1997
---- ----
(Dollars in thousands)
ASSETS
Current Assets
Cash and Cash Equivalents $3,777 $2,494
Accounts Receivable - less allowances of
$3,443 and $2,529 55,443 52,696
Unbilled Accounts Receivable 286 248
Inventories 52,980 51,580
Deferred Tax Benefit 1,483 1,691
Other Current Assets 3,620 3,582
------- --------
Total Current Assets 117,589 112,291
Property and Equipment - net 55,841 40,715
Equity Investments --- 8,778
Other Assets and Deferred Charges - net 7,148 5,516
Excess of Cost over Net Assets of Acquired Companies 24,565 23,817
-------- --------
Total Asset $205,143 $191,117
======== ========
See Accompanying Notes to Consolidated Financial Statements
MESTEK, INC.
CONSOLIDATED BALANCE SHEETS (continued)
As of December 31,
1998 1997
---- ----
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving Credit Agreement $12,619 $3,500
Current Portion of Long-Term Debt 131 15,167
Accounts Payable 20,126 20,276
Accrued Salaries and Bonuses 6,187 6,100
Accrued Commissions 3,985 4,157
Progress Billings in Excess of Cost
and Estimated Earnings 3,150 3,205
Customer Deposits 5,746 4,854
Other Accrued Liabilities 16,230 12,976
- ----------- ----------
Total Current Liabilities 68,174 70,235
Deferred Tax Liability 361 224
Long-Term Debt 438 662
Deferred Compensation 9 14
-------- ---------
Total Liabilities 68,982 71,135
-------- ---------
Minority Interests 2,863 1,975
-------- ---------
Shareholders' Equity:
Common Stock - no par, stated value $0.05 per share,
9,610,135 shares issued 479 479
Paid in Capital 15,434 15,434
Retained Earnings 125,263 109,199
Treasury Shares, at cost (719,830 and
683,830 common shares, respectively) (6,790) (6,109)
Cumulative Translation Adjustment (1,088) (996)
--------- ---------
Total Shareholders' Equity 133,298 118,007
--------- ---------
Total Liabilities and Shareholders' Equity $205,143 $191,117
========= =========
See Accompanying Notes to Consolidated Financial Statements.
MESTEK, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
1998 1997 1996
---- ---- ----
(Dollars in thousands, Except Earnings Per Common Share)
Net Sales $321,714 $310,749 $283,413
Net Service Revenues 16,630 17,029 16,114
--------- -------- --------
Total Revenues 338,344 327,778 299,527
Cost of Goods Sold 230,156 223,539 208,050
Cost of Service Revenues 10,052 9,790 9,249
--------- -------- --------
Gross Profit 98,136 94,449 82,228
Selling Expense 42,970 40,929 35,492
General and Administrative Expense 19,015 20,096 16,202
Engineering Expense 8,784 8,029 7,642
--------- --------- --------
Operating Profit 27,367 25,395 22,892
Interest Expense (1,256) (1,434) (1,377)
Gain on Sale of Property --- --- 1,444
Other Income (Expense), Net (460) (668) (968)
--------- --------- ---------
Income Before Income Taxes 25,651 23,293 21,991
Income Taxes 9,587 8,888 8,662
--------- --------- ---------
Net Income $16,064 $14,405 $13,329
========= ========= =========
Basic Earnings per Common Share: $ 1.80 $ 1.61 $ 1.49
========= ========= =========
Basic Weighted Average Shares Outstanding 8,921 8,929 8,938
========= ========= =========
Diluted Earnings Per Common Share $ 1.80 $ 1.61 $ 1.49
========= ======== =========
Diluted Weighted Average Shares Outstanding 8,949 8,951 8,943
========= ========= =========
See Accompanying Notes to Consolidated Financial Statements.
MESTEK, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
Common Paid In Retained Treasury Translation Cumulative
(Dollars in Thousands) Stock Capital Earnings Shares Adjustment Total
------ ------- -------- -------- ---------- ----------
Balance - December 31, 1995 $479 $15,434 $81,465 ($5,449) ($883) $91,046
Net Income 13,329 13,329
Common Stock Repurchase (591) (591)
Cumulative Translation Adjustment (66) (66)
------ ------- -------- -------- ---------- -----------
Balance - December 31, 1996 $479 $15,434 $94,794 ($6,040) ($949) $103,718
Net Income 14,405 14,405
Common Stock Repurchased (69) (69)
Cumulative Translation Adjustment (47) (47)
------ ------- -------- -------- ---------- -----------
Balance - December 31, 1997 $479 $15,434 $109,199 ($6,109) ($996) $118,007
Net Income 16,064 16,064
Common Stock Repurchased (681) (681)
Cumulative Translation Adjustment (92) (92)
------ ------- -------- -------- ---------- -----------
Balance - December 31, 1998 $479 $15,434 $125,263 ($6,790) ($1,088) $133,298
====== ======= ======== ======== ========== ===========
See Accompanying Notes to Consolidated Financial Statements
MESTEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Cash Flows from Operating Activities:
Net Income $16,064 $14,405 $13,329
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 8,599 6,548 5,143
Provision for Losses on Accounts
Receivable, net of write-offs 914 828 324
Gain on Sale of Property --- --- (1,444)
Net Change in Minority Interests net of
effects of acquisitions and dispositions 256 (82) (491)
Changes in assets and liabilities net of
effects of acquisitions and dispositions:
Accounts Receivable (2,782) (2,498) (5,047)
Unbilled Accounts Receivable (38) (74) (35)
Inventory 755 (6,894) 1,002
Accounts Payable (560) 430 1,109
Other Liabilities 2,718 247 (2,212)
Progress Billings (55) 306 (5)
Deferred Compensation (5) (4) (4)
Other (1,341) 109 4,399
------- ------- -------
Net Cash Provided by Operating Activities 24,525 13,321 16,068
------- ------- -------
Cash Flows from Investing Activities:
Capital Expenditures (12,802) (11,740) (7,213)
Disposition of Property & Equipment --- --- 4,642
Acquisition of Businesses and Other
Assets, Net of Cash Acquired (2,877) (12,886) (14,172)
------- ------- -------
Net Cash (Used in) Investing Activities (15,679) (24,626) (16,743)
------- ------- -------
Cash Flows from Financing Activities:
Net Borrowings (Repayments) Under
Revolving Credit Agreement 9,119 3,500 (1,725)
Principal Payments Under Long
Term Debt Obligations (15,909) (1,234) (1,699)
Proceeds from Issuance of Long Term Debt --- --- 15,000
Repurchase of Common Stock (681) (69) (591)
------- ------- -------
Net Cash (Used In) Provided by Financing Activities (7,471) 2,197 10,985
------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents 1,375 (9,108) 10,310
Translation effect on Cash (92) (47) (66)
Cash and Cash Equivalents - Beginning of Year 2,494 11,649 1,405
------- ------- -------
Cash and Cash Equivalents - End of Year $3,777 $2,494 $11,649
======= ======= =======
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 subsidiaries, collectively referred to as the Company. All material
inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue recognition and unbilled receivables
Revenue from product sales is recognized at the time of shipment. Revenue from
the licensing of software applications and software systems development 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
The Company considers all highly liquid investments with a remaining maturity of
90 days or less at the time of purchase to be cash equivalents. Cash equivalents
include investments in an institutional money market fund, which invests in U.S.
Treasury bills, notes and bonds, and/or repurchase agreements, backed by such
obligations.
Inventories
Inventories are valued at the lower of cost or market. Approximately
eighty-three percent (83%) of the cost of inventories are determined by the
last-in, first-out (LIFO) method.
Property and equipment
Property and equipment are carried at cost. Depreciation and amortization are
computed using the straight-line and accelerated methods over the estimated
useful lives of the assets or the life of the lease, if shorter. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is reflected in
income for the period. The cost of maintenance and repairs is charged to income
as incurred; significant improvements are capitalized.
Excess of Cost Over Net Assets of Acquired Companies (Goodwill)
The Company amortizes goodwill on the straight-line basis over the estimated
period to be benefited. The acquisition of RBI, as more fully described in Note
2, resulted in goodwill of
approximately $1,807,000 which will be amortized over 25 years. The Company
continually evaluates the carrying value of goodwill. Any impairments would be
recognized when the expected future operating cash flows derived from the
underlying acquired businesses is less than the carrying value of the goodwill.
Accumulated amortization of goodwill and other intangibles was $3,640,000 and
$2,514,000 at December 31, 1998 and 1997, respectively.
Advertising Expense
Advertising costs are charged to operations as incurred. Such charges aggregated
$3,993,000, $3,738,000, and $3,193,000 for the years ended December 31, 1998,
1997, and 1996 respectively.
Equity Investments
The Company's 48.6 percent interest in H. B. Smith Company, Incorporated (HBS)
is accounted for under the equity method. The company's 46.8 percent interest in
Eafco, Inc., (EAFCO), as more fully explained in Note 2, was exchanged on
November 2, 1998, pursuant to a tax-free reorganization, for 93.6 percent of the
foundry and machining operations of EAFCO.
Research and Development Expense
Research and development expenses are charged to operations as incurred. Such
charges aggregated $2,136,000, $1,628,000, and $1,018,000, for the years-ended
December 31, 1998, 1997, and 1996, respectively.
Software Development Expenses
The Company's MCS, Inc. subsidiary is in the business of application software
and systems development. SFAS 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 $1,992,000,
$1,575,000, and $1,338,000, for the years ended December 31,1998, 1997, and
1996, respectively.
Treasury shares
Common stock held in the Company's treasury has been recorded at cost.
Earnings per common share
Basic earnings per share have been computed using the weighted average number of
common shares outstanding. Common stock options, as more fully described in Note
15, were considered in the computation of diluted earnings per share but had no
effect.
Currency Translation
Assets and liabilities denominated in foreign currencies are translated into
U.S. dollars at exchange rates prevailing on the balance sheet date. Net foreign
currency transactions are reported in the results of operations in U.S. dollars
at average exchange rates. Adjustments resulting from balance sheet translations
are excluded from the determination of income and are accumulated in a separate
component of shareholders' equity.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
New Accounting Standard
SFAS No. 130, "Reporting Comprehensive Income," established standards for the
reporting and display of comprehensive income. For the years ended December 31,
1998 and December 31, 1997, respectively, the components of other comprehensive
income were immaterial and consisted solely of foreign currency translation
adjustments.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 131, which was effective for fiscal years beginning
after December 15, 1997. FAS 131 requires, in general, a "management approach"
rather than an "industry approach" to the disclosure of segment information. The
Company adopted FAS 131 in 1998 and expanded its segmental reporting accordingly
as reflected in Note 12 to the Consolidated Financial Statements.
Reclassification
Reclassifications are made periodically to previously issued financial
statements to conform to the current year presentation.
2. BUSINESS ACQUISITIONS
On November 2, 1998, the Company exchanged its forty-six and eight tenths
percent (46.8%) interest in Eafco, Inc. for ninety-three and six tenths percent
(93.6%) of the common stock of Boyertown Foundry Company (BFC) of Boyertown,
Pennsylvania. BFC received one hundred percent (100%) of the foundry and
machining operations of Eafco on that same date pursuant to "a split-up" of
Eafco structured for tax purposes as a tax-free reorganization under Internal
Revenue code Section 355. The Company has accounted for this transaction under
the purchase method of accounting. Accordingly, the carrying value of the
Company's equity investment in Eafco, $8,778,000 at November 2, 1998, was
treated as the purchase price for accounting purposes. The assets acquired by
BFC included substantially all of the real estate and equipment owned by Eafco
in Boyertown, Pennsylvania and used in the foundry, machining and boiler
assembly operations and certain other assets and liabilities. BFC will operate
principally as a cast-iron foundry, supplying cast iron sections and related
machining services to both the Company's Westcast subsidiary and to various
third parties, including Peerless Heater Company, Inc. In connection with this
transaction the Company loaned Eafco, Inc. $1,500,000 and also assumed and paid
$650,000 of Eafco's then outstanding bank indebtedness. The $1,500,000 loan
bears interest at BankBoston's (or any successor's) prime rate less one, is
payable over 42 months beginning on May 1, 2000, and is secured by substantially
all of Eafco's assets. BFC has also leased a portion of its boiler assembly
facilities in Boyertown, Pennsylvania, to Eafco, Inc. which will continue to
assemble and warehouse boilers in Boyertown, Pennsylvania, for Peerless Heater
Company, Inc.
On April 29, 1998, the Company, through a Canadian subsidiary, acquired 100
percent of the outstanding common stock of Ruscio Brothers Refractory Ltd. (RBR)
and 988721 Ontario, Inc. (988721), both of Mississauga, Ontario, Canada. RBR and
988721 manufacture and distribute commercial and residential copper-finned
boilers and water heaters under the name Ruscio Brothers Industries, (RBI),
primarily in Canada. Copper-finned boilers and water heaters are complementary
to the Company's other hydronic products and the Company now distributes RBI's
products in the United States. The purchase price paid for the acquired stock
was approximately $2,877,000 (U.S.) and included goodwill of approximately
$1,807,000 (U.S.)
Pro forma unaudited results of operations for BFC and RBI for 1998 and 1997 are
not provided herein as they are not considered material.
On January 2, 1997, the Company's National Northeast subsidiary paid $4,028,000
in additional consideration related to the purchase on October 30, 1995 of
approximately eighty-three percent (83%) of the issued and outstanding voting
common stock of National Northeast Corporation and National Southeast
Corporation (National). This payment completed the Company's acquisition of
National.
On January 31, 1997, the Company acquired ninety-one and one hundredth percent
(91.01%) of the issued and outstanding common stock of Hill Engineering, Inc.
(Hill) of Villa Park, Illinois and Danville, Kentucky. Hill is a leading
producer of precision tools and dies for the gasket manufacturing and
roll-forming industries and other specialty equipment. The purchase price paid
for the acquired stock was $5,141,000. The Company has accounted for this
acquisition under the purchase method of accounting.
On November 3, 1997 the Company acquired one hundred percent (100%) of the
issued and outstanding common stock of Coilmate, Inc. (Coilmate) of Southington,
Connecticut. Coilmate is the leading producer of pallet decoiling equipment for
the metal stamping and roll forming industries. The purchase price paid was
$3,521,000. The Company has accounted for this acquisition under the purchase
method of accounting.
Pro forma unaudited results of operations for Hill Engineering and Coilmate for
1997 and 1996 are not provided herein as they are not considered material.
On February 2, 1996, the Company acquired all of the issued and outstanding
common stock of Omega Flex, Inc. of Exton, Pennsylvania (Omega). Omega is a
manufacturer of flexible metal hose and related hose fabrications. The purchase
price paid for the acquired stock was $9,119,000. The Company has accounted for
this acquisition under the purchase method of accounting. Omega has leased its
manufacturing and office facilities through December 31, 2001, for $268,000 per
year.
On February 5, 1996, the Company acquired certain assets of the press feeding
and cut-to-length line businesses of Rowe Machinery & Automation, Inc. of
Dallas, Texas (Rowe). Rowe is a leading manufacturer of press feeding and
cut-to-length line equipment serving the appliance, office furniture,
automotive, and many other markets. The purchase price paid was $5,495,000,
including the assumed liabilities of $1,900,000. The Company has accounted for
this acquisition under the purchase method of accounting. The Company leased the
Rowe facility in Dallas, including machinery and equipment, on a short-term
basis through April of 1997.
On August 30, 1996, the Company acquired substantially all of the operating
assets of Dahlstrom Industries, Inc. (Dahlstrom) of Schiller Park, Illinois.
Dahlstrom is a leading manufacturer of roll-forming equipment for the metal
fabrication industry. The purchase price paid was $4,288,000 including assumed
liabilities of $2,606,000. The Company has accounted for this acquisition under
the purchase method of accounting.
Pro forma unaudited results of operations for Omega, Rowe, and Dahlstrom, for
1996 are not provided herein, as they are not considered material.
Under the purchase method of accounting, results of operations of acquired
businesses are included in consolidated operations subsequent to the date of
acquisition.
3. INVENTORIES
Inventories consisted of the following at December 31:
1998 1997
---- ----
Finished Goods $21,803,000 $18,012,000
Work-in-progress 13,948,000 15,386,000
Raw materials 24,463,000 25,842,000
----------- -----------
60,214,000 59,240,000
Less provision for LIFO
method of valuation (7,234,000) (7,660,000)
----------- -----------
$52,980,000 $51,580,000
=========== ===========
Progress billings exceeded related contract costs by $3,150,000, and $3,205,000
at December 31, 1998 and 1997, respectively. As such, these amounts are reported
as a liability in the accompanying consolidated financial statements.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
Depreciation and
Amortization Est.
1998 1997 Useful Lives
---- ---- -----------------
Land $2,395,000 $2,045,000
Buildings 21,887,000 18,319,000 19-39 Years
Leasehold Improvnts 4,474,000 4,352,000 15-39 Years
Equipment 78,820,000 60,260,000 3-10 Years
----------- -----------
107,576,000 84,976,000
Accumulated Depreciation (51,735,000) (44,261,000)
------------ ------------
$55,841,000 $40,715,000
============ ============
The above amounts include $6,870,000, and $1,939,000, at December 31, 1998 and
1997, respectively, in assets that had not yet been placed in service by the
Company. No depreciation was recorded in the related periods for these assets.
Depreciation and amortization expense was $8,599,000, $6,548,000, and
$5,143,000, for the years ended December 31, 1998, 1997, and 1996, respectively.
5. EQUITY INVESTMENTS
H. B. Smith Company Incorporated (HBS)
The Company's investment in HBS is carried at a zero balance reflecting the
Company's equity in HBS' cumulative losses. The Company has no obligation to
fund future HBS operating losses.
Eafco, Inc. (EAFCO)
As explained more fully in Note 2, the Company's forty-six and eight hundredths
percent (46.8%) investment in Eafco, Inc. was exchanged on November 2, 1998 for
ninety-three and six tenths percent (93.6%) of the foundry and machining
operations of Eafco.
6. LONG TERM DEBT
Long-Term Debt consisted of the following:
Dec. 31, Dec. 31,
1998 1997
---- ----
Senior Notes --- $15,000,000
Revolving Loan Agreement $12,619,000 3,500,000
Other Bonds and Notes Payable 569,000 829,000
------------- --------------
13,188,000 19,329,000
Less Current Maturities (12,750,000) (18,667,000)
------------ ------------
$ 438,000 $ 662,000
============= =============
Revolving Loan Agreement - The Company has a Revolving Loan Agreement and Letter
of Credit Facility (the Agreement) with a commercial bank. The Agreement
provides $50 million of unsecured revolving credit in U. S. dollars, $5 million
of unsecured involving credit in Canadian dollars, and $10 Million of standby
letter of credit capacity. Borrowings outstanding under the Agreement at
December 31, 1998 include $8,400,000 (CA$) in Canadian denominated indebtedness.
Borrowings under the Agreement bear interest at a floating rate based on the
bank's prime rate less one and seventy-five hundredths percent (1.75%) or, at
the discretion of the borrower, LIBOR plus a quoted market factor. The Agreement
was recently renewed on a one-year basis through April 30, 1999. The Company
expects to renew the Agreement as of April 30, 1999 on a one-year basis. The
Revolving Loan Agreement contains financial covenants, which require that the
Company maintain certain current ratios, working capital amounts, capital bases
and leverage ratios. This Agreement also contains restrictions regarding the
creation of indebtedness, the occurrence of mergers or consolidations, the sale
of subsidiary stock and the payment of dividends in excess of 50 percent of net
income.
Senior Notes - On April 5, 1996 the Company borrowed $15,000,000 from a
commercial insurance company on an unsecured basis, executing a Note Purchase
Agreement and the related Senior Notes, (the Notes). The Notes matured and were
paid off on March 1, 1998. The Notes bore interest at five and fifty-three
percent (5.53%) per annum.
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 five percent (5%) and matures on July
25, 2001. The outstanding balance under the Bond at December 31, 1998 was
$104,000. The Company's National Northeast subsidiary is obligated under a
non-interest bearing subordinated Note Payable on which interest was imputed at
eight percent (8%). The note is secured by certain pieces of equipment. The
outstanding balance under the note at December 31, 1998 was $65,000 and the note
matures on May 1, 2001. The Company's Hill Engineering subsidiary is obligated
under an Industrial Revenue Bond secured by certain of its operating assets. The
outstanding balance under the bond at December 31, 1998 was $400,000. The bond
bears interest at eighty percent (80%) of the prime rate and matures on
September 1, 2005.
Cash paid for interest was $1,256,000, $1,434,000, and $1,377,000, during the
years ended December 31, 1998, 1997, and 1996, respectively.
Maturities of long-term debt in each of the next five years are as follows:
1999 $12,750,000
2000 115,000
2001 72,000
2002 50,000
2003 50,000
The fair value of the Company's long-term debt is estimated based on the current
interest rates offered to the Company for debt of the same remaining maturities.
Management believes the carrying value of debt and the contractual values of the
outstanding letters of credit approximate their fair values as of December 31,
1998.
7. 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, 1998, John E. Reed,
Chairman, President and CEO of the Company and Stewart B. Reed, a Director of
the Company and son of John E. Reed, together beneficially own a majority of the
outstanding shares of the Company's common stock.
By a vote of its shareholders at its annual meeting of shareholders on May 22,
1996, the Company amended its Articles of Incorporation to authorize 10,000,000
shares of a new class (or classes) of preferred stock (the Preferred Stock) and
to eliminate both its $5.00 convertible, non-cumulative, non-voting, $100 par,
preferred stock (the Convertible Preferred) and its $6.00, $100 par, redeemable
preferred stock (the Redeemable Preferred). As of December 31, 1998 no shares of
the Preferred Stock have been issued.
8. INCOME TAXES
Income before income taxes included foreign losses of ($1,166,000), ($730,000),
and ($474,000) in 1998, 1997, and 1996, respectively. Income tax expense
(benefit) consisted of the following:
1998 1997 1996
---- ---- ----
Federal Income Tax:
Current $8,897,000 $7,188,000 $7,259,000
Deferred (283,000) 527,000 (134,000)
State Income Tax:
Current 1,708,000 1,045,000 1,551,000
Deferred (141,000) 166,000 (29,000)
Foreign Income Tax:
Current 18,000 18,000 15,000
Deferred (612,000) (56,000) ---
---------- ---------- ----------
Income Taxes $9,587,000 $8,888,000 $8,662,000
========== ========== ==========
Total income tax expense from continuing operations differed from "expected"
income tax expense, computed by applying the U.S. federal income tax rate of
thirty-five percent(35%) to earnings before income tax, as follows:
1998 1997 1996
---- ---- ----
Computed "expected" income tax $9,068,000 $8,218,000 $7,736,000
State income tax, net of federal tax benefit 867,000 787,000 989,000
Foreign tax rate differential (35,000) (22,000) (14,000)
Other - net (313,000) (95,000) (49,000)
----------- ----------- -----------
Income Taxes $9,587,000 $8,888,000 $8,662,000
=========== =========== ===========
A deferred income tax (expense) benefit results from temporary timing
differences in the recognition of income and expense for income tax and
financial reporting purposes. The components of and changes in the net deferred
tax assets (liability) which give rise to this deferred income tax (expense)
benefit for the year ended December 31, 1998 are as follows:
Change
December 31, (Expense) December 31,
1997 Benefit 1998
------------ --------- ------------
Deferred Tax Assets:
Warranty Reserve $566,000 $90,000 $656,000
Compensated Absences 722,000 (6,000) 716,000
Inventory Valuation 468,000 140,000 608,000
Accounts Receivable Valuation 858,000 (617,000) 241,000
State Tax Operating Loss
Carryforward 158,000 (27,000) 131,000
Foreign Tax Operating Loss
Carryforward 768,000 352,000 1,120,000
Deferred Income on Sale of Assets
to Non-consolidated Investees 159,000 --- 159,000
Other 17,000 10,000 27,000
---------- --------- ----------
Total Gross Deferred Tax Assets 3,716,000 (58,000) 3,658,000
Less Valuation Allowance (119,000) --- (119,000)
---------- --------- ----------
Deferred Tax Assets 3,597,000 (58,000) 3,539,000
---------- --------- ----------
Deferred Tax Liabilities:
Prepaid Expenses (733,000) 232,000 (501,000)
Depreciation and Amortization (1,397,000) (519,000) (1,916,000)
---------- --------- ----------
Deferred Tax Liabilities (2,130,000) (287,000) (2,417,000)
---------- --------- ----------
Net Deferred Tax Assets $1,467,000 ($345,000) $1,122,000
========== ========= ==========
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. This valuation
allowance was adjusted downward to $119,000 on December 31, 1995 because the
foreign operations resulted in earnings for the year. At December 31, 1998, no
additional valuation allowance has been established relative to the remaining
foreign tax operating loss carryforward or state tax operating 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, 1998, the Company has state tax operating loss and
foreign tax operating loss carryforwards of approximately $3,401,000 and
$2,416,000, respectively, which are available to reduce future income taxes
payable, subject to applicable "carryforward" rules and limitations. These
losses begin to expire after the following years:
State Foreign
2000 --- $2,416,000
2007 $3,401,000 ---
----------- -----------
$3,401,000 $2,416,000
=========== ===========
Cash paid for income taxes was $7,876,000, $9,027,000, and $7,354,000 for the
years ended December 31, 1998, 1997 and 1996 respectively.
9. LEASES
Related Party Leases
The Company leases various manufacturing facilities and equipment from companies
owned by certain officers and directors of the Company, either directly or
indirectly, through affiliates. The leases generally provide that the Company
will bear the cost of property taxes and insurance.
Details of the principal operating leases with related parties as of December
31, 1998 including the effect of renewals and amendments executed subsequent to
December 31, 1998 are as follows:
Date Basic Minimum
Of Annual Future
Lease Term Rental Rentals
Sterling Realty Trust
Land and Building - Main 12/17/84 15 years $192,000 $192,000
Land and Building - Engineering 07/01/98 5 years 76,800 345,600
Land and Building - South Complex 01/01/94 15 years 256,800 2,568,000
Machinery & Equipment 01/01/93 5 years 41,460 *
(Westfield, Farmville & Wrens
Locations)
Machinery Rental
Machinery & Equipment 01/01/93 5** years 223,980 223,980
(Westfield, Farmville, Wrens
and South Windsor Locations)
Elizabeth C. Reed Trust
Machinery & Equipment 01/01/93 5 years 14,100 *
Production Realty
Land and Building 01/01/97 2++years 120,000 240,000
Rudbeek Realty Corp.
(Farmville Location) 11/02/92+ 18.16 years 435,600 5,227,000
MacKeeber
(South Windsor Location) 01/01/97 8 years 324,600 1,947,600
* Original lease expired 01/01/98, month-to-month rental terminated as of
12/31/98, and machinery and equipment sold to the Company in January of 1999.
** Original lease expired on 01/01/98, month-to-month rental to continue until
12/31/99.
+ Original lease amended 4/1/98 extending the lease term to 12/31/10; and
amended again 7/1/98 increasing rent expense to $36,300 per month.
++ Lease was renewed as of 1/1/99 for an additional two-year renewal term
at $4.80/sf. for 25,000sf.
All Leases
Rent expense for operating leases, including those with related parties, was
$2,801,000, $2,719,000, and $3,454,000 for the years ended December 31, 1998,
1997 and 1996 respectively.
Future minimum lease payments under all noncancellable leases as of December 31,
1998 are as follows:
Operating
Year Ending December 31, Leases
1999 $2,612,121
2000 1,817,000
2001 1,362,000
2002 1,094,000
2003 1,052,000
After 2003 5,239,000
Total minimum lease payments $13,176,121
============
10. EMPLOYEE BENEFIT PLANS
The Company maintains a qualified non-contributory profit-sharing plan covering
all eligible employees. Contributions to the plan were $1,118,000, $1,011,000,
and $ 872,000, for the years ended December 31, 1998, 1997, and 1996,
respectively. Contributions to the Plan are defined as three percent (3%) of
gross wages up to the current Old Age, Survivors, and Disability, (OASDI), limit
and six percent (6%) of the excess over the 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 twenty percent (20%)
vesting after 3 years of service, forty percent (40%) after 4 years, sixty
percent (60%) after 5 years, eighty percent (80%) after 6 years, and one hundred
percent (100%) vesting after 7 years.
In addition to the profit-sharing plan, the Company also offers the following
defined contribution benefit plans:
The Company maintains a Retirement Savings Plan qualified under Internal Revenue
Code Section 401(k) for employees covered under regional collective bargaining
agreements. Service eligibility requirements differ by division and collective
bargaining agreement. Participants may elect to have up to fifteen percent (15%)
of their compensation withheld, up to the maximum allowed by the Internal
Revenue Code. Participants may also elect to make nondeductible voluntary
contributions up to an additional ten percent (10%) of their gross earnings each
year within the legal limits. The Company contributes differing amounts
depending upon the division's collective bargaining agreement. Contributions are
funded on a current basis. Contributions to the Plan were $302,000, $269,000,
and $247,000, for the years-ended December 31, 1998, 1997, and 1996,
respectively.
The Company maintains a separate qualified 401(k) Plan for salaried employees
not covered by a collective bargaining agreement, who choose to participate.
Participants may elect to have up to fifteen percent (15%) of their compensation
withheld, up to the maximum allowed by the Internal Revenue Code. Participants
may also elect to make nondeductible voluntary contributions up to an additional
ten percent (10%) of their gross earnings each year within the legal limits. The
Company contributes $0.25 of each $1.00 deferred by participants and deposited
to the Plan not to exceed one and five tenths percent (1.5%) of an employee's
compensation. The Company does not match any amounts for withholdings from
participants in excess of six percent (6%) of their compensation or for any
nondeductible voluntary contributions. Contributions are funded on a current
basis. Contributions to the Plan were $435,000, $392,000, and $349,000 for the
years ended December 1998, 1997, and 1996, respectively.
One of the Company's subsidiaries maintains a qualified defined contribution
target benefit pension plan, which covers substantially all of its employees.
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, 1998,
1997, and 1996 was $88,000, $65,000, and $70,000, 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 maintains an
employment agreement with its chief executive officer.
Approximately twenty-eight percent (28%) of the Company's employees are covered
under collective bargaining agreements, of which nineteen (19%) of these
employees are covered under agreements expected to be renewed in 1999.
11. COMMITMENTS AND CONTINGENCIES
The Company is 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.
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, 1998 was
$772,000.
The Company is subject to numerous laws and regulations that govern the
discharge and disposal of materials into the environment. Liabilities for
environmental remediation and/or restoration are recorded when it is probable
that obligations have been incurred and the amounts can be reasonably estimated.
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
Environmental Laws. The Company is engaged in various matters with respect to
obtaining, amending or renewing permits required under Environmental Laws to
operate each of its manufacturing facilities. 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, in the judgement of management, would have a material adverse impact
on the financial condition or results of operations of the Company. There have
been releases of hazardous materials on a few parcels of property which are
presently leased or operated by the Company. 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.
12. SEGMENT INFORMATION
Description of the types of products and services from which each reportable
segment derives its revenues:
The Company has four reportable segments: the manufacture of heating,
ventilating and air-conditioning equipment (HVAC), the manufacture of metal
handling and metal forming machinery (Metal Forming), the production of metal
products (Metal Products), and computer software development and system design,
(Computer Software).
The Company's HVAC segment manufactures and sells a wide variety of residential,
commercial and industrial heating, cooling, and air distribution products to
independent wholesales supply warehouses, to mechanical, sheet metal and other
contractors, and in some cases to other HVAC manufacturers under original
equipment manufacture (OEM) contracts. The products include finned tube and
baseboard radiation equipment gas fired heating and ventilating equipment, air
damper equipment and related air distribution products and commercial and
residential boilers. The products are marketed under a number of franchise names
including Sterling, Beacon Morris, Smith, Hydrotherm, RBI, Vulcan, Applied Air,
Wing, AWV, ABI, Arrow, Koldwave, and SpacePak.
The Company's Metal Forming Segment designs, manufactures and sells a variety of
metal handling and metal forming products under names such as Cooper-Weymouth,
Peterson, Dahlstrom, Hill Engineering, Coilmate/Dickerman, and Rowe. The
products are sold through independent dealers in most cases to end-users and in
some cases to other original equipment manufacturers. The products include roll
formers, feeds, straighteners, cradles, cut-to-length lines, specialty dies, and
flying cut-off saws.
The Company's Metal Products segment manufactures a variety of metal products
including aluminum extrusions, flexible metal hose and grey iron castings. This
segment sells its products mostly as components to manufacturers who incorporate
them into their own products. In some cases flexible metal hose is sold to
distributors.
The Company's Computer Software segment operates under the name MCS and develops
and sells software used principally in the medical information systems
marketplace. MCS's products include software used to manage the day-to-day
operations of durable medical equipment dealers and home health agencies.
Measurement of segment profit or loss and segment assets:
The Company evaluates performance and allocates resources based on profit or
loss from operations before interest expense and income taxes, (EBIT) not
including non-operating gains and losses. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Intersegment sales and transfers are recorded
at prices substantially equivalent to the Company's cost; inter-company profits
on such intersegment sales or transfers are not material.
Factors management used to identify the enterprise's reportable segments:
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because they
manufacture and distribute distinct products using distinct production processes
intended for distinct marketplaces.
Year ended
December 31, 1998
Metal Metal Computer All
HVAC Product Forming Software Other Totals
Revenues from External
Customers $229,704 50,745 41,265 16,630 --- $338,344
Intersegment & Intrasegment
Revenues $7,851 2,288 234 --- --- $10,373
Interest Expense $711 342 169 34 --- $1,256
Depreciation Expense $3,870 2,242 1,168 194 --- $7,474
Amortization Expense $231 584 373 --- --- $1,188
Segment Operating Profit $15,668 5,194 4,170 2,335 --- $27,367
Segment Assets $114,004 55,842 29,916 5,589 --- 205,351
Expenditures for
Long-lived Assets (1.) $3,064 8,185 1,025 528 --- $12,802
Year ended
December 31, 1997
Metal Metal Computer All
HVAC Product Forming Software Other(2.) Totals
Revenues from External
Customers $229,423 42,797 38,529 17,029 --- $327,778
Intersegment & Intrasegment
Revenues $7,809 634 509 --- --- $8,952
Interest Expense $850 265 215 38 66 $1,434
Depreciation Expense $2,732 1,791 940 119 --- $5,582
Amortization Expense $144 584 246 --- --- $974
Segment Operating Profit $17,846 2,723 1,537 3,289 --- $25,395
Segment Assets $113,405 35,312 28,577 5,045 8,778 $191,117
Expenditures for
Long-lived Assets (1.) $5,802 5,589 183 166 --- $11,740
Year ended
December 31, 1996
Metal Metal Computer All
HVAC Product Forming Software Other(2.) Totals
Revenues from External
Customers $228,115 31,052 24,246 16,114 --- $299,527
Intersegment & Intrasegment
Revenues $7,052 --- --- --- --- $7,052
Interest Expense $920 214 135 37 71 $1,377
Depreciation Expense $3,020 1,540 278 20 --- $4,858
Amortization Expense $169 368 104 --- --- $641
Segment Operating Profit $16,142 2,261 1,426 3,063 --- $22,892
Segment Assets $113,587 26,460 16,631 4,554 8,778 $170,010
Expenditures for
Long-lived Assets (1.) $3,950 1,440 1,619 204 --- $7,213
(1.) Excludes long-lived assets acquired via business acquisition.
(2.) Segment Assets in All Other in 1997 and 1996 represent the Company's
investment in Eafco, Inc. which was exchanged, as more fully described in Note
2, on November 2, 1998 for ninety-three and six tenths percent (93.6%) of the
foundry and machining operations of Eafco. The business assets thus acquired and
the related results of operations are included in the Metal Products segment in
1998.
RECONCILIATION WITH CONSOLIDATED DATA:
Revenues 1998 1997 1996
- -------- ---- ---- ----
Total external revenues for reportable segments $338,344 $327,778 $299,527
Inter & Intrasegment revenues for reportable segments 10,373 8,952 7,052
Elimination of Inter & Intrasegment revenues (10,373) (8,952) (7,052)
-------- -------- --------
Total consolidated revenues $338,344 $327,778 $299,527
======== ======== ========
Profit or Loss
Total profit or loss for reportable segments $27,367 $25,395 $22,892
Interest Expense (1,256) (1,434) (1,377)
Gain on sale of property --- --- 1,444
Other income (expense) net (460) (668) (968)
------- -------- -------
Income before income taxes $25,651 $23,293 $21,991
======== ======== ========
Assets:
Total assets for reportable segments $205,143 $182,339 $161,232
Equity Investment in Eafco Inc. (see Note 2) --- 8,778 8,778
-------- -------- --------
Total consolidated assets $205,143 $191,117 $170,010
========= ======== ========
GEOGRAPHIC INFORMATION:
1998 1997 1996
---- ---- ----
Revenues:
United States $314,603 $305,728 $273,980
Canada 17,310 14,235 17,590
Other Foreign Countries 6,431 7,815 7,957
-------- -------- --------
Consolidated Total $338,344 $327,778 $299,527
======== ======== ========
Long Lived Assets:
United States $78,502 $64,349 $45,163
Canada 1,904 183 251
Other Foreign Countries --- --- ---
------- ------- -------
Consolidated Total $80,406 $64,532 $45,414
======= ======= =======
13. SELECTED QUARTERLY INFORMATION (UNAUDITED)
The table below sets forth selected quarterly information for each full quarter
of 1998 and 1997.
(Dollars in thousands except per common share amounts).
1998 1st 2nd 3rd 4th
- ----
Quarter Quarter Quarter Quarter
Total Revenues $75,649 $77,688 $92,013 $92,994
Gross Profit $21,172 $21,607 $26,432 $28,925
Net Income $3,370 $2,832 $4,324 $5,538
Per Common Share:
Basic $0.38 $0.32 $0.48 $0.62
Diluted $0.38 $0.32 $0.48 $0.62
1997 1st 2nd 3rd 4th
- ----
Quarter Quarter Quarter Quarter
Total Revenues $75,216 $74,868 $87,327 $90,367
Gross Profit $20,427 $20,016 $24,980 $29,026
Net Income $3,253 $2,241 $3,841 $5,070
Per Common Share:
Basic $0.36 $0.25 $0.43 $0.57
Diluted $0.36 $0.25 $0.43 $0.57
14. COMMON STOCK BUYBACK PROGRAM
In 1998 and 1997 the Company continued its program of selective "open-market"
and odd lot purchases. 36,000 and 3,466 of such shares were acquired in 1998 and
1997, respectively. All such shares are accounted for as treasury shares.
15. STOCK OPTION PLANS
On March 20, 1996 the Company adopted a stock option plan, the Mestek, Inc. 1996
Stock Option Plan, (the Plan), which provides for the granting of incentive and
non-qualified stock options of up to 500,000 shares of stock to certain
employees of the Company and other persons, including directors, for the
purchase of the Company's common stock at fair market value at the date of
grant. The Plan was approved by the Company's shareholders on May 22, 1996.
Options granted under the plan vest over a five-year period and expire at the
end of ten years. During 1996, 90,000 options were granted, at an exercise price
of $13.75, to four employees and these options are outstanding at December 31,
1998.
As of March 20, 1996, the date of grant, the fair value of the options was
estimated using the Black-Scholes model with the following weighted average
assumptions:
Expected life (years) 10
Interest 6.56%
Volatility 22.5%
Dividend yield 0%
Effective with 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
SFAS No. 123. As permitted by the statement, the Company has chosen to continue
to account for stock-based compensation using the intrinsic value method.
Accordingly, no compensation expense has been recognized for its stock-based
compensation plan. Had the fair value method of accounting been applied to the
Company's stock option plan, with compensation cost for the Plan determined on
the basis of the fair value at the grant date for awards in 1998 and 1997, the
Company's net income and earnings per share would have been as follows:
1998 1997
---- ----
Net Earnings - as reported $16,064.00 $14,405.00
Net Earnings - pro forma $15,985.00 $14,326.00
Earnings per share - as reported $1.80 $1.61
Earnings per share - pro forma $1.79 $1.61
The application of SFAS 123 for pro forma disclosure may not be representative
of future effects of applying the statement.
On January 4, 1999, the Company granted 65,000 additional options at an exercise
price of $20.00 to three employees. The options granted vest over a five-year
period and expire at the end of ten years.
16. SUBSEQUENT EVENT
On March 26, 1999, the Company acquired substantially all of the operating
assets of the Anemostat Products and Anemostat-West Divisions of Dynamics
Corporation of America, a wholly-owned subsidiary of CTS Corporation. Anemostat
manufactures commercial air distribution products (grilles, registers, diffusers
and VAV boxes); security air distribution products; and door and vision frame
products for the HVAC and commercial building industries at locations in
Scranton, Pennsylvania, (Anemostat Products) and Carson, California,
(Anemostat-West). The Anemostat products are complementary to the Company's
existing louver and damper businesses. The purchase price paid for the assets
acquired was approximately $26,084,000, including assumed liabilities of
approximately $3,123,000. The Company intends to account for this acquistion
under the purchase method of accounting.
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 18, 1999, and to the extent required, is incorporated herein by
reference. Information regarding executive officers of the Company is set forth
under the caption "Executive Officers".
Item 11 - EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth in the Company's
proxy statement relating to the annual meeting of shareholders to be held May
18, 1999, 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 18, 1999, 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 18, 1999, 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' Reports Page 22
Financial Statements:
(a)(1) Consolidated Balance Sheets as
of December 31, 1998 and 1997 Pages 23 and 24
Consolidated Statements of Income for the Years
Ended December 31, 1998, 1997, and 1996 Page 25
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1998, 1997, and 1996 Page 26
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997, and 1996 Page 27
Notes to the Consolidated Financial Statements
(a)(2) Financial Statement Schedules
II. Valuation and Qualifying Accounts Page 47
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 48 through 51
(b) No reports on Form 8-K were filed during the three months ended December 31,
1998.
No annual report to security holders as of December 31, 1998 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 1999. Such annual report to security holders, proxy
statement or form of proxy will be furnished to security holders subsequent to
the filing of this Annual Report on Form 10-K.
Schedule II
MESTEK, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
Bal. at Charged Bad Debt Bal.
Beg. to Other Write-offs at end
Year Description of Year expense (1) (2) of Year
------- ------- ----- ---------- -------
1998 Allowance
for doubtful
accounts $2,529 $1,165 $57 ($308) $3,443
1997 Allowance
for doubtful
accounts $1,701 $1,124 $16 ($312) $2,529
1996 Allowance
for doubtful
accounts $1,377 $740 $26 ($442) $1,701
(1) Includes recoveries of amounts previously written-off and allowances for
doubtful accounts of acquired companies.
(2) Bad debts written off.
EXHIBIT INDEX
Those documents followed by a parenthetical notation are incorporated herein by
reference to previous filings with the Securities and Exchange Commission as set
forth below.
Exhibit No.
Description
****************
2.1 Plan of Reorganization of Eafco, Inc.
3.1 Restated Articles of Incorporation of Mestek, Inc., as amended (K)
3.2 By-laws of Mestek, Inc. as amended through April 1, 1993 (D)
10.1 Employment Agreement dated January 1, 1982 between Mestek
and John E. Reed (A)
10.2 Lease dated July 1, 1983 between Sterling Realty Trust (lessor)
and Mestek, Inc. (lessee) (D)
10.3 Lease dated December 17, 1984 between Mestek (lessee) and Sterling Realty
Trust (lessor), as amended on November 1, 1991 (D)
10.4 Lease dated January 1, 1994 between Mestek (lessee) and Sterling Realty
Trust (lessor) (D)
10.5 Amended and restated lease agreement dated as of July 1, 1997
between Mestek, Inc. (lessee) and Rudbeek Realty Corp. (lessor)
10.6 Amended and restated lease agreement dated as of January 1, 1997
between Vulcan Radiator Division, Mestek, Inc. (lessee) and
MacKeeber Associates Limited Partnership (lessor). (K)
10.7 Equipment Lease Agreement dated January 1, 1993, between Mestek (lessee)
and Sterling Realty Trust (lessor) (D)
10.8 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. (A)
10.9 Loan Agreement dated as of May 1, 1984 among the Connecticut Development
Authority (the "CDA"), MacKeeber Limited Partnership, Vulcan Radiator
Corporation and the Promissory Notes thereunder; Guaranty of Vulcan
Radiator Corporation and Reed National Corp. to the Connecticut Bank and
Trust Company, NA (A)
10.10 Note Agreement dated as of July 1, 1987 between Mestek, Inc. and
Massachusetts Mutual Life Insurance Company. (B)
10.11Indemnification Agreements entered into between Mestek, Inc. and its
Directors and Officers and the Directors of its wholly-owned subsidiaries
incorporated by reference as provided herein, except as set forth in the
attached schedule (C)
10.12 Share Purchase Agreement relating to the acquisition of capital
stock of Ruscio Brothers Refractory, Ltd. And Rainbow Electronics
Spotwelding Equipment, Ltd. dated April 29, 1998 by and between
1291893 Ontario, Inc. as Buyer and Domenic Ruscio, et al., as Sellers. (L)
10.13 Variable Interest Rate Cognovit Note dated December 15, 1993
between Mestek, Inc. and The Mary Staebell Trust (D)
10.14 Lease Agreement dated July 1, 1998 between Mestek (lessee) and
Sterling Realty Trust (lessor). (D)
10.15 Loan Agreement and Promissory Note dated June 7, 1993 between
The First National Bank of Boston and Mestek, Inc. (D)
10.16 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. (D)
10.17 Closing Agreement dated February 10, 1995 between Shougang
Mechanical Equipment of Pennsylvania, Inc. and West Homestead
Joint Venture Corporation. (E)
10.18 Equipment Lease Agreement dated January 1, 1993 between Machinery
Rental Company (Lessor) and Vulcan Radiator Corporation (Lessee). (E)
10.19 Equipment Lease Agreement dated January 1, 1993 between Machinery
Rental Company (Lessor) and Mestek, Inc. (Lessee). (E)
10.20 Equipment Lease Agreement dated January 1, 1993 between
Elizabeth C. Reed Trust (Lessor) and Mestek, Inc. (Lessee). (E)
10.21 Asset Purchase Agreement dated September 9, 1994 between
Mestek, Inc. and Aztec International, Ltd., debtor-in-possession;
and Aztec Sensible Cooling, Inc., debtor-in-possession, and the
Amendment thereto dated October 31, 1994. (E)
10.22 Stock Purchase Agreement relating to the acquisition of stock
of National Northeast Corporation dated October 30, 1995
by and between Mestek, Inc. as Buyer and David Weener,
Wayne Frerichs, Mark McCrill,and Jon Morrison as Sellers;
Stock Purchase Agreement dated October 30, 1995 relating to
the acquisition of stock of National Southeast Aluminum Corporation
by and between Mestek, Inc. as Buyer and David Weener,
Wayne Frerichs, Mark McCrill, and on Morrison as Sellers. (F)
10.23 Asset Purchase Agreement dated November 15, 1995 by and
between Mestek, Inc. and Heat Exchangers, Inc. and Lease. (G)
10.24 Stock Purchase Agreement dated February 2, 1996 for the purchase
of stock of Omega Flex, Inc. between Mestek, Inc. and Koji Shimada
and Lease. (G)
10.25 Agreement for the Purchase and Sale of Assets dated
January 12, 1996 by and between Mestex, Ltd.,
Rowe Machinery & Automation, Inc., and Met-Coil Systems Corporation,
and the Amendment thereto dated February 5, 1996 and Lease. (G)
10.26 Stock Purchase Agreement dated October 27, 1997 between
Formtek, Inc. and Joseph Julian. (J)
10.27 Asset Purchase Agreement dated October 2, 1995 by and
between Mestek, Inc. and Honeywell, Inc. (H)
10.28 Agreement of Sale dated July 5, 1995 between
The Hydrotherm Corporation and SET Realty, L.L.C. for the
purchase and sale of real propertyin Northvale, New Jersey. (H)
10.29 Purchase Contract dated November 15, 1995 for the purchase and
sale of real property in Dunmore, Pennsylvania between
Peritek, Inc. and R.R. Donnelly & Sons Company. (H)
10.30 1996 Mestek, Inc. Stock Option Plan. (I)
10.31 Amended and Restated Revolving Loans and Foreign Exchange
Facilities Agreement between Mestek, Inc. and Bank Boston
dated July 15, 1997. (J)
10.31 Agreement for The Purchase and Sale of Assets between
Formtek, Inc. (Purchaser) and Dalhstrom Industries, Inc.
(Seller) dated August 8, 1996. (K)
10.32 Lease dated January 1, 1997 between Pacific/
Air Balance, Inc. (Lessee) and Production Realty, Inc. (Lessor). (J)
10.33 Stock Purchase Agreement between Formtek, Inc.(Purchaser) and
Maurice Hill Trust dated August 16, 1991, Thomas Nedbal,
Donald Hill, Robert Martinelli, Elmer Utley, and Allen Reczek
(Sellers) dated January 30, 1997. (K)
10.34 Letter Agreement between Mestek, Inc. and the Travelers Insurance
Company, dated March 1, 1996, regarding five and fifty-three
hundredth percent (5.53%) Senior Notes due March 1, 1998. (K)
10.35 Supplemental Executive Retirement Agreements entered into between
Mestek, Inc. and certain of its officers. (J)
11.1 Schedule of Computation of Earnings per Common Share.
22.1 Subsidiaries of Mestek, Inc.
(A) Filed as an Exhibit to the Registration Statement 33-7101, effective
July 31, 1986
(B) Filed as an Exhibit to the Current Report on Form 8-K dated July 2,
1987
(C) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1987
(D) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1993
(E) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1994
(F ) Filed as an Exhibit to the Current Report on Form 8-K dated November
13, 1995.
(G) Filed as an Exhibit to the Current Report on Form 8-K dated February
13, 1996.
(H) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1995.
(I) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
(J) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
(K) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1996.
(L) Filed as an Exhibit to the Quarterly report on Form 10-Q for the
quarter ended June 30, 1998.
Exhibit 11.1
MESTEK, INC.
Schedule of Computation of Earnings Per Common Share
Years Ended December 31,
1998 1997 1996
---- ---- ----
Net income for earnings per share $16,064 $14,405 $13,329
======= ======= =======
Basic weighted ave. no. of common shares outstanding 8,921 8,929 8,938
======= ======= =======
Basic earnings per common share $1.80 $1.61 $1.49
======= ======= =======
Diluted weighted ave. no. of common shares outstanding 8,949 8,951 8,943
======= ======= =======
Diluted earnings per common share $1.80 $1.61 $1.49
======= ======= =======
Exhibit 22.1
LIST OF SUBSIDIARIES
Jurisdiction of
Name Formation
Advanced Thermal Hydronics, Inc. Delaware
Alapco Holding, Inc. Delaware
Anemostat, Inc Delaware
Boyertown Foundry Company Delaware
Deltex Partners, Inc. Delaware
Formtek, Inc. Delaware
Cooper-Weymouth, Peterson, Inc. Delaware
Hill Engineering, Inc. Illinois
CoilMate, Inc. Connecticut
Gentex Partners, Inc. Texas
Mestex, Ltd. (Texas limited partnership) Texas
Yorktown Properties, Ltd. (Texas limited partnership) Texas
HBS Acquisition Corporation Delaware
Keyser Properties, Inc. Delaware
Lexington Business Trust (Massachusetts business trust) Massachusetts
Mestek Canada, Inc. Ontario
Mestek Foreign Sales Corporation U.S. Virgin Islands
Mestek Technology, Inc. Delaware
MCS, Inc. Pennsylvania
National Northeast Corporation Delaware
Omega Flex, Inc. Pennsylvania
Pacific/Air Balance, Inc. California
TEK Capital Corporation Delaware
Westcast, Inc. Massachusetts
Exhibit 10.12
SCHEDULE OF DIRECTORS/OFFICERS
Indemnification Agreements
The Indemnification Agreement entered into by the Directors and/or Officers of
Mestek, Inc. and certain Directors of Mestek's wholly owned subsidiaries are
identical in all respects, except for the name of the indemnified director or
officer and the date of execution.
Set forth below is the identity of each director and officer of Mestek, Inc. and
the date upon which the above Indemnification Agreement was executed by the
Director or Officer.
Director and/or Officer Year of Execution
A. Warne Boyce 1987
E. Herbert Burk 1987
William J. Coad 1987
David R. Macdonald 1987
David M. Kelly 1996
Winston R. Hindle, Jr. 1995
David W. Hunter 1987
John E. Reed 1987
Stewart B. Reed 1987
James A. Burk 1987
R. Bruce Dewey 1990
Robert G. Dewey 1988
Nicholas Kakavis 1987
Robert K. McCauley 1995
Richard J. McKnight 1987
Walter J. Markowski 1990
John F. Melesko, Jr. 1987
Jack E. Nelson 1996
William S. Rafferty 1990
Stephen M. Shea 1987
Charles J. Weymouth 1995
Kevin R. Hoben 1996
Stephen M. Schwaber 1997
Phil K. LaRosa 1997
Robert P. Kandel 1997
Robert F. Neveu 1997
Richard E. Kessler 1997
Timothy P. Scanlan 1997
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: March 31, 1999 By: /S/ John E. Reed
-------------- -------------------------------------------------
John E. Reed, Chairman of the Board
and Chief Executive Officer
Date: March 31, 1999 By: /S/ Stephen M. Shea
-------------- -------------------------------------------------
Stephen M. Shea, Senior Vice President
Finance, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 31, 1999 By: /S/ A. Warne Boyce
-------------- -----------------------------------------------
A. Warne Boyce, Director
Date: March 31, 1999 By: /S/ E. Herbert Burk
-------------- -----------------------------------------------
E. Herbert Burk, Director
Date: March 31, 1999 By: /S/ William J. Coad
-------------- -----------------------------------------------
William J. Coad, Director
Date: March 31, 1999 By: /S/ David M. Kelly
-------------- -----------------------------------------------
David M. Kelly, Director
Date: March 31, 1999 By: /S/ Winston R. Hindle, Jr.
-------------- -----------------------------------------------
Winston R. Hindle, Jr., Director
Date: March 31, 1999 By: /S/ David W. Hunter
-------------- -----------------------------------------------
David W. Hunter, Director
Date: March 31, 1999 By: /S/ David R. Macdonald
-------------- -----------------------------------------------
David R. Macdonald, Director
Date: March 31, 1999 By: /S/ John E. Reed
-------------- -----------------------------------------------
John E. Reed, Director
Date: March 31, 1999 By: /S/ Stewart B. Reed
-------------- -----------------------------------------------
Stewart B. Reed, Director