UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2005March 31, 2006
( ) | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________________________ to ______________________
Commission File Number 000-51372
Omega Flex, Inc.
(Exact name of registrant as specified in its charter)
(610) 524-7272 Registrant’s telephone number, including area code
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes {x} No { } Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes { } No {x} Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of The Exchange Act). Yes { } No {x} The number of shares of the registrant’s common stock issued and outstanding as of
OMEGA FLEX, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements OMEGA FLEX, INC. CONSOLIDATED BALANCE SHEETS
See Accompanying Notes to Consolidated Financial Statements.
OMEGA FLEX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
See Accompanying Notes to Consolidated Financial Statements.
OMEGA FLEX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
See Accompanying Notes to Consolidated Financial Statements.
OMEGA FLEX, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The Company is a leading manufacturer of flexible metal hose, which is used in a variety of applications to carry gases and liquids within their particular applications. These applications The Company manufactures flexible metal hose at its facility in Exton, Pennsylvania, and sells its product through distributors, wholesalers and to original equipment manufacturers (“OEMs”) throughout North America, and in certain European markets. The accompanying consolidated financial statements include the accounts of Omega Flex, Inc. (Omega) and its subsidiaries (collectively the “Company”). The Company’s unaudited consolidated financial statements for the quarter ended
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions
Revenue Recognition The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe. Under generally accepted accounting principles, revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. The following criteria represent preconditions to the recognition of revenue: Persuasive evidence of an arrangement for the sale of product or services must exist. Delivery has occurred or services rendered. The sales price to the customer is fixed or determinable. Collection is reasonably assured. The Company generally recognizes revenue upon shipment in accordance with the above principles.
Earnings per Common Share | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic earnings per share have been computed using the weighted average number of common shares outstanding. StockCommon stock options forof the Company’s common stock (asCompany, as more fully described in Note 6)3, were considered in the computation of diluted earnings per share, except when such effect would be anti-dilutive.antidilutive. Basic and diluted weighted average shares outstanding have been adjusted for all periods to give retroactive effect to the stock split which was completed on June 23, 2005, as more fully described in the Spin-Off disclosure in Note 3.
Stock Based Compensation |
TheEffective January 1, 2006, the Company has adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), Share-Based Payment, (“SFAS 123R”), using the statement’s modified prospective application method. Prior to January 1, 2006, the Company followed SFAS No. 123, Accounting for Stock-Based Compensation (“FAS, as amended by SFAS No. 123”). As permitted by148, Accounting for Stock based Compensation Transition and Disclosure, an amendment to FASB Statement No. 123, which required entities to recognize as expense over the accounting standard,vesting period the Company has chosenfair value of stock-based awards on the date of grant or measurement date. For employee stock-based awards, however, SFAS Nos. 123 and 148 allowed entities to continue to account for stock-based compensations usingapply the intrinsic value method as prescribed byunder the provisions of Accounting Principles Board (“APB”) Opinion No. 25. Accordingly,25 and provide pro forma net earnings disclosures as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS Nos. 123 and 148 for periods as required prior to January 1, 2006.
Under the provisions of SFAS 123R, the Company recognizes the estimated fair value of stock based compensation in the consolidated statement of operations over the requisite service period of each option granted. Under the modified prospective application method of SFAS 123R, the Company applies the provisions of SFAS 123R to all awards granted or modified after January 1, 2006. The Company had no compensation expense has been recognized for its stock-based compensation plan, except as explained in Note 6.
The Companystock options outstanding at December 31, 2005 and made no option grants modifications of option grants, or settlement of option grants in the three year periodquarters ended DecemberMarch 31, 20042006 and accordingly,2005. Accordingly, there was no compensation expense recorded in 2006 and the adoption of SFAS 123R had no impact or pro forma adjustments to Net Income, Basic earnings per share or Diluted earnings per share.on the Company’s financial statements.
-7- |
Currency Translation |
Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing on the balance sheet date. The Statement of Operations is translated at average exchange rates. Net foreign currency transactions are reported in the results of operations in U.S. dollars at average exchange rates. Adjustments resulting from the translation of financial statements are excluded from the determination of income and are accumulated in a separate component of shareholders’ equity.
Income Taxes |
The Company has elected in 2004prior years and prior yearsup to the date of the Spin-Off as described in Note 3 below to file its federal income tax return as part of the consolidated tax return of Mestek, Inc., its former parent company.consolidated return. Mestek and the Company accountedaccount for the Company’s federal tax liabilities on the “separate company basis” method in accordance with FASSFAS No. 109, Accounting“Accounting for Income Taxes.Taxes”. Under this method the Company recorded tax expense and related deferred taxes and tax benefits in a manner comparable to that which it would have recorded if it were not affiliated with Mestek during those periods.Mestek.
The Company will file a separate Federal income tax return for the five months of 2005 in which it was a separate company, and for 2006 in its entirety.
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 offrom a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain.
Other Comprehensive (Loss) Income |
For the year ended December 31, 2004,2005, and for the quarter ended September 30, 2005March 31, 2006, respectively, the components of Other Comprehensive (Loss) Income consisted solely of foreign currency translation adjustments.
Note 3 – Distribution from Mestek, Inc.
Reclassification |
Reclassifications are made periodically to previously issued financial statements to conform to the current year presentation.
3. DISTRIBUTION FROM MESTEK, INC (Spin-Off)
On January 19, 2005, Mestek, Inc., (Mestek) and the Company’s former majority shareholder,Company announced plansthat Mestek intended to distribute itsit’s 86% equity interest in the Company in a Spin-Off, pro rata, to all of Mestek’s public shareholders as of a record date, which was subsequently established at June 23,
-8- |
2005, (the “Spin-Off”). The Spin-Off was preceded by an amendment on April 19, 2005 to the Company’s articles of incorporation to authorize a maximum of 20 million shares of common stock. The board of directors declared a share split on the Company’s common stock andon June 23, 2005 that resulted in a share split of 1 to 10,153.633 in order to effect a 1 for 1 share distribution under the Spin-Off. All references to shares and per share amounts in these Financial Statements have been retroactively restated to give effect to the stock split at the 1 to 10,153.633 ratio. In conjunction with the Spin-Off, the Company filed several preliminary registration statements on Form 10 with the Securities and Exchange Commission under the Securities Exchange Act of 1934. On July 22, 2005, the Company filed its definitive registration statement on Form 10 with the Securities and Exchange Commission and completed the Spin-Off on July 29, 2005. The Company’s common shares began trading on the NASDAQ National Market under the trading symbol “OFLX” on August 1, 2005.
In connection with the “Spin-Off” the Company executed certain agreements governing its relationship with Mestek subsequent to the date of the Spin-Off. These include:
A Separation and Distribution Agreement which relates to the events surrounding the distribution of Omega common shares to Mestek shareholders and certain aspects of the relationship between the companies thereafter.
A Tax Responsibility Allocation Agreement which relates to the allocation of tax liabilities between Mestek and the Company subsequent to the Spin-Off.
An Indemnification and Insurance Matters Agreement which provides for mutual indemnification relating to the respective company’s liabilities and definitions relating to insurance rights and obligations.
A Transitional Services Agreement by which Mestek will continue to provide to the Company certain corporate services, including legal, financial and tax services, in exchange for a fixed annual fee of approximately $70,000.
A Confidential Nondisclosure Agreement which imposes certain duties of confidentiality on the Company and Mestek.
All of the above agreements are described in greater detail in the Form 10 filing which has been made with the Securities and Exchange Commission by the Company in connection with the Spin-Off.
On January 12, 2005, the Company paid a dividend of $9,350,000 to its shareholders of record as of January 1, 2005. Consistent with their shareholdings, 10% of the dividend was received by Kevin Hoben, President and Chief Executive Officer and 4% by Mark Albino, Executive Vice President (both treated as a reduction of the accrued put obligation), and 86%, or $8,041,000 was received by Mestek, and charged against Retained Earnings. On July 1, 2005 and in anticipation of the Spin-Off, the Company stopped lending its daily cash receipts to Mestek, Inc., its 86% shareholder, in order to accumulate cash reserves necessary for working capital purposes prior to the effective date of the Spin-Off. At the effective date of the Spin-Off, Mestek remained indebted to the Company in the amount of $3,249,615.63 which was converted on the effective date of the Spin-Off to a 3-year note receivable from Mestek bearing interest at 100 basis points above the then prevailing 3 year US Treasury note yield.
|
|
The Company, Mestek, Inc., and the above officers entered into a shareholder agreement in 1996 that imposed certain restrictions on the transfer of any shares acquired by such officer in connection with the Omega Flex 1996 Stock Option Plan, and that also provided for rights by the Company to “call,” or the officers to “put,” such shares to or from the other party at a per share price based upon the Company book value. The shareholder agreement was terminated immediately preceding the effective date of the Spin-Off as explained in Note 7.
4. INVENTORIES
| March 31, | December 31, |
| 2006 | 2005 |
| (unaudited) |
|
| (dollars in thousands) | |
|
|
|
Finished Goods | $5,186 | $4,280 |
Raw Materials | 1,952 | 1,948 |
|
|
|
Total Inventory | $7,138 | $6,228 |
| ===== | ===== |
5. SHAREHOLDERS’ EQUITY
As of December 31, 2004, the Company had authorized common stock of 1,000 shares with par value of $60 per share. As of December 31, 2004, Mestek, Inc. owned 860 shares of the Company’s common stock, or 86%, and Kevin R. Hoben and Mark F. Albino, the President and Executive Vice President of the Company respectively, collectively owned the remaining 14% of the Company’s common stock. As explained more fully in Note 3, on June 23, 2005 the Company authorized a split of its common shares at a ratio of 1 to 10,153.633 in connection with the planned Spin-Off of Omega Flex common shares to Mestek Stockholders. All references to shares and per share amounts in these Financial Statements have been retroactively restated to give effect to the stock split at the above ratio.
The Company has paid two special dividends on its common stock, but these special dividends were declared and paid prior to the date that our common stock was registered with the Securities and Exchange Commission and began trading on the NASDAQ National Market in August, 2005. The first dividend was declared and paid to shareholders of record as of October 13, 2004, and the amount of the dividend was $0.886 per share on a fully diluted basis and after giving effect to the forward split as part of the distribution, as described in Note 3 under the caption “Spin-Off”. On January 12, 2005, the second dividend was paid to record shareholders as of January 1, 2005, and was $0.92 per share on a fully diluted basis and after giving effect to the forward split as part of the distribution. The 2005 dividend totaling $9,350,000 was recorded as a reduction to retained earnings for the portion related to Mestek, its 86% shareholder, and the remaining 14% portion relating to Mr. Hoben and Mr. Albino was recorded as a reduction to Common Stock Subject to Put Obligation in Current Liabilities as described in Note 7. Our future decisions concerning the payment of dividends on our common stock will depend upon our results of operations, financial condition and capital expenditure plans, as well as such other factors as the Board of Directors, in its sole discretion, may consider relevant. In addition, our existing indebtedness restricts, and we anticipate our future indebtedness may restrict, our ability to pay dividends.
-10- |
6. COMMITMENTS AND CONTINGENCIES
Note 4 - InventoriesCommitments:
| September 30, | December 31, |
| 2005 | 2004 |
| (unaudited) | (audited) |
| (dollars in thousands) | |
|
|
|
Finished Goods | $4,408 | $3,856 |
Raw materials | 1,871 | 1,576 |
|
|
|
Total Inventory | $6,279 | $5,432 |
Note 5 – Commitments, Contingencies and Warranties
Commitments:
The Company is obligated under indemnity agreementsIndemnity Agreements executed on behalf of 11 of the Company’s officersOfficers and directors.Directors. Under the terms of the agreements,Agreement, the Company is contingently liable for costs which may be incurred by the officersOfficers and directorsDirectors in connection with claims arising by reason of these individuals’ roles as officersOfficers and directors. The Company has obtained insurance policies against all or some of the contingent liabilities arising from such agreements.Directors.
As disclosed in Note 8,of March 31, 2006 and December 31, 2005, the Company has guaranteedwas a guarantor of the debt incurred byof its wholly-owned subsidiary, Exton Ranch, Inc., related to the mortgage note established on April 16, 2004 with Sovereign Bank for the purchase of the Company’s main operating facility at 451 Creamery Way in whichExton, Pennsylvania. However, as disclosed in Note 8, under the Company conducts its manufacturing operations, and whichcaption “Subsequent Events”, on April 27, 2006, the Company continues to lease fromCompany’s subsidiary Exton Ranch, Inc. repaid the entire outstanding principal balance (and accrued interest) of the $3.348 million.
The Company has entered into salary continuation agreements with two employees which provide for monthly payments to each of the employee or his designated beneficiary upon the employee’s retirement or death. The payment benefits range from $1,000 per month to $3,000 per month with the term of such payments limited to 15 years after the employee’s retirement at age 65. The agreements also provide for survivorship benefits if the employee dies after retirement but before the expiration of the 15 year payment period; death benefits if the employee dies before attaining age 65; and severance payments if the employee is terminated without cause, the amount of which is dependent on the length of company service at the timedate of termination. The net present value of the retirement payments is included in Other Long-term Liabilities. The Company has obtained and is the beneficiary of two whole life insurance policies in respect of the two employees, and the cash surrender value of such policies (included in Other Assets) exceeds the net present value of the Company’s obligations for the retirement payments at September 30, 2005.March 31, 2006.
Contingencies:
The Company retains significant obligations under its commercial insurance policies for losses occurring in the policy years in which it was a subsidiary of Mestek, Inc. For the policy year ending October 1, 2004.the2004, the Company retained liability for the first $2,000,000 per occurrence of commercial general liability claims (including productsproduct liability claims), subject to an agreed aggregate. For losses occurring in the policy year ended October 31, 2003, the Company retained liability for the first $500,000 per occurrence of commercial general liability claims (including product liability)liability claims), subject to an agreed aggregate. In addition, for 2004 and 2003 the Company retained liability for the first $250,000 per occurrence of workers compensation coverage, subject to an agreed aggregate. However, for policy years beginning on July 22, 2005, (the effective date of the Spin Off),Spin-Off) the Company retained liability for the first $25,000 per occurrence of commercial general liability claims (including products liability claims), subject to an agreed aggregate, and the Company is currently insured on a ‘first dollar’ basis for workers’ compensation subject to statutory limits. The Company maintains reserves for its obligations under these various policies based on claim experience and the reserves established by the insurers in relation to these claims. The reserve balances at September 30, 2005March 31, 2006 and December 31, 20042005 were not material in amount.
Prior to the Spin-Off, the Company self-insured a substantial portion of the health benefits provided for its employees and maintained reserves in this regard and relied upon a
|
|
recognized actuarial consulting firm to help it set and maintain these reserves. After the Spin-Off, the Company’s liability is limited to $30,000 per case and an aggregate of $600,000 annually. Current claims experience is running at about slightly less than $300,000 on an annualized basis.
The Company was obligated as a guarantor with respect to the debt of Mestek, Inc. under itMestek’s primary commercial bank line of credit. As of the effective date of the distribution of the Company’s common stock by Mestek, Inc. to its shareholdersSpin-Off (as disclosed in Note 3), the guaranty was cancelled and is no longer in effect.
The Company is subject to several legal actions and proceedings in which various monetary claims are asserted. Management, after consultation with its corporate legal department and outside counsel, does not anticipate that any ultimate liability arising out of all such litigation and proceedings will have a material adverse effect on the financial condition of the Company, except as set forth below.
The case Berry, et al. v. Titeflex Corp., et al., Company is currently pendingengaged in a litigation matter that was filed in the Clark County Circuit Court, of Clark County, Arkansas. In thisin Arkansas, alleging that the Company’s corrugated stainless steel tubing product, TracPipe®, and similar products manufactured by several other manufacturers, also named as defendants in the case, four individual residents of Arkansasis defective, or that instructions, warnings and an individual Texas resident have suedtraining in the top four United States manufacturersinstallation of corrugated stainless steel tubing (“CSST”), including Omega Flex, Inc.are defective, against potential damage to the corrugated stainless steel tubing systems caused by the near-by lightening strikes. The plaintiffs in this case have named three other corrugated stainless steel tubing manufacturers, and one plumber residing in Arkansas, as the manufacturer of TracPipe® brand CSST. The complaint proposes a nationaldefendants in this matter, and are seeking class action on behalfcertification as representatives of all ownerssimilarly situated persons in the United States, or in the alternative, in Arkansas and Texas, pursuant to the Arkansas rules of installed CSST. Installed CSSTcivil procedure. The case is alleged bycurrently in discovery, and no determinations have been made whether to certify the plaintiffs to be defective because it is alleged to be more susceptible to failure from near-lightning strikes than traditional black iron pipeclass either within the United States, or within the states of Texas and because the several manufacturers allegedly failed to warn of CSST’s allegedly heightened susceptibility to such damage.Arkansas. The Company believes it has valid defenses tothat the issues of both class certificationplaintiffs’ claims are entirely without merit and product liability andare defending the Company will contest these claimsmatter vigorously. At this time, there is no ability to estimate the Company believes that no estimationcost of defense or potential liability in the matter can be reasonably made. It is the nature of class action litigation in general anddamages related to this matter in particular, that if there should be an adverse decision on the issue of certification of a national class of CSST owners and an adverse decision on the issue of product liability, the financial position and results of operation of the Company could be materially adversely affected. Please refer to Part II, Item 1, “Legal Proceedings” for further information.matter.
Warranty CommitmentsCommitments::
Gas transmission products such as those made by the Company carry potentially serious personal injury risks in the event of failures in the field. As a result, the Company has extensive internal testing and other quality control procedures and historically the Company has not had a meaningful failure rate in the field due to the extensive nature of these quality controls. Accordingly,Due to the Company’s quality systems, the warranty expense is de minimis, and accordingly, the Company does not maintain aexpenses warranty reserve.costs on an “as incurred basis”.
Note 6 – Termination of “Put” Rights7. STOCK OPTION PLANS
In 1996, The Company had previously adopted a stock option plan (Plan) that(the “Plan”), effective July 1, 1996 which provided for the granting of both Incentive and Non-Qualified Stock Options (as those terms are defined in the Internal Revenue Code) of up to (pre-split) 200 shares of the Company’s common stock to certain employees of the Company for the purchase of the Company’s common stock at fair market value as of the date of grant. The Plan was approved by Mestek, Inc., then the Company’s sole shareholder. Options to purchase an aggregate of (pre-split) 140 shares of the common stock of the Company, representing a 14% equity share in the Company, were granted to two executives, Kevin Hoben, President and Mark Albino, SeniorExecutive Vice President, effective July 1, 1996. The options vested
-12- |
over a five-year period commencing May 1, 1999 and ending on May 1, 2004. All of the options granted subsequently vested in accordance with the terms of the Plan, and were exercised on October 13, 2004. The2004, in connection with which the Company received the $1,260,000 exercise price. Upon the exercise of the outstanding options by the two management shareholders, the Plan was terminated.
Through a separate agreement, the option holders (now shareholders in the Company) had a put right after exercise which allowed them to sell their shares to the Company at an amount based upon book value and the Company had a corresponding call option at an amount based upon book value. Under the terms of the agreement, the put right expired with the registration of the Company’s securities under federal securities laws. In accordance with APB 25, the
Company has reflected pre-tax charges to earnings as of September 30, 2004for the first quarter ended March 31, 2006 and September 30, 2005, of approximately $349,000$0 and $501,000,$228,000, respectively, for the compensation value in those periods of the options granted. These charges, which reflectreflected the potential obligations of the Company relative to the put rights, have beenwere credited to Common Stock Subject to Put Obligation which is reflectedObligation. In July 2005 in coordination with the accompanying financial statements“Spin-Off” described in Current Liabilities. The cumulative balance accrued byNote 3 the Company inand Mr. Hoben and Mr. Albino mutually terminated their respective call and put rights at which time the form of stock based compensation expense in respect ofCompany reclassified the remaining liability (approximately $2,743,000) to the put rights as of September 30, 2005 is $2,657,000. As of July 29, 2005, the effective date of the Spin-off (as disclosed in Note 5), the “put” right of the two management shareholders was terminated. The remaining liability relating to the “put” rights has been reclassified to Paid In Capital. No stock options were outstanding at or after December 31, 2005.
|
Note 7 – Dividends8. SUBSEQUENT EVENTS
On October 8, 2004, the Company’s board of directors declared two dividends to the Company’s then current shareholders of record (i.e., prior to the Spin-off). The first dividend was in the total aggregate amount of $9,000,000 and was paid in October 2004. The second dividend was paid in January 2005 in the total aggregate amount of $ 9,350,000, of which $8,041,000 was charged against Retained Earnings and $1,309,000 was charged against Common Stock Subject To Put Obligations.
Note 8 – Purchase of Exton Facility
On April 16, 2004,27, 2006, the Company’s subsidiary Exton Ranch, Inc. purchased from a third partypaid the facility at 451 Creamery Way in Exton, Pennsylvania in which Omega conducts its manufacturing operations, and which Omega continues to lease from Exton Ranch, Inc. To finance this purchase, Exton Ranch borrowed $3,720,000entire outstanding principal balance (and accrued interest) of the $3.348 million Mortgage Note that was obtained from Sovereign Bank evidenced by a mortgage note payablein 2004 to the bank. The mortgage note bears interest at LIBOR, plus 1.75% and matures on April 16, 2014. The mortgage note is amortized on a twenty-year schedule, but matures ten years after the date of the mortgage note. The monthly payments include a fixed principal payment of $15,500 per month and a variable interest payment based on the above formula. The mortgage note is secured by a first priority Open End Mortgage and Security Agreement on the property, and by the guaranty of Omega.
Note 9 - Segment and Geographic Information
To date, the Company has viewed its operations and manages its business as principally one segment, the manufacture and sale of flexible metal hose and accessories. The financial information disclosed herein represents all of the material financial information related topurchase the Company’s principal operating segmentmain facility in accordance with SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information.Exton, Pennsylvania.
Total revenues from international sources were $1,596,000 and $4,059,000 for the three months and nine months ended September 30, 2005, respectively, and $919,000 and $2,536,000 for the three months and nine months ended September 30, 2004, respectively. The Company’s revenues from international sources were primarily generated from customers located in Canada and Europe.
Note 10 – Intercompany Receivable from Former Parent Company
Upon the effective date of the Spin-off, Mestek was indebted to the Company in an approximate amount of $3.25 million, as a result of the prior intercompany financial relationship between the Company as a subsidiary and Mestek as the corporate parent. This indebtedness has been converted into a formal promissory note payable in three years and bearing interest at 5.03% per annum, which is equal to the three year U.S. Treasury note yield plus 100 basis points prevailing on the date the note was executed.
|
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements, which are subject to inherent uncertainties. These uncertainties include, but are not limited to, variations in weather, changes in the regulatory environment, customer preferences, general economic conditions, increased competition, the outcome of outstanding litigation, and future developments effecting environmental matters. All of these are difficult to predict, and many are beyond the ability of the Company to control.
Certain statements in this Quarterly Report on Form 10-Q that are not historical facts, but rather reflect the Company’s current expectations concerning future results and events, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believes”, “expects”, “intends”, “plans”, “anticipates”, “hopes”, “likely”, “will”, and similar expressions identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of this Form 10-Q. The Company undertakes no obligation to update the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances.
-13- |
OVERVIEW
As disclosed in Note 31 to the Financial Statements,financial statements, the Company is a former subsidiary of Mestek, Inc. On July 29, 2005, Mestek, Inc. effected a distribution of its 86% ownership of the Company’s common stock to the Mestek record shareholders. This distribution was preceded by the filing on July 22, 2005 of a definitive registration statement of the Company’s common stock on Form 10 with the Securities and Exchange Commission. The Company’s common shares began trading on the NASDAQ National Market under the trading symbol “OFLX” on August 1, 2005. Certain effects of the distribution are reflected in the changes of financial condition of the Company for the quarter ended September 30, 2005.March 31, 2006.
The Company is a leading manufacturer of flexible metal hose, and is currently engaged in a number of different markets, including construction, manufacturing, transportation, petrochemical, pharmaceutical and other industries.
The Company’s business is controlled as a single operating segment that consists of the manufacture and sale of flexible metal hose and accessories. The Company’s products are concentrated in residential and commercial construction, and general industrial markets. The Company’s primary product line, TracPipe® TracPipe® flexible gas piping, is used for gas piping within residential and commercial buildings. Through its flexibility and ease of use with patented fittings distributed under the trademark, AutoFlare®AutoFlare®, the TracPipe®TracPipe® flexible gas piping allows users to substantially cut the time required to install the gas piping, as compared to traditional methods. All of the Company’s annular hose products are manufactured at the Company’s Exton, Pennsylvania facility. A majority of the Company’s sales across all industries are generated through independent outside sales organizations such as sales representatives, wholesalers and distributors, or a combination of both. The Company has a broad distribution network in North America and to a lesser extent in other global markets.
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents increased from $280,000 in$9,882,000 at December 31, 20042005 to $7,325,000$11,928,000 in September 30, 2005.March 31, 2006. This increase is the result of collections in 2006 on the Company maintaining its own cash balances subsequentelevated receivables balance that existed at December 31, 2005, offset by reductions in current liabilities.
Accounts receivable (net of allowances) has decreased $4,986,000 when comparing the December 31, 2005 balance of $11,938,000 to the “Spin Off” andMarch 31, 2006 balance of $6,952,000, reflecting the cash generated bylower sales volume in the first quarter of 2006 compared to the fourth quarter of 2005.
The $1,832,000 decrease in accrued compensation results from the payment of performance incentives to employees in March 2006, which were earned for performance in 2005.
Accrued sales incentives have decreased $3,544,000 from $5,299,000 at December 31, 2005 to $1,755,000 at March 31, 2006. The change is attributable to the Company’s business operations since1st quarter 2006 payout of distributor and representative incentives earned in 2005.
Other accrued liabilities decreased $1,185,000 from $1,324,000 at December 31, 2005 to $2,509,000 at March 31, 2006, primarily reflecting the “Spin Off”. The inter-company receivable from parentbuild up of $16,572,000 was eliminated, primarily as a result of the repayment by Mestek of its debtfederal tax liability prior to the Company (from Mestek’s share ofCompany’s first estimated tax payment related to the dividends paid by the Company to its then current shareholders), and the remaining balance (approximately $3,250,000) of the Company’s intercompany receivables was fixed and documented in a written promissory note upon consummation of the “Spin Off”, and is now recorded as Note Receivable fromyear 2006.
|
|
Mestek. The dividends declared prior to the “Spin-Off” were declared in October 2004, and paid in two installments in October 2004 in the amount of $9,000,000, and in January 2005 in the amount of $ 9,350,000, of which $8,041,000 was charged against retained earnings and $1,309,000 was charged against Common Stock Subject to Put Obligations. The payment of these dividends also reduced the Company’s retained earnings, although the Company’s continued earnings during the first nine months of 2005 dampened the overall impact of the dividend on retained earnings.
The balance of the liability for the Put Obligation ($2,693,000) was converted to Paid in Capital effective with the date of the “Spin Off.”
Other accrued liabilities decreased $2,039,000 from $5,060,000 at December 31, 2004 to $3,021,000 at September 30, primarily reflecting the payment of year-end customer rebates for the year 2004.
RESULTS OF OPERATIONS
| Three months ended |
The Company reported comparative results from continuing operations for three-monthsthe three-month period ended September 30,March 31, 2006 and 2005 and 2004 as follows:
| Three-months ended September 30, | Three-months ended March 31, | ||||||
| 2005 | 2005 | 2004 | 2006 | 2006 | 2005 | 2005 | |
| ($000) | % | ($000) | % | ($000) | % | ($000) | % |
|
|
|
|
| ||||
Net Sales | $17,087 | 100.00% | $11,693 | 100.00% | $17,315 | 100.00% | $13,268 | 100.00% |
Gross Profit | $8,486 | 49.7% | $5,888 | 50.4% | $9,064 | 52.3% | $6,790 | 51.2% |
Operating Profits | $3,292 | 19.3% | $2,048 | 17.5% | $3,452 | 19.9% | $2,352 | 17.7% |
The Company’s sales increased $5,394,000 (46.1%$4,047,000 (30.5%) to $17,087,000$17,315,000 in the three-months period ended September 30, 2005,March 31, 2006, as compared against $11,693,000to $13,268,000 in the three-months period ended September 30, 2004,March 31, 2005, due to continued strong sales of the Company’s flagship TracPipe® flexible gas piping product and its patented connection system. Sales of TracPipe( were sustained by relatively strong single family and multi-family residential construction activity. The $5,394,000 increase in net sales from three-months period ended September 30, 2004 to three-months period ended September 30, 2005 reflects volume increases of $4,162,000 and net price increases of $1,232,000.was driven by volume.
The Company’s gross profit margins were down slightlyup from 50.4%51.2% in the three-months period ended September 30, 2004March 31, 2005 to 49.7%52.3% in the three-months period ended September 30, 2005March 31, 2006 indicative of inflationary pressures affecting stainless steelour abilities to effectively price our product coupled with enhanced manufacturing efficiencies and other commodities, softened somewhat by manufacturing efficiencies.
Reflecting the factors mentioned above, Operating Profit margins, increased by 1.8 percentage points from $2,048,000 in the three-months period ended September 30, 2004 to $3,292,000 in the three-months period ended September 30, 2005.reduced procurement costs.
Selling Expenses. Selling expenses consist primarily of employee salaries and associated overhead costs, commissions, and the cost of marketing programs such as advertising, trade shows and related communication costs. Selling expense was $2,484,000$2,525,000 and $2,075,000$2,432,000 for the three months ended September 30,March 31, 2006 and 2005, and 2004, respectively. The $409,000 increase in selling expenses is due to increased sales commissions and costs of additional personnel in the sales force. Sales expense as a percentage of sales declined from 17.7%18.3% for the three months ended September 30, 2004March 31, 2005 to 14.5%14.6% for the three months ended September 30, 2005.March 31, 2006.
General and Administrative Expenses. General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, and corporate general and administrative services. General and administrative expenses were $2,295,000$2,677,000 and $1,306,000$1,685,000 for the three months ended September 30,March 31, 2006 and 2005, and 2004, respectively. The $989,000$992,000 increase in expenses is attributable to legal
|
expenses and to management compensation as well as expenses associated with operating as a public company. For the preceding reasons, general and administrative expense, as a percentage of sales, increased from 11.2%12.7% for the three months ended September 30, 2004March 31, 2005 to 13.4%15.5% for the three months ended September 30, 2005.March 31, 2006.
Engineering ExpenseExpenses. DevelopmentEngineering expense consists of development expenses associated with the development of new products and enhancements to existing products, and manufacturing engineering costs. Engineering expenses were $415,000$410,000 and $459,000$321,000 for the three months ended September 30,March 31, 2006 and 2005 and 2004 respectively. The $44,000 decrease in engineering expenses is due almost entirely from decreased expenditures associated with the certification and qualification of new products. Accordingly, engineering expenses asAs a percentage of sales decreased from 3.9% for the three months ended September 30, 2004 toengineering expenses were flat at 2.4% for the three months ended September 30,March 31, 2006 and 2005.
-15- |
Reflecting the factors mentioned above, Operating Profit margins, increased by 2.2 percentage points from $2,352,000 in the three-months period ended March 31, 2005 to $3,452,000 in the three-months period ended March 31, 2006.
Interest Income-Net. Interest income-net includes interest income on the note receivable from Mestek which bears interest at 5.03% per annum,and interest income from the Company’s newly-enacted investment account for excess cash, andon our interest-bearing investments, reduced by interest expense associated with the commercial bank borrowings in April 2004 related to the Company’s purchase of itsvariable rate first mortgage on our manufacturing premises. The mortgage note bears interest at LIBOR plus 1.75%. Interest income was $57,000 in the three-months period ended September 30, 2005 and $153,000 for the three-months period ended September 30, 2004. The note receivable from Mestek decreased from $22,606,000 at September 30, 2004 to $3,250,000 at September 30, 2005.facility. Interest Expense was $45,000$37,000 for the three-months ended September 30,March 31, 2005 and $46,000$53,000 for the 3 monthsthree-months ended September 30, 2004.March 31, 2006. On April 27, 2006 the Company’s subsidiary Exton Ranch, Inc. repaid the entire outstanding principal balance (and accrued interest) of the $3,348 million Mortgage Note that was obtained from Sovereign Bank in 2004 to purchase the Company’s main facility in Exton, Pennsylvania.
Other Income-Net. Other Income-net primarily consists of realized foreign currency exchange gains (losses) on Omega Flex Limited payments for accounts payable, interest and management fee to Omega Flex, Inc., its parent corporation.
Income Tax Expense. For three-months period ended September 30,March 31, 2005, the Company’s effective income tax rate varied slightly from the statutory rates for both federal and state income taxes due to limitations on deductions related to Incentive Stock Options.
Nine months ended September 30, 2005 vs. September 30, 2004
The Company reported comparative results from continuing operations for the nine-month period ended September 30, 2005 and nine-months ended September 30, 2004 as follows:
| Nine-months ended September 30, | |||
| 2005 | 2005 | 2004 | 2004 |
| ($000) | % | ($000) | % |
|
|
|
|
|
Net Sales | $45,579 | 100.00% | $33,820 | 100.00% |
Gross Profit | $22,789 | 50.0% | $16,934 | 50.1% |
Operating Profits | $8,530 | 18.7% | $5,898 | 17.4% |
The Company’s sales increased $ 11,759,000 (34.8%) to $45,579,000 in the nine-months period ended September 30, 2005, as compared to $33,820 in the nine-months period ended September 30, 2004, due to continued strong sales of the Company’s flagship TracPipe® flexible gas piping product and its patented connection system. Sales of TracPipe( were sustained by relatively strong single family and multi-family residential construction activity. The $11,759,000 increase in sales from the nine-month period ended September 30, 2004 to the nine-month period ended September 30, 2005 reflects volume increases of $7,811,000and net price increases of $3,948,000.
The Company’s gross profit margins were decreased slightly from 50.1% in the nine-month period ended September 30, 2004 to 50.0% in the nine months period ended September 30, 2005 indicative of our abilities to effectively price our products, despite inflationary pressures affecting stainless steel and other commodities
Selling Expenses. Selling expense was $7,269,000 and $6,127,000 for the nine-month period ended September 30, 2005 and 2004, respectively. The $1,142,000 increase in selling expenses is due to increased sales commissions and freight costs on incremental sales, and costs of additional personnel in the sales force at our
|
foreign subsidiary. Sales expense as a percentage of sales declined from 18.1% for the nine-month period ended September 30, 2005 to 15.9% for the nine-month period ended September 30, 2004.
General and Administrative Expenses. General and administrative expenses were $5,943,000 and $3,544,000 for the nine months ended September 30, 2005 and 2004, respectively. The $2,399,000 increase in expenses is attributable to legal, management compensation, and costs associated with the “spin-off” from Mestek, Inc. For the preceding reasons, general and administrative expense, as a percentage of sales, increased from 10.5% for the nine months ended September 30, 2004 to 13.0% for the nine months ended September 30, 2005.
Engineering Expense. Engineering expenses were $1,047,000 and $1,364,000 for the nine months ended September 30, 2005 and 2004 respectively. The $317,000 decrease in engineering expenses is due mostly to decreased expenditures associated with the certification and qualification of new products. Accordingly, engineering expenses as a percentage of sales decreased from 4.0% for the nine months ended September 30, 2004 to 2.3% for the nine months ended September 30, 2005.
Interest Income-Net. Interest income-net includes interest income on the note receivable from Mestek which bears interest at 5.03% per annum, interest income from the Company’s newly-enacted investment account for excess cash, and interest expense associated with the commercial bank borrowings in April 2004 related to the Company’s purchase of its manufacturing premises. The mortgage note bears interest at LIBOR plus 1.75%. Interest income was $227,000 in the nine-months period ended September 30, 2005 and $304,000 for the nine-months period ended September 30, 2004. The note receivable from Mestek decreased from $22,606,000 at September 30, 2004 to $3,250,000 at September 30, 2005. Interest Expense was $128,000 for the nine-months ended September 30, 2005 and $51,000 for the nine months ended September 30, 2004.
Other Income-Net. Other Income-net primarily consists of realized foreign currency exchange gains (losses) on Omega Flex, Ltd. payments for accounts payable, interest and management fee to Omega Flex, Inc., the Parent.
Income Tax Expense. For nine-month period ended September 30, 2005, the Company’s effective income tax rate varied slightly from the statutory rates for both federal and state income tax due to limitations on deductions related to Incentive Stock Options.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Financial Reporting Release No. 60, released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 12 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The following is a brief discussion of the Company’s more significant accounting policies.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition, accounts receivable valuations, inventory valuations, goodwill valuation, intangible asset valuations, product liability costs, workers compensation claims reserves, health care claims reserves, and accounting for income taxes. Actual amounts could differ significantly from these estimates.
-16- |
Our critical accounting policies and significant estimates and assumptions are described in more detail as follows:
Revenue Recognition
Revenue Recognition |
The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of its flexible metal hose and pipe.related products. Under generally accepted accounting principles, revenues are considered to have been earned
|
when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. TheWith respect to sales of the Company’s products, the following criteria represent preconditions to the recognition of revenue:
Persuasive evidence of an arrangement for the sale of product or services must exist.
* | persuasive evidence of an arrangement must exist; |
* | delivery has occurred or services rendered; |
* | the sales price to the customer is fixed or determinable; and |
* | collection is reasonably assured. |
Delivery has occurred or services rendered.
The sales price to the customer is fixed or determinable.
Collection is reasonably assured.
The Company generally recognizes revenue upon shipment in accordance with the above principles.
Accounting for Income Taxes
Accounting for Income Taxes |
TheUp to the date of the Spin-Off, the Company has elected in 2004 and prior years to file its federal income tax return as part of the consolidated tax return of Mestek, Inc. its former parent company.company, consolidated return. Mestek and Omega accountaccounted for Omega’s federal tax liabilities on the “separate company basis” method in accordance with FAS 109, Accounting for Income Taxes. Under this method Omega recorded tax expense and related deferred taxes and tax benefits in a manner comparable to that which it would have recordedrecord if it were not affiliated during thosewith Mestek.
The Company will file a separate Federal income tax return for the five months of 2005 in which it was a separate and public company and will file a separate Federal income tax return for 2006 in its entirety.
By agreement, the Company will be responsible for and hold Mestek harmless from, any liability for its income taxes for all taxable periods, with Mestek.whether before or after the Spin-Off.
The preparation of the Company’s Consolidated Financial Statements requires it to estimate its income taxes in each of the jurisdictions in which it operates, including those outside the United States which may be subject to certain risks that ordinarily would not be expected in the United States. The income tax accounting process involves estimating its actual current exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and stock based compensation, for tax and accounting purposes. These differences result in the recognition of deferred tax assets and liabilities. The Company must then record a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Significant management judgment is required in determining the Company’s provision for income taxes, its deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, it may need to adjust its valuation allowance which could materially impact its financial position and results of operations.
-17- |
IMPACT OF INFLATION
Stainless steel and other related commodities represent a significant portion of the Company’s prime costs. As such, the Company’s margins are vulnerable to inflationary pressures which affect the commodity markets from time to time. Gross profit marginsMargins were down slightlynot significantly impacted by such commodity cost increases in the three-month period ended September 30, 2005 from the comparable period in 2004, which is indicativefirst quarter of inflationary pressures affecting stainless steel and other commodities, mitigated somewhat by manufacturing efficiencies. However, in the nine month period ended September 30, 2005, gross profit margins were essentially unchanged from the comparable period in 20042006 due to the timely implementation of price increases to our customers and to increased manufacturing efficiencies.effective hedging of commodity exposures, as explained above. If the rate of inflation continues to climb in 2006, with concurrent interest rate increases, the Company expects that the construction markets and the commodity markets in which it operates could be adversely impacted, thus potentially impacting the Company’s results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Three Months ended March 31, 2006
As of September 30,March 31, 2006, we had $11.9 million in consolidated cash, cash equivalents and short-term investments, which is $2.0 million more than at December 31, 2005 resulting from cash generated by the Company’s business operations. As disclosed in Note 8, our subsidiary Exton Ranch, Inc. used approximately $3,354 of cash to repay the entire outstanding principal balance of the $3,348 million Mortgage Note (and accrued interest).
Operating Activities
Cash provided by operations for the first quarter of 2006 was $2.1 million compared with $0.4 million provided by the first quarter of 2005, a $1.7 million increase. The most significant component was the collection of accounts receivable balances.
Investing Activities
Capital spending for the first quarter ended March 31, 2006 was $92,000. Capital spending in the first quarter ended March 31, 2005 was $386,000.
Financing
Cash used in financing activities was nominal in the first quarter of 2006 and 2005. |
As of March 31, 2006 and December 31, 2004,2005, the Company had no commercial bank line of credit for working capital purposes. The Company had historically relied upon its former corporate parent, Mestek, Inc. (Mestek), to provide working capital and other credit as needed through an intercompanyinter-company account relationship; however, the Company consistently transferred more cash to Mestek than it has borrowed resulting in a cumulative intercompanyinter-company receivable from Mestek. The Company discontinued the coordination of its bank accounts with Mestek on or about July 5, 2005, so that the Company continued to receive all of the proceeds from the payment of its accounts receivable, and Mestek continued to pay the Company’s account payables until on or about July 21, 2005, at which time the Company began paying its own accounts payable. The Company’s intercompanyinter-company receivable from Mestek was fixed and documented in a written promissory note upon the consummation of the Spin-offSpin-Off (as described in Note 31 to the consolidated financial statements)Consolidated Financial Statements), in the principal amount of $3,249,615 .$3,249,615.63. The Mestek promissory note bears interest at a rate equal to 5.03%of 5.06%, which is equal to the three year U.S. Treasury note yield plus 100 basis points prevailing on the date the note was executed, and is payable in full after three
years from the effective date of the Spin-off.Spin-Off. The Company has accumulated approximately $7,325,000$11,900,000 in cash and cash equivalents which are invested in a short-term investment facility.
|
|
The Company believes its liquidity position as of September 30, 2005 and DecemberMarch 31, 20042006 (and after the repayment in full of the Mortgage Note as disclosed in Note 8) is fully adequate to meet foreseeable future needs. The Company also believes that it will possess adequate cash reserves and will be able to obtain sufficient working capital lines of credit to meet its day-to-day needs including any acquisitions or capital expenditures it can reasonably foresee at this time.
Prior to the Spin-Off, the Company was obligated as a guarantor with respect to the debt of Mestek, Inc., its previous parent (as described in Note 3) under it primary commercial bank line of credit. As of the effective date of the distribution of the Company’s common stock by Mestek, Inc. to its shareholders, the guaranty was cancelled and is no longer in effect.
CONTINGENT LIABILITIES AND GUARANTEES
See Note 56 to the Company’s financial statements.
TheAs of March 31, 2006 and December 31, 2005, the Company is obligated aswas a guarantor forof the debt incurred byof its wholly-owned subsidiary, Exton Ranch, Inc., related to the mortgage note established on April 16, 2004 with Sovereign Bank for the purchase of the Company’s main operating facility at 451 Creamery Way,in Exton, Pennsylvania,PA., however, as disclosed in Note 8, tounder the financial statements.caption “Subsequent Events”, on April 27, 2006, the remaining $3.348 million principal balance on the mortgage note was paid in full along with all applicable accrued interest.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
Item 3. Quantitative And Qualitative Information About Market Risks
The Company does not engage in the purchase or trading of market risk sensitive instruments. The Company does not presently have any positions with respect to hedge transactions such as forward contracts relating to currency fluctuations. No market risk sensitive instruments are held for speculative or trading purposes. For a discussion of the risk factors facing the Company, and the shareholders’ investment in the Company, please refer to the Risk Factors set forth in the Company’s final registration statement on Form 10-12G/A, filed with the Securities and Exchange Commission on July 22, 2005.
Item 4 – Controls And Procedures
| (a) | Evaluation of Disclosure Controls and Procedures. |
At the end of the fiscal thirdfirst quarter of 2005,2006, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to ensure that the Company records, processes, summarizes and reports in a timely manner the information required to be disclosed in the periodic reports filed by the Company with the Securities and Exchange Commission. The Company’s management, including the chief executive officer and chief financial officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s Disclosure Controls and Procedures as defined in the Rule 13a-15(e) of Securities Exchange Act of 1934. Based on
-19- |
that evaluation, the chief executive officer and chief financial officer have concluded that, as of the date of their evaluation, the Company’s disclosure controls and procedures are effective to provide reasonable assurance of achieving the purposes described in Rule 13a-15(e), and no changes are required at this time. However, the Company’s management has disclosed to its audit committee and to its independent auditors a control deficiency regarding two non-material contractual commitments that were not previously recorded in the Company’s financial records. As of September 30, 2005, the Company has recorded these non-material contractual commitments without any material impact on the current or prior period financial results.
| (b) | Changes in Internal Controls. |
There was no change in the Company’s “internal control over financial reporting” (as defined in rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the three-month period covered by this Report on Form 10-Q that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting subsequent to the date the chief executive officer and chief financial officer completed their evaluation.
|
|
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings
The Company is subject to several legal actions and proceedings in which various monetary claims are asserted. Management, after consultation with its corporate legal department and outside counsel, does not anticipate that any ultimate liability arising out of all such litigation and proceedings will have a material adverse effect on the financial condition of the Company, except as set forth below.
Berry, et al. v. Titeflex Corp., et al.
Case No. CV-2004-211, Circuit Court of Clark County, Arkansas, filed November 15, 2004.
Four individual residents of Arkansas and an individual Texas resident have sued the top four manufacturers of corrugated stainless steel tubing (“CSST”), including Omega Flex, Inc. as the manufacturer of TracPipe® brand CSST. The complaint proposes a national class action on behalf of all owners of installed CSST. Installed CSST is alleged to be defective because it is alleged to be more susceptible to failure from near-lightning strikes than traditional black iron pipe and because the manufacturers allegedly failed to warn of CSST’s allegedly heightened susceptibility to such damage.
The Company has filed motions to dismiss the amended complaint and the cross-complaint of the individual Arkansas plumber defendant, who likewise proposed a class action cross-claim on behalf of installers of CSST. Fullcase is currently in discovery is proceeding and disposition of the class certification issue is expected in the second half of 2006. The Company will oppose both class certification and any request for a national class. The Company believes it has valid defenses to the issues of both class certification and product liability and the Company will contest these claims vigorously. At this time, the Company believes that no estimation of potential liability in the matter can be reasonably made. It is the nature of class action litigation in general and this matter in particular, that if there should be an adverse decision on the issue of certification of a national class of CSST owners and an adverse decision on the issue of product liability, the financial position and results of operation of the Company could be materially adversely affected.
Item 3 - Defaults Upon Senior Securities
Certain inter-company dividends paid by the Company to Mestek in 2004 and 2005, prior to the “spin-off”“Spin-Off” transaction described in more detail in Note 5,1, caused the Company to be in technical breach of two loan covenants relating to the mortgage note for certain periods. The Company paid all amounts due under the mortgage note during the periods of the above technical breaches. On September 6, 2005 the Company received a waiver of the technical breach and revised its Loan Covenants which are more conduciveappropriate to the Company’s operations as a public company. The Company believes that it is in compliance with all required covenants at March 31, 2006. As disclosed in Note 8, on April 27, 2006, our subsidiary Exton Ranch, Inc. repaid the entire outstanding principal balance (and accrued interest) of the $3,348 million Mortgage Note.
Item 5 – Other Information
On March 27, 2006, the Company entered into an Employment Agreement with Duane E. Shooltz as the Company’s Senior Vice President and General Manager of September 30, 2005.the Company’s TracPipe® flexible gas piping business. Mr. Shooltz will be responsible for the management of
-21- |
the day-to-day operations and affairs of the TracPipe® business in North America, including manufacturing, engineering, sales and marketing. Mr. Shooltz will report directly to Kevin R. Hoben, the Company’s President & CEO.
-22- |
EXHIBIT INDEX
Exhibit
No. | Description |
10.1 | Employment Agreement dated March 27, 2006 between Omega Flex, Inc. and Duane E. Shooltz. |
31.1 | Certification of Chief Executive Officer of Omega Flex, Inc. pursuant to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. |
31.2 | Certification of Chief Financial Officer of Omega Flex, Inc. pursuant to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer of Omega Flex, Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OMEGA FLEX, INC.
(Registrant)
| |||||||||
E. Lynn Wilkinson | |||||||||
Vice President – Finance | |||||||||
and Chief Financial Officer |
|
|