-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KqJ0MrcT6kqh3N9UvIThXQCVMx2WDsKaklX9+ER9fQ7g+3TBBbfPXeUDKOhS6p0B KkYSBjzv4uHUWly3cdSNfg== 0000950129-03-002801.txt : 20030515 0000950129-03-002801.hdr.sgml : 20030515 20030515152008 ACCESSION NUMBER: 0000950129-03-002801 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATCO GROUP INC CENTRAL INDEX KEY: 0001057693 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED PLATE WORK (BOILER SHOPS) [3443] IRS NUMBER: 222906892 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15603 FILM NUMBER: 03704482 BUSINESS ADDRESS: STREET 1: BROOKHOLLOW CENTRAL III STREET 2: 2950 NORTH LOOP WEST STE 750 CITY: HOUSTON STATE: TX ZIP: 77092 BUSINESS PHONE: 7136839292 MAIL ADDRESS: STREET 1: BROOKHOLLOW CENTERL III STREET 2: 2950 NORTH LOOP WEST STE 750 CITY: HOUSTON STATE: TX ZIP: 77092 10-Q 1 h05958e10vq.txt NATCO GROUP INC.- PERIOD ENDED MARCH 31, 2003 ================================================================================ 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 ENDED MARCH 31, 2003, OR [ ] 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 1-15603 NATCO GROUP INC. (Exact name of registrant as specified in its charter) DELAWARE 22-2906892 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 2950 NORTH LOOP WEST 7TH FLOOR HOUSTON, TEXAS 77092 (Address of principal executive offices) (Zip Code) 713-683-9292 (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of May 1, 2003, $0.01 par value per share, 15,854,067 shares ================================================================================ NATCO GROUP INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003 TABLE OF CONTENTS
PAGE NO. ---- PART I -- FINANCIAL INFORMATION Item 1. Financial Statements ................................................... 3 Condensed Consolidated Balance Sheets -- March 31, 2003 (unaudited) and December 31, 2002 ................................. 3 Unaudited Condensed Consolidated Statements of Operations -- Three Months Ended March 31, 2003 and 2002 ............... 4 Unaudited Condensed Consolidated Statements of Cash Flows -- Three Months Ended March 31, 2003 and 2002 ................... 5 Notes to Unaudited Condensed Consolidated Financial Statements ............................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................... 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................................................ 22 Item 4. Controls and Procedures ................................................ 22 PART II -- OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds .............................. 23 Item 6. Exhibits and Reports on Form 8-K ....................................... 23 Signatures ..................................................................... 25 Certifications ................................................................. 26
2 PART I ITEM 1. FINANCIAL STATEMENTS NATCO GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 2003 2002 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents .......................................... $ 1,282 $ 1,689 Trade accounts receivable, net ..................................... 80,914 74,677 Inventories ........................................................ 33,325 32,400 Prepaid expenses and other current assets .......................... 9,859 7,611 ------------ ------------ Total current assets ......................................... 125,380 116,377 Property, plant and equipment, net ................................... 33,104 31,485 Goodwill, net ........................................................ 79,356 78,977 Deferred income tax assets, net ...................................... 2,846 2,984 Other assets, net .................................................... 1,584 1,772 ------------ ------------ Total assets ................................................. $ 242,270 $ 231,595 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt ............................. $ 14,558 $ 7,097 Accounts payable ................................................... 42,094 36,074 Accrued expenses and other ......................................... 34,826 37,243 Customer advances .................................................. 536 1,354 ------------ ------------ Total current liabilities .................................... 92,014 81,768 Long-term debt, excluding current installments ....................... 30,640 45,257 Postretirement benefit and other long-term liabilities ............... 12,544 12,718 ------------ ------------ Total liabilities ............................................ 135,198 139,743 ------------ ------------ Series B redeemable convertible preferred stock (aggregate redemption value of $15,000), $.01 par value. 15,000 shares authorized, issued and outstanding (net of issuance costs) ........ 14,101 -- Stockholders' equity: Preferred stock $.01 par value. Authorized 5,000,000 shares (of which 500,000 are authorized under Series A and 15,000 are authorized under Series B); no shares issued and outstanding (except Series B shares above) ....................... -- -- Series A preferred stock, $.01 par value. Authorized 500,000 shares; no shares issued and outstanding ......................... -- -- Common stock, $.01 par value. Authorized 50,000,000 shares; issued and outstanding 15,803,797 shares as of March 31, 2003 and December 31, 2002, respectively ......... 158 158 Additional paid-in capital ......................................... 97,223 97,223 Accumulated earnings ............................................... 8,764 8,734 Treasury stock, 795,692 shares at cost as of March 31, 2003 and December 31, 2002 ............................................ (7,182) (7,182) Accumulated other comprehensive loss ............................... (2,266) (3,395) Notes receivable from officers and stockholders .................... (3,726) (3,686) ------------ ------------ Total stockholders' equity ................................... 92,971 91,852 ------------ ------------ Commitments and contingencies Total liabilities and stockholders' equity ................... $ 242,270 $ 231,595 ============ ============
See accompanying notes to unaudited condensed consolidated financial statements. 3 NATCO GROUP INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, -------------------------------- 2003 2002 ------------- ------------- Revenues ....................................................... $ 68,013 $ 73,578 Cost of goods sold ............................................. 52,202 55,315 ------------- ------------- Gross profit ......................................... 15,811 18,263 Selling, general and administrative expense .................... 12,644 13,545 Depreciation and amortization expense .......................... 1,230 1,159 Interest expense ............................................... 1,062 1,017 Interest cost on postretirement benefit liability .............. 209 122 Interest income ................................................ (49) (56) Other, net ..................................................... 576 (397) ------------- ------------- Income before income taxes and cumulative effect of change in accounting principle .......... 139 2,873 Income tax provision ........................................... 50 1,100 ------------- ------------- Net income before cumulative effect of change in accounting principle ....................... 89 1,773 Cumulative effect of change in accounting principle (net of tax benefit of $18) ................................ 34 -- ------------- ------------- Net income ........................................... $ 55 $ 1,773 ============= ============= Earnings per share--basic: Net income before cumulative effect of change in accounting principle ........................................ $ -- $ 0.11 Cumulative effect of change in accounting principle ............ -- -- ------------- ------------- Net income ........................................... $ -- $ 0.11 ============= ============= Earnings per share--diluted: Net income before cumulative effect of change in accounting principle ........................................ $ -- $ 0.11 Cumulative effect of change in accounting principle ............ -- -- ------------- ------------- Net income ........................................... $ -- $ 0.11 ============= ============= Basic weighted average number of shares of common stock outstanding ..................................... 15,804 15,804 Diluted weighted average number of shares of common stock outstanding .................................. 15,874 15,936
See accompanying notes to unaudited condensed consolidated financial statements. 4 NATCO GROUP INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------------------ 2003 2002 ------------ ------------ Cash flows from operating activities: Net income .................................................... $ 55 $ 1,773 Adjustments to reconcile net income to net cash used in operating activities: Cumulative effect of change in accounting principle ........ 34 -- Deferred income tax expense ................................ 125 101 Depreciation and amortization expense ...................... 1,230 1,159 Non-cash interest income ................................... (40) (56) Interest cost on postretirement benefit liability .......... 209 122 Gain on the sale of property, plant and equipment .......... (231) (8) Change in assets and liabilities: Increase in trade accounts receivable .................... (6,575) (8,774) (Increase) decrease in inventories ....................... (653) 1,159 (Increase) decrease in prepaid expense and other current assets ........................................ (1,985) 793 Increase in long-term assets ............................. (119) (61) Increase in accounts payable ............................. 6,921 1,569 Increase (decrease) in accrued expenses and other ................................................. (2,307) 455 Decrease in customer advances ............................ (818) (5,008) ------------ ------------ Net cash used in operating activities ................. (4,154) (6,776) ------------ ------------ Cash flows from investing activities: Capital expenditures for property, plant and equipment ................................................ (3,072) (1,480) Proceeds from the sale of property, plant and equipment ................................................ 618 23 Acquisitions, net ............................................. -- (242) ------------ ------------ Net cash used in investing activities ................. (2,454) (1,699) ------------ ------------ Cash flows from financing activities: Change in bank overdrafts ..................................... (989) 406 Net borrowings (repayments) under long-term revolving credit facilities ........................................... (5,592) 7,697 Repayments of long-term debt .................................. (1,775) (1,750) Borrowings of long-term debt .................................. -- 1,460 Proceeds from the issuance of preferred stock, net ............ 14,101 -- Payments on postretirement benefit liability .................. (374) (562) Other, net .................................................... 193 159 ------------ ------------ Net cash provided by financing activities ............. 5,564 7,410 ------------ ------------ Effect of exchange rate changes on cash and cash equivalents .................................................. 637 (172) ------------ ------------ Change in cash and cash equivalents ............................. (407) (1,237) Cash and cash equivalents at beginning of period ................ 1,689 3,093 ------------ ------------ Cash and cash equivalents at end of period ...................... $ 1,282 $ 1,856 ============ ============ Cash payments for: Interest ...................................................... $ 1,022 $ 644 Income taxes .................................................. $ 340 $ 1,238
See accompanying notes to unaudited condensed consolidated financial statements. 5 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying condensed consolidated interim financial statements and related disclosures are unaudited and have been prepared by NATCO Group Inc. ("the Company" or "NATCO") pursuant to generally accepted accounting principles for interim financial statements and the rules and regulations of the Securities and Exchange Commission. As permitted by these regulations, certain information and footnote disclosures that would typically be required in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. However, the Company's management believes that these statements reflect all the normal recurring adjustments necessary for a fair presentation, in all material respects, of the results of operations for the periods presented, so that these interim financial statements are not misleading. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K filing for the year ended December 31, 2002. To prepare financial statements in accordance with generally accepted accounting principles, the Company's management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses incurred during the reporting period. Actual results could differ from those estimates. Furthermore, certain reclassifications have been made to fiscal year 2002 amounts in order to present these results on a comparable basis with amounts for fiscal year 2003. These reclassifications had no impact on net income. References to "NATCO" and "the Company" are used throughout this document and relate collectively to NATCO Group Inc. and its consolidated subsidiaries. (2) EMPLOYEE STOCK OPTIONS The Company accounts for its employee stock option plans by applying the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 allows entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. If entities continued to apply the provision of APB Opinion No. 25, pro forma net income and earnings per share disclosures would be required for all employee stock option grants made in 1995 and subsequent years, as if the fair value-based method defined in SFAS No. 123 had been applied. In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure, an amendment to FASB Statement No. 123," was issued and provided alternative methods to transition to the fair value method of accounting for stock-based compensation, on a volunteer basis, and required additional disclosures at annual and interim reporting dates. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and to provide the pro forma disclosures required by SFAS No. 123. The Company determines pro forma net income and earnings per share by applying the Black-Sholes Single Option--Reduced Term valuation method. This valuation model requires management to make highly subjective assumptions about volatility of NATCO's common stock, the expected term of outstanding stock options, the Company's risk-free interest rate and expected dividend payments during the contractual life of the options. These pro forma net earnings and earnings per share amounts for the quarters ended March 31, 2003 and 2002, summarize as follows: 6
QUARTER QUARTER ENDED ENDED MARCH 31, MARCH 31, 2003 2002 ------------ ------------ (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income before cumulative effect of change in accounting principle -- as reported ................... $ 89 $ 1,773 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ............. (151) (241) ------------ ------------ Pro forma net income (loss) ..................................... $ (62) $ 1,532 ============ ============ Earnings (loss) per share: Basic -- as reported ......................................... $ -- $ 0.11 Basic -- pro forma ........................................... $ -- $ 0.10 Diluted -- as reported ....................................... $ -- $ 0.11 Diluted -- pro forma ......................................... $ -- $ 0.10
(3) CAPITAL STOCK AND REDEEMABLE CONVERTIBLE PREFERRED STOCK On March 13, 2003, the Company executed an agreement, which subsequently closed on March 25, 2003, to issue 15,000 shares of its Series B Convertible Preferred Stock ("Series B Preferred Shares"), and warrants to purchase 248,800 shares of NATCO's common stock, to Lime Rock Partners II, L.P., a private investment fund, for an aggregate purchase price of $15.0 million. Of the aggregate purchase price, approximately $99,000 was allocated to the warrants. Proceeds from the issuance of these securities, net of related estimated issuance costs of approximately $800,000, were used to reduce the Company's outstanding revolving debt balances and for other general corporate purposes. Each of the Series B Preferred Shares has a face value of $1,000 and pays a cumulative dividend of 10% per annum of face value, which is payable semi-annually on June 15 and December 15 of each year, except the initial dividend payment which is payable on July 1, 2003. Each of the Series B Preferred Shares is convertible, at the option of the holder thereof, into (i) a number of shares of common stock equal to the face value of such Series B Preferred Share divided by the conversion price, which was $7.805 (or an aggregate of 1,921,845 shares) at March 31, 2003, and (ii) a cash payment equal to the amount of dividends on such share that have accrued since the prior semi-annual dividend payment date. As of March 31, 2003, the Company accrued dividends payable of $25,000 related to the Series B Preferred Shares. In the event of a change in control, as defined in the agreement, each holder of the Series B Preferred Shares has the right to convert the Series B Preferred Shares into common stock or to cause the Company to redeem for cash some or all of the Series B Preferred Shares at an aggregate redemption price equal to the sum of (i) $1,000 (adjusted for stock splits, stock dividends, etc.) multiplied by the number of shares to be redeemed, plus (ii) an amount (not less than zero) equal to the product of $500 (adjusted for stock splits, stock dividends, etc.) multiplied by the aggregate number of the Series B Preferred Shares to be redeemed less the sum of the aggregate amount of dividends paid in cash since the issuance date, plus any gain on the related stock warrants. If the holder of the Series B Preferred Shares converts upon a change in control occurring on or before March 25, 2006, the holder would also be entitled to receive cash in an amount equal to the dividends that would have accrued through March 25, 2006 less the sum of the aggregate amount of dividends paid in cash through the date of conversion, and the aggregate amount of dividends accrued in prior periods but not yet paid. The Company has the right to redeem the Series B Preferred Shares for cash on or after March 25, 2008, at a redemption price per share equal to the face value of the Series B Preferred Shares plus the amount of dividends that have been accrued but not paid since the most recent semi-annual dividend payment date. 7 Due to the cash redemption features upon a change in control as described above, the Series B Preferred Shares do not qualify for permanent equity treatment in accordance with the Emerging Issues Task Force Topic D-98: "Classification and Measurement of Redeemable Securities," which specifically requires that permanent equity treatment be precluded for any security with redemption features that are not solely within the control of the issuer. Therefore, the Company has accounted for the Series B Preferred Shares as temporary equity in the accompanying balance sheet, as required by the SEC rules and regulations. No value has been assigned to the Company's right to redeem the Series B Preferred Shares on or after March 25, 2008. If the Series B Preferred Shares are converted under contingent redemption features, any redemption amount greater than carrying value would be recorded as a reduction of income available to common shareholders when the event becomes probable. If the Company fails to pay dividends or any redemption price due with respect to the Series B Preferred Shares for a period of sixty days following the payment date, the Company will be in default under the terms of such shares. During a default period, (1) the dividend rate on the Series B Preferred Shares would increase to 10.25%, (2) the holders of Series B Preferred Shares would have the right to elect or appoint a second director to the Board of Directors and (3) the Company would be restricted from paying dividends on, or redeeming or acquiring its common or other outstanding stock, with limited exceptions. If the Company fails to set aside or make payments in cash of any redemption price due with respect to the Series B Preferred Shares, and the holders elect, the Company's right to redeem the shares may be terminated. The warrants issued to Lime Rock Partners II, L.P. have an exercise price of $10.00 per share of common stock and expire on March 25, 2006. The Company can force the exercise of the warrants if NATCO's common stock trades above $13.50 per share for 30 consecutive days. The warrants contain a provision whereby the holder could require the Company to make a net-cash settlement for the warrants in the case of a change in control. The warrants were deemed to be derivative instruments and, therefore, the warrants were recorded at fair value as of the issuance date. Fair value, as agreed with the counter-party to the agreement, was calculated by applying a pricing model that included subjective assumptions for stock volatility, expected term that the warrants would be outstanding, a dividend rate of zero and an overall liquidity factor. The resulting liability of $99,000 was recorded at March 31, 2003. Changes in fair value in subsequent periods will be recorded as charges to net income during the period of the change. On January 1, 2002, all outstanding shares of the Company's Class B Common Stock, 334,719 shares, were converted automatically to Class A Common Stock, on a share for share basis, in accordance with the terms under which the Class B Common Stock was originally issued, resulting in a single class that was re-designated "Common Stock." (4) EARNINGS PER SHARE The Company computed basic earnings per share by dividing net income available to common shareholders by the weighted average number of shares outstanding for the period. Net income available to common shareholders at March 31, 2003, represented net income before cumulative effect of change in accounting principle less preferred stock dividends accrued. The Company determined diluted earnings per common and potential common share at March 31, 2003, as net income before the cumulative effect of change in accounting principle divided by the weighted average number of shares outstanding for the period, after applying the if-converted method to determine any incremental shares associated with convertible preferred stock and warrants outstanding. Since the effect of the incremental shares associated with convertible preferred stock and warrants was anti-dilutive at March 31, 2003, these shares were not considered common and potential common shares for purposes of calculating earnings per share at March 31, 2003, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." However, outstanding employee stock options were considered potential common shares for purposes of this calculation. For the quarter ended March 31, 2003, 70,525 potential common shares related to employee stock options were included in diluted weighted average shares. Diluted shares for the quarter ended March 31, 2002 included potential common shares related to employee stock options of 132,402 shares. Anti-dilutive stock options were excluded from the calculation of potential common shares. If anti-dilutive shares were included for the quarters ended March 31, 2003 and 2002, the impact would have been a reduction of 465,598 shares and 252,141 shares, respectively. The following table presents the computation of basic and diluted earnings per common and potential common share at March 31, 2003 and 2002, respectively: 8
FOR THE QUARTER ENDED MARCH 31, 2003 -------------------------------------------- INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ----------- (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income before cumulative effect of change in accounting principle ................................... $ 89 Less: Preferred stock dividends accrued .................. (25) ----------- BASIC EPS: Income available to common stockholders before cumulative effect of change in accounting principle .... $ 64 15,804 $ -- =========== EFFECT OF DILUTIVE SECURITIES: Stock options ............................................. -- 70 ----------- ----------- DILUTED EPS: Income available to common stockholders before cumulative effect of change in accounting principle + assumed conversions ........................ $ 64 15,874 $ -- =========== =========== ===========
FOR THE QUARTER ENDED MARCH 31, 2002 ---------------------------------------------- INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ------------ ------------- ------------ (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income before cumulative effect of change in accounting principle .................................... $ 1,773 ------------ BASIC EPS: Income available to common stockholders before cumulative effect of change in accounting principle ..... $ 1,773 15,804 $ 0.11 ============ EFFECT OF DILUTIVE SECURITIES: Stock options .............................................. -- 132 ------------ ------------ DILUTED EPS: Income available to common stockholders before cumulative effect of change in accounting principle + assumed conversions ......................... $ 1,773 15,936 $ 0.11 ============ ============ ============
(5) INVENTORIES Inventories consisted of the following amounts:
MARCH 31, DECEMBER 31, 2003 2002 ------------ ------------ (UNAUDITED) (IN THOUSANDS) Finished goods .................... $ 12,862 $ 13,088 Work-in-process ................... 7,212 6,486 Raw materials and supplies ........ 14,789 14,362 ------------ ------------ Inventories at FIFO ............. 34,863 33,936 Excess of FIFO over LIFO cost ..... (1,538) (1,536) ------------ ------------ $ 33,325 $ 32,400 ============ ============
9 (6) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Cost and estimated earnings on uncompleted contracts were as follows:
MARCH 31, DECEMBER 31, 2003 2002 ------------ ------------ (UNAUDITED) (IN THOUSANDS) Cost incurred on uncompleted contracts .................................... $ 108,296 $ 87,586 Estimated earnings ........................................................ 20,862 19,656 ------------ ------------ 129,158 107,242 Less billings to date ..................................................... 102,342 87,187 ------------ ------------ $ 26,816 $ 20,055 ============ ============ Included in the accompanying balance sheet under the captions: Trade accounts receivable ............................................... $ 26,927 $ 20,262 Advance payments ........................................................ (111) (207) ------------ ------------ $ 26,816 $ 20,055 ============ ============
(7) CLOSURE AND OTHER As of December 31, 2002, the Company had recorded a liability totaling $304,000, related to certain restructuring costs incurred in connection with the closure of a manufacturing facility in Edmonton, Alberta, Canada. As of March 31, 2003, this liability totaled $249,000. The following table summarizes changes to the restructuring liability by cost type:
BALANCE AT EFFECT OF BALANCE AT DECEMBER 31, AMOUNTS PAID EXCHANGE RATE MARCH 31, 2002 AND ADJUSTMENTS CHANGES 2003 ------------- --------------- ------------- ------------- (UNAUDITED, IN THOUSANDS) Employee severance $ 21 $ (7) $ 2 $ 16 Lease termination and other 283 (65) 15 233 ------------- ------------- ------------- ------------- Total $ 304 $ (72) $ 17 $ 249 ============= ============= ============= =============
The accrual related to lease termination and other at March 31, 2003, included an adjustment of approximately $25,000, related to an agreement to sublet a portion of the facility to another tenant. The Company recorded non-operating expense associated with this restructuring plan of $233,000 during the quarter ended March 31, 2003, including equipment moving costs, employee relocations and certain severance cost totaling $116,000 that was not identified as a restructuring cost as of the plan date. The Company expects to continue to incur costs associated with this restructuring plan through June 30, 2003. (8) LONG-TERM DEBT The consolidated borrowings of the Company were as follows:
MARCH 31, DECEMBER 31, 2003 2002 ------------ ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT PERCENTAGES) BANK DEBT Term loan with variable interest rate (3.81% at March 31, 2003 and 4.21% at December 31, 2002) and quarterly payments of principal ($1,750) and interest, due March 15, 2006 ..................... $ 36,000 $ 37,750 Revolving credit bank loans with variable interest rate (4.77% at March 31, 2003 and 4.43% at December 31, 2002) and quarterly interest payments, due March 15, 2004 ..................... 7,461 8,967 Promissory note with variable interest rate (4.60% at March 31, 2003 and 4.65% at December 31, 2002) and quarterly payments of principal ($24) and interest, due February 8, 2007 ................... 1,362 1,387 Revolving credit bank loans (export sales facility) with variable interest rate (4.25% at March 31, 2003 and 4.25% at December 31, 2002) and monthly interest payments, due July 23, payments, due July 23, 2004 .......................................................... 375 4,250 ------------ ------------ Total ................................................................. $ 45,198 $ 52,354 Less current installments ............................................. (14,558) (7,097) ------------ ------------ Long-term debt ..................................................... $ 30,640 $ 45,257 ============ ============
10 The Company maintains a credit facility that consists of a $50.0 million term loan, a $30.0 million U.S. revolving facility, a $10.0 million Canadian revolving facility and a $10.0 million U.K. revolving facility. The term loan matures on March 15, 2006, and each of the revolving facilities matures on March 15, 2004. In July 2002, the Company's lenders approved the amendment of various provisions of the term loan and revolving credit facility agreement, effective April 1, 2002. This amendment revised certain restrictive debt covenants, modified certain defined terms, allowed for future capital investment in the Company's CO2 processing facility in West Texas, facilitates the issuance of up to $7.5 million of subordinated indebtedness, increased the aggregate amount of operating lease expense allowed during a fiscal year and permitted an increase in borrowings under the export sales credit facility, without further consent, up to a maximum of $20.0 million. These modifications will result in higher commitment fee percentages and interest rates if the Funded Debt to EBITDA ratio, as defined, exceeds 3 to 1. Amounts borrowed under the term loan bear interest at a rate of 3.81% per annum as of March 31, 2003. Amounts borrowed under the revolving portion of the facility bear interest at a rate based upon the ratio of Funded Debt to EBITDA and ranging from, at the Company's election, (1) a high of the London Inter-bank Borrowing Rate ("LIBOR") plus 3.00% to a low of LIBOR plus 1.75% or, (2) a high of a base rate plus 1.50% to a low of a base rate plus 0.25%. NATCO will pay commitment fees of 0.30% to 0.625% per year depending upon the ratio of Funded Debt to EBITDA, on the undrawn portion of the facility. The revolving credit facility is guaranteed by all of the Company's domestic subsidiaries and is secured by a first priority lien on substantially all inventory, accounts receivable and other material tangible and intangible assets. NATCO has also pledged 65% of the voting stock of its active foreign subsidiaries. On February 6, 2002, the Company borrowed $1.5 million under a long-term promissory note. This note accrues interest at the 90-day LIBOR plus 3.25% per annum, and requires quarterly payments of principal of approximately $24,000 and interest for five years beginning May 2002, with a final balloon payment due February 2007. This promissory note is collateralized by a manufacturing facility in Magnolia, Texas that the Company purchased in the fourth quarter of 2001. The Company maintains a working capital facility for export sales that provides for aggregate borrowings of $10.0 million, subject to borrowing base limitations, under which borrowings of $375,000 were outstanding at March 31, 2003. Letters of credit outstanding under the export sales credit facility as of March 31, 2003 totaled $170,000. The export sales credit facility is secured by specific project inventory and receivables, and is partially guaranteed by the EXIM Bank. The export sales credit facility loans mature in July 2004. On March 31, 2003, the Company was in compliance with all restrictive debt covenants. NATCO had letters of credit outstanding under the revolving credit facilities totaling $17.9 million at March 31, 2003. These letters of credit support contract performance and warranties and expire at various dates through January 2006. The Company had unsecured letters of credit, guarantees and bonds totaling $432,000 at March 31, 2003. (9) INCOME TAXES NATCO's effective income tax rate for the quarter ended March 31, 2003 was 35.7%, which exceeded the amount that would have resulted from applying the U.S. federal statutory tax rate due to the impact of state income taxes, foreign income tax rate differentials, losses in foreign subsidiaries and certain permanent book-to-tax differences. (10) INDUSTRY SEGMENTS The Company's operations are organized into three separate business segments: North American operations, a segment which primarily provides traditional, standard and small custom production equipment and components, replacement parts, used equipment and components, equipment servicing and field operating support including operations of our domestic membrane facility; engineered systems, a segment which primarily provides customized and more complex technological equipment, large scale integrated oil and gas production systems, and equipment and services provided by certain international operations, including Axsia; and automation and control systems, a segment which provides control panels and systems that monitor and control oil and gas production, as well as installation and start-up and other field services related to instrumentation and electrical systems. 11 The accounting policies of the reportable segments were consistent with the policies used to prepare the Company's condensed consolidated financial statements for the respective periods presented. The Company evaluates the performance of its operating segments based on income before net interest expense, income taxes, depreciation and amortization and accounting changes. Summarized financial information concerning the Company's reportable segments is shown in the following table.
NORTH AUTOMATION AMERICAN ENGINEERED & CONTROL CORPORATE & OPERATIONS SYSTEMS SYSTEMS OTHER TOTAL ------------ ------------ ------------ ------------ ------------ (UNAUDITED, IN THOUSANDS) THREE MONTHS ENDED MARCH 31, 2003 Revenues from unaffiliated customers ........ $ 27,965 $ 26,016 $ 14,032 $ -- $ 68,013 Inter-segment revenues ...................... 650 30 1,209 (1,889) -- Segment profit (loss) ....................... 1,264 972 1,319 (964) 2,591 Total assets ................................ 94,793 113,544 21,277 12,656 242,270 Capital expenditures ........................ 2,483 489 99 1 3,072 Depreciation and amortization ............... 575 473 93 89 1,230 THREE MONTHS ENDED MARCH 31, 2002 Revenues from unaffiliated customers ........ $ 38,288 $ 24,797 $ 10,493 $ -- $ 73,578 Inter-segment revenues ...................... 88 312 1,372 (1,772) -- Segment profit (loss) ....................... 3,928 1,336 912 (1,061) 5,115 Total assets ................................ 101,381 104,378 21,507 11,711 238,977 Capital expenditures ........................ 623 543 228 86 1,480 Depreciation and amortization ............... 667 296 95 101 1,159
The following table reconciles total segment profit to net income before cumulative effect of change in accounting principle:
FOR THE QUARTER ENDED MARCH 31, ------------------------------- 2003 2002 ------------ ------------- (UNAUDITED) Total segment profit ............................. $ 2,591 $ 5,115 Net interest expense ............................. 1,222 1,083 Income taxes ..................................... 50 1,100 Depreciation and amortization .................... 1,230 1,159 ------------ ------------ Net income before cumulative effect of change in accounting principle .............. $ 89 $ 1,773 ============ ============
(11) COMMITMENTS AND CONTINGENCIES The Porta-Test International, Inc. purchase agreement, executed in January 2000, contains a provision to calculate a payment to certain former stockholders of Porta-Test Systems, Inc. for a three-year period ended January 23, 2003, based upon sales of a limited number of specified products designed by or utilizing technology that existed at the time of the acquisition. Liability under this arrangement is contingent upon attaining certain performance criteria, including gross margins and sales volumes for the specified products. If applicable, payment is required annually. In January 2002, the Company accrued $219,000 under this arrangement for the twelve-month period ended January 23, 2002, resulting in an increase in goodwill, of which $197,000 was paid in August 2002. No accrual was recorded under this arrangement for the twelve-month period ended January 23, 2003. (12) GOODWILL IMPAIRMENT TESTING The Financial Accounting Standards Board ("FASB") approved SFAS No. 142, "Goodwill and Other Intangible Assets" in June 2001. This pronouncement requires that intangible assets with indefinite lives, including goodwill, cease being amortized and be evaluated on an impairment basis. Intangible assets with a defined term, such as patents, would continue to be amortized over the useful life of the asset. 12 The Company adopted SFAS No. 142 on January 1, 2002. Intangible assets subject to amortization under the pronouncement as of March 31, 2003 and 2002 are summarized in the following table:
AS OF MARCH 31, 2003 AS OF MARCH 31, 2002 ----------------------------- ----------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED TYPE OF INTANGIBLE ASSET AMOUNT AMORTIZATION AMOUNT AMORTIZATION - ------------------------------ ------------ ------------ ------------ ------------ (UNAUDITED, IN THOUSANDS) Deferred financing fees ...... $ 3,324 $ 2,157 $ 2,953 $ 1,370 Patents ...................... 152 24 101 10 Other ....................... 299 208 267 128 ------------ ------------ ------------ ------------ Total ...................... $ 3,775 $ 2,389 $ 3,321 $ 1,508 ============ ============ ============ ============
Amortization and interest expense of $219,000 and $184,000 were recognized related to these assets for the quarters ended March 31, 2003 and 2002, respectively. The estimated aggregate amortization and interest expense for these assets for each of the following five fiscal years is: 2003--$632,000; 2004--$390,000; 2005--$348,000; 2006--$153,000; and 2007--$27,000. For segment reporting purposes, these intangible assets and the related amortization expense were recorded under "Corporate and Other." Goodwill was the Company's only intangible asset that required no periodic amortization as of the date of the adoption of SFAS No. 142. Net goodwill at March 31, 2003 was $79.4 million. The Company tested impairment of goodwill at December 31, 2002 and management determined that goodwill was not impaired. (13) CHANGE IN ACCOUNTING PRINCIPLE Effective January 1, 2003, NATCO recorded the cumulative effect of change in accounting principle related to the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard required the Company to record the fair value of an asset retirement obligation as a liability in the period in which a legal obligation associated with the retirement of tangible long-lived assets that result from acquisition, construction, development and/or normal use of the assets, was incurred. In addition, the standard requires the Company to record a corresponding asset that will be depreciated over the life of the asset that gave rise to the liability. Subsequent to the initial measurement of the asset retirement obligation, the Company will be required to adjust the related liability at each reporting date to reflect changes in estimated retirement cost and the passage of time. A loss of $34,000, net of tax, was recorded as of January 1, 2003, as a result of this change in accounting principle. The related asset retirement obligation and asset cost of $96,000, associated with an obligation to remove certain leasehold improvements upon termination of lease arrangements, including concrete pads and equipment. The asset cost will be depreciated over the remaining useful life of the related assets. There was no significant change in the asset or liability during the quarter ended March 31, 2003. (14) NEW ACCOUNTING PRONOUNCEMENTS In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." This statement amends existing guidance on reporting gains and losses on extinguishment of debt, prohibiting the classification of the gain or loss as extraordinary. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback arrangements. The Company adopted SFAS No. 145 with respect to the revision of Statement No. 13 on May 15, 2002, and with respect to the amendment of SFAS No. 4, on January 1, 2003, with no material impact on the Company's financial condition or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities," which addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that were previously accounted for pursuant to the guidance set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 became effective for the Company on January 1, 2003. The adoption of SFAS No. 146 had no material impact on the Company's financial condition or results of operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual 13 financial statements about its obligations under guarantees issued. The interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation taken. The initial recognition and measurement provisions of the interpretation are applicable to guarantees issued or modified after December 31, 2002. Application of this interpretation did not have a material impact on the Company's financial condition or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure, an amendment to FASB Statement No. 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods to transition, on a volunteer basis, to the fair value method of accounting for stock-based employee compensation. Additionally, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Certain disclosure modifications are required for fiscal years ending after December 31, 2002, if a transition to SFAS No. 123 is elected. The Company has not elected transition to SFAS No. 123 as of March 31, 2003. See Note 2, Employee Stock Options. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement provides additional guidance to account for derivative instruments, including certain derivative instruments embedded in other contracts as well as hedging activities under SFAS No. 133. This pronouncement becomes effective for new contract arrangements and hedging transactions entered into after June 30, 2003, with exceptions for certain SFAS No. 133 implementation issues begun prior to June 15, 2003. The Company has not yet determined the impact that this pronouncement will have on its financial condition or results of operations. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "believe," "expect," "plan," "intend," "estimate," "project," "will," "could," "may" and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this document include, but are not limited to, discussions regarding indicated trends in the level of oil and gas exploration and production and the effect of such conditions on our results of operations (see "--Industry and Business Environment"), future uses of and requirements for financial resources (see "--Liquidity and Capital Resources"), and anticipated backlog levels for 2003 (see "--Liquidity and Capital Resources"). Our expectations about our business outlook, customer spending, oil and gas prices, our business environment and that of the industry in general are only our expectations regarding these matters. Actual results may differ materially from those expressed in the forward-looking statements for reasons including, but not limited to; market factors such as pricing and demand for petroleum related products, the level of petroleum industry exploration and production expenditures, the effects of competition, world economic conditions, the level of drilling activity, the legislative environment in the United States and other countries, policies of the Organization of Petroleum Exporting Countries ("OPEC"), conflict involving the United States or in major petroleum producing or consuming regions, acts of terrorism, the development of technology which could lower overall finding and development costs, weather patterns and the overall condition of capital and equity markets for countries in which we operate. The following discussion should be read in conjunction with the financial statements, related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Readers also are urged to review and consider carefully the various disclosures advising interested parties of the factors that affect our business, including without limitation, the disclosures made under the caption "Risk Factors" and the other factors and risks discussed in our Annual Report on Form 10-K as of December 31, 2002, and in subsequent reports filed with the Securities and Exchange Commission. We expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which any forward-looking statement is based. OVERVIEW References to "NATCO" "we" and "our" are used throughout this document and relate collectively to NATCO Group Inc. and its consolidated subsidiaries. We organize our operations into three separate business segments: North American operations, a segment that primarily provides traditional, standard and small custom production equipment and components, replacement parts, used equipment and components, equipment servicing and field operating support including operations of our domestic membrane facility; Engineered Systems, a segment that primarily provides customized and more complex technological equipment, large scale integrated oil and gas production systems, and equipment and services provided by certain international operations, including Axsia; and Automation and Control Systems, a segment that provides control panels and systems that monitor and control oil and gas production, as well as installation and start-up and other field services related to instrumentation and electrical systems. CRITICAL ACCOUNTING POLICIES Our management makes certain estimates and assumptions in preparing our consolidated financial statements that affect the results reported in the accompanying notes. We base these estimates and assumptions on historical experience and on future expectations that we believe to be reasonable under the circumstances. Note 2 to the consolidated financial statements filed in our Annual Report on Form 10-K at December 31, 2002, contains a summary of our significant accounting policies. We believe the following accounting policies are the most critical in the preparation of our condensed consolidated financial statements: Revenue Recognition: Percentage-of-Completion Method. We recognize revenues from significant contracts (greater than $250,000 and longer than four months in duration) and certain automation and controls contracts and orders on the percentage-of-completion method of accounting. Earned revenue is based on the percentage that costs incurred to date relate to total estimated costs of the project, after giving effect to the most recent estimates of total cost. The timing of costs incurred, and therefore recognition of revenue, could be affected by various internal or external factors including, but not limited to: changes in project scope (change orders), changes in productivity, scheduling, the cost and availability of labor, the cost and availability of raw materials, the weather, client delays in providing approvals at benchmark stages of the project and the timing of deliveries from third-party providers of key components. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known. Earned revenues reflect the original contract price adjusted for agreed claims and change order 15 revenues, if applicable. Losses expected to be incurred on the jobs in progress, after consideration of estimated probable minimum recoveries from claims and change orders, are charged to income as soon as such losses are known. Claims for additional contract revenue are recognized if it is probable that the claim will result in additional revenue and the amount can be reliably estimated. We generally recognize revenue and earnings to which the percentage-of-completion method applies over a period of two to six quarters. In the event a project is terminated by our customer before completion, our customer is liable for costs incurred under the contract. We believe that our operating results should be evaluated over a term of several years to evaluate performance under long-term contracts, after all change orders, scope changes and cost recoveries have been negotiated and realized. We record revenues and profits on all other sales as shipments are made or services are performed. Impairment Testing: Goodwill. As required by Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," we evaluate goodwill annually for impairment by comparing the fair value of operating assets to the carrying value of those assets, including any related goodwill. As required by SFAS No. 142, we identify separate reportable units for purposes of this evaluation. In determining carrying value, we segregate assets and liabilities that, to the extent possible, are clearly identifiable by specific reportable unit. All inter-company receivables/payables are excluded. Certain corporate and other assets and liabilities, that are not clearly identifiable by specific reportable unit, are allocated based on the ratio of each unit's net assets relative to total net assets. The fair value is then compared to the carrying value of the reportable unit to determine whether or not impairment has occurred at the reportable unit level. In the event an impairment is indicated, an additional test is performed whereby an implied fair value of goodwill is determined through an allocation of the fair value to the reporting unit's assets and liabilities, whether recognized or unrecognized, in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, "Business Combinations." Any residual fair value after this purchase price allocation would be assumed to relate to goodwill. If the carrying value of the goodwill exceeded the residual fair value, we would record an impairment charge for that amount. No impairment charge was recorded at December 31, 2002, and no indications of impairment were noted during the three months ended March 31, 2003. Net goodwill was $79.4 million and $79.0 million at March 31, 2003 and December 31, 2002, respectively. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") approved SFAS No. 142, "Goodwill and Other Intangible Assets" in June 2001. This pronouncement requires that intangible assets with indefinite lives, including goodwill, cease being amortized and be evaluated on an impairment basis. Intangible assets with a defined term, such as patents, would continue to be amortized over the useful life of the asset. We adopted SFAS No. 142 on January 1, 2002, and continued to amortize certain net assets totaling $1.4 million at March 31, 2003, and recorded amortization and interest expense related to those assets for the quarter ended March 31, 2003 of $219,000. We ceased periodic amortization of goodwill on the date of adoption. In accordance with SFAS No. 142, we tested impairment of goodwill as of December 31, 2002. Based upon the testing performed, we determined that goodwill was not impaired. Goodwill will be tested for impairment annually on December 31. No indications of impairment were noted during the three months ended March 31, 2003. Therefore, no impairment charge was recorded under SFAS No. 142 for the quarter ended March 31, 2003. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard provides guidance on reporting and accounting for obligations associated with the retirement of long-lived tangible assets and the related retirement costs. This standard is effective for financial statements issued for fiscal years beginning after June 15, 2002. On January 1, 2003, we adopted this pronouncement and recorded a loss of $34,000, net of tax effect, as the cumulative effect of change in accounting principle. In addition, we recorded an asset retirement obligation liability and asset cost of $96,000, associated with an obligation to remove certain leasehold improvements upon termination of lease arrangements, including concrete pads and equipment. The asset cost will be depreciated over the remaining useful life of the related assets. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." This statement provides guidance for income statement classification of gains and losses on extinguishment of debt and accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 became effective and was adopted on January 1, 2003, with no material impact on our financial condition or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities," which addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that were previously accounted for pursuant to the guidance set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 became effective on January 1, 2003. The adoption of SFAS No. 146 had no material impact on our financial condition or results of operations. 16 In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement provides additional guidance to account for derivative instruments, including certain derivative instruments embedded in other contracts as well as hedging activities under SFAS No. 133. This pronouncement becomes effective for new contract arrangements and hedging transactions entered into after June 30, 2003, with exceptions for certain SFAS No. 133 implementation issues begun prior to June 15, 2003. We have not yet determined the impact that this pronouncement will have on our financial condition or results of operations. INDUSTRY AND BUSINESS ENVIRONMENT As a leading provider of wellhead process equipment, systems and services used in the production of crude oil and natural gas, our revenues and results of operations are closely tied to demand for oil and gas products and spending by oil and gas companies for exploration and development of oil and gas reserves. These companies generally invest more in exploration and development efforts during periods of favorable oil and gas commodity prices, and invest less during periods of unfavorable oil and gas prices. As supply and demand change, commodity prices fluctuate producing cyclical trends in the industry. During periods of lower demand, revenues for service providers such as NATCO generally decline, as existing projects are completed and new projects are postponed. During periods of recovery, revenues for service providers can lag behind the industry due to the timing of new project awards. Changes in commodity prices have impacted our business over the past several years. The following table summarizes the price of domestic crude oil per barrel and the wellhead price of natural gas per thousand cubic feet ("mcf") for the quarters ended March 31, 2003 and 2002, as well as averages for the years ended December 31, 2002 and 2001, derived from published reports by the U.S. Department of Energy, and the rotary rig count, as published by Baker Hughes Incorporated.
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------------------------- ----------------------------- 2003 2002 2002 2001 ------------ ------------ ------------ ------------ Average price of crude oil per barrel in the U.S. $ 31.21(a) $ 17.64 $ 22.51 $ 21.86 Average wellhead price of natural gas per mcf in $ 4.14(a) $ 2.34 $ 2.95 $ 4.12 the U.S. Average North American rig count 1,389 1,191 1,093 1,497
- ---------- (a) Calculated using actual and projected data from the U.S. Department of Energy At March 31, 2003, the spot price of West Texas Intermediate crude oil per barrel was $30.43 per barrel, the price of natural gas was $5.00 per mcf, and the North American rig count was 1,250. At April 30, 2003, the spot price of West Texas Intermediate crude oil was $28.43 per barrel, the price of Henry Hub natural gas was $5.35 per mcf, as per the New York Mercantile Exchange, and the North American rig count was 1,084, per Baker Hughes Incorporated. These spot prices reflect the overall volatility of oil and gas commodity prices in the current and recent periods. Historically, we have viewed operating rig counts as a benchmark of spending in the oil and gas industry for exploration and development efforts. Our traditional equipment sales and services business generally correlates to changes in rig activity, but tends to lag behind the North American rig count trend. With the North American rig count increasing significantly in the first quarter of 2003, we expect traditional equipment and services in the U.S. and Canada to show improving results during the second half of 2003. The following discussion of our historical results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and notes thereto. RESULTS OF OPERATIONS Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 Revenues. Revenues of $68.0 million for the three months ended March 31, 2003 decreased $5.6 million, or 8%, from $73.6 million for the three months ended March 31, 2002. The following table summarizes revenues by business segment for the quarters ended March 31, 2003 and 2002, respectively. 17
THREE MONTHS ENDED MARCH 31, ------------------------------ PERCENTAGE 2003 2002 CHANGE CHANGE ------------ ------------ ------------ ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT PERCENTAGE CHANGE) North American Operations ......... $ 28,615 $ 38,376 $ (9,761) (25%) Engineered Systems ................ 26,046 25,109 937 4% Automation and Control Systems .... 15,241 11,865 3,376 28% Corporate and Other ............... (1,889) (1,772) (117) (7%) ------------ ------------ ------------ Total ................... $ 68,013 $ 73,578 $ (5,565) (8%) ============ ============ ============
North American Operations revenues decreased $9.8 million, or 25%, for the quarter ended March 31, 2003, as compared to the quarter ended March 31, 2002, despite a 17% increase in the number of operating rotary rigs in North America, from an average of 1,191 rigs for the quarter ended March 31, 2002 to an average of 1,389 rigs for the quarter ended March 31, 2003. We experienced a decline in demand primarily for our traditional equipment and services due to the timing of project awards and a decline in new project bookings. Revenues related to our Canadian operations also declined, with fewer projects in progress in 2003 compared to 2002. Inter-segment revenues for this business segment were $650,000 for the quarter ended March 31, 2003, as compared to $88,000 for the quarter ended March 31, 2002. Revenues for the Engineered Systems segment increased $937,000, or 4%, for the quarter ended March 31, 2003, as compared to the quarter ended March 31, 2002. This increase was primarily due to an increase in revenues contributed by our U.K.-based operations, which provided $14.1 million of revenues for the quarter ended March 31, 2003 as compared to $9.8 million for the quarter ended March 31, 2002. Partially offsetting this increase was a decline in other engineered systems projects. Engineered Systems revenues of $26.0 million for the quarter ended March 31, 2003 included approximately $30,000 of inter-segment revenues, as compared to $312,000 of inter-segment revenues for the quarter ended March 31, 2002. Revenues for the Automation and Control Systems segment increased $3.4 million, or 28%, for the quarter ended March 31, 2003, as compared to the quarter ended March 31, 2002. This increase in revenues was the result of more large projects in progress during 2003 relative to the first quarter of 2002, including several deep-water projects in the Gulf of Mexico as well as control system and implementation projects in West Africa and Thailand. Inter-segment sales declined from $1.4 million for the quarter ended March 31, 2002 to $1.2 million for the quarter ended March 31, 2003. The change in revenues for Corporate and Other represents the elimination of inter-segment revenues as discussed above. Gross Profit. Gross profit for the quarter ended March 31, 2003 decreased $2.5 million, or 13%, to $15.8 million, compared to $18.3 million for the quarter ended March 31, 2002. As a percentage of revenue, gross margins declined from 25% for the quarter ended March 31, 2002 to 23% for the quarter ended March 31, 2003. The following table summarizes gross profit by business segment for the quarters then ended:
THREE MONTHS ENDED MARCH 31, ----------------------------- PERCENTAGE 2003 2002 CHANGE CHANGE ------------ ------------ ------------ ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT PERCENTAGE CHANGE) North American Operations ......... $ 7,354 $ 10,250 $ (2,896) (28%) Engineered Systems ................ 5,871 5,852 19 -- Automation and Control Systems .... 2,586 2,161 425 20% ------------ ------------ ------------ Total ................... $ 15,811 $ 18,263 $ (2,452) (13%) ============ ============ ============
Gross profit for the North American Operations business segment decreased $2.9 million, or 28%, for the quarter ended March 31, 2003, as compared to the quarter ended March 31, 2002, due to a 25% decline in revenues for the respective periods. As a percentage of revenue, gross margins were 26% and 27% for the quarters ended March 31, 2003 and 2002, respectively. 18 Gross profit for the Engineered Systems segment for the quarter ended March 31, 2003 remained relatively constant with gross profit earned for the quarter ended March 31, 2002, despite a 4% increase in revenues for the business segment for the respective periods. Gross margin as a percentage of revenues for Engineered Systems was 22.5% and 23.3% for the quarters ended March 31, 2003 and 2002, respectively. Gross profit for the Automation and Control Systems segment increased $425,000, or 20%, for the quarter ended March 31, 2003, as compared to the quarter ended March 31, 2002, due primarily to a 28% increase in revenues for the respective period. Gross margin as a percentage of revenue for the quarters ended March 31, 2003 and 2002, was 17% and 18%, respectively. Selling, General and Administrative Expense. Selling, general and administrative expense of $12.6 million decreased $901,000, or 7%, for the quarter ended March 31, 2003, as compared to the quarter ended March 31, 2002. This decrease was primarily related to cost savings resulting from certain restructuring activities in the U.S. and Canada, including the closure of a manufacturing facility in Canada during late 2002 and overall headcount reductions, from 1,831 employees at March 31, 2002 to 1,721 employees at March 31, 2003. Depreciation and Amortization Expense. Depreciation and amortization expense of $1.2 million for the quarter ended March 31, 2003, increased $71,000, or 6%, compared to the results for the quarter ended March 31, 2002. Depreciation expense of $1.2 million for the quarter ended March 31, 2003, increased $73,000, or 6%, as compared to the respective period for 2002, related to the addition of capital assets purchased and constructed during 2002, including a significant expansion of the Sacroc gas processing facility. Amortization expense of $23,000 for the quarter ended March 31, 2003 was consistent with the results for the respective period in 2002. Interest Expense. Interest expense of $1.1 million for the quarter ended March 31, 2003, increased $45,000, or 4%, from $1.0 million for the quarter ended March 31, 2002. Other, net. Other, net was $576,000 for the quarter ended March 31, 2003 and included severance and relocation costs associated with reductions in force in the U.S. and the consolidation of operations at our Canadian subsidiary, as well as foreign exchange transaction losses, primarily on inter-company balances. Other, net for the quarter ended March 31, 2002 represented net foreign currency exchange transaction gains of $397,000, primarily related to our U.K.-based operations. Provision for Income Taxes. Income tax expense for the quarter ended March 31, 2003 was $50,000 compared to $1.1 million for the quarter ended March 31, 2002. The primary reason for this decrease in tax expense was a decline in income before income taxes from $2.9 million for the quarter ended March 31, 2002 to $139,000 for the quarter ended March 31, 2003. The effective tax rate declined from 38.3% for the first quarter of 2002 to 35.7% for the first quarter of 2003, as a larger percentage of pre-tax income was earned by subsidiaries in lower tax jurisdictions in 2003 relative to 2002. Cumulative Effect of Change in Accounting Principle. The cumulative effect of change in accounting principle of $34,000, net of tax effect, related to the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations," on January 1, 2003. See Recent Accounting Pronouncements. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2003, we had cash and working capital of $1.3 million and $33.4 million, respectively, as compared to cash and working capital of $1.7 million and $34.6 million, respectively, at December 31, 2002. Net cash used in operating activities for the quarter ended March 31, 2003 was $4.2 million, compared to $6.8 million for the quarter ended March 31, 2002. Factors that contributed to the decline in cash used in operating activities during 2003 included a decrease in trade accounts receivable, an increase in trade accounts payable and customer advances, offset by a decline in net income and increase in other current assets. Net cash used in investing activities for the quarter ended March 31, 2003 was $2.5 million, of which $3.1 million was used for capital expenditures, partially offset by proceeds from the sale of fixed assets totaling $618,000. For the quarter ended March 31, 2002, cash used in investing activities was $1.7 million and related primarily to capital expenditures. Net cash provided by financing activities for the quarter ended March 31, 2003 was $5.6 million. The primary source of funds for financing activities for the quarter ended March 31, 2003 was proceeds from the issuance of our Series B Convertible Preferred Stock and related warrants of $14.1 million, net of issuance costs, offset by repayments of long-term borrowings under our term loan facility and revolving credit facilities of $1.8 million and $5.6 million, respectively, as well as a decline in bank overdrafts of $989,000. Net cash provided by financing activities for the quarter ended March 31, 2002 was $7.4 million. The primary source of funds for 19 financing activities during the quarter ended March 31, 2002 was borrowings of $7.7 million under our revolving credit facilities and borrowings of $1.5 million under a long-term promissory note arrangement related to the purchase of our Magnolia manufacturing facility, offset by repayments of $1.8 million under our term loan facility. We borrowed $1.5 million under a long-term promissory note arrangement on February 6, 2002. This note accrues interest at the 90-day London Inter-bank Offered Rate ("LIBOR") plus 3.25% per annum, and requires quarterly payments of principal of approximately $24,000 and interest for five years beginning May 2002, with a final balloon payment due February 2007. This promissory note is collateralized by our manufacturing facility in Magnolia, Texas that we purchased in the fourth quarter of 2001. We maintain a credit facility that consists of a $50.0 million term loan, a $30.0 million U.S. revolving facility, a $10.0 million Canadian revolving facility and a $10.0 million U.K. revolving facility. The term loan matures on March 15, 2006, and each of the revolving facilities matures on March 15, 2004. On or before that date, we expect to extend or refinance our loan agreements to have continued access to comparable credit facilities on reasonable terms. In July 2002, our lenders approved the amendment of various provisions of the term loan and revolving credit facility agreement, effective April 1, 2002. This amendment revised certain restrictive debt covenants, modified certain defined terms, allowed for future capital investment in our CO2 processing facility in West Texas, facilitates the issuance of $7.5 million of subordinated debt, increased the aggregate amount of operating lease expense allowed during a fiscal year and permitted an increase in borrowings under the export sales credit facility, without further consent, up to a maximum of $20.0 million. These modifications will result in higher commitment fee percentages and interest rates if the Funded Debt to EBITDA ratio, as defined, exceeds 3 to 1. Borrowings outstanding under the term loan facility totaled $36.0 million at March 31, 2003, and bear interest at 3.81% per annum. Amounts borrowed under the revolving facilities bear interest at a rate based upon the ratio of Funded Debt to EBITDA and ranging from, at our election, (1) a high of LIBOR plus 3.00% to a low of LIBOR plus 1.75% or, (2) a high of a base rate plus 1.50% to a low of a base rate plus 0.25%. As of March 31, 2003, the weighted average interest rate of our borrowings under the revolving credit facilities was 4.77%. We will pay commitment fees of 0.30% to 0.625% per year, depending upon the ratio of Funded Debt to EBITDA, on the undrawn portion of the facility. The revolving credit facility is guaranteed by all of our domestic subsidiaries and is secured by a first priority lien on substantially all inventory, accounts receivable and other material tangible and intangible assets. We have also pledged 65% of the voting stock of our active foreign subsidiaries. We had letters of credit outstanding under the revolving credit facilities of $17.9 million at March 31, 2003. These letters of credit support contract performance and warranties and expire at various dates through January 2006. We maintain a working capital facility for export sales that provides for aggregate borrowings of $10.0 million, subject to borrowing base limitations, under which borrowings of $375,000 were outstanding as of March 31, 2003. Letters of credit outstanding under this facility at March 31, 2003 totaled $170,000. The export sales credit facility is secured by specific project inventory and receivables, and is partially guaranteed by the EXIM Bank. The export sales credit facility loans mature in July 2004. We had unsecured letters of credit, guarantees and bonds outstanding at March 31, 2003 of $432,000. Our sales backlog at March 31, 2003 was $82.8 million compared to $77.0 million at March 31, 2002. Backlog increased primarily in Engineered Systems, which offset a decline in bookings for traditional equipment sales and services in our North American Operations segment. On March 13, 2003, we executed an agreement, which subsequently closed on March 25, 2003, to issue 15,000 shares of our Series B Convertible Preferred Stock ("Series B Preferred Shares"), and warrants to purchase 248,800 shares of our common stock, to Lime Rock Partners II, L.P., a private investment fund, for an aggregate purchase price of $15.0 million. Of the aggregate purchase price, approximately $99,000 was allocated to the warrants. Proceeds from the issuance of these securities, net of related estimated issuance costs of approximately $800,000, were used to reduce our outstanding revolving debt balances and for other general corporate purposes. Each of the Series B Preferred Shares has a face value of $1,000 and pays a cumulative dividend of 10% per annum of face value, which is payable semi-annually on June 15 and December 15 of each year, except the initial dividend payment which is payable on 20 July 1, 2003. Each of the Series B Preferred Shares is convertible, at the option of the holder thereof, into (i) a number of shares of common stock equal to the face value of such Series B Preferred Share divided by the conversion price, which was $7.805 (or an aggregate of 1,921,845 shares at March 31, 2003), and (ii) a cash payment equal to the amount of dividends on such share that have accrued since the prior semi-annual dividend payment date. As of March 31, 2003, we accrued dividends payable of $25,000 related to the Series B Preferred Shares. In the event of a change in control, as defined in the agreement, each holder of the Series B Preferred Shares has the right to convert the Series B Preferred Shares into common stock or to cause the Company to redeem for cash some or all of the Series B Preferred Shares at an aggregate redemption price equal to the sum of (i) $1,000 (adjusted for stock splits, stock dividends, etc.) multiplied by the number of shares to be redeemed, plus (ii) an amount (not less than zero) equal to the product of $500 (adjusted for stock splits, stock dividends, etc.) multiplied by the aggregate number of Series B Preferred Shares to be redeemed less the sum of the aggregate amount of dividends paid in cash since the issuance date, plus any gain on the related stock warrants. If the holder of the Series B Preferred Shares converts upon a change in control occurring on or before March 25, 2006, the holder would also be entitled to receive cash in an amount equal to the dividends that would have accrued through March 25, 2006 less the sum of the aggregate amount of dividends paid in cash through the date of conversion, and the aggregate amount of dividends accrued in prior periods but not yet paid. We have the right to redeem the Series B Preferred Shares for cash on or after March 25, 2008, at a redemption price per share equal to the face value of the Series B Preferred Shares plus the amount of dividends that have been accrued but not paid since the most recent semi-annual dividend payment date. Due to the cash redemption features upon a change in control as described above, the Series B Preferred Shares do not qualify for permanent equity treatment in accordance with the Emerging Issues Task Force Topic D-98: "Classification and Measurement of Redeemable Securities," which specifically requires that permanent equity treatment be precluded for any security with redemption features that are not solely within the control of the issuer. Therefore, we have accounted for the Series B Preferred Shares as temporary equity in the accompanying balance sheet, as required by the SEC rules and regulations. No value has been assigned to our right to redeem the Series B Preferred Shares on or after March 25, 2008. If the Series B Preferred Shares are redeemed under contingent redemption features, any redemption amount greater than carrying value would be recorded as a reduction of income available to common shareholders when the event becomes probable. If we fail to pay dividends or any redemption price due with respect to the Series B Preferred Shares for a period of sixty days following the payment date, we will be in default under the terms of such shares. During a default period, (1) the dividend rate on the Series B Preferred Shares would increase to 10.25%, (2) the holders of Series B Preferred Shares would have the right to elect or appoint a second director to the Board of Directors and (3) we would be restricted from paying dividends on, or redeeming or acquiring our common or other outstanding stock, with limited exceptions. If we fail to set aside or make payments in cash of any redemption price due with respect to the Series B Preferred Shares, and the holders elect, our right to redeem the shares may be terminated. The warrants issued to Lime Rock Partners II, L.P. have an exercise price of $10.00 per share of common stock and expire on March 25, 2003. We can force the exercise of the warrants if our common stock trades above $13.50 per share for 30 consecutive days. The warrants contain a provision whereby the holder could require us to make a net-cash settlement for the warrants in the case of a change in control. The warrants were deemed to be derivative instruments and, therefore, the warrants were recorded at fair value as of the issuance date. Fair value, as agreed with the counter-party to the agreement, was calculated by applying a pricing model that included subjective assumptions for stock volatility, expected term that the warrants would be outstanding, a dividend rate of zero and an overall liquidity factor. The resulting liability of $99,000 was recorded at March 31, 2003. Changes in fair value in subsequent periods will be recorded as charges to net income during the period of the change. At March 31, 2003, available borrowing capacity under the term loan and revolving credit agreement and the export sales credit agreement were $24.4 million and $5.3 million, respectively. We were in compliance with all restrictive debt covenants in our loan agreements as of March 31, 2003. Under our agreement, certain of our debt covenants become more restrictive at June 30, 2003, and we may not be in compliance with such covenants at that date. We may be required to request amendments or waivers of some or all of these covenants in the future. We believe these amendments or waivers can be obtained, if necessary, on reasonable terms. If we are unable to obtain a waiver on reasonable terms, we would be required to classify our term loan as a current obligation and we may be required to amend the terms of our credit facility or seek alternative financing. Although no assurances can be given, we believe that our operating cash flow, supported by our borrowing capacity, will be adequate to fund operations for at least the next twelve months. Should we decide to pursue acquisition opportunities, the determination of our ability to finance these acquisitions will be a critical element of the analysis of the opportunities. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our operations are conducted around the world in a number of different countries. Accordingly, future earnings are exposed to changes in foreign currency exchange rates. The majority of our foreign currency transactions relate to operations in Canada and the U.K. In Canada, most contracts are denominated in Canadian dollars, and most of the costs incurred are in Canadian dollars, which mitigates risks associated with currency fluctuations. In the U.K., many of our sales contracts and material purchases are denominated in a currency other than British pounds sterling, primarily U.S. dollars and euros, whereas our engineering and overhead costs are principally denominated in British pounds sterling. Consequently, we have currency risk in our U.K. operations. No forward contracts or other currency-related derivative hedge arrangements existed at March 31, 2003, and we do not currently intend to enter into such contracts or arrangements as part of our currency risk management strategy. The warrants issued to the holders of our Series B Preferred Shares provide for a net-cash settlement in the event of a change in control, as defined in the warrants. Consequently, we use derivative accounting to record the warrant transaction. At March 31, 2003, we recorded a $99,000 liability, representing the fair value of this derivative arrangement. Fair value, as agreed with the counter-party to the agreement, was based on a pricing model that included subjective assumptions concerning the volatility of our common stock, the expected term that the warrants would be outstanding, an expected dividend rate of zero and an overall liquidity factor. At each reporting date, the liability will be adjusted to current fair value with any changes in fair value reported in earning during the period of change. As such, we may be exposed to certain income fluctuations based upon changes in the fair market value of this liability due to changes in the price of our common stock, as well as other factors. Our financial instruments are subject to changes in interest rates, including our revolving credit and term loan facilities and our working capital facility for export sales. At March 31, 2003, we had borrowings of $36.0 million outstanding under the term loan portion of the revolving credit and term loan facilities, at an interest rate of 3.81%. Borrowings, which bear interest at floating rates, outstanding under the revolving credit agreement at March 31, 2003, totaled $7.5 million. As of March 31, 2003, the weighted average interest rate of our borrowings under revolving credit facilities was 4.77%. Borrowings under the working capital facility for export sales at March 31, 2003 totaled $375,000 and accrued interest at 4.25%, while borrowings under the long-term arrangement secured by our Magnolia manufacturing facility totaled $1.4 million and accrued interest at 4.60%. Based on past market movements and possible near-term market movements, we do not believe that potential near-term losses in future earnings, fair values or cash flows from changes in interest rates are likely to be material. Assuming our current level of borrowings, a 100 basis point increase in interest rates under our variable interest rate facilities would decrease our current quarter net income and cash flow from operations by less than $100,000. In the event of an adverse change in interest rates, we could take action to mitigate our exposure. However, due to the uncertainty of actions that could be taken and the possible effects, this calculation assumes no such actions. Furthermore, this calculation does not consider the effects of a possible change in the level of overall economic activity that could exist in such an environment. ITEM 4. CONTROLS AND PROCEDURES CONTROLS AND PROCEDURES Members of our management team, including our chief executive officer and our principal financial officer (who currently is fulfilling the functions of chief financial officer), have reviewed our disclosure controls and procedures, as defined by the Securities and Exchange Commission in Rule 13a-14(c) of the Securities Exchange Act of 1934, within 90 days of this Quarterly Report on Form 10-Q, in an effort to evaluate the effectiveness of the design and operation of these controls. Based upon this review, our management has determined that disclosure controls and procedures operate such that important information is collected in a timely manner, provided to management and made known to our chief executive officer and chief financial officer (or officer performing the functions of the chief financial officer), as appropriate, to allow timely decisions regarding disclosure in our public filings. Furthermore, no significant changes have been made to our internal controls and procedures subsequent to March 31, 2003 but prior to filing this Quarterly Report on Form 10-Q, and no corrective actions are anticipated as we noted no significant deficiencies or material weaknesses in our control structure. 22 PART II ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On March 13, 2003, we executed an agreement, which subsequently closed on March 25, 2003, to issue 15,000 shares of our Series B Convertible Preferred Stock ("Series B Preferred Shares"), and warrants to purchase 248,800 shares of our common stock, to Lime Rock Partners II, L.P., a private investment fund, for an aggregate purchase price of $15.0 million. Of the aggregate purchase price, approximately $99,000 was allocated to the warrants. Proceeds from the issuance of these securities, net of related estimated issuance costs of approximately $800,000, were used to reduce our outstanding revolving debt balances and for other general corporate purposes. These securities were issued in a private offering to a single purchaser and were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. Each of the Series B Preferred Shares has a face value of $1,000 and pays a cumulative dividend of 10% per annum of face value, which is payable semi-annually on June 15 and December 15 of each year, except the initial dividend payment which is payable on July 1, 2003. Each of the Series B Preferred Shares is convertible, at the option of the holder thereof, into (i) a number of shares of common stock equal to the face value of such Series B Preferred Share divided by the conversion price, which was $7.805 (or an aggregate of 1,921,845 shares at March 31, 2003), and (ii) a cash payment equal to the amount of dividends on such share that have accrued since the prior semi-annual dividend payment date. As of March 31, 2003, we accrued dividends payable of $25,000 related to the Series B Preferred Shares. In the event of a change in control, as defined in the agreement, each holder of the Series B Preferred Shares has the right to convert the Series B Preferred Shares into common stock or to cause the Company to redeem for cash some or all of the Series B Preferred Shares at an aggregate redemption price equal to the sum of (i) $1,000 (adjusted for stock splits, stock dividends, etc.) multiplied by the number of shares to be redeemed, plus (ii) an amount (not less than zero) equal to the product of $500 (adjusted for stock splits, stock dividends, etc.) multiplied by the aggregate number of Series B Preferred Shares to be redeemed less the sum of the aggregate amount of dividends paid in cash since the issuance date, plus any gain on the related stock warrants. If the holder of the Series B Preferred Shares elects redemption in cash upon a change in control occurring on or before March 25, 2006, the holder would also be entitled to receive cash in an amount equal to the dividends that would have accrued through March 25, 2006, less the sum of the aggregate amount of dividends paid in cash through the date of conversion, and the aggregate amount of dividends accrued in prior periods but not yet paid. We have the right to redeem the Series B Preferred Shares for cash on or after March 25, 2008, at a redemption price per share equal to the face value of the Series B Preferred Shares plus the amount of dividends that have been accrued but not yet paid since the most recent semi-annual dividend payment date. If the Series B Preferred Shares are redeemed under contingent redemption features, any redemption amount greater than carrying value would be recorded as a reduction of income available to common shareholders when the event becomes probable. If we fail to pay dividends or any redemption price due with respect to the Series B Preferred Shares for a period of sixty days following the payment date, we will be in default under the terms of such shares. During a default period, (1) the dividend rate on the Series B Preferred Shares would increase to 10.25%, (2) the holders of Series B Preferred Shares would have the right to elect or appoint a second director to the Board of Directors and (3) we would be restricted from paying dividends on, or redeeming or acquiring our common or other outstanding stock, with limited exceptions. If we fail to set aside or make payments in cash of any redemption price due with respect to the Series B Preferred Shares, and the holders elect, our right to redeem the shares may be terminated. The warrants issued to Lime Rock Partners II, L.P. have an exercise price of $10.00 per share of common stock and expire on March 25, 2006. We can force the exercise of the warrants if our common stock trades above $13.50 per share for 30 consecutive days. The warrants contain a provision whereby the holder could require us to make a net-cash settlement for the warrants in the case of a change in control. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) See Index of Exhibits for a list of those exhibits filed herewith. (b) Reports on Form 8-K. o Report on Form 8-K filed February 25, 2003, to report Fourth Quarter and Year 2002 Results. o Report on Form 8-K filed March 7, 2003, to announce key personnel changes. o Report on Form 8-K filed March 14, 2003, to announce the sale of $15.0 million of convertible preferred stock and warrants to a private equity firm. o Report on Form 8-K filed March 25, 2003, announcing the completion of a $15.0 million convertible preferred stock and warrant private placement to a private equity firm. o Report on Form 8-K filed May 7, 2003, to report First Quarter 2003 Results. 23 (c) Index of Exhibits EXHIBIT NO. DESCRIPTION 2.3 -- Securities Purchase Agreement by and among Lime Rock Partners II, L.P. and NATCO Group Inc., dated March 13, 2003 (incorporated by reference to Exhibit 99.2 of the Company's Current Report on Form 8-K filed March 14, 2003). 3.1 -- Restated Certificate of Incorporation of the Company dated March 6, 1998, as amended by Certificates of Amendment dated November 18, 1998 and November 29, 1999 and January 21, 2000 (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement No. 333-48851 on Form S-1). 3.2 -- Certificate of Designations of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.2 of the Company's Registration Statement No. 333-48851 on Form S-1). 3.3* -- Composite Amended and Restated By-laws of the Company, as amended 3.4 -- Certificate of Designations of Series B Convertible Preferred Stock of NATCO Group Inc. dated March 25, 2003 (incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on March 27, 2003). 4.3 -- Registration Rights Agreement by and between Lime Rock Partners II, L.P. and NATCO Group Inc. dated March 25, 2003 (incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K filed on March 27, 2003). 4.4 -- Rights Agreement dated as of May 15, 1998 by and among the Company and Chase Mellon Shareholder Services, LLC (incorporated by reference to Exhibit 4.2 of the Company's Registration Statement No. 333-48851 on Form S-1) 4.5 -- First Amendment to Rights Agreement between NATCO Group Inc. and Mellon Investor Services L.L.C. (as successor to ChaseMellon Shareholder Services, L.L.C.), as Rights Agent dated March 25, 2003 (incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K filed on March 27, 2003). 99.1* -- Certification of Chief Executive Officer of NATCO Group Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2* -- Certification of Principal Financial Officer of NATCO Group Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - ---------- * Filed with this report 24 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. NATCO Group Inc. By: /s/ NATHANIEL A. GREGORY ------------------------------ Name: Nathaniel A. Gregory Chairman of the Board and Chief Executive Officer Date: May 15, 2003 By: /s/ RYAN S. LILES ------------------------------ Name: Ryan S. Liles Vice President and Controller (Principal Financial Officer) Date: May 15, 2003 25 CERTIFICATIONS I, Nathaniel A. Gregory, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NATCO Group Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 --------------------------- /s/ NATHANIEL A. GREGORY ------------------------------------------ Nathaniel A. Gregory Chief Executive Officer 26 CERTIFICATIONS I, Ryan S. Liles, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NATCO Group Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 ----------------------------- /s/ RYAN S. LILES ------------------------------------------ Ryan S. Liles, Vice President and Controller (Principal Financial Officer*) * Currently performing the function of chief financial officer, following the chief financial officer's resignation on March 21, 2003. 27 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.3 -- Securities Purchase Agreement by and among Lime Rock Partners II, L.P. and NATCO Group Inc., dated March 13, 2003 (incorporated by reference to Exhibit 99.2 of the Company's Current Report on Form 8-K filed March 14, 2003). 3.1 -- Restated Certificate of Incorporation of the Company dated March 6,, 1998, as amended by Certificates of Amendment dated November 18, 1998 and November 29, 1999 and January 21, 2000 (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement No. 333-48851 on Form S-1). 3.2 -- Certificate of Designations of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.2 of the Company's Registration Statement No. 333-48851 on Form S-1). 3.3* -- Composite Amended and Restated By-laws of the Company, as amended 3.4 -- Certificate of Designations of Series B Convertible Preferred Stock of NATCO Group Inc. dated March 25, 2003 (incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on March 27, 2003). 4.3 -- Registration Rights Agreement by and between Lime Rock Partners II, L.P. and NATCO Group Inc. dated March 25, 2003 (incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K filed on March 27, 2003). 4.4 -- Rights Agreement dated as of May 15, 1998 by and among the Company and Chase Mellon Shareholder Services, LLC (incorporated by reference to Exhibit 4.2 of the Company's Registration Statement No. 333-48851 on Form S-1) 4.5 -- First Amendment to Rights Agreement between NATCO Group Inc. and Mellon Investor Services L.L.C. (as successor to ChaseMellon Shareholder Services, L.L.C.), as Rights Agent dated March 25, 2003 (incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K filed on March 27, 2003). 99.1* -- Certification of Chief Executive Officer of NATCO Group Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2* -- Certification of Principal Financial Officer of NATCO Group Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- ---------- * Filed with this report 28 EX-3.1 3 h05958exv3w1.txt RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.3 COMPOSITE BYLAWS OF NATCO GROUP INC. a Delaware corporation Dates of Adoption: Amended and Restated Bylaws - February 17, 1998 Amendment adopted by the Board of Directors - September 27, 1999 Amendment adopted by the Board of Directors - January 10, 2000 Amendment adopted by the Board of Directors - April __, 2000 (omitted - superceded by following amendment) Amendment adopted by the Board of Directors - March 4, 2003, but effective 25, 2003 BYLAWS OF NATCO GROUP INC. Article I Offices Section 1. Registered Office. The registered office of the Corporation required by the General Corporation Law of the State of Delaware to be maintained in the State of Delaware, shall be the registered office named in the original Certificate of Incorporation of the Corporation as amended and restated from time to time (the "Certificate of Incorporation"), or such other office as may be designated from time to time by the Board of Directors in the manner provided by law. Should the Corporation maintain a principal office within the State of Delaware such registered office need not be identical to such principal office of the Corporation. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. Article II Stockholders Section 1. Place of Meetings. All meetings of the stockholders shall be held at the principal office of the Corporation, or at such other place within or without the State of Delaware as shall be specified or fixed in the notices or waivers of notice thereof. Section 2. Quorum; Adjournment of Meetings. Unless otherwise required by law or provided in the Certificate of Incorporation or these bylaws, the holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at any meeting of stockholders for the transaction of business and the act of a majority of such stock so represented at any meeting of stockholders at which a quorum is present shall constitute the act of the meeting of stockholders. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Notwithstanding the other provisions of the Certificate of Incorporation or these bylaws, the chairman of the meeting or the holders of a majority of the issued and outstanding stock, present in person or represented by proxy, at any meeting of stockholders, whether or not a quorum is present, shall have the power to adjourn such meeting from time to time, without any notice other than announcement at the meeting of the time and place of the holding of the adjourned meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at such meeting. At such -2- adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally called. Section 3. Annual Meetings. An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, within or without the State of Delaware, on such date, and at such time as the Board of Directors shall fix and set forth in the notice of the meeting, which date shall be within fifteen (15) months subsequent to the date of the last annual meeting of stockholders. Section 4. Special Meetings. Unless otherwise provided in the Certificate of Incorporation, special meetings of the stockholders for any purpose or purposes may be called at any time by the Chairman of the Board (if any), by the President or by a majority of the Board of Directors. Section 5. Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors of the Corporation may fix, in advance, a date as the record date for any such determination of stockholders, which date shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the Board of Directors does not fix a record date for any meeting of the stockholders, the record date for determining stockholders entitled to notice of or to vote at such meeting shall be at the close of business on the day next preceding the day on which notice is given, or, if in accordance with Article VIII, Section 3 of these bylaws notice is waived, at the close of business on the day next preceding the day on which the meeting is held. If, in accordance with Section 13 of this Article II, corporate action without a meeting of stockholders is to be taken, the record date for determining stockholders entitled to express consent to such corporate action in writing, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 6. Notice of Meetings. Except as otherwise required by law or the Certificate of Incorporation, written notice of the place, date and hour of all meetings, and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be given by or at the direction of the Chairman of the Board (if any) or the President, the Secretary or the other person(s) calling the meeting to each stockholder entitled to vote thereat not less than ten (10) nor more than sixty (60) days before the date of the meeting. Such notice may be delivered -3- either personally or by mail. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Section 7. Stock List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in the name of such stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 8. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. Proxies for use at any meeting of stockholders shall be filed with the Secretary, or such other officer as the Board of Directors may from time to time determine by resolution, before or at the time of the meeting. All proxies shall be received and taken charge of and all ballots shall be received and canvassed by the secretary of the meeting who shall decide all questions touching upon the qualification of voters, the validity of the proxies, and the acceptance or rejection of votes, unless an inspector or inspectors shall have been appointed by the chairman of the meeting, in which event such inspector or inspectors shall decide all such questions. No proxy shall be valid after three (3) years from its date, unless the proxy provides for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power. Should a proxy designate two or more persons to act as proxies, unless such instrument shall provide the contrary, a majority of such persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting or giving consents thereby conferred, or if only one be present, then such powers may be exercised by that one; or, if an even number attend and a majority do not agree on any particular issue, each proxy so attending shall be entitled to exercise such powers in respect of the same portion of the shares as he is of the proxies representing such shares. Section 9. Voting; Elections; Inspectors. Unless otherwise required by law or provided in the Certificate of Incorporation, each stockholder shall have one vote for each share of stock entitled to vote which is registered in his name on the record date for the meeting. Shares registered in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the bylaw (or comparable instrument) of such corporation may prescribe, or in the absence of such provision, as the Board of Directors (or comparable body) of such corporation may determine. Shares registered in the name of a deceased person may be voted by his executor or administrator, either in person or by proxy. -4- All voting shall be by stock vote. Every stock vote shall be taken by written ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. All elections of directors shall be by ballot, unless otherwise provided in the Certificate of Incorporation. At any meeting at which a vote is taken by ballots, the chairman of the meeting may appoint one or more inspectors, each of whom shall subscribe an oath or affirmation to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of his ability. Such inspector shall receive the ballots, count the votes and make and sign a certificate of the result thereof. The chairman of the meeting may appoint any person to serve as inspector, except no candidate for the office of director shall be appointed as an inspector. Unless otherwise provided in the Certificate of Incorporation, cumulative voting for the election of directors shall be prohibited. Section 10. Conduct of Meetings. The meetings of the stockholders shall be presided over by the Chairman of the Board (if any), or if he is not present, by the President, or if neither the Chairman of the Board (if any), nor President is present, by a chairman elected at the meeting. The Secretary of the Corporation, if present, shall act as secretary of such meetings, or if he is not present, an Assistant Secretary shall so act; if neither the Secretary nor an Assistant Secretary is present, then a secretary shall be appointed by the chairman of the meeting. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him in order. Unless the chairman of the meeting of stockholders shall otherwise determine, the order of business shall be as follows: (a) Calling of meeting to order. (b) Election of a chairman and the appointment of a secretary if necessary. (c) Presentation of proof of the due calling of the meeting. (d) Presentation and examination of proxies and determination of a quorum. (e) Reading and settlement of the minutes of the previous meeting. (f) Reports of officers and committees. (g) The election of directors if an annual meeting, or a meeting called for that purpose. (h) Unfinished business. (i) New business. (j) Adjournment. Section 11. Treasury Stock. The Corporation shall not vote, directly or indirectly, shares of its own stock owned by it and such shares shall not be counted for quorum purposes. Section 12. Action Without Meeting. Any action permitted or required by law, the Certificate of Incorporation or these bylaws to be taken at a meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of all of the outstanding shares entitled to vote thereon. -5- Section 13. Notice of Stockholder Business. At an annual meeting of stockholders, only such business shall be conducted as shall have been properly brought before the meeting (a) by or at the direction of the Board or (b) by a stockholder who is a stockholder of record at the time of giving such notice, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 40 days prior to the meeting. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's book, of the stockholder proposing such business, (c) the class and number of shares of the Corporation that are beneficially owned by the stockholder and (d) any material interest of the stockholder in such business. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in compliance with this Section. The Chairman of an annual meeting shall, if the facts warrant, determine and declare accordance with the provisions of this Section, and, if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended and the rules and regulations thereunder with respect to the matters set forth in this Section. Article III Board of Directors Section 1. Power; Number; Term of Office. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, and subject to the restrictions imposed by law or the Certificate of Incorporation, they may exercise all the powers of the Corporation. The number of directors which shall constitute the whole Board of Directors shall be eight. Each director shall hold office for the term for which he is elected, and until his successor shall have been elected and qualified or until his earlier death, resignation or removal. Unless otherwise provided in the Certificate of Incorporation, directors need not be stockholders nor residents of the State of Delaware. Section 2. Quorum. Unless otherwise provided in the Certificate of Incorporation, a majority of the total number of directors shall constitute a quorum for the transaction of business of the Board of Directors and the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 3. Place of Meetings; Order of Business. The directors may hold their meetings and may have an office and keep the books of the Corporation, except as otherwise provided by law, in such place or places, within or without the State of Delaware, as the Board of Directors -6- may from time to time determine by resolution. At all meetings of the Board of Directors business shall be transacted in such order as shall from time to time be determined by the Chairman of the Board (if any), or in his absence by the President, or by resolution of the Board of Directors. Section 4. First Meeting. Each newly elected Board of Directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of the stockholders. Notice of such meeting shall not be required. At the first meeting of the Board of Directors in each year at which a quorum shall be present, held next after the annual meeting of stockholders, the Board of Directors shall proceed to the election of the officers of the Corporation. Section 5. Regular Meetings. Regular meetings of the Board of Directors shall be held at such times and places as shall be designated from time to time by resolution of the Board of Directors. Notice of such regular meetings shall not be required. Section 6. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board (if any), the President or, on the written request of any two directors, by the Secretary, in each case on at least twenty-four (24) hours personal, written, telegraphic, cable or wireless notice to each director. Such notice, or any waiver thereof pursuant to Article VIII, Section 3 hereof, need not state the purpose or purposes of such meeting, except as may otherwise be required by law or provided for in the Certificate of Incorporation or these bylaws. Section 7. Removal. Any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided that, unless the Certificate of Incorporation otherwise provides, if the Board of Directors is classified, then the stockholders may effect such removal only for cause; and provided further that, if the Certificate of Incorporation expressly grants to stockholders the right to cumulate votes for the election of directors and if less than the entire board is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors, or, if there be classes of directors, at an election of the class of directors of which such director is a part. Section 8. Vacancies; Increases in the Number of Directors. Unless otherwise provided in the Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or a sole remaining director; and any director so chosen shall hold office until the next annual election and until his successor shall be duly elected and shall qualify, unless sooner displaced. If the directors of the Corporation are divided into classes, any directors elected to fill vacancies or newly created directorships shall hold office until the next election of the class for which such directors shall have been chosen, and until their successors shall be duly elected and shall qualify. -7- Section 9. Compensation. Unless otherwise restricted by the Certificate of Incorporation, the Board of Directors shall have the authority to fix the compensation of directors. Section 10. Action Without a Meeting; Telephone Conference Meeting. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors, or any committee designated by the Board of Directors, may be taken without a meeting if all members of the Board of Directors or committee, as the case may be consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Such consent shall have the same force and effect as a unanimous vote at a meeting, and may be stated as such in any document or instrument filed with the Secretary of State of Delaware. Unless otherwise restricted by the Certificate of Incorporation, subject to the requirement for notice of meetings, members of the Board of Directors, or members of any committee designated by the Board of Directors, may participate in a meeting of such Board of Directors or committee, as the case may be, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 11. Approval or Ratification of Acts or Contracts by Stockholders. The Board of Directors in its discretion may submit any act or contract for approval or ratification at any annual meeting of the stockholders, or at any special meeting of the stockholders called for the purpose of considering any such act or contract, and any act or contract that shall be approved or be ratified by the vote of the stockholders holding a majority of the issued and outstanding shares of stock of the Corporation entitled to vote and present in person or by proxy at such meeting (provided that a quorum is present), shall be as valid and as binding upon the Corporation and upon all the stockholders as if it has been approved or ratified by every stockholder of the Corporation. In addition, any such act or contract may be approved or ratified by the written consent of stockholders holding a majority of the issued and outstanding shares of capital stock of the Corporation entitled to vote and such consent shall be as valid and as binding upon the Corporation and upon all the stockholders as if it had been approved or ratified by every stockholder of the Corporation. Article IV Committees Section 1. Designation; Powers. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, including, if they shall so determine, an executive committee, each such committee to consist of one or more of the directors of the Corporation. Any such designated committee shall have and may exercise such of the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation as may be provided in such resolution, except that no such committee shall have the power or authority of the Board of Directors in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the -8- stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution of the Corporation, or amending, altering or repealing the bylaws or adopting new bylaws for the Corporation and, unless such resolution or the Certificate of Incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Any such designated committee may authorize the seal of the Corporation to be affixed to all papers which may require it. In addition to the above such committee or committees shall have such other powers and limitations of authority as may be determined from time to time by resolution adopted by the Board of Directors. Section 2. Procedure; Meetings; Quorum. Any committee designated pursuant to Section 1 of this Article shall choose its own chairman, shall keep regular minutes of its proceedings and report the same to the Board of Directors when requested, shall fix its own rules or procedures, and shall meet at such times and at such place or places as may be provided by such rules, or by resolution of such committee or resolution of the Board of Directors. At every meeting of any such committee, the presence of a majority of all the members thereof shall constitute a quorum and the affirmative vote of a majority of the members present shall be necessary for the adoption by it of any resolution. Section 3. Substitution of Members. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Article V Officers Section 1. Number, Titles and Term of Office. The officers of the Corporation shall be a President, one or more Vice Presidents (any one or more of whom may be designated Executive Vice President or Senior Vice President), a Treasurer, a Secretary and, if the Board of Directors so elects, a Chairman of the Board and such other officers as the Board of Directors may from time to time elect or appoint. Each officer shall hold office until his successor shall be duly elected and shall qualify or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Any number of offices may be held by the same person, unless the Certificate of Incorporation provides otherwise. Except for the Chairman of the Board, if any, no officer need be a director. Section 2. Salaries. The salaries or other compensation of the officers and agents of the Corporation shall be fixed from time to time by the Board of Directors. Section 3. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed, either with or without cause, by the vote of a majority of the whole Board of Directors at a special meeting called for the purpose, or at any regular meeting of the Board of Directors, provided the notice for such meeting shall specify that the matter of any such proposed removal will be considered at the meeting but such removal shall be without prejudice to the -9- contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Section 4. Vacancies. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors. Section 5. Powers and Duties of the Chief Executive Officer. The President shall be the chief executive officer of the Corporation unless the Board of Directors designates the Chairman of the Board as chief executive officer. Subject to the control of the Board of Directors and the executive committee (if any), the chief executive officer shall have general executive charge, management and control of the properties, business and operations of the Corporation with all such powers as may be reasonably incident to such responsibilities; he may agree upon and execute all leases, contracts, evidences of indebtedness and other obligations in the name of the Corporation and may sign all certificates for shares of capital stock of the Corporation; and shall have such other powers and duties as designated in accordance with these bylaws and as from time to time may be assigned to him by the Board of Directors. Section 6. Powers and Duties of the Chairman of the Board. If elected, the Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors; and he shall have such other powers and duties as designated in these bylaws and as from time to time may be assigned to him by the Board of Directors. Section 7. Powers and Duties of the President. Unless the Board of Directors otherwise determines, the President shall have the authority to agree upon and execute all leases, contracts, evidences of indebtedness and other obligations in the name of the Corporation; and, unless the Board of Directors otherwise determines, he shall, in the absence of the Chairman of the Board or if there be no Chairman of the Board, preside at all meetings of the stockholders and (should he be a director) of the Board of Directors; and he shall have such other powers and duties as designated in accordance with these bylaws and as from time to time may be assigned to him by the Board of Directors. Section 8. Vice Presidents. In the absence of the President, or in the event of his inability or refusal to act, a Vice President designated by the Board of Directors shall perform the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. In the absence of a designation by the Board of Directors of a Vice President to perform the duties of the President, or in the event of his absence or inability or refusal to act, the Vice President who is present and who is senior in terms of time as a Vice President of the Corporation shall so act. The Vice Presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 9. Treasurer. The Treasurer shall have responsibility for the custody and control of all the funds and securities of the Corporation, and he shall have such other powers and duties as designated in these bylaws and as from time to time may be assigned to him by the Board of Directors. He shall perform all acts incident to the position of Treasurer, subject to the control of the chief executive officer and the Board of Directors; and he shall, if required by the Board of -10- Directors, give such bond for the faithful discharge of his duties in such form as the Board of Directors may require. Section 10. Assistant Treasurers. Each Assistant Treasurer shall have the usual powers and duties pertaining to his office, together with such other powers and duties as designated in these bylaws and as from time to time may be assigned to him by the chief executive officer or the Board of Directors. The Assistant Treasurers shall exercise the powers of the Treasurer during that officer's absence or inability or refusal to act. Section 11. Secretary. The Secretary shall keep the minutes of all meetings of the Board of Directors, committees of directors and the stockholders, in books provided for that purpose; he shall attend to the giving and serving of all notices; he may in the name of the Corporation affix the seal of the Corporation to all contracts of the Corporation and attest the affixation of the seal of the Corporation thereto; he may sign with the other appointed officers all certificates for shares of capital stock of the Corporation; he shall have charge of the certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct, all of which shall at all reasonable times be open to inspection of any director upon application at the office of the Corporation during business hours; he shall have such other powers and duties as designated in these bylaws and as from time to time may be assigned to him by the Board of Directors; and he shall in general perform all acts incident to the office of Secretary, subject to the control of the chief executive officer and the Board of Directors. Section 12. Assistant Secretaries. Each Assistant Secretary shall have the usual powers and duties pertaining to his office, together with such other powers and duties as designated in these bylaws and as from time to time may be assigned to him by the chief executive officer or the Board of Directors. The Assistant Secretaries shall exercise the powers of the Secretary during that officer's absence or inability or refusal to act. Section 13. Action with Respect to Securities of Other Corporations. Unless otherwise directed by the Board of Directors, the chief executive officer shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of security holders of or with respect to any action of security holders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. Article VI Indemnification of Directors, Officers, Employees and Agents Section 1. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative, is or was or has agreed to become a director or officer of the Corporation or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a -11- director or officer or in any other capacity while serving or having agreed to serve as a director or officer, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended, (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) against all expense, liability and loss (including without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to serve in the capacity which initially entitled such person to indemnity hereunder and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the board of directors of the Corporation. The right to indemnification conferred in this Article VI shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a current, former or proposed director or officer in his or her capacity as a director or officer or proposed director or officer (and not in any other capacity in which service was or is or has been agreed to be rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnified person, to repay all amounts so advanced if it shall ultimately be determined that such indemnified person is not entitled to be indemnified under this Section or otherwise. Section 2. Indemnification of Employees and Agents. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation, individually or as a group, with the same scope and effect as the indemnification of directors and officers provided for in this Article. Section 3. Right of Claimant to Bring Suit. If a written claim received by the Corporation from or on behalf of an indemnified party under this Article VI is not paid in full by the Corporation within ninety days after such receipt, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that -12- the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 4. Nonexclusivity of Rights. The right to indemnification and the advancement and payment of expenses conferred in this Article VI shall not be exclusive of any other right which any person may have or hereafter acquire under any law (common or statutory), provision of the Certificate of Incorporation of the Corporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 5. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any person who is or was serving as a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. Section 6. Savings Clause. If this Article VI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify and hold harmless each director and officer of the Corporation, as to costs, charges and expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative to the full extent permitted by any applicable portion of this Article VI that shall not have been invalidated and to the fullest extent permitted by applicable law. Section 7. Definitions. For purposes of this Article, reference to the "Corporation" shall include, in addition to the Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger prior to (or, in the case of an entity specifically designated in a resolution of the Board of Directors, after) the adoption hereof and which, if its separate existence had continued, would have had the power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. Article VII Capital Stock Section 1. Certificates of Stock. The certificates for shares of the capital stock of the Corporation shall be in such form, not inconsistent with that required by law and the Certificate of Incorporation, as shall be approved by the Board of Directors. The Chairman of the Board (if any), President or a Vice President shall cause to be issued to each stockholder one or more certificates, under the seal of the Corporation or a facsimile thereof if the Board of Directors shall have provided for such seal, and signed by the Chairman of the Board (if any), President or a Vice President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer certifying the number of shares (and, if the stock of the Corporation shall be divided -13- into classes or series, the class and series of such shares) owned by such stockholder in the Corporation; provided, however, that any of or all the signatures on the certificate may be facsimile. The stock record books and the blank stock certificate books shall be kept by the Secretary, or at the office of such transfer agent or transfer agents as the Board of Directors may from time to time by resolution determine. In case any officer, transfer agent or registrar who shall have signed or whose facsimile signature or signatures shall have been placed upon any such certificate or certificates shall have ceased to be such officer, transfer agent or registrar before such certificate is issued by the Corporation, such certificate may nevertheless be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. The stock certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder's name and number of shares. Section 2. Transfer of Shares. The shares of stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives upon surrender and cancellation of certificates for a like number of shares. Upon surrender to the Corporation or a transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 3. Ownership of Shares. The Corporation shall be entitled to treat the holder of record of any share or shares of capital stock of the Corporation as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. Section 4. Regulations Regarding Certificates. The Board of Directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration or the replacement of certificates for shares of capital stock of the Corporation. Section 5. Lost or Destroyed Certificates. The Board of Directors may determine the conditions upon which a new certificate of stock may be issued in place of a certificate which is alleged to have been lost, stolen or destroyed; and may, in their discretion, require the owner of such certificate or his legal representative to give bond, with sufficient surety, to indemnify the Corporation and each transfer agent and registrar against any and all losses or claims which may arise by reason of the issue of a new certificate in the place of the one so lost, stolen or destroyed. Article VIII Miscellaneous Provisions Section 1. Fiscal Year. The fiscal year of the Corporation shall be such as established from time to time by the Board of Directors. -14- Section 2. Corporate Seal. The Board of Directors may provide a suitable seal, containing the name of the Corporation. The Secretary shall have charge of the seal (if any). If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by the Assistant Secretary or Assistant Treasurer. Section 3. Notice and Waiver of Notice. Whenever any notice is required to be given by law, the Certificate of Incorporation or under the provisions of these bylaws, said notice shall be deemed to be sufficient if given (i) by telegraphic, cable or wireless transmission or (ii) by deposit of the same in a post office box in a sealed prepaid wrapper addressed to the person entitled thereto at his post office address, as it appears on the records of the Corporation, and such notice shall be deemed to have been given on the day of such transmission or mailing, as the case may be. Whenever notice is required to be given by law, the Certificate of Incorporation or under any of the provisions of these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or the bylaws. Section 4. Resignations. Any director, member of a committee or officer may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of its receipt by the chief executive officer or Secretary. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. Section 5. Facsimile Signatures. In addition to the provisions for the use of facsimile signatures elsewhere specifically authorized in these bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors. Section 6. Reliance upon Books, Reports and Records. Each director and each member of any committee designated by the Board of Directors shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or reports made to the Corporation by any of its officers, or by an independent certified public accountant, or by an appraiser selected with reasonable care by the Board of Directors or by any such committee, or in relying in good faith upon other records of the Corporation. Article IX Amendments Unless otherwise restricted by the Certificate of Incorporation, the Board of Directors shall have the power to adopt, amend and repeal from time to time bylaws of the Corporation at any regular -15- or special meeting of the Board of Directors upon the affirmative vote of a majority of the directors then in office, subject to the right of the stockholders entitled to vote with respect thereto to amend or repeal such bylaws as adopted or amended by the Board of Directors. -16- EX-99.1 4 h05958exv99w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 906 EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF NATCO GROUP INC. PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying report on Form 10-Q for the quarterly period ended March 31, 2003 filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Nathaniel A. Gregory, Chief Executive Officer of NATCO Group Inc. (the "Company"), hereby certify, to my knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ NATHANIEL A. GREGORY ----------------------------------- Name: Nathaniel A. Gregory Date: May 15, 2003 A signed original of this written statement as required by Section 906 has been provided to NATCO Group Inc. and will be retained by NATCO Group Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 5 h05958exv99w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 906 EXHIBIT 99.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER OF NATCO GROUP INC. PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying report on Form 10-Q for the quarterly period ended March 31, 2003 filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ryan S. Liles, Vice President and Controller of NATCO Group Inc. (the "Company"), hereby certify, to my knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ RYAN S. LILES ----------------------------------- Name: Ryan S. Liles Date: May 15, 2003 A signed original of this written statement as required by Section 906 has been provided to NATCO Group Inc. and will be retained by NATCO Group Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----