TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
a charge of $1.2 million was also recorded in 2001 to reflect the impairment of inventory and fixed assets. Of this charge, $0.9 million was included in cost of sales. All assets were disposed of prior to the end of 2001. During the third quarter of 2002, the Company announced the closure of its underutilized Maquoketa, Iowa, Heavy Duty component parts plant in order to move the manufacturing closer to where the parts are used. As a result, the Company recorded a provision of $0.5 million to reduce the inventory and fixed assets to net realizable value, which was included in cost of sales. The Company also received proceeds of $0.1 million during the second quarter of 2002 from the sale of assets, which had been written off during 2001 in connection with the closure of a California manufacturing plant. In conjunction with the closure of two Heavy Duty Aftermarket plants in 2003, the Company wrote down the related fixed assets and inventory to net realizable value and disposed of the assets.
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
The Company entered into a $65.0 million Loan and Security Agreement (the "Loan Agreement") on January 4, 2001 with Congress Financial Corporation (New England) ("Congress"), an affiliate of Wachovia Bank N.A. ("Wachovia"). Proceeds from the Loan Agreement were utilized to repay the then existing revolving credit arrangement with five banking institutions. The Loan Agreement originally provided for collateralized borrowings or the issuance of letters of credit in an aggregate amount not to exceed $65.0 million and was comprised of a $60.0 million Revolving Credit Facility and a $5.0 million Term Loan. The initial term of the Loan Agreement was to expire on January 5, 2004, with annual extensions thereafter at the option of Congress. The Loan Agreement is collateralized by a blanket first security interest in substantially all of the Company's assets plus a pledge of the stock of the Company's subsidiaries. Available borrowings under the Revolving Credit Facility are determined by a borrowing base consisting of the Company's eligible accounts receivable and inventory, adjusted by an advance rate. Borrowings under the Revolving Credit Facility are classified as short term in the accompanying consolidated balance sheet. The Term Loan originally was payable in 59 consecutive monthly installments of $75 thousand commencing February 1, 2001, with a balloon payment due on January 5, 2004.
Amounts borrowed under the Loan Agreement initially bore interest at variable rates based, at the Company's option, on either the Eurodollar rate plus a margin of 2.0%, 2.25% or 2.50% depending on the Company's pretax profit performance, or the Wachovia base lending rate. The Loan Agreement contains covenants regarding working capital and net worth and prohibits the payment of common stock dividends.
For the period April 30, 2001 through June 30, 2001, the Company was in default of the net worth covenant contained in the Loan Agreement. Congress waived the default by executing an amendment to the Loan Agreement, which provided that effective July 1, 2001, borrowings bear interest at either 1.5% above the prime rate or 4% in excess of the Eurodollar rate, at the Company's option. On July 30, 2001, the Company entered into an amendment to the Loan Agreement, which lowered the net worth threshold to $63.0 million for periods after July 30, 2001. On November 27, 2001, an amendment was entered into which lowered the maximum borrowing amount under the Loan Agreement from $65.0 million to $55.0 million and lowered the maximum borrowing amount under the revolving credit facility from $60.0 million to $50.0 million. On February 20, 2002, the Company entered into an amendment, which redefined working capital to exclude deferred tax assets, and established the minimum working capital threshold at $53.0 million effective December 31, 2001 through March 31, 2002 and at $55.0 million thereafter. These amendments were entered into in order to correct a violation, which would have occurred under the original wording of the agreement. In order to correct a net worth violation, which would have occurred as a result of recording the tax valuation reserve in 2001, and writing off goodwill in the first quarter of 2002, the Company obtained an amendment, which as of December 31, 2001, lowered the minimum net worth threshold to $37.0 million. On November 22, 2002, the maximum credit line was permanently increased to $65.0 million as a result of an amendment to the Loan Agreement.
On December 27, 2002, the Company entered into an amendment to its Loan Agreement, along with an amendment to its Term Promissory Note. These amendments provide for a permanent increase in the maximum credit line to $80.0 million and an extension of the credit line through December 27, 2005. The expanded credit line is comprised of a Revolving Credit facility of up to $77.0 million and a Term Loan of $3.0 million. The Term Loan is payable in 35 consecutive monthly installments of $75 thousand, commencing on February 1, 2003 with a balloon payment due on December 27, 2005. In addition, the interest rate was decreased to the prime rate from the prime rate plus 1.5%. The Company also has the option to elect a Eurodollar-based interest rate, which has been decreased from plus 4.0% to plus 2.5%. There were no changes to the minimum thresholds for net worth or working capital, which remain at $37 million and $55 million, respectively. The extension and amendment to the Loan Agreement provides the Company with additional flexibility to meet its ongoing development needs and lowers borrowing costs.
At December 31, 2003 and 2002, the interest rate on outstanding borrowings under the Loan Agreement was 4.00% and 4.25%, respectively. The weighted average interest rate during 2003 and 2002 was 4.13% and 6.08%, respectively. Available borrowings under the Revolving Credit facility at December 31, 2003 were $4.2 million.
34
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
In addition, the Company had an Industrial Revenue Bond relating to its New Haven, Connecticut facility, which was due in October 2013 and was fully collateralized by letters of credit. The Industrial Revenue Bond bore interest, payable quarterly, at a rate based on a short-term tax-exempt bonds index, as defined in the bonds, and approximated 1.40% at December 31, 2002. The average interest rate approximated 1.44% during 2002. This Industrial Revenue Bond was repaid when the building was sold in May 2003.
Capitalized lease obligations relate primarily to computer equipment.
Interest paid during 2003, 2002 and 2001 was $2.9 million, $2.9 million and $3.8 million, respectively.
The Company utilizes letters of credit in the amounts of $4.9 million and $10.1 million, at December 31, 2003 and 2002, respectively, to back certain insurance policies and certain trade purchases. Prior to being repaid, the Company was required to have a letter of credit to back its Industrial Revenue Bond.
Minimum future debt repayments, excluding the Revolving Credit facility, will be $1.0 million in 2004 and $1.3 million in 2005.
Note 10. Stockholders' Equity
Stockholder Rights Plan: On September 14, 1995, the Board of Directors adopted a Stockholder Rights Plan (the "Rights Plan"), under which one Right (the "Right") was issued and distributed for each share of common stock. The Rights Plan is intended to protect shareholders against unsolicited attempts to acquire control of the Company that do not offer what the Company believes to be an adequate price to all shareholders. Each Right will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Preferred Stock at a price of $60.00 per one one-hundredth of a share of Series A Preferred Stock subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights Agent.
The Rights will become exercisable only if a person or group acquires or obtains the right to acquire beneficial ownership of 20% or more of the outstanding shares of common stock (an "Acquiring Person") or 10 days (or such later date as the Company's Board of Directors may determine) following the commencement by a person or group of a tender or exchange offer which would result in such person or group becoming an Acquiring Person. The earlier of such dates is called the "Rights Distribution Date." Until the Rights Distribution Date, the Rights will be evidenced by the certificates for shares of common stock. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights that are or were owned beneficially by the Acquiring Person (which, from and after the later of the Rights Distribution Date and the date of the earliest of any such events, will be void), will thereafter have the right to receive, upon exercise thereof at the then current exercise price of the Right, that number of shares of common stock having a market value of two times the exercise price of the Right.
Preferred Stock: In connection with the acquisition of Ready-Aire, the Company issued 30,000 shares of Transpro, Inc. Series B Convertible Preferred Stock ("Preferred Stock"). The purchase agreement provides for a potential additional payout for the Ready-Aire acquisition based on the earnings performance of the business for the period January 1, 1999 through December 31, 2000 that would, under certain circumstances, take the form of an increase in the liquidation preference of the Preferred Stock. The holder of the Preferred Stock has disputed the calculation of the payout amount and, the Company is attempting to resolve the differences in accordance with the arbitration provisions of the Ready-Aire stock purchase agreement. Should any adjustment result from this arbitration, the resulting increase in goodwill may be impaired as a result of the provisions of SFAS 142, resulting in a charge to operating income. The Preferred Stock is non-transferable and is entitled to cumulative dividends of 5%. It is convertible into common stock at the rate of 50% on August 1, 2001, an additional 25% on August 1, 2002 and the remaining 25% on August 1, 2003 and is redeemable thereafter at the liquidation
35
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
preference at the time of redemption. The Preferred Stock is convertible into common stock based upon the liquidation preference and the market value of common stock at the time of conversion, as further defined in the purchase agreement. The aggregate number of shares of common stock to be issued upon conversion of Preferred Stock may not exceed 7% of the total number of shares of common stock outstanding, after giving effect to the conversion. During the month of December 2002, the holder of the Preferred Stock converted 6,139 shares of Preferred Stock $(0.6 million) into 124,134 shares of common stock. During the fourth quarter of 2001, 11,080 shares of Preferred Stock ($1.1 million) were converted into 373,279 shares of common stock.
Treasury Stock: During the second quarter of 2001, the Board of Directors authorized the issuance of 30,175 shares of treasury stock and the payment of $97 thousand to the Chairman of the Board as compensation for serving as interim President of the Company.
Accumulated Other Comprehensive Loss: Other comprehensive loss pertains to revenues, expenses, gains and losses that are not included in net (loss) income, but rather are recorded directly in Stockholders' Equity. For 2003, 2002 and 2001, other comprehensive loss reflects minimum pension liability adjustments. The pre-tax and net of tax (loss) adjustments for the years ended December 31, were $(18) thousand and $(18) thousand for 2003, $(2.6) million and $(2.6) million for 2002; and $(1.6) million and $(1.6) million for 2001, respectively.
Note 11. Retirement and Post-retirement Plans
Retirement Plans: A majority of the Company's non-union full-time U.S. employees are covered by a cash balance defined benefit plan. Generally, employees become vested in their pension plan benefits after 5 years of employment. The Company also maintains a non-qualified retirement plan to supplement benefits for designated employees whose pension plan benefits are limited by the provisions of the Internal Revenue Code.
The Company has recorded an additional minimum liability at the end of each year representing the excess of the accumulated benefit obligations over the fair value of plan assets and accrued pension liabilities. To the extent possible, an intangible asset, representing unrecognized prior service costs exists, an intangible asset has been recorded to offset the liabilities. The balance of the liability at the end of the period is reported as a separate reduction of Stockholders' Equity, net of tax.
Postretirement Plans: The Company provides healthcare and life insurance benefits for certain retired employees who reach retirement age while working for the Company. The Company accrues for the cost of its postretirement health care and life insurance benefits based on actuarially determined costs recognized over the period from the date of hire to the full eligibility date of employees who are expected to qualify for these benefits. The Company funds these costs on a pay as you go basis.
Components of net periodic benefit cost for the three years ended December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| | | 2003 | | 2002 | | 2001 | | 2003 | | 2002 | | 2001 |
| | | (in thousands) |
| Service cost | | $ | 801 | | | $ | 817 | | | $ | 798 | | | $ | 5 | | | $ | 2 | | | $ | 2 | |
| Interest cost | | | 1,824 | | | | 1,815 | | | | 1,788 | | | | 37 | | | | 42 | | | | 54 | |
| Expected return on plan assets | | | (2,095 | ) | | | (1,947 | ) | | | (1,955 | ) | | | — | | | | — | | | | — | |
| Plan curtailment | | | — | | | | — | | | | (6 | ) | | | — | | | | — | | | | — | |
| Amortization of net loss (gain) | | | 141 | | | | 94 | | | | (84 | ) | | | 4 | | | | (5 | ) | | | (13 | ) |
| Net periodic benefit cost | | $ | 671 | | | $ | 779 | | | $ | 541 | | | $ | 46 | | | $ | 39 | | | $ | 43 | |
|
36
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
The following tables set forth the plans' combined funded status and amounts recognized in the Company's consolidated balance sheets at the measurement date, December 31:
| | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| | | 2003 | | 2002 | | 2003 | | 2002 |
| | | (in thousands) |
| Change in benefit obligation: | | | | | | | | | |
| Benefit obligation at January 1 | | $ | 28,793 | | | $ | 25,979 | | | $ | 584 | | | $ | 693 | |
| Service cost | | | 801 | | | | 817 | | | | 5 | | | | 2 | |
| Interest cost | | | 1,824 | | | | 1,815 | | | | 37 | | | | 42 | |
| Actuarial loss | | | 797 | | | | 1,889 | | | | 31 | | | | 97 | |
| Actual gross benefits paid | | | (2,003 | ) | | | (1,707 | ) | | | (131 | ) | | | (250 | ) |
| Benefit obligation at December 31 | | $ | 30,212 | | | $ | 28,793 | | | $ | 526 | | | $ | 584 | |
| | | | | | |
| Change in plan assets: | | | | | | | | | |
| Fair value of plan assets at January 1 | | $ | 19,101 | | | $ | 20,020 | | | $ | — | | | $ | — | |
| Actual return on plan assets | | | 2,710 | | | | (1,794 | ) | | | — | | | | — | |
| Company contributions | | | 1,795 | | | | 2,582 | | | | 131 | | | | 250 | |
| Actual gross benefits paid | | | (2,003 | ) | | | (1,707 | ) | | | (131 | ) | | | (250 | ) |
| Fair value of plan assets at December 31 | | $ | 21,603 | | | $ | 19,101 | | | $ | — | | | $ | — | |
| | | | | | |
| Reconciliation of funded status: | | | | | | | | | |
| Funded status at December 31 | | $ | (8,609 | ) | | $ | (9,692 | ) | | $ | (526 | ) | | $ | (584 | ) |
| Unrecognized transition asset | | | 18 | | | | 13 | | | | — | | | | — | |
| Unrecognized prior service cost (benefit) | | | 425 | | | | 482 | | | | 54 | | | | (49 | ) |
| Unrecognized net loss | | | 7,030 | | | | 6,902 | | | | 25 | | | | 100 | |
| Accrued benefit cost | | $ | (1,136 | ) | | $ | (2,295 | ) | | $ | (447 | ) | | $ | (533 | ) |
| | | | | | |
| Amounts recognized in statements of financial position: | | | | | |
| Long-term pension asset | | $ | 2,662 | | | $ | 2,741 | | | $ | — | | | $ | — | |
| Accrued benefit liability | | | (8,498 | ) | | | (9,738 | ) | | | (447 | ) | | | (533 | ) |
| Intangible asset | | | 190 | | | | 210 | | | | — | | | | — | |
| Accumulated other comprehensive loss | | | 4,510 | | | | 4,492 | | | | — | | | | — | |
| Net amount recognized at December 31 | | $ | (1,136 | ) | | $ | (2,295 | ) | | $ | (447 | ) | | $ | (533 | ) |
|
The assumptions used in the determination of the retirement and postretirement benefit obligation at December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| | | 2003 | | 2002 | | 2001 | | 2003 | | 2002 | | 2001 |
| Discount rate | | | 6.25 | % | | | 6.75 | % | | | 7.25 | % | | | 6.25 | % | | | 6.75 | % | | | 7.25 | % |
| Salary progression | | | 4.00 | % | | | 4.25 | % | | | 4.00 | % | | | — | | | | — | | | | — | |
|
37
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
The assumptions used in the determination of the net periodic benefit cost for the retirement and postretirement plans for the years ended December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| | | 2003 | | 2002 | | 2001 | | 2003 | | 2002 | | 2001 |
| Discount rate | | | 6.75 | % | | | 7.25 | % | | | 7.75 | % | | | 6.75 | % | | | 7.25 | % | | | 7.25 | % |
| Return on assets | | | 9.00 | % | | | 9.00 | % | | | 9.00 | % | | | — | | | | — | | | | — | |
| Salary progression | | | 4.25 | % | | | 4.00 | % | | | 4.25 | % | | | — | | | | — | | | | — | |
|
The return on assets reflects the long-term rate of return on plan assets expected to be realized over a ten-year or longer period. As such, it will normally not be adjusted for short-term trends in the stock or bond markets. In addition, the rate of return will reflect the investment allocation currently used to manage the pension portfolio. The Company's pension assumptions currently include a 9% long-term annual rate of return, which is based upon the current portfolio allocation, long-term rates of return for similar investment vehicles and economic and other indicators of future performance.
The assumptions used to develop postretirement plan healthcare costs at December 31 are as follows:
| | | | | | | | | | | | | | |
| | | 2003 | | 2002 | | 2001 |
| Initial trend rate | | | 10.00 | % | | | 11.00 | % | | | 12.00 | % |
| Ultimate trend rate | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % |
| Years to ultimate trend | | | 8 | | | | 9 | | | | 10 | |
|
Assumed healthcare cost trend rates can have an effect on the amounts reported for the healthcare plan. A one-percentage point change in the assumed healthcare cost trend rates would have the following effects:
| | | | | | | | | | | | | | |
| | | 1% Increase | | 1% Decrease | |
| | | (in thousands) | |
| Effect on total service and interest cost components | | $ | 0.1 | | | $ | (0.1 | ) | |
| Effect on post-retirement benefit obligation | | $ | 2.0 | | | $ | (2.0 | ) | |
|
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $24.1 million, $23.9 million and $15.4 million as of December 31, 2003 and $23.1 million, $23.1 million and $13.7 million as of December 31, 2002, respectively.
The accumulated benefit obligation for all retirement plans was $30.0 million and $28.7 million at December 31, 2003 and 2002, respectively.
Assets of the Company's pension plans and target allocations by category of investment are as follows:
| | | | | | | | | | | | | | |
| | | | | Percentage of Assets
at December 31, |
| Asset Category | | Target Allocation | | 2003 | | 2002 |
| Equity securities | | | 70 | % | | | 70 | % | | | 69 | % |
| Debt securities | | | 30 | % | | | 30 | % | | | 31 | % |
| Other | | | 0 | % | | | 0 | % | | | 0 | % |
| Total | | | 100 | % | | | 100 | % | | | 100 | % |
|
Equity securities are invested in a combination of U.S. and international investments. The plan assets do not include any shares of the Company's common stock. An outside investment advisor is utilized to manage and act as trustee for the Company's pension plan assets. The Company's strategy is to invest in diverse asset classes to minimize risk and maintain liquidity to ensure adequate asset values to meet ongoing obligations.
38
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
It is the Company's policy to make contributions to its qualified retirement plans sufficient to meet the minimum funding requirements of applicable laws and regulations. During 2004, the Company currently estimates that pension contributions will be $3.6 million.
401(k) Investment Plan: Under the Company's 401(k) Plan, substantially all of the Company's non-union employees and certain union employees are eligible to contribute a portion of their salaries into various investment options, which include the Company's common stock. The Company matches a percentage of the amounts contributed by the employees. The Company's matching contributions were approximately $0.4 million in 2003, 2002 and 2001.
Note 12. Stock Compensation Plans
Stock Options: At December 31, 2003 the Company had two stock option plans under which key employees and directors have been granted options to purchase Transpro common stock. Under the 1995 Stock Plan (the "Stock Plan") options are granted at fair market value on the date of grant and are generally exercisable cumulatively at the rate of 25% one year from the date of grant, 50% two years from the date of grant, 75% three years from the date of grant, and 100% four years from the date of grant. Options granted under the Stock Plan generally expire ten years from the date of the grant. Awards of restricted stock may also be granted to key employees under the Stock Plan and may be issued in addition to, or in lieu of stock options. The total number of shares of common stock with respect to which stock options may be granted and restricted shares may be awarded under the Stock Plan shall not exceed 600,000. At December 31, 2003 and 2002, respectively, 432,359 and 441,859 common shares were reserved for stock options and restricted shares granted under the Stock Plan. The Non-Employee Directors Stock Option Plan (the "Directors Plan") provides for the issuance of options at the fair market value of the common stock covered thereby on the date of grant. Subject to certain acceleration provisions, each option granted under the Directors Plan will be exercisable 50% after two years from the date of grant, 75% after three years from the date of grant and 100% after four years from the date of grant. Options granted under the Directors Plan expire ten years from the date of grant. The total number of shares of common stock with respect to which options may be granted under the Directors Plan may not exceed 100,000 shares. At December 31, 2003 and 2002, 99,200 common shares were reserved for stock options granted under the Directors Plan.
On July 5, 2001, the Company commenced a tender offer for all outstanding options under the 1995 Stock Plan having an exercise price in excess of $4.00 per share. This did not apply to options outstanding under the Directors Plan. Under the terms of the offer, tendered options would be canceled and exchanged for new options to be granted on or about the first business day, which is six months and one day after the option cancellation date. The number of options to be granted would be equal to one half of the tendered options for those grants with an exercise price between $4.00 and $6.00 and one-third of the tendered options for those grants with an exercise price greater than $6.00. The tender offer expired on August 2, 2001. Of the options to purchase 116,576 shares available to be tendered, options to purchase 69,176 shares were tendered and have been canceled. Options, which were not tendered, continue with their original terms and conditions. On February 6, 2002, options to purchase 28,614 shares were granted at an exercise price of $3.39 per share to replace the options which had been tendered.
39
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Information regarding the Stock Plan and the Directors Plan is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | Option Price Range |
| Stock Plan | | Number
of Options | | Low | | Weighted
Average | | High |
| Outstanding at December 31, 2000 | | | 470,278 | | | $ | 3.72 | | | $ | 7.24 | | | $ | 11.75 | |
| Granted | | | 230,000 | | | | 2.50 | | | | 2.88 | | | | 3.20 | |
| Canceled | | | (491,778 | ) | | | 2.50 | | | | 6.94 | | | | 11.75 | |
| Outstanding at December 31, 2001 | | | 208,500 | | | | 2.50 | | | | 3.14 | | | | 5.88 | |
| Granted | | | 243,614 | | | | 3.39 | | | | 4.56 | | | | 4.72 | |
| Canceled | | | (10,255 | ) | | | 3.39 | | | | 5.21 | | | | 5.88 | |
| Outstanding at December 31, 2002 | | | 441,859 | | | | 2.50 | | | | 3.88 | | | | 5.88 | |
| Canceled | | | (9,500 | ) | | | 5.88 | | | | 5.88 | | | | 5.88 | |
| Outstanding at December 31, 2003 | | | 432,359 | | | | 2.50 | | | | 3.85 | | | | 5.88 | |
| Exercisable at December 31, 2003 | | | 157,854 | | | | 2.50 | | | | 3.63 | | | | 5.88 | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | Option Price Range |
| Directors Plan | | Number
of Options | | Low | | Weighted
Average | | High |
| Outstanding at December 31, 2000 | | | 77,800 | | | $ | 5.50 | | | $ | 8.54 | | | $ | 11.75 | |
| Granted | | | 10,700 | | | | 2.70 | | | | 2.70 | | | | 2.70 | |
| Outstanding at December 31, 2001 | | | 88,500 | | | | 2.70 | | | | 7.84 | | | | 11.75 | |
| Granted | | | 10,700 | | | | 4.72 | | | | 4.72 | | | | 4.72 | |
| Outstanding at December 31, 2002 | | | 99,200 | | | | 2.70 | | | | 7.50 | | | | 11.75 | |
| Granted | | | — | | | | — | | | | — | | | | — | |
| Outstanding at December 31, 2003 | | | 99,200 | | | | 2.70 | | | | 7.50 | | | | 11.75 | |
| Exercisable at December 31, 2003 | | | 85,825 | | | | 2.70 | | | | 8.06 | | | | 11.75 | |
|
No options were granted during 2003. The weighted-average grant date fair values of options granted during 2002 and 2001 were $2.77 and $1.66.
40
Additional information relating to outstanding options under both plans as of December 31, 2003 is as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | Options Outstanding | | Options Exercisable |
Range of
Exercise Price | | Options
Outstanding | | Weighted
Average
Remaining
Term (Years) | | Weighted
Average
Exercise
Price | | Shares
Exercisable | | Weighted
Average
Exercise
Price |
| $2.35 – $3.53 | | | 230,559 | | | | 7.4 | | | $ | 2.98 | | | | 108,204 | | | $ | 3.00 | |
| 4.70 – 5.88 | | | 244,600 | | | | 8.0 | | | | 4.80 | | | | 79,075 | | | | 4.97 | |
| 7.05 – 8.23 | | | 10,700 | | | | 3.3 | | | | 7.75 | | | | 10,700 | | | | 7.75 | |
| 8.23 – 9.40 | | | 10,700 | | | | 2.3 | | | | 8.38 | | | | 10,700 | | | | 8.38 | |
| 9.40 – 10.58 | | | 14,000 | | | | 1.8 | | | | 10.00 | | | | 14,000 | | | | 10.00 | |
| 10.58 – 11.75 | | | 21,000 | | | | 1.8 | | | | 11.17 | | | | 21,000 | | | | 11.17 | |
|
The fair value of each option grant, included in the pro forma disclosure of SFAS 123 in Note 2, is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| | | | | | | | | | | | | | |
| | | 2003 | | 2002 | | 2001 |
| Dividend yield | | | — | | | | 0 | % | | | 0 | % |
| Expected volatility | | | — | | | | 55.3 | % | | | 56.5 | % |
| Risk-free interest rate | | | — | | | | 4.9 | % | | | 4.6 | % |
| Expected life | | | — | | | 6 Years | | 6 Years |
|
Restricted Stock: Restricted stock awards vest four years from the date of the award. Unearned compensation, representing the fair value of the restricted shares at the date of the award, is charged to income over the period. Compensation expense with respect to restricted shares was zero in 2003 and 2002, and $0.02 million in 2001.
Information relating to outstanding restricted stock awards is as follows:
| | | | | | |
| Outstanding at December 31, 2000 | | | 17,026 | |
| Vested | | | (5,126 | ) |
| Canceled | | | (11,900 | ) |
| Outstanding at December 31, 2001 | | | — | |
|
Note 13. Income Taxes
The (benefit from) provision for income taxes for the three years ended December 31 is as follows:
| | | | | | | | | | | | | | |
| | | 2003 | | 2002 | | 2001 |
| | | (in thousands) |
| Current: | |
| Federal | | $ | (1,442 | ) | | $ | (4,624 | ) | | $ | (1,999 | ) |
| Foreign | | | 276 | | | | 292 | | | | 273 | |
| State and local | | | 3 | | | | (21 | ) | | | (414 | ) |
| | | | (1,163 | ) | | | (4,353 | ) | | | (2,140 | ) |
| Deferred: | |
| Federal | | | (753 | ) | | | 1,300 | | | | (4,752 | ) |
| State and local | | | (326 | ) | | | 307 | | | | (937 | ) |
| Valuation allowance | | | 1,079 | | | | (1,607 | ) | | | 10,539 | |
| | | | — | | | | — | | | | 4,850 | |
| (Benefit from) provision for income taxes | | $ | (1,163 | ) | | $ | (4,353 | ) | | $ | 2,710 | |
|
41
A reconciliation of the (benefit from) provision for income taxes at the Federal statutory rate of 34% to the reported tax (benefit from) provision for continuing operations in 2003, 2002 and 2001 is as follows:
| | | | | | | | | | | | | | |
| | | 2003 | | 2002 | | 2001 |
| | | (in thousands) |
| (Benefit) provision computed at the Federal statutory rate | | $ | (1,938 | ) | | $ | 784 | | | $ | (5,983 | ) |
| State and local income taxes, net of Federal income tax benefit | | | (323 | ) | | | 286 | | | | (1,351 | ) |
| Foreign tax rate differential | | | 112 | | | | 136 | | | | 95 | |
| Permanent differences | | | 55 | | | | 57 | | | | 144 | |
| Reduction in tax reserves based on tax review | | | (108 | ) | | | — | | | | — | |
| Federal audit adjustment | | | — | | | | — | | | | (576 | ) |
| State tax credit adjustment | | | — | | | | (110 | ) | | | (390 | ) |
| Valuation allowance | | | 1,079 | | | | (5,371 | ) | | | 10,539 | |
| Other | | | (40 | ) | | | (135 | ) | | | 232 | |
| (Benefit from) provision for income taxes | | $ | (1,163 | ) | | $ | (4,353 | ) | | $ | 2,710 | |
|
Significant components of deferred income tax assets and liabilities as of December 31 are as follows:
| | | | | | | | | | |
| | | 2003 | | 2002 |
| | | (in thousands) |
| Deferred tax assets: | | | | | | | | |
| Inventories | | $ | 558 | | | $ | 1,757 | |
| Pensions | | | 1,547 | | | | 2,575 | |
| Postretirement benefits | | | 181 | | | | 214 | |
| Allowance for bad debts | | | 1,284 | | | | 1,352 | |
| Self insurance reserves | | | 1,206 | | | | 1,258 | |
| Warranty reserves | | | 440 | | | | 538 | |
| Accrued vacation | | | 768 | | | | 696 | |
| Federal and state net operating loss | | | 4,891 | | | | 877 | |
| Other | | | 467 | | | | 1,314 | |
| Valuation reserve | | | (7,961 | ) | | | (6,875 | ) |
| Total deferred tax assets | | | 3,381 | | | | 3,706 | |
| Deferred tax liabilities: | |
| Depreciation | | | (3,114 | ) | | | (3,188 | ) |
| Deferred charges | | | — | | | | (371 | ) |
| Other | | | (267 | ) | | | (147 | ) |
| Total deferred tax liabilities | | | (3,381 | ) | | | (3,706 | ) |
| Net deferred tax assets | | $ | — | | | $ | — | |
|
At the time of filing the Company's 2002 tax return, the amount of net operating loss, which could be carried back, was adjusted due to the Company's decision to change its method of tax accounting for several items and the finalization of other amounts which had been previously estimated. These items resulted in additional tax refunds of $1.4 million. As the Company's net deferred tax assets are fully reserved, this refund resulted in a tax benefit which was included in the results of operations for 2003.
During March 2002, tax legislation was enacted which included a provision that allowed pre-tax losses incurred in 2001 and 2002 to be carried-back for a period of five years instead of the current two years. As a result, the Company increased its net income in the first quarter of 2002 by approximately $3.8 million, which reflects a reduction in the deferred tax valuation allowance. This amount was received in cash during the second quarter of 2002.
42
During the fourth quarter of 2001, the Company recorded a non-cash valuation allowance of $10.5 million to offset fully its net deferred tax asset balance in accordance with the provisions of SFAS 109 "Accounting for Income Taxes." The reserve was required due to the Company's cumulative losses during the past three years.
The earnings of certain foreign subsidiaries are considered permanently reinvested in the foreign operations and therefore no provision has been made for U.S. taxes related to these subsidiaries. (Loss) income before taxes from United States and foreign sources for the three years ended December 31 is as follows:
| | | | | | | | | | | | | | |
| | | 2003 | | 2002 | | 2001 |
| | | (in thousands) |
| United States | | $ | (6,181 | ) | | $ | 1,848 | | | $ | (18,120 | ) |
| Foreign | | | 482 | | | | 458 | | | | 522 | |
| (Loss) income before taxes | | $ | (5,699 | ) | | $ | 2,306 | | | $ | (17,598 | ) |
|
Net income taxes (refunded) during 2003, 2002 and 2001 were $(1.9) million, $(4.8) million and $(2.8) million, respectively.
Note 14. (Loss) Income Per Share
The following table sets forth the computation of basic and diluted (loss) income per common share for the three years ended December 31:
| | | | | | | | | | | | | | |
| | | 2003 | | 2002 | | 2001 |
| | | (in thousands, except per share amounts) |
| Numerator: | |
| (Loss) income from continuing operations | | $ | (4,536 | ) | | $ | 6,659 | | | $ | (20,838 | ) |
| Less: preferred stock dividends | | | (64 | ) | | | (86 | ) | | | (138 | ) |
| (Loss) income from continuing operations (attributable) available to common stockholders | | | (4,600 | ) | | | 6,573 | | | | (20,976 | ) |
| Cumulative effect of accounting change, net of tax | | | — | | | | (4,671 | ) | | | — | |
| Net (loss) income (attributable) available to common stockholders — basic | | | (4,600 | ) | | | 1,902 | | | | (20,976 | ) |
| Add back: preferred stock dividend | | | — | | | | 86 | | | | — | |
| Net (loss) income (attributable) available to stockholders and assumed conversions | | $ | (4,600 | ) | | $ | 1,988 | | | $ | (20,976 | ) |
| Denominator: | |
| Weighted average common shares — basic | | | 7,106 | | | | 7,001 | | | | 6,624 | |
| Dilutive effect of stock options | | | — | | | | 84 | | | | — | |
| Dilutive effect of Series B Preferred Stock | | | — | | | | 36 | | | | — | |
| Weighted average common shares and equivalents — diluted | | | 7,106 | | | | 7,121 | | | | 6,624 | |
| Basic (loss) income per common share: | | | | | | | | | |
| Continuing operations | | $ | (0.65 | ) | | $ | 0.94 | | | $ | (3.17 | ) |
| Cumulative effect of accounting change | | | — | | | | (0.67 | ) | | | — | |
| Net (loss) income per common share | | $ | (0.65 | ) | | $ | 0.27 | | | $ | (3.17 | ) |
| Diluted (loss) income per common share: | |
| Continuing operations | | $ | (0.65 | ) | | $ | 0.94 | | | $ | (3.17 | ) |
| Cumulative effect of accounting change | | | — | | | | (0.66 | ) | | | — | |
| Net (loss) income per common share | | $ | (0.65 | ) | | $ | 0.28 | | | $ | (3.17 | ) |
|
43
The weighted average basic common shares outstanding was used in the calculation of the diluted loss per common share for the years ended December 31, 2003 and 2001 as the use of weighted average diluted common shares outstanding would have an anti-dilutive effect on the loss per share.
There were outstanding options to purchase common stock excluded from the diluted calculation because their exercise price exceeded the average market price of Transpro common stock during the respective earnings periods. The shares excluded and the average market prices were as follows:
| | | | | | | | | | | | | | |
| | | 2003 | | 2002 | | 2001 |
| Options | | | 301,000 | | | | 83,800 | | | | 181,300 | |
| Average market prices | | $ | 4.35 | | | $ | 4.98 | | | $ | 2.96 | |
|
Note 15. Commitments and Contingencies
Leases: The Company's leases consist primarily of manufacturing and distribution facilities and equipment, which expire between 2004 and 2012. A number of leases require that the Company pay certain executory costs (taxes, insurance, and maintenance) and contain renewal and purchase options. Annual rental expense for operating leases approximated $4.8 million in 2003, $4.3 million in 2002 and $4.2 million in 2001.
Future minimum annual rental payments under non-cancelable operating leases as of December 31, 2003 were as follows: $4.3 million in 2004, $3.5 million in 2005, $2.5 million in 2006, $1.6 million in 2007 and $1.3 million in 2008 and $2.9 million thereafter.
Insurance: The Company is self-insured for healthcare, workers compensation, general liability and product liability claims up to predetermined amounts above which third party insurance applies. The Company has reserved approximately $2.9 million and $3.1 million to pay such claims as of December 31, 2003 and 2002, respectively.
Legal Proceedings: Various legal actions are pending against or involve the Company in the ordinary course of business with respect to such matters as product liability, casualty and employment-related claims.
Pursuant to an Agreement and Plan of Merger dated July 23, 1998 (the "Purchase Agreement"), the Company acquired from Paul S. Wilhide ("Wilhide") all of the common stock of EVAP, Inc. The consideration for this transaction was a payment of $3 million in cash, the issuance of 30,000 shares of the Company's Series B Convertible Redeemable Preferred Stock (the "Convertible Shares"), and the potential for an "earn-out" payment to Wilhide based on a calculation relating to EVAP's performance during the years 1999 and 2000. There is presently a dispute between the Company and Wilhide relating to the calculation of the earn-out. Wilhide claims that the value of his earn-out is $3.75 million, while the Company believes that Wilhide is not entitled to any earn-out. Under the payout formula in the Purchase Agreement, any earn-out may be payable to Wilhide in cash. The Purchase Agreement includes an arbitration provision and the arbitration is currently proceeding before an arbitrator in Ft. Worth, Texas. While the arbitration schedule has not been finalized, it is anticipated that the arbitration hearing will occur in the last quarter of 2004, with a decision to be rendered by the first quarter of 2005. Should any adjustment result from these negotiations, the resulting increase in goodwill may be impaired as a result of the provisions of SFAS 142, resulting in a charge to operating income. Depending on the amount and timing, an unfavorable resolution of this matter could materially affect the Company's consolidated financial position, future operations or cash flows in a particular period.
Environmental Matters: The Company is subject to Federal, state and local laws designed to protect the environment and believes that, as a general matter, its policies, practices and procedures are properly designed to reasonably prevent risk of environmental damage and financial liability to the Company. On January 27, 2003, the Company announced that it had signed a Consent Agreement with the State of Connecticut Department of Environmental Protection. Under the agreement, the Company will voluntarily initiate the investigation and cleanup of environmental contamination on property occupied by a wholly-owned subsidiary of the Company over 20 years ago. The Company believes there will not be a material adverse impact to its financial results due to the investigation and cleanup activities. The
44
Company also does not currently anticipate any material adverse effect on its consolidated results of operations, financial condition or competitive position as a result of compliance with Federal, state, local or foreign environmental laws or regulations. However, risk of environmental liability and charges associated with maintaining compliance with environmental laws is inherent in the nature of the Company's business and there is no assurance that material environmental liabilities and compliance charges will not arise. The Company also believes it is reasonably possible that environmental-related liabilities might exist with respect to other industrial sites formerly occupied by the Company. Based upon environmental site assessments, the Company believes that the cost of any potential remediation, other than amounts already provided, for which the Company may ultimately be responsible will not have a material adverse effect on the consolidated financial position, results of operations, or liquidity of the Company.
Warranty Expense: The Company provides an accrual for warranty costs based upon historical experience and agreements currently in place with certain customers. It also accrues for unusual exposures at the time the exposure is identified and quantified, based upon analyses of expected product failure rates and engineering cost estimates. An analysis of activity for the years ended December 31 is as follows:
| | | | | | | | | | | | | | |
| | | 2003 | | 2002 | | 2001 |
| | | (in thousands) |
| Balance at beginning of period | | $ | 1,569 | | | $ | 1,933 | | | $ | 1,100 | |
| Charged to cost and expenses | | | 1,687 | | | | 1,174 | | | | 3,642 | |
| Warranty credits issued | | | (2,660 | ) | | | (1,538 | ) | | | (2,809 | ) |
| Balance at end of period | | $ | 596 | | | $ | 1,569 | | | $ | 1,933 | |
|
Warranty expenses in 2003 increased over 2002 due to a change in a customer program. The higher level of expense in 2001 relates to a Heavy Duty OEM warranty program, which was identified in the fourth quarter of 2000. Exposure under the program increased in 2001 due to higher than originally expected claim activity and claims are expected to continue through the first half of 2004.
Note 16. Business Segments
The Company evaluates its business as two segments, based upon the type of customer served — Automotive and Light Truck and Heavy Duty.
The Automotive and Light Truck strategic business group includes complete radiators and radiator cores, heaters, air conditioning condensers, air conditioning compressors and other air conditioning parts for aftermarket customers. The Heavy Duty strategic business group provides manufactured specialized heavy-duty equipment radiators, radiator cores, charge air coolers, charge air cooler cores and oil coolers to original equipment manufacturers and aftermarket customers.
The Company evaluates the performance of its segments and allocates resources accordingly based on operating income (loss) before interest and taxes. Intersegment sales are recorded at cost. Certain other expenses such as information technology, human resources and finance and accounting functions are allocated between segments based on their respective use of shared facilities and resources.
45
The tables below set forth information about reported segments for the three years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated Revenues | | Operating (Loss) Income |
| | | 2003 | | 2002 | | 2001 | | 2003 | | 2002 | | 2001 |
| | | (in thousands) |
| Trade sales: | | | | | | | | | | | | | | | | | |
| Automotive and light truck | | $ | 167,932 | | | $ | 164,538 | | | $ | 139,019 | | | $ | 3,355 | | | $ | 13,911 | | | $ | (1,023 | ) |
| Heavy duty | | | 60,772 | | | | 66,027 | | | | 64,293 | | | | (747 | ) | | | (2,053 | ) | | | (7,481 | ) |
| Inter-segment revenues: | | | | | | | | | | | | | | | | | |
| Automotive and light truck | | | 3,806 | | | | 3,406 | | | | 2,512 | | | | — | | | | — | | | | — | |
| Heavy duty | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Elimination of inter-segment revenues | | | (3,806 | ) | | | (3,406 | ) | | | (2,512 | ) | | | — | | | | — | | | | — | |
| Corporate expenses | | | — | | | | — | | | | — | | | | (4,568 | ) | | | (5,808 | ) | | | (4,567 | ) |
| Consolidated total | | $ | 228,704 | | | $ | 230,565 | | | $ | 203,312 | | | $ | (1,960 | ) | | $ | 6,050 | | | $ | (13,071 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total Assets | | Capital Expenditures | | Depreciation and
Amortization Expense |
| | | 2003 | | 2002 | | 2001 | | 2003 | | 2002 | | 2001 | | 2003 | | 2002 | | 2001 |
| Automotive and light truck | | $ | 120,174 | | | $ | 121,265 | | | $ | 86,202 | | | $ | 4,476 | | | $ | 4,506 | | | $ | 2,705 | | | $ | 3,997 | | | $ | 3,293 | | | $ | 3,319 | |
| Heavy duty | | | 28,267 | | | | 26,899 | | | | 33,389 | | | | 694 | | | | 1,052 | | | | 372 | | | | 1,904 | | | | 1,962 | | | | 2,012 | |
| Corporate | | | 8,737 | | | | 12,802 | | | | 10,092 | | | | — | | | | — | | | | — | | | | 96 | | | | 171 | | | | 183 | |
| Consolidated totals | | $ | 157,178 | | | $ | 160,966 | | | $ | 129,683 | | | $ | 5,170 | | | $ | 5,558 | | | $ | 3,077 | | | $ | 5,997 | | | $ | 5,426 | | | $ | 5,514 | |
|
Restructuring and other special charges included in operating (loss) income for the three years ended December 31 are as follows:
| | | | | | | | | | | | | | |
| | | 2003 | | 2002 | | 2001 |
| | | (in thousands) |
| Automotive and light truck | | $ | 864 | | | $ | 206 | | | $ | 3,988 | |
| Heavy duty | | | 626 | | | | 1,610 | | | | 587 | |
| Total restructuring and other special charges | | $ | 1,490 | | | $ | 1,816 | | | $ | 4,575 | |
|
In 2003, 2002 and 2001, sales to AutoZone accounted for 20%, 21% and 19% of net sales, respectively. In addition, in 2003 sales to Advance Auto Parts accounted for 12% of net sales. These sales were in the Automotive and Light Truck segment. No other customers individually represented more than 10% of net trade sales. The loss of either of these major customers could have a material adverse impact on the Company's results of operations.
46
Note 17. Quarterly Financial Data (Unaudited)
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2003 |
| | | 1st Qtr | | 2nd Qtr | | 3rd Qtr | | 4th Qtr |
| | | (in thousands, except per share amounts) |
| Net sales | | $ | 52,700 | | | $ | 58,302 | | | $ | 65,629 | | | $ | 52,073 | |
| Gross margin | | | 7,191 | | | | 8,998 | | | | 13,214 | | | | 8,264 | |
| (Loss) income from continuing operations | | | (4,738 | ) | | | (2,285 | ) | | | 2,899 | | | | (1,575 | ) |
| Net (loss) income | | | (4,335 | ) | | | (607 | ) | | | 1,961 | | | | (1,555 | ) |
| Basic (loss) income per common share: | | | | | | | | | |
| Net (loss) income per common share | | $ | (0.61 | ) | | $ | (0.09 | ) | | $ | 0.27 | | | $ | (0.22 | ) |
| Diluted (loss) income per common share: | | | | | | | | | |
| Net (loss) income per common share | | $ | (0.61 | ) | | $ | (0.09 | ) | | $ | 0.27 | | | $ | (0.22 | ) |
|
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2002 |
| | | 1st Qtr | | 2nd Qtr | | 3rd Qtr | | 4th Qtr |
| Net sales | | $ | 50,962 | | | $ | 62,472 | | | $ | 65,922 | | | $ | 51,209 | |
| Gross margin | | | 10,073 | | | | 13,203 | | | | 14,360 | | | | 8,614 | |
| Income (loss) from continuing operations | | | 3,756 | | | | 1,545 | | | | 1,700 | | | | (342 | ) |
| Cumulative effect of accounting change, net of tax | | | (4,671 | ) | | | — | | | | — | | | | — | |
| Net (loss) income | | | (915 | ) | | | 1,545 | | | | 1,700 | | | | (342 | ) |
| Basic (loss) income per common share: | | | | | | | | | |
| Continuing operations | | $ | 0.54 | | | $ | 0.21 | | | $ | 0.24 | | | $ | (0.05 | ) |
| Cumulative effect of accounting change, net of tax | | | (0.67 | ) | | | — | | | | — | | | | — | |
| Net (loss) income per common share | | | (0.13 | ) | | | 0.21 | | | | 0.24 | | | | (0.05 | ) |
| Diluted income (loss) per common share: | | | | | | | | | |
| Continuing operations | | $ | 0.52 | | | $ | 0.21 | | | $ | 0.24 | | | $ | (0.05 | ) |
| Cumulative effect of accounting change, net of tax | | | (0.65 | ) | | | — | | | | — | | | | — | |
| Net (loss) income per common share | | | (0.13 | ) | | | 0.21 | | | | 0.24 | | | | (0.05 | ) |
|
Prior year and prior quarter balances have been reclassified to correspond with the account classifications used at the end of 2003.
47
SCHEDULE II
Transpro, Inc.
Valuation and Qualifying Accounts
| | | | | | | | | | | | | | | | | | | | | | |
| | | Balance at
Beginning of
Period | | Charged to
Costs and
Expenses | | Write-Offs | | Other | | Balance at
End of Period |
| | | (in thousands) |
| Year Ended December 31, 2003 | |
| Allowance for doubtful accounts | | $ | 2,996 | | | $ | 609 | | | $ | (859 | ) | | $ | — | | | $ | 2,746 | |
| Allowance for excess/slow moving inventory | | | 3,750 | | | | 1,282 | | | | (2,885 | ) | | | — | | | | 2,147 | |
| Reserve for warranty costs | | | 1,569 | | | | 1,687 | (c) | | | (2,660 | ) | | | — | | | | 596 | |
| Tax valuation reserve | | | 6,875 | | | | 1,079 | | | | — | | | | 7 | (d) | | | 7,961 | |
| Year Ended December 31, 2002 | |
| Allowance for doubtful accounts | | $ | 2,805 | | | $ | 538 | | | $ | (347 | ) | | $ | — | | | $ | 2,996 | |
| Allowance for excess/slow moving inventory | | | 4,582 | | | | 2,347 | | | | (3,179 | ) | | | — | | | | 3,750 | |
| Reserve for warranty costs | | | 1,933 | | | | 1,174 | (c) | | | (1,538 | ) | | | — | | | | 1,569 | |
| Tax valuation reserve | | | 11,228 | | | | (5,371 | )(b) | | | — | | | | 1,018 | (d) | | | 6,875 | |
| Year Ended December 31, 2001 | |
| Allowance for doubtful accounts | | $ | 2,698 | | | $ | 1,786 | (a) | | $ | (1,679 | ) | | $ | — | | | $ | 2,805 | |
| Allowance for excess/slow moving inventory | | | 4,969 | | | | 1,942 | | | | (2,329 | ) | | | — | | | | 4,582 | |
| Reserve for warranty costs | | | 1,100 | | | | 3,642 | (c) | | | (2,809 | ) | | | — | | | | 1,933 | |
| Tax valuation reserve | | | — | | | | 10,539 | | | | — | | | | 689 | (d) | | | 11,228 | |
|
| (a) | Higher expense levels in 2001 reflect the write-off of receivables from several Automotive and Light Truck customers which declared bankruptcy. |
| (b) | Includes $3,795 recorded as a tax benefit in the first quarter of 2002 due to changes in tax laws. |
| (c) | Primarily reflects charges for a Heavy Duty OEM warranty program, which was initiated in the fourth quarter of 2000. Exposure under the program increased in 2001 due to higher than expected levels of claim activity. Claims exposure returned to normal historical levels in 2002, and claims are expected to continue through the second quarter of 2004. Expenses increased in 2003 due to a change in a customer program. |
| (d) | Amount represents change in the valuation allowance and the deferred tax asset resulting from minimum pension liability adjustment included in Shareholders' Equity. |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
48
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2003. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.
There have been no changes in the Company's internal control over financial reporting during the quarter ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
Portions of the information required by this item are included in Part I of this Report. Other information required by this item is contained in the Company's 2004 Proxy Statement under the headings, "PROPOSAL NO. 1 — ELECTION OF DIRECTORS" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference.
Item 11. Executive Compensation
The information contained in the Company's 2004 Proxy Statement under the heading "EXECUTIVE COMPENSATION" is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information contained in the Company's 2004 Proxy Statement under the heading "STOCK OWNERSHIP — Principal Stockholders and Directors and Officers" is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
| | | | | | | | | | | | | | |
| | | December 31, 2003 |
| | | Number of Shares to
be Issued Upon
Exercise of
Outstanding Options | | Weighted Average
Exercise Price of
Outstanding Options | | Number of
Options
Available for
Future Grant |
| Equity Compensation Plans approved by Stockholders: | |
| 1995 Stock Plan | | | 432,359 | | | $ | 3.85 | | | | 132,004 | |
| Non-Employee Directors Plan | | | 99,200 | | | $ | 7.50 | | | | 800 | |
| Total | | | 531,559 | | | $ | 4.53 | | | | 132,804 | |
|
There are no plans which have not previously been approved by stockholders.
Item 13. Certain Relationships and Related Transactions
The information contained in the Company's 2004 Proxy Statement, under the heading "CERTAIN TRANSACTIONS" is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information contained in the 2004 Proxy Statement, under the heading "AUDITOR MATTERS" is incorporated herein by reference.
49
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements of the Registrant
See Consolidated Financial Statements under Item 8 of this Report.
(a) (2) Financial Statement Schedules
See Schedule II — Valuation and Qualifying Accounts under Item 8 of this Report.
Schedules other than the schedule listed above are omitted because they are not applicable, or because the information is furnished elsewhere in the Consolidated Financial Statements or the Notes thereto.
(a) (3) Exhibits
The information required by this Item relating to Exhibits to this Report is included in the Exhibit Index in (c) below.
(b) Reports on Form 8-K
During the quarter ended December 31, 2003, the following Form 8-K's were filed:
| |
| • | On October 10, 2003, a Form 8-K was filed containing as an exhibit a press release announcing a change in the exchange on which the Company's common stock is traded, from the New York Stock exchange to the American Stock Exchange. |
| |
| • | On October 28, 2003, a Form 8-K was filed containing as an exhibit a press release announcing the Company's results of operations for the quarter and nine months ended September 30, 2003. |
(c) Exhibits — The following exhibits are filed as part of this report:
| | | | | | |
| 2.1 | | Agreement, dated June 15, 1995, between Allen Heat Transfer Products, Inc., AHTP II, Inc., GO/DAN Industries and Handy & Harman Radiator Corporation.(1) |
| 2.2 | | Asset Purchase Agreement dated as of April 17, 2000 by and among Transpro, Inc. and Leggett & Platt, Incorporated.(3) |
| 2.3 | | Asset Purchase Agreement dated December 27, 2002 by and among GO/DAN Industries, Inc., Transpro, Inc., Fedco Automotive Components Company, Inc. and Stant Corporation.(10) |
| 3.1 (i) | | Restated Certificate of Incorporation of Transpro, Inc.(2) |
| 3.1 (ii) | | By-laws of Transpro, Inc., as amended.(6) |
| 4.1 | | Form of Rights Agreement between the Company and American Stock Transfer & Trust Company, as assignee of the First National Bank of Boston, as Rights Agent (including form of Certificate of Designations of Series A Junior Participating Preferred Stock and form of Rights Certificate).(1) |
| 4.2 | | Loan and Security Agreement dated as of January 4, 2001, by and between Congress Financial Corporation (New England) as Lender and Transpro, Inc., Ready-Aire, Inc., and GO/DAN Industries, Inc. as Borrowers.(4) |
| 4.3 | | First Amendment to Loan and Security Agreement with Congress Financial Corporation.(5) |
| 4.4 | | Second Amendment to Loan and Security Agreement with Congress Financial Corporation.(5) |
| 4.5 | | Third Amendment to Loan and Security Agreement with Congress Financial Corporation.(7) |
| 4.6 | | Fourth Amendment to Loan and Security Agreement with Congress Financial Corporation.(7) |
| 4.7 | | Fifth Amendment to Loan and Security Agreement with Congress Financial Corporation.(7) |
|
50
| | | | | | |
| 4.8 | | Sixth Amendment to Loan and Security Agreement with Congress Financial Corporation.(7) |
| 4.9 | | Seventh Amendment to Loan and Security Agreement with Congress Financial Corporation.(8) |
| 4.10 | | Eighth Amendment to Loan and Security Agreement with Congress Financial Corporation.(9) |
| 4.11 | | Ninth Amendment to Loan and Security Agreement with Congress Financial Corporation.(10) |
| 10.1 | | Transpro, Inc. 1995 Stock Plan.(1) |
| 10.2 | | Form of Stock Option Agreement under the 1995 Stock Plan.(1) |
| 10.3 | | Form of Transpro, Inc. 1995 Non-employee Directors Stock Option Plan.(1) |
| 10.4 | | Form of Stock Option Agreement under the 1995 Non-employee Directors Stock Option Plan.(1) |
| 10.5 | | Form of Contribution Agreement between Allen and the Company.(1) |
| 10.6 | | Form of Instrument of Assumption of the Company.(1) |
| 10.7 | | Form of Indemnification Agreement.(1) |
| 10.8 | | Form of Key Employee Severance Policy.(1) |
| 10.9 | | Letter Agreement, dated December 15, 1992 between Jeffrey J. Jackson and GO/DAN Industries.(1) |
| 10.10 | | Employment Agreement between the Company and Charles E. Johnson.(5) |
| 21.1 | | Subsidiaries of the Company. |
| 23 | | Consent of PricewaterhouseCoopers LLP. |
| 24 | | Powers of Attorney (included on signature page). |
| 31.1 | | Certification of CEO in accordance with Section 302 of the Sarbanes-Oxley Act. |
| 31.2 | | Certification of CFO in accordance with Section 302 of the Sarbanes-Oxley Act. |
| 32.1 | | Certification of CEO in accordance with Section 906 of the Sarbanes-Oxley Act. |
| 32.2 | | Certification of CFO in accordance with Section 906 of the Sarbanes-Oxley Act. |
|
| (1) | Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 33-96770). |
| (2) | Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1998 (File No. 1-13894). |
| (3) | Incorporated by reference to the Company's Form 8-K filed May 2, 2000 (File No. 1-13894). |
| (4) | Incorporated by reference to the Company's 2000 Form 10-K (File No. 1-13894). |
| (5) | Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 2001 (File No. 1-13894). |
| (6) | Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 2001 (File No. 1-13894). |
| (7) | Incorporated by reference to the Company's 2001 Form 10-K (File 1-13894). |
| (8) | Incorporated by reference to the Company's Form 8-K filed September 20, 2002. (File 1-13894) |
| (9) | Incorporated by reference to the Company's Form 8-K filed November 22, 2002. (File 1-13894) |
| (10) | Incorporated by reference to the Company's Form 8-K filed December 27, 2002. (File 1-13894) |
51
Signatures
Pursuant to the requirements of Section 13 or 15 (d) 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.
| TRANSPRO, INC. |
| | |
| By: | /s/ CHARLES E. JOHNSON
Charles E. Johnson
President and Chief Executive Officer |
Date: March 24, 2004
Power of Attorney
Each of the undersigned hereby appoints Barry R. Banducci and Charles E. Johnson and each of them severally, his or her true and lawful attorneys to execute on behalf of the undersigned any and all amendments to this annual report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. Each such attorney will have the power to act hereunder with or without the others. Each of the undersigned hereby ratifies and confirms all such attorneys, or any of them may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | |
| | | | | |
|
| /s/ WILLIAM J. ABRAHAM, JR. | | | March 24, 2004 |
|
| William J. Abraham, Jr., Director |
|
| /s/ BARRY R. BANDUCCI | | | March 24, 2004 |
|
| Barry R. Banducci, Director |
|
| /s/ PHILIP WM. COLBURN | | | March 24, 2004 |
|
| Philip Wm. Colburn, Director |
|
| /s/ CHARLES E. JOHNSON | | | March 24, 2004 |
|
Charles E. Johnson,
President, Chief Executive Officer
and Director |
|
| /s/ PAUL R. LEDERER | | | March 24, 2004 |
|
| Paul R. Lederer, Director |
|
| /s/ SHARON M. OSTER | | | March 24, 2004 |
|
| Sharon M. Oster, Director |
|
| /s/ F. ALAN SMITH | | | March 24, 2004 |
|
| F. Alan Smith, Director |
|
| /s/ RICHARD A. WISOT | | | March 24, 2004 |
|
Richard A. Wisot
Vice President, Treasurer, Secretary and Chief Financial Officer
Principal Financial and Accounting Officer |
|
52
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934