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.
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
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.
On November 19, 2004, the Company entered into an amendment to its Loan Agreement which increased loan availability by $1.0 million as a result of a reduction in an Availability Reserve contained in the Loan Agreement. In addition, the minimum Adjusted Net Worth requirement, under the agreement, was increased from $37.0 million to $40.0 million for all periods after September 30, 2004. The increased availability provides the Company with additional flexibility to meet its working capital needs throughout the year.
At December 31, 2004 and 2003, the interest rate on outstanding borrowings under the Loan Agreement was 4.83% and 4.00%, respectively. The weighted average interest rate during 2004 and 2003 was 4.29% and 4.13%, respectively. Available borrowings under the Revolving Credit facility at December 31, 2004 were $4.5 million.
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 2004, 2003 and 2002 was $3.9 million, $2.9 million and $2.9 million, respectively.
The Company utilizes letters of credit in the amounts of $4.9 million at December 31, 2004 and 2003 to back certain insurance policies and certain trade purchases.
37
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Minimum future debt repayments, excluding the Revolving Credit facility, will be $1.4 million in 2005 and $0.1 million in 2006.
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 was 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 entitled 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 were set forth in a Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights Agent.
On April 29, 2004, the Company announced that its Board of Directors approved an amendment of the Company's Shareholders' Rights Agreement to accelerate its expiration date from September 29, 2005 to September 30, 2004. As a result, the Rights Plan was effectively terminated on October 1, 2004.
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 provided 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 at the Company's option, thereafter at the liquidation 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.
Accumulated Other Comprehensive Loss: Other comprehensive loss pertains to revenues, expenses, gains and losses that are not included in net income (loss), but rather are recorded directly in Stockholders' Equity. For 2004, 2003 and 2002, other comprehensive loss reflects minimum pension liability adjustments. The adjustments for the years ended December 31, were $(1.9) million for 2004, $(18) thousand for 2003; and $(2.6) million for 2002.
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
38
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
pension liabilities. To the extent possible, an intangible asset, representing unrecognized prior service costs, 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.
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 healthcare 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 |
| | | 2004 | | 2003 | | 2002 | | 2004 | | 2003 | | 2002 |
| | | (in thousands) |
| Service cost | | $ | 813 | | | $ | 801 | | | $ | 817 | | | $ | 5 | | | $ | 5 | | | $ | 2 | |
| Interest cost | | | 1,821 | | | | 1,824 | | | | 1,815 | | | | 31 | | | | 37 | | | | 42 | |
| Expected return on plan assets | | | (2,062 | ) | | | (2,095 | ) | | | (1,947 | ) | | | — | | | | — | | | | — | |
| Amortization of net loss (gain) | | | 281 | | | | 141 | | | | 94 | | | | 4 | | | | 4 | | | | (5 | ) |
| Net periodic benefit cost | | $ | 853 | | | $ | 671 | | | $ | 779 | | | $ | 40 | | | $ | 46 | | | $ | 39 | |
|
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 |
| | | 2004 | | 2003 | | 2004 | | 2003 |
| | | (in thousands) |
| Change in benefit obligation: | | | | | | | | | |
| Benefit obligation at January 1 | | $ | 30,212 | | | $ | 28,793 | | | $ | 526 | | | $ | 584 | |
| Service cost | | | 813 | | | | 801 | | | | 5 | | | | 5 | |
| Interest cost | | | 1,821 | | | | 1,824 | | | | 31 | | | | 37 | |
| Actuarial loss | | | 984 | | | | 797 | | | | 18 | | | | 31 | |
| Actual gross benefits paid | | | (1,511 | ) | | | (2,003 | ) | | | (65 | ) | | | (131 | ) |
| Benefit obligation at December 31 | | $ | 32,319 | | | $ | 30,212 | | | $ | 515 | | | $ | 526 | |
|
39
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
| | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| | | 2004 | | 2003 | | 2004 | | 2003 |
| | | (in thousands) |
| Change in plan assets: | |
| Fair value of plan assets at January 1 | | $ | 21,603 | | | $ | 19,101 | | | $ | — | | | $ | — | |
| Actual return on plan assets | | | 2,612 | | | | 2,710 | | | | — | | | | — | |
| Company contributions | | | 2,756 | | | | 1,795 | | | | 65 | | | | 131 | |
| Actual gross benefits paid | | | (1,511 | ) | | | (2,003 | ) | | | (65 | ) | | | (131 | ) |
| Fair value of plan assets at December 31 | | $ | 25,460 | | | $ | 21,603 | | | $ | — | | | $ | — | |
| Reconciliation of funded status: | | | | | | | | | |
| Funded status at December 31 | | $ | (6,859 | ) | | $ | (8,609 | ) | | $ | (515 | ) | | $ | (526 | ) |
| Unrecognized transition obligation | | | 11 | | | | 18 | | | | — | | | | — | |
| Unrecognized prior service cost | | | 206 | | | | 425 | | | | 50 | | | | 54 | |
| Unrecognized net loss | | | 7,175 | | | | 7,030 | | | | 43 | | | | 25 | |
| Prepaid (accrued) benefit cost | | $ | 533 | | | $ | (1,136 | ) | | $ | (422 | ) | | $ | (447 | ) |
| Amounts recognized in statements of financial position: | | | | | |
| Long-term pension asset | | $ | 791 | | | $ | 2,662 | | | $ | — | | | $ | — | |
| Accrued benefit liability | | | (6,722 | ) | | | (8,498 | ) | | | (422 | ) | | | (447 | ) |
| Intangible asset | | | 55 | | | | 190 | | | | — | | | | — | |
| Accumulated other comprehensive loss | | | 6,409 | | | | 4,510 | | | | — | | | | — | |
| Net amount recognized at December 31 | | $ | 533 | | | $ | (1,136 | ) | | $ | (422 | ) | | $ | (447 | ) |
|
The assumptions used in the determination of the retirement and postretirement benefit obligation at December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| | | 2004 | | 2003 | | 2002 | | 2004 | | 2003 | | 2002 |
| Discount rate | | | 6.00 | % | | | 6.25 | % | | | 6.75 | % | | | 6.00 | % | | | 6.25 | % | | | 6.75 | % |
| Salary progression | | | 4.00 | % | | | 4.00 | % | | | 4.25 | % | | | — | | | | — | | | | — | |
|
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 |
| | | 2004 | | 2003 | | 2002 | | 2004 | | 2003 | | 2002 |
| Discount rate | | | 6.25 | % | | | 6.75 | % | | | 7.25 | % | | | 6.25 | % | | | 6.75 | % | | | 7.25 | % |
| Return on assets | | | 9.00 | % | | | 9.00 | % | | | 9.00 | % | | | — | | | | — | | | | — | |
| Salary progression | | | 4.25 | % | | | 4.25 | % | | | 4.00 | % | | | — | | | | — | | | | — | |
|
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.
40
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
The assumptions used to develop postretirement plan healthcare costs at December 31 are as follows:
| | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| Initial trend rate | | | 9.00 | % | | | 10.0 | % | | | 11.00 | % |
| Ultimate trend rate | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % |
| Years to ultimate trend | | | 7 | | | | 8 | | | | 9 | |
|
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 | | $ | 2.1 | | | $ | (2.1 | ) |
|
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 $30.4 million, $30.3 million and $23.5 million as of December 31, 2004 and $24.1 million, $23.9 million and $15.4 million as of December 31, 2003, respectively.
Benefits expected to be paid to participants under the Company's defined benefit pension plans are $2.0 million in 2005, $1.8 million in 2006, $1.9 million in 2007, $2.3 million in 2008, $2.0 million in 2009 and $10.4 million between 2010 and 2014.
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 | | 2004 | | 2003 |
| Equity securities | | | 70 | % | | | 72 | % | | | 70 | % |
| Debt securities | | | 30 | % | | | 28 | % | | | 30 | % |
| 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.
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 2005, the Company currently estimates that pension contributions will be $2.3 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 2004, 2003 and 2002.
41
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Note 12 Stock Compensation Plans
Stock Options: At December 31, 2004 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, 2004 and 2003, respectively, 544,359 and 432,359 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, 2004 and 2003, 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 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.
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, 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 | |
| Granted | | | 112,000 | | | | 4.51 | | | | 4.56 | | | | 5.25 | |
| Outstanding at December 31, 2004 | | | 544,359 | | | | 2.50 | | | | 4.00 | | | | 5.88 | |
| Exercisable at December 31, 2004 | | | 278,849 | | | | 2.50 | | | | 3.68 | | | | 5.88 | |
|
42
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
| | | | | | | | | | | | | | | | | | |
| | | | | Option Price Range |
| Directors Plan | | Number
of Options | | Low | | Weighted
Average | | High |
| 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 | |
| Granted | | | — | | | | — | | | | — | | | | — | |
| Outstanding at December 31, 2004 | | | 99,200 | | | | 2.70 | | | | 7.50 | | | | 11.75 | |
| Exercisable at December 31, 2004 | | | 91,175 | | | | 2.70 | | | | 7.81 | | | | 11.75 | |
|
Total options exercisable at December 31, 2003 and 2002 were 243,679 and 129,059, respectively.
No options were granted during 2003. The weighted-average grant date fair values of options granted during 2004 and 2002 were $4.56 and $2.77.
Additional information relating to outstanding options under both plans as of December 31, 2004 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 | | | | 6.4 | | | $ | 2.98 | | | | 179,374 | | | $ | 3.00 | |
| 3.53 – 4.70 | | | 105,000 | | | | 9.2 | | | | 4.51 | | | | — | | | | — | |
| 4.70 – 5.88 | | | 251,600 | | | | 7.1 | | | | 4.81 | | | | 134,250 | | | | 4.87 | |
| 7.05 – 8.23 | | | 10,700 | | | | 2.3 | | | | 7.75 | | | | 10,700 | | | | 7.75 | |
| 8.23 – 9.40 | | | 10,700 | | | | 1.3 | | | | 8.38 | | | | 10,700 | | | | 8.38 | |
| 9.40 – 10.58 | | | 14,000 | | | | 0.8 | | | | 10.00 | | | | 14,000 | | | | 10.00 | |
| 10.58 – 11.75 | | | 21,000 | | | | 0.8 | | | | 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:
| | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| Dividend yield | | | 0 | % | | | — | | | | 0 | % |
| Expected volatility | | | 54.8 | % | | | — | | | | 55.3 | % |
| Risk-free interest rate | | | 4.7 | % | | | — | | | | 4.9 | % |
| 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. At December 31, 2004, 2003 and 2002, there were no outstanding restricted stock awards.
43
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Note 13 Income Taxes
The (benefit from) provision for income taxes for the three years ended December 31 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | |
| | | (in thousands) | |
| Current: | |
| Federal | | $ | 43 | | | $ | (1,442 | ) | | $ | (4,624 | ) | |
| Foreign | | | 236 | | | | 276 | | | | 292 | | |
| State and local | | | 199 | | | | 3 | | | | (21 | ) | |
| Total current | | | 478 | | | | (1,163 | ) | | | (4,353 | ) | |
| Deferred: | |
| Federal | | | 1,264 | | | | (753 | ) | | | 1,300 | | |
| State and local | | | (16 | ) | | | (326 | ) | | | 307 | | |
| Valuation allowance | | | (2,118 | ) | | | 1,079 | | | | (1,607 | ) | |
| Total deferred | | | (870 | ) | | | — | | | | — | | |
| (Benefit from) income taxes | | $ | (392 | ) | | $ | (1,163 | ) | | $ | (4,353 | ) | |
|
A reconciliation of the (benefit from) provision for income taxes at the Federal statutory rate of 34% to the reported tax (benefit from) income taxes in 2004, 2003 and 2002 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | |
| | | (in thousands) | |
| Provision (benefit) computed at the Federal statutory rate | | $ | 1,627 | | | $ | (1,938 | ) | | $ | 784 | | |
| State and local income taxes, net of Federal income tax benefit | | | 183 | | | | (323 | ) | | | 286 | | |
| Foreign tax rate differential | | | 63 | | | | 112 | | | | 136 | | |
| Permanent differences | | | 63 | | | | 55 | | | | 57 | | |
| Reduction in tax reserves based on tax review | | | — | | | | (108 | ) | | | — | | |
| State tax credit adjustment | | | — | | | | — | | | | (110 | ) | |
| Valuation allowance | | | (2,118 | ) | | | 1,079 | | | | (5,371 | ) | |
| Other | | | (210 | ) | | | (40 | ) | | | (135 | ) | |
| (Benefit from) income taxes | | $ | (392 | ) | | $ | (1,163 | ) | | $ | (4,353 | ) | |
|
44
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Significant components of deferred income tax assets and liabilities as of December 31 are as follows:
| | | | | | | | | | |
| | | 2004 | | 2003 |
| | | (in thousands) |
| Deferred tax assets: | |
| Inventories | | $ | — | | | $ | 558 | |
| Pensions | | | 1,935 | | | | 1,547 | |
| Postretirement benefits | | | 172 | | | | 181 | |
| Allowance for bad debts | | | 1,374 | | | | 1,284 | |
| Self insurance reserves | | | 1,021 | | | | 1,206 | |
| Warranty reserves | | | 281 | | | | 440 | |
| Accrued vacation | | | 713 | | | | 768 | |
| Federal and state net operating loss | | | 4,914 | | | | 4,891 | |
| Deferred charges | | | 478 | | | | — | |
| Other | | | 386 | | | | 467 | |
| Valuation reserve | | | (5,843 | ) | | | (7,961 | ) |
| Total deferred tax assets | | | 5,431 | | | | 3,381 | |
| Deferred tax liabilities: | | | | | |
| Depreciation | | | (3,649 | ) | | | (3,114 | ) |
| Inventories | | | (23 | ) | | | — | |
| Other | | | (889 | ) | | | (267 | ) |
| Total deferred tax liabilities | | | (4,561 | ) | | | (3,381 | ) |
| Net deferred tax assets | | $ | 870 | | | $ | — | |
|
The Company's federal net operating loss carry forwards at December 31, 2004 of approximately $9.0 million expire through 2024.
During the fourth quarter of 2004, the Company reversed $0.9 million of its tax valuation reserve in anticipation of the gain to be recorded in 2005 resulting from the sale of its Heavy Duty OEM business.
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.
The earnings of certain foreign subsidiaries, which are immaterial, are considered permanently reinvested in the foreign operations and therefore no provision has been made for U.S. taxes related to these subsidiaries.
45
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Income (loss) before taxes from United States and foreign sources for the three years ended December 31 is as follows:
| | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| | | (in thousands) |
| United States | | $ | 4,276 | | | $ | (6,181 | ) | | $ | 1,848 | |
| Foreign | | | 510 | | | | 482 | | | | 458 | |
| Income (loss) before taxes | | $ | 4,786 | | | $ | (5,699 | ) | | $ | 2,306 | |
|
Net income taxes paid (refunded) during 2004, 2003 and 2002 were $0.4 million, $(1.9) million and $(4.8) million, respectively.
Note 14 Income (Loss) Per Share
The following table sets forth the computation of basic and diluted income (loss) per common share for the years ended December 31:
| | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| | | (in thousands, except per share amounts) |
| Numerator: | |
| Income (loss) from continuing operations | | $ | 5,178 | | | $ | (4,536 | ) | | $ | 6,659 | |
| Less: preferred stock dividends | | | (64 | ) | | | (64 | ) | | | (86 | ) |
| Income (loss) from continuing operations available (attributable) to common stockholders | | | 5,114 | | | | (4,600 | ) | | | 6,573 | |
| Cumulative effect of accounting change, net of tax | | | — | | | | — | | | | (4,671 | ) |
| Net income (loss) available (attributable) to common stockholders — basic | | | 5,114 | | | | (4,600 | ) | | | 1,902 | |
| Add back: preferred stock dividend | | | 64 | | | | — | | | | 86 | |
| Net income (loss) available (attributable) to stockholders and assumed conversions — diluted | | $ | 5,178 | | | $ | (4,600 | ) | | $ | 1,988 | |
| Denominator: | | | | | |
| Weighted average common shares — basic | | | 7,106 | | | | 7,106 | | | | 7,001 | |
| Dilutive effect of stock options | | | 152 | | | | — | | | | 84 | |
| Dilutive effect of Series B Preferred Stock | | | 235 | | | | — | | | | 36 | |
| Weighted average common shares and equivalents — diluted | | | 7,493 | | | | 7,106 | | | | 7,121 | |
| Basic income (loss) per common share: | | | | | |
| Continuing operations | | $ | 0.72 | | | $ | (0.65 | ) | | $ | 0.94 | |
| Cumulative effect of accounting change | | | — | | | | — | | | | (0.67 | ) |
| Net income (loss) per common share | | $ | 0.72 | | | $ | (0.65 | ) | | $ | 0.27 | |
| Diluted income (loss) per common share: | | | | | |
| Continuing operations | | $ | 0.69 | | | $ | (0.65 | ) | | $ | 0.94 | |
| Cumulative effect of accounting change | | | — | | | | — | | | | (0.66 | ) |
| Net income (loss) per common share | | $ | 0.69 | | | $ | (0.65 | ) | | $ | 0.28 | |
|
The weighted average basic common shares outstanding was used in the calculation of the diluted loss per common share for the year ended December 31, 2003 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 the Company's common stock
46
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
during the respective earnings periods. The shares excluded and the average market prices were as follows:
| | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| Options | | | 80,300 | | | | 301,000 | | | | 83,800 | |
| Average market prices | | $ | 5.44 | | | $ | 4.35 | | | $ | 4.98 | |
|
Note 15 Commitments and Contingencies
Leases: The Company's leases consist primarily of manufacturing and distribution facilities and equipment, which expire between 2005 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 2004, $4.8 million in 2003 and $4.3 million in 2002.
Future minimum annual rental payments under non-cancelable operating leases as of December 31, 2004 were as follows: $6.4 million in 2005, $4.9 million in 2006, $4.5 million in 2007, $4.3 million in 2008 and $3.9 million in 2009 and $2.1 million thereafter. These amounts exclude obligations of the Heavy Duty OEM business unit which was sold on March 1, 2005 (see Note 18).
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 $2.8 million and $3.0 million to pay such claims as of December 31, 2004 and 2003, 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, environmental 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 and a decision rendered during 2005. The Company intends to vigorously defend this matter. 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. The ultimate outcome at this time, however, is unknown, and any potential loss cannot be estimated.
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
47
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
cleanup activities. The 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 owned or 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:
| | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| | | (in thousands) |
| Balance at beginning of period | | $ | 596 | | | $ | 1,569 | | | $ | 1,933 | |
| Charged to cost and expenses | | | 5084 | | | | 1,687 | | | | 1,174 | |
| Warranty credits issued | | | (5,226 | ) | | | (2,660 | ) | | | (1,538 | ) |
| Balance at end of period | | $ | 454 | | | $ | 596 | | | $ | 1,569 | |
|
Warranty expenses in 2004 increased over 2003 due to a change in a customer program being in place for the full year 2004 versus being in place for only four months of the prior year. As a result of the change, the Company is now incurring additional warranty expense as compared to offering the customer a fixed percentage off invoice allowance, which was reflected as a reduction of net sales in prior years. Warranty expenses in 2003 increased over 2002 due to this changed customer program being implemented for a portion of the year.
Note 16 Business Segments
The Company is organized into two strategic business groups ("SBG") based on the type of customer served — Automotive and Light Truck and Heavy Duty. The Automotive and Light Truck SBG is comprised of a heat exchanger unit and a temperature control unit. The Heavy Duty SBG consisted of both an OEM and aftermarket unit prior to the sale of Transpro's Heavy Duty OEM business unit.
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. Prior to the sale of the Heavy Duty OEM business unit, the Heavy Duty strategic business group provided 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. Subsequent to the Heavy Duty OEM sale, the Company serves only 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.
48
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
The tables below set forth information about reported segments for the three years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated Revenues | | Operating Income (Loss) |
| | | 2004 | | 2003 | | 2002 | | 2004 | | 2003 | | 2002 |
| | | (in thousands) | | |
| Trade sales: | | | | | |
| Automotive and light truck | | $ | 185,331 | | | $ | 167,932 | | | $ | 164,538 | | | $ | 11,428 | | | $ | 3,355 | | | $ | 13,911 | |
| Heavy duty | | | 82,812 | | | | 60,772 | | | | 66,027 | | | | 4,935 | | | | (747 | ) | | | (2,053 | ) |
| Inter-segment revenues: | | | | | |
| Automotive and light truck | | | 6,938 | | | | 3,806 | | | | 3,406 | | | | — | | | | — | | | | — | |
| Heavy duty | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Elimination of inter-segment revenues | | | (6,938 | ) | | | (3,806 | ) | | | (3,406 | ) | | | — | | | | — | | | | — | |
| Corporate expenses | | | — | | | | — | | | | — | | | | (6,765 | ) | | | (4,568 | ) | | | (5,808 | ) |
| Consolidated total | | $ | 268,143 | | | $ | 228,704 | | | $ | 230,565 | | | $ | 9,598 | | | $ | (1,960 | ) | | $ | 6,050 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total Assets | | Capital Expenditures | | Depreciation and
Amortization Expense |
| | | 2004 | | 2003 | | 2002 | | 2004 | | 2003 | | 2002 | | 2004 | | 2003 | | 2002 |
| Automotive and light truck | | $ | 111,567 | | | $ | 120,174 | | | $ | 121,265 | | | $ | 3,365 | | | $ | 4,476 | | | $ | 4,506 | | | $ | 4,026 | | | $ | 3,997 | | | $ | 3,293 | |
| Heavy duty | | | 32,919 | | | | 28,267 | | | | 26,899 | | | | 1,812 | | | | 694 | | | | 1,052 | | | | 1,889 | | | | 1,904 | | | | 1,962 | |
| Corporate | | | 5,624 | | | | 8,737 | | | | 12,802 | | | | — | | | | — | | | | — | | | | 48 | | | | 96 | | | | 171 | |
| Consolidated totals | | $ | 150,110 | | | $ | 157,178 | | | $ | 160,966 | | | $ | 5,177 | | | $ | 5,170 | | | $ | 5,558 | | | $ | 5,963 | | | $ | 5,997 | | | $ | 5,426 | |
|
Restructuring and other special charges included in operating income (loss) for the three years ended December 31 are as follows:
| | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| | | (in thousands) |
| Automotive and light truck | | $ | — | | | $ | 864 | | | $ | 206 | |
| Heavy duty | | | — | | | | 626 | | | | 1,610 | |
| Total restructuring and other special charges | | $ | — | | | $ | 1,490 | | | $ | 1,816 | |
|
In 2004, 2003 and 2002 sales to AutoZone accounted for approximately 20%, 20% and 21% of net sales, respectively. In addition, Advance Auto Parts accounted for approximately 14%, 12% and 6% of net sales for 2004, 2003 and 2002 respectively. These sales were in the Automotive and Light Truck segment.
In 2004, 2003 and 2002 sales to Paccar accounted for approximately 11%, 6% and 7% of net sales, respectively. These sales were in the Heavy Duty segment. As a result of the sale of the Heavy Duty OEM business on March 1, 2005, described in Note 18, Paccar is no longer a customer of the Company.
No other customer individually represented more than 10% of net trade sales in any of the years reported. The loss of one of the major automotive and light truck aftermarket customers, indicated above, could have a material adverse effect on the Company's results of operations.
The principal raw materials used by the Company in its Automotive and Light Truck and Heavy Duty segments are copper, brass and aluminum. Although these materials are available from a number of vendors, the Company has chosen to concentrate its sources with a limited number of long-term suppliers. The Company believes this strategy results in purchasing and operating
49
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
economies. The Company has not experienced any significant supply problems for these commodities and does not anticipate any significant supply problems in the foreseeable future.
Note 17 Quarterly Financial Data (Unaudited)
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2004 | |
| | | 1st Qtr | | 2nd Qtr | | 3rd Qtr | | 4th Qtr |
| | | (in thousands, except per share amounts) | |
| Net sales | | $ | 59,895 | | | $ | 72,221 | | | $ | 72,012 | | | $ | 64,015 | |
| Gross margin | | | 10,259 | | | | 12,682 | | | | 15,157 | | | | 14,493 | |
| Net (loss) income | | | (643 | ) | | | 803 | | | | 2,658 | | | | 2,360 | |
| Net (loss) income per common share — basic | | $ | (0.09 | ) | | $ | 0.11 | | | $ | 0.37 | | | $ | 0.33 | |
| Net (loss) income per common share — diluted | | $ | (0.09 | ) | | $ | 0.11 | | | $ | 0.36 | | | $ | 0.31 | |
|
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2003 | |
| | | 1st Qtr | | 2nd Qtr | | 3rd Qtr | | 4th Qtr |
| Net sales | | $ | 52,700 | | | $ | 58,302 | | | $ | 65,629 | | | $ | 52,073 | |
| Gross margin | | | 7,191 | | | | 8,998 | | | | 13,214 | | | | 8,264 | |
| Net (loss) income | | | (4,335 | ) | | | (607 | ) | | | 1,961 | | | | (1,555 | ) |
| Net (loss) income per common share — basic | | $ | (0.61 | ) | | $ | (0.09 | ) | | $ | 0.27 | | | $ | (0.22 | ) |
| Net (loss) income per common share — diluted | | $ | (0.61 | ) | | $ | (0.09 | ) | | $ | 0.27 | | | $ | (0.22 | ) |
|
During the fourth quarter of 2004, the Company reversed $0.9 million of its tax valuation reserve in anticipation of the gain to be recorded in 2005 resulting from the sale of its Heavy Duty OEM business, as described in Note 18.
Note 18 Subsequent Event
On February 1, 2005, the Company announced that it had signed definitive agreements providing for the merger of the aftermarket business of Modine Manufacturing Company ("Modine") into Transpro and Modine's acquisition of Transpro's Heavy Duty OEM business unit for $17 million in cash. The parties had announced a letter of intent for the transactions on October 26, 2004. Modine will spin off its aftermarket business on a debt-free basis to its shareholders, and the resulting company will immediately merge into Transpro. Each step of the transaction is expected to be tax free to the shareholders of both companies. Following the merger, current Transpro shareholders will own 48% of the Company, and Modine shareholders will own 52%. The transaction is expected to increase the Company's consolidated annual sales to over $400 million (unaudited) and add manufacturing and distribution locations in the U.S., Europe and Mexico. In addition, the Company will now be focused solely on supplying heating and cooling components and systems to the automotive and heavy duty aftermarkets in North and Central America and Europe. In the merger, Transpro will be the accounting acquirer, and it is expected that negative goodwill will be generated as the net fair value of the assets being acquired will exceed the consideration being issued. This negative goodwill will first be used to write down fixed assets to zero and any remainder will be included in the income statement in the year of the acquisition. The Company expects to record restructuring costs commencing in 2005 in order to obtain synergistic benefits which should be seen within 12 to 18 months.
The merger closing is subject to Transpro shareholder and regulatory approvals and other customary conditions. On February 4, 2005, the Antitrust Division of the Department of Justice and the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, applicable to the merger. It is expected that the merger will close during the second quarter of 2005.
As described above, in conjunction with the merger agreement, the Company entered into an agreement to sell its Heavy Duty OEM business unit to Modine for $17 million in cash. This
50
TRANSPRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
transaction was completed on March 1, 2005, and the Company expects to record a pre-tax gain of approximately $6 million in its first quarter 2005 results of operations. The proceeds from the sale of the business were utilized to reduce debt. For the year ended December 31, 2004, net sales of the Heavy Duty OEM business unit was $49.7 million, and pre-tax income was $5.7 million. In future reports, operating results of the Heavy Duty OEM business unit for periods prior to the sale will be shown as a discontinued operation.
51
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, 2004 | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 2,746 | | | $ | 499 | | | $ | (292 | ) | | $ | — | | | $ | 2,953 | |
| Allowance for excess/slow moving inventory | | | 2,147 | | | | 2,353 | | | | (1,668 | ) | | | — | | | | 2,832 | |
| Reserve for warranty costs | | | 596 | | | | 5,084 | (b) | | | (5,226 | ) | | | — | | | | 454 | |
| Tax valuation reserve | | | 7,961 | | | | (2,118 | )(c) | | | — | | | | — | | | | 5,843 | |
| | | | | | | | | | | | | | | | | | | | | |
| 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 | (b) | | | (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 | (b) | | | (1,538 | ) | | | — | | | | 1,569 | |
| Tax valuation reserve | | | 11,228 | | | | (5,371 | )(a) | | | — | | | | 1,018 | (d) | | | 6,875 | |
|
| |
| (a) | Includes $3,795 recorded as a tax benefit in the first quarter of 2002 due to changes in tax laws. |
| |
| (b) | Expenses increased in 2004 and 2003 due to a change in a customer program described in Note 15 of the Notes to Consolidated Financial Statements contained herein. |
| |
| (c) | Includes $0.9 million reversal resulting from the expected gain from the Heavy Duty OEM business sale in 2005. |
| |
| (d) | Amount represents change in the valuation allowance and the deferred tax asset resulting from minimum pension liability adjustment included in Shareholders' Equity. |
52
| |
| 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.
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, 2004. 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, 2004 that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information Regarding the Board of Directors
Transpro's Board of Directors consists of seven members. The directors, their ages, the year in which each first became a director of Transpro and their principal occupations or employment during the past five years are:
| | | | | | | | | | | | | | |
| Name | | Age | | Year First
Became Director | | Principal Occupation
During the Past Five Years |
| Barry R. Banducci | | 69 | | 1995 | | Chairman of the Board of Transpro, Inc. since September 1995; from 1984 to 1996, Vice Chairman of the Board and a director of The Equion Corporation, a manufacturer of automotive products; from 1988 to 1994, President and Chief Executive Officer of Equion and from 1984 to 1988, President and Chief Operating Officer of Equion; currently a director of Dexmet Corporation.(1) |
| | | | | | | |
| William J. Abraham, Jr. | | 57 | | 1995 | | Partner with Foley & Lardner, a law firm in Milwaukee, Wisconsin, since 1980; formerly Chairman of the Business Law Department of Foley & Lardner and a member of its Management Committee; currently a director of The Vollrath Company, Inc., Park Bank, Quad/Graphics, Inc., Phillips Plastics Corporation and Windway Capital Corp.(1) |
| | | | | | | |
| Philip Wm. Colburn | | 76 | | 1995 | | Chairman of the Board of Allen Telecom Inc. from December 1988 to July 2003 and a director of Allen from 1973 to July 2003; from March 1988 to February 1991, Chief Executive Officer of Allen; currently a director of Superior Industries International, Inc. and Andrew Corporation.(2) |
| | | | | | | |
| Charles E. Johnson | | 59 | | 2001 | | Since March 2001, President and Chief Executive Officer of Transpro, Inc.; from 1996 to March 2001, President and Director, and from 1997 to March 2001, Chief Executive Officer, of Canadian General-Tower Ltd., a producer of polymer films and composite materials to the automotive and other markets; from 1984 to 1996, various positions at The Equion Corporation, including President and Chief Operating Officer from 1993 to 1996. |
|
54
| | | | | | | | | | | | | | |
| Name | | Age | | Year First
Became Director | | Principal Occupation
During the Past Five Years |
| Paul R. Lederer | | 65 | | 1995 | | Currently a director of R&B Inc., Maximus, Inc., United Components, Inc. and O'Reilly Automotive, Inc.; prior to retirement in October 1998, Executive Vice President — Worldwide Aftermarket of Federal-Mogul Corporation since February 1998; from November 1994 to February 1998, President and Chief Operating Officer of Fel-Pro Inc., which was acquired by Federal-Mogul Corporation.(1) |
| | | | | | | |
| Sharon M. Oster | | 56 | | 1995 | | Frederic D. Wolfe Professor of Management and Entrepreneurship at the School of Management, Yale University since 1992; from 1992 to 1994, Associate Dean of Yale's School of Management; from 1983 to 1994, Professor of Economics and Management at Yale's School of Management; currently a director of HealthCare REIT, Inc. and The Aristotle Corporation.(2) |
| | | | | | | |
| F. Alan Smith | | 73 | | 1995 | | Chairman of Advanced Accessory Systems, LLC from September 1995 to April 2003; Chairman of Mackie Automotive Systems from May 1998 to December 2001, and a director of 3M from 1986 to 2001; retired from General Motors Corporation in 1992 after 36 years of service; from 1981 to 1992, Executive Vice President and a member of the Board of Directors of GM.(2) |
|
| |
| (1) | Member of the Nominating, Governance and Compensation Committee |
| |
| (2) | Member of the Audit Committee |
The business and affairs of Transpro are managed under the direction of our Board of Directors, whose members are elected annually by the stockholders. Our Board of Directors has designated a Nominating, Governance and Compensation Committee and an Audit Committee. Messrs. Lederer, Abraham and Banducci are the members of the Nominating, Governance and Compensation Committee; and Messrs. Smith, Colburn and Ms. Oster are the members of the Audit Committee. Each member of the Audit Committee is independent under Rule 10A-3 of the Securities and Exchange Commission and AMEX listing standards. The Board of Directors has determined that Mr. Smith, Chairman of the Audit Committee, and Mr. Colburn are each an "audit committee financial expert" as that term is defined in Item 401(h) of Regulation S-K of the Securities and Exchange Commission. Each member of the Nominating, Governance and Compensation Committee is independent as provided under AMEX listing standards.
The Nominating, Governance and Compensation Committee recommends to the Board salaries and incentive compensation awards for our officers; reviews and approves guidelines for the administration of incentive compensation programs for other management employees; makes recommendations to the Board with respect to major compensation programs; administers our 1995
55
Stock Plan and our 1995 Nonemployee Directors Stock Option Plan (the "Directors Plan"), grants stock options and restricted shares of common stock under the 1995 Stock Plan; and issues the Report on Executive Compensation required to be included in our proxy statement by the rules of the Securities and Exchange Commission. This committee also oversees corporate governance issues in accordance with applicable law and American Stock Exchange rules, selects and recommends to the Board nominees for election as directors and considers the performance of incumbent directors in determining whether to recommend them for nomination for re-election. The charter of the Nominating, Governance and Compensation Committee is posted on our website at www.transpro.com.
The Audit Committee is directly responsible for the appointment, compensation and oversight of the audit and related work of our independent auditors. The Audit Committee reviews the degree of their independence; approves the scope of the audit engagement, including the cost of the audit; approves any non-audit services rendered by the auditors and the fees for these services; reviews with the auditors and management our policies and procedures with respect to internal accounting and financial controls and, upon completion of an audit, the results of the audit engagement; and reviews internal accounting and auditing procedures with our financial staff and the extent to which recommendations made by the independent auditors have been implemented. The Audit Committee has adopted a charter that meets the requirements of the Securities and Exchange Commission and the American Stock Exchange and a copy of the charter is posted on our website at www.transpro.com.
During 2004, the Board of Directors held seven meetings, the Nominating, Governance and Compensation Committee held three meetings, and the Audit Committee held twelve meetings. During 2004, each director attended at least 75% of the meetings of the Board of Directors held and of all committees of the Board of Directors on which he or she served while he or she was director or a member of a committee of the Board of Directors, except for Mr. Abraham, who attended six of the ten Board and applicable committee meetings.
If the Modine aftermarket merger is completed, the Company's board of directors will be classified and will have ten members, consisting of six directors from the Company and four directors from Modine. The Company's proxy statement relating to the merger will describe the new board structure in more detail.
Executive Officers of the Registrant
See "Executive Officers of the Registrant" in Part I hereof.
Code of Ethics
Our Board of Directors has approved a Code of Business Conduct in accordance with the rules of the Securities and Exchange Commission and the American Stock Exchange that governs the conduct of each of our employees and directors, including our principal executive officer, principal financial officer, principal accounting officer and controller. Our Code of Business Conduct is maintained on our website at www.transpro.com.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who beneficially own more than ten percent of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC and the American Stock Exchange. Executive officers, directors and greater than ten percent beneficial owners are required by the SEC to furnish us with copies of all Section 16(a) forms they file.
Based upon a review of the copies of these forms furnished to us and written representations from our executive officers and directors, we believe that during fiscal 2004 all Section 16(a) filing requirements applicable to our executive officers, directors and greater than ten percent beneficial owners were complied with, except that Mr. Abraham failed to file Form 4 on a timely basis with respect to a transaction in an account controlled by certain members of his family.
56
ITEM 11. EXECUTIVE COMPENSATION
Annual and Long-Term Executive Compensation
The following table sets forth the annual and long-term compensation paid or accrued by Transpro and its subsidiaries to those persons who were the Chief Executive Officer and the other four most highly compensated executive officers at the end of 2004 (collectively, the "named executive officers"), for services rendered by them in all capacities in which they served Transpro and its subsidiaries during 2002, 2003 and 2004.
Summary Compensation Table:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | Annual Compensation (a) | | Long-Term Compensation Awards |
| Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Securities
Underlying
Options/SARs (#) | | All Other
Comp. ($)(b) |
| Charles E. Johnson | | | 2004 | | | $ | 411,154 | | | $ | 398,000 | | | | 20,000 | | | $ | 5,425 | |
| President and Chief Executive | | | 2003 | | | $ | 391,890 | | | $ | 0 | | | | 0 | | | $ | 9,817 | |
| Officer | | | 2002 | | | $ | 381,812 | | | $ | 242,000 | | | | 35,000 | | | $ | 10,123 | |
| Richard A. Wisot | | | 2004 | | | $ | 206,192 | | | $ | 110,000 | | | | 0 | | | $ | 5,123 | |
| Vice President, Treasurer, Secretary | | | 2003 | | | $ | 205,255 | | | $ | 0 | | | | 0 | | | $ | 6,323 | |
| and Chief Financial Officer | | | 2002 | | | $ | 194,778 | | | $ | 60,000 | | | | 15,000 | | | $ | 3,069 | |
| David Albert | | | 2004 | | | $ | 234,331 | | | $ | 140,000 | | | | 10,000 | | | $ | 28,620 | |
| Executive Vice President — | | | 2003 | | | $ | 234,998 | | | $ | 0 | | | | 0 | | | $ | 10,547 | |
| Operations | | | 2002 | | | $ | 200,858 | | | $ | 70,000 | | | | 25,000 | | | $ | 27,016 | |
| Jeffrey L. Jackson | | | 2004 | | | $ | 168,077 | | | $ | 87,000 | | | | 7,000 | | | $ | 3,626 | |
| Vice President — Human Resources | | | 2003 | | | $ | 166,546 | | | $ | 0 | | | | 0 | | | $ | 3,354 | |
| and Process | | | 2002 | | | $ | 157,403 | | | $ | 53,000 | | | | 26,433 | | | $ | 3,028 | |
| Kenneth T. Flynn, Jr. | | | 2004 | | | $ | 143,285 | | | $ | 80,000 | | | | 0 | | | $ | 4,191 | |
| Vice President and Corporate | | | 2003 | | | $ | 142,808 | | | $ | 0 | | | | 0 | | | $ | 4,569 | |
| Controller | | | 2002 | | | $ | 132,138 | | | $ | 27,000 | | | | 10,000 | | | $ | 3,859 | |
|
| |
| (a) | The aggregate amount of perquisites and other personal benefits is less than the lesser of $50,000 or 10% of the total salary and bonus reported for each indicated named executive officer. |
| |
| (b) | All Other Compensation includes for 2002, 2003 and 2004, respectively, (i) contributions made by Transpro to each named executive officer under its defined contribution plan in the following amounts: Mr. Johnson — $9,064, $8,638 and $4,100; Mr. Wisot — $2,010, $5,144 and $3,798; Mr. Albert — $2,260, $2,211 and $2,841; Mr. Jackson — $2,752, $3,072 and $3,362; and Mr. Flynn — $2,800, $3,390 and $2,866; and (ii) insurance premiums paid by Transpro in 2002, 2003 and 2004 for the benefit of the named executive officers in the following amounts: Mr. Johnson — $1,059, $1,179 and $1,325; Mr. Wisot — $1,059, $1,179 and $1,325; Mr. Albert — $1,059, $1,179 and $1,325; Mr. Jackson — $276, $282 and $264; and Mr. Flynn — $1,059, $1,179 and $1,325. Also includes reimbursement of grossed-up moving expenses in 2002, 2003 and 2004 for Mr. Albert in the amounts of $23,697, $7,157 and $24,454, respectively. |
57
The following table sets forth the grants of stock options made during the year ended December 31, 2004 to the named executive officers:
| | | | | | | | | | | | | | | | | | | | | | |
| Name | | Number of Securities
Underlying
Options Granted(a) | | % of Total
Options Granted
to Employees in
Fiscal Period(b) | | Exercise
Price | | Expiration
Date | | Grant Date
Present Value (c) |
| Charles E. Johnson | | | 20,000 | | | | 17.9 | % | | $ | 4.51 | | | | 2/25/2014 | | | $ | 57,600 | |
| Richard A. Wisot | | | — | | | | — | | | | — | | | | — | | | | — | |
| David Albert | | | 10,000 | | | | 8.9 | % | | $ | 4.51 | | | | 2/25/2014 | | | $ | 28,800 | |
| Jeffrey L. Jackson | | | 7,000 | | | | 6.3 | % | | $ | 5.25 | | | | 5/06/2014 | | | $ | 20,580 | |
| Kenneth T. Flynn, Jr. | | | — | | | | — | | | | — | | | | — | | | | — | |
|
| |
| (a) | All options granted are exercisable 25 percent after one year from date of grant, 50 percent after two years from date of grant, 75 percent after three years from date of grant and 100 percent after four years from date of grant. |
| |
| (b) | Options to purchase a total of 112,000 shares of common stock were issued by Transpro to employees in fiscal 2004. |
| |
| (c) | Present value calculated using the Black Scholes model assuming a 4.74% interest rate (the rate of treasury securities with a maturity date closest to the expected life of the options) and 54.8% volatility (calculated based upon the performance of the common stock from the date of the spin-off through the grant date). |
The following table sets forth information with respect to unexercised options to purchase Transpro common stock held by the named executive officers at December 31, 2004. No options to purchase common stock were exercised in 2004 by these persons.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
| | | | | | | | | | | | | | | | | | |
| | | Number of Unexercised
Options at Fiscal Year-End # | | Value of Unexercised in-the-Money
Options at Fiscal Year-End($)(a) |
| Name | | Exercisable | | Unexercisable | | Exercisable | | Unexercisable |
| Charles E. Johnson | | | 117,500 | | | | 37,500 | | | $ | 332,150 | | | $ | 44,152 | |
| Richard A. Wisot | | | 26,250 | | | | 13,750 | | | $ | 64,725 | | | $ | 28,475 | |
| David Albert | | | 31,250 | | | | 28,750 | | | $ | 71,375 | | | $ | 51,275 | |
| Jeffrey L. Jackson. | | | 24,766 | | | | 18,667 | | | $ | 63,816 | | | $ | 29,818 | |
| Kenneth T. Flynn, Jr. | | | 5,000 | | | | 5,000 | | | $ | 6,900 | | | $ | 6,900 | |
|
| |
| (a) | Computed based upon the difference between the closing price of Transpro common stock on December 31, 2004 ($6.10) and the exercise price. |
Retirement Plan
Each of our named executive officers are covered by a non-contributory defined benefit cash balance plan. We credit an amount, quarterly, to a notional account for each participant under the plan equal to the sum of (i) each participant's total compensation for the quarter (excluding bonus) multiplied by a percentage factor plus (ii) each participant's total compensation for the quarter (excluding bonus) in excess of a fraction of the Social Security wage base multiplied by a percentage factor. The percentage factors are determined under the following table:
| | | | | | | | | | |
| Years of Service | | Credit Account
with % of Pay | | Plus % of Pay Above
1/12 of Social Security
Taxable Wage Base |
| Less than 10 years | | | 2.25 | % | | | 2 | % |
| 10 to 20 years | | | 3.00 | % | | | 2 | % |
| 20 or more years | | | 4.00 | % | | | 2 | % |
|
Each year of employment until each participant's normal retirement date (age 65), the notional account balances will be credited quarterly with interest equal to the average of the one-year Treasury bill rate on the first day of October, November and December of the previous calendar year multiplied by his or her account balance at the beginning of the quarter. Upon retirement, the
58
notional account balance will be paid in the form of a lump sum payment or converted to an annuity to provide monthly benefit payments. Upon normal retirement at age 65, Messrs. Johnson, Wisot, Albert, Jackson, and Flynn's estimated annual pension benefits under the cash balance plan are $7,048, $6,973, $8,966, $12,971 and $7,579, respectively.
Employment, Termination of Employment and Change of Control Arrangements
Charles E. Johnson
Effective March 12, 2001, the Company entered into an employment agreement with Charles E. Johnson, our President and Chief Executive Officer. The agreement has a two-year term with automatic one-year extensions upon each anniversary date of the agreement unless either party gives at least 90 days' notice to the contrary. The employment agreement can be terminated by Transpro for "serious cause" (as defined in the employment agreement) or in the event Mr. Johnson becomes disabled, and Mr. Johnson can terminate the agreement for "good reason" (as defined in the agreement). The employment agreement provides annual pension benefits, supplemental to the annual benefits paid under our retirement plans, in an amount determined in accordance with the applicable Transpro retirement plan, without giving effect to limits imposed by the Internal Revenue Code and regulations of the IRS on the amount of benefits payable or compensation that may be used in determining benefits that may be paid to an individual under a Federal income tax qualified plan. As of December 31, 2004, our accrued obligation to Mr. Johnson with respect to his supplemental pension benefit was $25,086. The employment agreement also provides for an annual salary of $360,000 and a bonus of up to 150% of base salary determined based upon performance targets set annually by the Board. Mr. Johnson's annual base salary was increased in March 2002, 2003, 2004 and 2005 to $374,400, $395,000, $415,000 and $440,000, respectively. In addition, under the agreement, in March 2001 Mr. Johnson received options to purchase 60,000 shares of common stock under our 1995 Stock Plan exercisable one third after one year from date of grant, two-thirds after two years from date of grant and 100 percent after three years from date of grant. In June 2001, Mr. Johnson received options to purchase an additional 40,000 shares that are exercisable 50% after March 12, 2002 and 100% after March 12, 2003. The Company also agreed to pay Mr. Johnson's reasonable relocation expenses.
Mr. Johnson's employment agreement contains additional provisions which provide that, in the event the Company terminates Mr. Johnson's employment other than for "serious cause" or his disability, death or retirement, or if Mr. Johnson terminates his employment for "good reason," the Company would pay him an amount equal to his salary for one year and would provide his life, disability, accident, medical and hospitalization insurance benefits during a period of one year after termination. In addition, the Company would pay Mr. Johnson accrued vacation pay and all other amounts to which he is entitled under the agreement prior to termination.
On October 28, 2004, the Company entered into an amendment to its employment agreement with Mr. Johnson. The amendment alters and increases the amounts payable in the event Mr. Johnson's employment is terminated after a change in control transaction and makes certain other changes. Specifically, upon termination within two years after a change of control transaction is presented to our board of directors (formerly within one year):
| |
| • | Mr. Johnson's severance payment is increased from (i) 18 months base salary plus next year targeted bonus to (ii) 2.99 times his base amount (as that term is defined in Section 280G of the Internal Revenue Code). |
| |
| • | Life, long-term disability, and medical, dental and vision insurance coverage and automobile allowance to be provided for three years following termination (formerly to be provided for one year). |
| |
| • | Immediate vesting of all stock options and restricted stock. |
The change of control provisions of Mr. Johnson's agreement were amended to cap payments such that Transpro will not have to pay excise tax under the provisions of Section 4999 of the Internal Revenue Code.
59
Severance Agreements
Messrs. Wisot, Albert, Jackson and Flynn entered into severance agreements with the Company. Pursuant to their respective severance agreements, if the officer lost his current position (except for termination for "cause" as defined in each severance agreement), or if during the term thereof should there be a material change in ownership, or the sale of a portion of the business, which results in his not having a position similar to his current position including similar pay and benefits then his base salary will continue to be paid until he either secures other full-time employment, or for one year, whichever occurs first.
If the Modine aftermarket merger is completed, the Company will issue 52% of its voting stock, calculated on a fully-diluted basis giving effect to the merger, to Modine shareholders. As a result, the Modine merger may constitute a change-in-control under employment or severance agreements, equity rights or other arrangements, including those described in this section of the Report, to which the Company and certain of its executive officers are parties. The Company's proxy statement relating to the merger will describe these matters and any other interests in the merger which directors or executive officers may have that are in addition to or different from interests of shareholders generally.
Compensation of Directors
The Chairman of the Board of Directors is paid an annual retainer of $48,000 per year for his services as Chairman and $1,000 for each meeting of the Board of Directors attended. The Chairman does not receive any additional compensation for committee participation. All other nonemployee directors are paid $16,000 per year for their services as a director and $1,000 for each meeting of the Board of Directors attended. Each nonemployee member of the Audit Committee and Nominating, Governance and Compensation Committee is paid $2,000 per year for his or her service as a member ($4,000 if Chairman of the committee), and each committee member is paid $500 for each meeting of a committee attended. Directors are not paid fees for actions by unanimous written consent but are compensated for participation in telephonic meetings. Each director and committee member is reimbursed for travel and related expenses incurred in attending meetings.
Under our 1995 Nonemployee Directors Stock Option Plan, the Chairman and each nonemployee director are automatically entitled to a grant of options to purchase 3,200 and 1,500 shares of common stock, respectively, on an annual basis, on the first Friday following our annual meeting of stockholders. However, as there were insufficient shares remaining available for grant pursuant to the Directors Plan, no option grants were made to directors in 2004.
We maintain a matching gift program for the benefit of our directors. Pursuant to the matching gift program, in 2004, we matched gifts to charitable organizations made by the directors in amounts up to $2,500 for each director.
We are party to an employment agreement with Charles E. Johnson, our President and Chief Executive Officer, and a director. For a description of the terms of this agreement, see "Executive Compensation — Employment, Termination of Employment and Change of Control Arrangements."
Compensation Committee Interlocks and Insider Participation
Our Nominating, Governance and Compensation Committee currently consists of three non-employee directors — Messrs. Lederer, Abraham and Banducci. Under our 1995 Nonemployee Directors Stock Option Plan, the Chairman and each nonemployee director, including members of the Nominating, Governance and Compensation Committee, are automatically entitled to a grant of options to purchase 3,200 and 1,500 shares of common stock, respectively, on an annual basis, on the first Friday following our annual meeting of stockholders. However, as there were insufficient shares remaining available for grant pursuant to the Directors Plan, no option grants were made to directors in 2004.
We have from time to time retained the law firm of Foley & Lardner to perform legal services on our behalf. Payments made by us to Foley & Lardner in 2004 were approximately $164,000. Mr. Abraham is a partner at Foley & Lardner.
60
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
Principal Stockholders
The following tables set forth information as of March 1, 2005 with respect to the only persons known to us to be the beneficial owners (for purposes of the rules of the SEC) of more than 5% of the outstanding shares of our common stock as of that date.
| | | | | | | | | | |
| Name and Address of Beneficial Owners | | Amount and Nature of
Beneficial Ownership | | % of Class |
Gabelli Funds, LLC
GAMCO Investors, Inc.
MJG Associates, Inc.
Gabelli Advisers, Inc.
One Corporate Center
Rye, NY 10580 | | | 1,207,467 | (a) | | | 17.0 | % |
| | |
Towle & Co.
12855 Flushing Meadow Drive
St. Louis, MO 63131 | | | 613,600 | (b) | | | 8.6 | % |
| | |
Dimensional Fund Advisors Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401 | | | 607,100 | (c) | | | 8.5 | % |
| | |
Paul S. Wilhide
2121 North Fielder Road
Arlington, TX 76012 | | | 497,413 | (d) | | | 7.0 | % |
| | |
Ironwood Capital Management, LLC
Warren J. Isabelle
Richard L. Droster
Donald Collins
21 Custom House Street
Boston, MA 02110 | | | 493,975 | (e) | | | 7.0 | % |
| | |
Athena Capital Management, Inc.
Minerva Group, LP
David P. Cohen
4 Tower Bridge, #222
200 Barr Harbor Drive
West Conshohocken, PA 19428 | | | 453,400 | (f) | | | 6.4 | % |
| | |
Carl W. Dinger III
P.O Box 150
Green Village, NJ 07935 | | | 373,900 | (g) | | | 5.3 | % |
|
| |
| (a) | This figure is based on information set forth in a Schedule 13D Amendment No. 18 filed with the SEC on February 4, 2005. GAMCO Investors, Inc. ("GAMCO") holds sole voting and dispositive power over 656,167 shares of common stock. Gabelli Funds, LLC holds sole voting and dispositive power over an aggregate of 399,300 shares of common stock. MJG Associates, Inc. ("MJG") holds sole voting and dispositive power over 6,000 shares of common stock. Gabelli Advisers, Inc. holds sole voting and dispositive power over 146,000 shares of common stock. Mario J. Gabelli is the chief investment officer of each of the reporting persons and is the sole shareholder of MJG. |
| |
| (b) | This figure is based on information set forth in a Schedule 13D filed with the SEC on April 6, 2004. Towle & Co. holds sole voting and dispositive power over 192,400 shares, and shared dispositive power over 421,200 shares. |
61
| |
| (c) | This figure is based on information set forth in a Schedule 13G Amendment No. 1 filed with the SEC on February 9, 2005. Dimensional Fund Advisors Inc. holds sole voting and dispositive power over the indicated shares, and acts as an investment advisor or manager to various investment companies, trusts and accounts that own the shares. Dimensional Fund Advisors Inc. disclaims beneficial ownership of the indicated shares. |
| |
| (d) | This figure is based on information set forth in a Schedule 13G filed with the SEC on December 9, 2002. Mr. Wilhide holds sole voting and dispositive power over all of the indicated shares. Mr. Wilhide also holds 12,781 shares of Transpro's Series B Convertible Redeemable Preferred Stock. Mr. Wilhide's Series B preferred stock is convertible into common stock on a ratio based on the prevailing market price of Transpro common stock; provided that the aggregate Transpro common stock issued upon all Series B preferred stock conversions shall not exceed 7% of the outstanding common stock of Transpro after giving effect to the conversions. In December 2001, Mr. Wilhide converted 11,080 shares of Series B preferred stock into 373,279 shares of Transpro common stock and in November 2002, Mr. Wilhide converted an additional 6,139 shares of Series B preferred stock into 124,134 shares of Transpro common stock. |
| |
| (e) | This figure is based on information set forth in a Schedule 13G filed with the SEC on February 10, 2005. Each of the listed parties holds shared voting power over 273,475 shares and shared dispositive power over all of the indicated shares. |
| |
| (f) | This figure is based on information set forth in a Schedule 13G Amendment No. 1 filed with the SEC on February 10, 2005. Athena Capital Management, Inc. holds shared voting and dispositive power over 238,400 shares and Minerva Group, LP holds sole voting and dispositive power over 210,000 shares. David P. Cohen has sole voting and dispositive power over 5,000 shares and is deemed to have beneficial ownership of all of the indicated shares. |
| |
| (g) | This figure is based on information set forth in a Schedule 13D filed with the SEC on May 10, 2004. Carl W. Dinger III holds sole voting and dispositive power over all of the indicated shares, 22,900 of which are held in three trusts of which Mr. Dinger is co-trustee. |
62
Directors and Officers
The following table sets forth information as of March 1, 2005, with respect to shares of our common stock beneficially owned (for purposes of the rules of the SEC) by each director and each executive officer named in the Summary Compensation Table above and by all directors and current executive officers as a group, except that the information with respect to shares held by the trustee under Transpro's 401(k) Savings Plan is as of December 31, 2004 (the most recent practicable date for such information). Beneficial ownership includes shares that may be obtained within 60 days through the exercise of stock options.
| | | | | | | | | | |
| Name of Beneficial Owner | | Amount and Nature of
Beneficial Ownership | | % of Class |
| Barry R. Banducci | | | 153,975 | (a) | | | 2.2 | % |
| Charles E. Johnson | | | 202,130 | (b) | | | 2.8 | % |
| William J. Abraham, Jr. | | | 69,338(c | )(d) | | | 1.0 | % |
| Philip Wm. Colburn | | | 38,313 | (c) | | | | * |
| Paul R. Lederer | | | 15,875(c | )(e) | | | | * |
| Sharon M. Oster | | | 20,736 | (c) | | | | * |
| F. Alan Smith | | | 27,875 | (c) | | | | * |
| David Albert | | | 47,825 | (f) | | | | * |
| Kenneth T. Flynn, Jr. | | | 5,000 | (g) | | | | * |
| Jeffrey L. Jackson | | | 65,740 | (h) | | | | * |
| Richard A. Wisot | | | 37,250 | (i) | | | | * |
All directors and executive officers as
a group (11 persons) | | | 684,057 | (j) | | | 9.2 | % |
|
| |
| * | Less than 1% |
| |
| (a) | Includes 26,800 shares issuable upon exercise of options. Also includes 53,000 shares held by The Banducci Family LLC. |
| |
| (b) | Includes 15,180 shares held by the trustee under the Transpro, Inc. 401(k) Savings Plan and 122,500 shares issuable upon exercise of options. |
| |
| (c) | Includes 12,875 shares issuable upon exercise of options. |
| |
| (d) | Includes 13,100 shares held in Mr. Abraham's Keogh account. |
| |
| (e) | Includes 3,000 shares held by the Paul R. Lederer Revocable Trust. |
| |
| (f) | Includes 11,575 shares held by the trustee under the Transpro, Inc. 401(k) Savings Plan and 33,750 shares issuable upon exercise of options. |
| |
| (g) | Consists of shares issuable upon exercise of options. |
| |
| (h) | Includes 33,581 shares held by the trustee under the Transpro, Inc. 401(k) Savings Plan and 28,933 shares issuable upon exercise of options. |
| |
| (i) | Includes 26,250 shares issuable upon exercise of options. |
| |
| (j) | Consists of 316,113 shares owned by or on behalf of directors and executive officers; 60,336 shares held on behalf of certain executive officers by the trustee under the Transpro, Inc. 401(k) Savings Plan; and 307,608 shares issuable upon exercise of options. |
63
Equity Compensation Plan Information
The following table sets forth information concerning our equity compensation plans as of December 31, 2004:
| | | | | | | | | | | | | | |
| Plan Category | | Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights | | Weighted-average
exercise price of
outstanding
options, warrants
and rights ($) | | Number of securities
remaining available
for issuance under
equity compensation
plans (excluding
securities reflected
in left column) |
| Equity compensation plans approved by security holders: | |
| 1995 Stock Plan | | | 544,359 | | | $ | 4.00 | | | | 20,004 | |
| Directors' Plan | | | 99,200 | | | $ | 7.50 | | | | 800 | |
| | |
| Equity compensation plans not approved by security holders | | | 0 | | | | — | | | | 0 | |
| Total | | | 643,559 | | | $ | 4.54 | | | | 20,804 | |
|
Changes in Control
On January 31, 2005, Transpro entered into a merger agreement and a contribution agreement providing for the merger of Modine Manufacturing Company's aftermarket business into Transpro. Pursuant to the terms of the merger agreement and contribution agreement, Modine will spin off its aftermarket business on a debt-free basis to its shareholders, and the resulting company will immediately merge into Transpro. Each step of the transaction is expected to be tax-free to the shareholders of both companies. Following the merger, Transpro's current shareholders will own 48% of the Company's shares, and Modine's shareholders will own 52% of Transpro's shares. In addition, as provided in the Company's 1995 Stock Plan, the consummation of the Merger will result in the accelerated vesting of all stock options outstanding at the time of the merger.
Charles E. Johnson, currently CEO of Transpro, will remain as CEO and continue to serve on the Board of Directors. Additionally, it is contemplated that Transpro's Board of Directors will consist of two independent directors from Modine's Board and two Modine senior executives, as well as five independent directors from Transpro's Board. One of Transpro's current outside directors will serve as Chairman of the Board.
The merger is subject to Transpro shareholder and regulatory approvals and other customary conditions.
Item 13. Certain Relationships and Related Transactions
We have from time to time retained the law firm of Foley & Lardner to perform legal services on our behalf. Payments made by us to Foley & Lardner in 2004 were approximately $164,000. William J. Abraham, one of our directors, is a partner at Foley & Lardner.
Item 14. Principal Accountant Fees and Services
Effective September 24, 2004, the Audit Committee of our Board of Directors selected and engaged BDO Seidman, LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2004. BDO Seidman, LLP replaced PricewaterhouseCoopers LLP as our independent registered public accounting firm. PricewaterhouseCoopers LLP had been dismissed as our independent registered public accounting firm on August 20, 2004.
Audit Fees
Aggregate fees billed by BDO Seidman, LLP for professional services rendered for the audit of our annual consolidated financial statements included in the annual report on Form 10-K and the review of
64
interim consolidated financial statements included in the quarterly report on Form 10-Q for the quarter and nine months ended September 30, 2004 and the review and audit of the application of new accounting pronouncements and SEC releases were $340,000 for the year ended December 31, 2004.
Aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for the review of interim consolidated financial statements included in quarterly reports on Form 10-Q and the review of the application of new accounting pronouncements and SEC releases were $157,118 and $394,973 for the years ended December 31, 2004 and 2003, respectively.
Audit-Related Fees
Aggregate fees billed by BDO Seidman, LLP for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and that are not disclosed under "Audit Fees" above were $18,500 for the year ended December 31, 2004. These audit related services include primarily audit work in connection with acquisitions and consultations concerning Section 404 of Sarbanes-Oxley Act.
Aggregate fees billed by PricewaterhouseCoopers LLP for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and that are not disclosed under "Audit Fees" above were $58,359 and $56,120 for the years ended December 31, 2004 and 2003, respectively. These audit related services include primarily audits of the Company's employee benefit plans and audit work in connection with acquisitions.
Tax Fees
Aggregate fees billed by BDO Seidman, LLP for professional services rendered to Transpro for tax compliance, tax advice and tax planning were $2,426 for the year ended December 31, 2004. These tax related services include primarily tax compliance, tax planning and advice.
Aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered to Transpro for tax compliance, tax advice and tax planning were $19,448 and $26,320 for the years ended December 31, 2004 and 2003, respectively. These tax related services include primarily tax compliance, tax planning and advice, and assistance with tax appeals.
All Other Fees
Aggregate fees billed by BDO Seidman, LLP for all other products and services provided to Transpro were zero for the year ended December 31, 2004.
Aggregate fees billed by PricewaterhouseCoopers LLP for all other products and services provided to Transpro were $1,515 and $1,400 for the years ended December 31, 2004 and 2003, respectively. These fees were for accounting research software license fees.
Audit Committee Pre-Approval Policy
Pursuant to its charter, the Audit Committee is responsible for selection, approving compensation and overseeing the independence, qualifications and performance of the independent accountants. The Audit Committee has adopted a pre-approval policy pursuant to which certain permissible audit and non-audit services may be provided by the independent accountants. Pre-approval is generally provided for up to one year, is detailed as to the particular service or category of services and may be subject to a specific budget. The Audit Committee may also pre-approve particular services on a case-by-case basis. In assessing requests for services by the independent accountants, the Audit Committee considers whether such services are consistent with the auditor's independence; whether the independent accountants are likely to provide the most effective and efficient service based upon their familiarity with the company; and whether the service could enhance our ability to manage or control risk or improve audit quality.
Notwithstanding the pre-approval policy, all of the audit-related, tax and other services provided by BDO Seidman, LLP and PricewaterhouseCoopers LLP in fiscal year 2004 and 2003 and related fees were approved in advance by the Audit Committee.
65
PART IV
Item 15. Exhibits and Financial Statement Schedules
(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 (b) below.
(b) 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) |
| 2.4 | | Agreement and Plan of Merger, dated as of January 31, 2005, among Modine Manufacturing Company, Modine Aftermarket Holdings, Inc. and Transpro.(11) |
| 2.5 | | Contribution Agreement, dated as of January 31, 2005, among Modine Aftermarket Holdings, Inc., Modine Manufacturing Company, Modine, Inc. and Transpro.(11) |
| 2.6 | | OEM Acquisition Agreement, dated as of January 31, 2005, between Modine Manufacturing Company and Transpro.(11) |
| 2.7 | | Amendment to OEM Acquisition Agreement, dated as of March 1, 2005, between Modine Manufacturing Company and Transpro.(12) |
| 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) |
| 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) |
| 4.12 | | Tenth Amendment to Loan and Security Agreement with Congress Financial Corporation.(13) |
| 4.13 | | Eleventh Amendment to Loan and Security Agreement with Congress Financial Corporation.(12) |
|
66
| | | | | | |
| 4.14 | | Amendment No. 2 to Rights Agreement between the Company and American Stock Transfer & Trust Company.(15) |
| 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) |
| 10.11 | | Amendment No. 1 to Employment Agreement between the Company and Charles E. Johnson ..(14) |
| 21.1 | | Subsidiaries of the Company. |
| 23.1 | | Consent of BDO Seidman, LLP. |
| 23.2 | | 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. |
| |
| (3) | Incorporated by reference to the Company's Form 8-K filed May 2, 2000. |
| |
| (4) | Incorporated by reference to the Company's 2000 Form 10-K. |
| |
| (5) | Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 2001. |
| |
| (6) | Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 2001. |
| |
| (7) | Incorporated by reference to the Company's 2001 Form 10-K. |
| |
| (8) | Incorporated by reference to the Company's Form 8-K filed September 20, 2002. |
| |
| (9) | Incorporated by reference to the Company's Form 8-K filed November 22, 2002. |
| |
| (10) | Incorporated by reference to the Company's Form 8-K filed December 27, 2002. |
| |
| (11) | Incorporated by reference to the Company's Form 8-K filed February 1, 2005. |
| |
| (12) | Incorporated by reference to the Company's Form 8-K filed March 7, 2005. |
| |
| (13) | Incorporated by reference to the Company's Form 8-K filed November 19, 2004. |
| |
| (14) | Incorporated by reference to the Company's Form 8-K filed November 3, 2004. |
| |
| (15) | Incorporated by reference to the Company's Form 10-Q/A Amendment No, 2 for the quarter ended March 31, 2004. |
67
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 28, 2005
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 28, 2005 |
|
| William J. Abraham, Jr., Director |
|
| /s/ BARRY R. BANDUCCI | | | | March 28, 2005 |
|
| Barry R. Banducci, Director |
|
| /s/ PHILIP WM. COLBURN | | | | March 28, 2005 |
|
| Philip Wm. Colburn, Director |
|
| /s/ CHARLES E. JOHNSON | | | | March 28, 2005 |
|
Charles E. Johnson, President,
Chief Executive Officer and Director |
|
| /s/ PAUL R. LEDERER | | | | March 28, 2005 |
|
| Paul R. Lederer, Director |
|
| /s/ SHARON M. OSTER | | | | March 28, 2005 |
|
| Sharon M. Oster, Director |
|
| /s/ F. ALAN SMITH | | | | March 28, 2005 |
|
| F. Alan Smith, Director |
|
| /s/ RICHARD A. WISOT | | | | March 28, 2005 |
|
Richard A. Wisot
Vice President, Treasurer,
Secretary and Chief Financial Officer
Principal Financial and
Accounting Officer |
|
68
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