Assets acquired in the Modine Aftermarket merger have been recorded with a zero cost and accumulated depreciation due to the application of a portion of the excess of net assets acquired over the total consideration of the transaction.
The cost and accumulated depreciation of assets under capital lease obligations was $2.1 million and $0.4 million at December 31, 2005 and $0.2 million and $0.1 million at December 31, 2004, respectively.
On July 22, 2005, in connection with the merger of the Company with the aftermarket business of Modine, the Company amended its $80.0 million credit facility with Wachovia Capital Financial Corporation (New England), formerly known as Congress Financial Corporation (New England) effective July 21, 2005. The amended credit facility consists of a revolving credit line with maximum borrowings of $78.3 million and a $1.7 million term loan, each of which was amended to expire on July 21, 2009 (subject to renewal on an annual basis thereafter). Under the amended credit facility, the interest rate is 2% over a Eurodollar-based rate through April 21, 2006 and ranges from 1.75% to 2.25% over such rate thereafter. The amended credit facility also provides that the Company may pay dividends or repurchase capital stock of up to $3.0 million annually, as long as excess availability, as defined in the agreement, is at least $18.0 million for the 30 consecutive days both prior to and following the payment date. The amended credit facility also amends the borrowing base calculation such that (i) up to $55.0 million in respect of eligible inventory may be counted and (ii) availability reserves, as defined in the agreement, may be revised for dilution in respect of the Company’s accounts. The amended facility adds financial covenants for (i) minimum EBITDA (tested quarterly commencing September 30, 2005 and not required if excess availability exceeds $15.0 million), (ii) minimum excess availability ($5.0 million at all times through June 30, 2006 and $13.0 million immediately after giving effect to the merger), and (iii) capital expenditures (not to exceed $12.0 million in any calendar year, if financed under the credit facility).
On October 20, 2005, the Company amended its Loan and Security Agreement (the ‘‘Loan Agreement’’) with Wachovia Capital Finance Corporation (New England), pursuant to a Thirteenth
Amendment to Loan and Security Agreement. Under the amended Loan Agreement, the Unused Line Fee was reduced through June 30, 2006. The amended Loan Agreement changes financial covenants for (i) minimum EBITDA (tested quarterly commencing September 30, 2005 and not required if Excess Availability exceeds $15.0 million) such that minimum EBITDA for the September 30, 2005 and December 31, 2005 test dates was lowered and (ii) minimum Excess Availability ($5.0 million at all times through June 30, 2006) so as to give no effect to the limitations on Excess Availability imposed by the Maximum Credit under the amended Loan Agreement of $80.0 million or the Revolving Loan Ceiling. The amended Loan Agreement also included a financial covenant requiring that consolidated inventory, excluding the Company’s NRF and Mexpar subsidiaries, as of December 31, 2005 would not exceed $122.0 million. The Company was in compliance with these covenants at December 31, 2005.
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 Loan Agreement, which was originally entered into on January 4, 2001, and amended thereafter, 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.
Amounts borrowed under the Loan Agreement prior to the amendment noted above, 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 also contained covenants regarding working capital and net worth.
At December 31, 2005 and 2004, the interest rate on outstanding borrowings under the Loan Agreement was 6.29% and 4.83%, respectively. The weighted average interest rate during 2005 and 2004 was 5.85% and 4.29%, respectively. Available borrowings under the Revolving Credit facility at December 31, 2005 were $17.5 million.
The term loan requires monthly payments, totaling $0.3 million per year with a final payment in July, 2009.
Capitalized lease obligations relate primarily to computer equipment and racking at the Company’s distribution center in Southaven, Mississippi. The total future rental payments under the capital leases of $1.7 million include interest payments of $0.2 million.
Interest paid during 2005, 2004 and 2003 was $7.0 million, $3.9 million, and $2.9 million, respectively.
The Company’s NRF subsidiary in The Netherlands has an available credit facility of five million Euro. There were no borrowings under the arrangement at December 31, 2005.
The Company utilizes letters of credit in the amounts of $4.9 million at December 31, 2005 and 2004 to back certain insurance policies and certain trade purchases.
Minimum future debt repayments, excluding the Revolving Credit facility, will be $0.9 million in 2006, $0.8 million in 2007, $0.7 million in 2008 and $0.7 million in 2009.
Note 11 Stockholders’ Equity
Common Stock: At the Company’s annual shareholders’ meeting, held on July 22, 2005, shareholders approved an increase in the Company’s authorized common stock from 17.5 million shares to 47.5 million shares.
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
46
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 its 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. The Preferred Stock is non-transferable and is entitled to cumulative dividends of 5%. It is redeemable at the Company’s option, 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.
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 2005, 2004 and 2003, other comprehensive loss reflected minimum pension liability adjustments. As a result of the Modine Aftermarket merger, in 2005, other comprehensive loss also reflects accumulated foreign currency translation adjustments. The adjustments for the three years ended December 31, were as follows:
| | | | | | | | | | | | | | |
| | | Minimum
Pension
Liability | | Foreign
Currency
Translation | | Total |
| | | (in thousands) |
| Balance at December 31, 2002 | | $ | (4,492 | ) | | $ | — | | | $ | (4,492 | ) |
| Annual adjustment | | | (18 | ) | | | — | | | | (18 | ) |
| Balance at December 31, 2003 | | | (4,510 | ) | | | — | | | | (4,510 | ) |
| Annual adjustment | | | (1,899 | ) | | | — | | | | (1,899 | ) |
| Balance at December 31, 2004 | | | (6,409 | ) | | | — | | | | (6,409 | ) |
| Annual adjustment | | | 347 | | | | (620 | ) | | | (273 | ) |
| Balance at December 31, 2005 | | $ | (6,062 | ) | | $ | (620 | ) | | $ | (6,682 | ) |
|
Note 12 Retirement and Post-retirement Plans
Domestic 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.
47
The Company has recorded an additional minimum liability at the end of each year representing the excess of the accumulated benefit obligations over the fair value of plan assets and accrued pension liabilities. To the extent possible, an intangible asset, representing unrecognized prior service costs, 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.
Pension assets and liabilities associated with the Heavy Duty OEM business unit remained with the Company after the sale of this business unit in 2005.
Domestic 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 of domestic retirement and postretirement plans for the three years ended December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 |
| | | (in thousands) |
| Service cost | | $ | 807 | | | $ | 813 | | | $ | 801 | | | $ | 2 | | | $ | 5 | | | $ | 5 | |
| Interest cost | | | 1,842 | | | | 1,821 | | | | 1,824 | | | | 25 | | | | 31 | | | | 37 | |
| Expected return on plan assets | | | (2,065 | ) | | | (2,062 | ) | | | (2,095 | ) | | | — | | | | — | | | | — | |
| Curtailment (gain) loss | | | 181 | | | | — | | | | — | | | | (30 | ) | | | — | | | | — | |
| Amortization of net loss | | | 530 | | | | 281 | | | | 141 | | | | 2 | | | | 4 | | | | 4 | |
| Net periodic benefit cost | | | 1,295 | | | | 853 | | | | 671 | | | | (1 | ) | | | 40 | | | | 46 | |
| Allocated to discontinued operation | | | 66 | | | | 395 | | | | 331 | | | | — | | | | — | | | | — | |
| Allocated to continuing operations | | $ | 1,229 | | | $ | 458 | | | $ | 340 | | | $ | (1 | ) | | $ | 40 | | | $ | 46 | |
|
The curtailment charge incurred in 2005 relates to the closure of facilities in conjunction with the Company’s restructuring activities.
The following tables set forth the domestic plans’ combined funded status and amounts recognized in the Company’s consolidated balance sheets at the measurement date, December 31:
48
| | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| | | 2005 | | 2004 | | 2005 | | 2004 |
| | | (in thousands) |
| Change in benefit obligation: | | | | | | | | | | | | | | | | |
| Benefit obligation at January 1 | | $ | 32,319 | | | $ | 30,212 | | | $ | 515 | | | $ | 526 | |
| Service cost | | | 807 | | | | 813 | | | | 2 | | | | 5 | |
| Interest cost | | | 1,842 | | | | 1,821 | | | | 25 | | | | 31 | |
| Curtailment and termination gain | | | (252 | ) | | | — | | | | (78 | ) | | | — | |
| Actuarial loss (gain) | | | 502 | | | | 984 | | | | (61 | ) | | | 18 | |
| Actual gross benefits paid | | | (1,952 | ) | | | (1,511 | ) | | | (18 | ) | | | (65 | ) |
| Benefit obligation at December 31 | | $ | 33,266 | | | $ | 32,319 | | | $ | 385 | | | $ | 515 | |
| Change in plan assets: | | | | | | | | | | | | | | | | |
| Fair value of plan assets at January 1 | | $ | 25,460 | | | $ | 21,603 | | | $ | — | | | $ | — | |
| Actual return on plan assets | | | 1,991 | | | | 2,612 | | | | — | | | | — | |
| Company contributions | | | 664 | | | | 2,756 | | | | 18 | | | | 65 | |
| Actual gross benefits paid | | | (1,952 | ) | | | (1,511 | ) | | | (18 | ) | | | (65 | ) |
| Fair value of plan assets at December 31 | | $ | 26,163 | | | $ | 25,460 | | | $ | — | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| | | 2005 | | 2004 | | 2005 | | 2004 |
| | | (in thousands) |
| Reconciliation of funded status: | | | | | | | | | | | | | | | | |
| Funded status at December 31 | | $ | (7,103 | ) | | $ | (6,859 | ) | | $ | (385 | ) | | $ | (515 | ) |
| Unrecognized transition obligation | | | 4 | | | | 11 | | | | — | | | | — | |
| Unrecognized prior service cost | | | 154 | | | | 206 | | | | — | | | | 50 | |
| Unrecognized net loss (gain) | | | 6,882 | | | | 7,175 | | | | (18 | ) | | | 43 | |
| (Accrued) prepaid benefit cost | | $ | (63 | ) | | $ | 533 | | | $ | (403 | ) | | $ | (422 | ) |
| Amounts recognized in statements of financial position: | | | | | | | | | | | | | | | | |
| Long-term pension asset | | $ | 832 | | | $ | 791 | | | $ | — | | | $ | — | |
| Accrued benefit liability | | | (6,957 | ) | | | (6,722 | ) | | | (403 | ) | | | (422 | ) |
| Intangible asset | | | — | | | | 55 | | | | — | | | | — | |
| Accumulated other comprehensive loss | | | 6,062 | | | | 6,409 | | | | — | | | | — | |
| Net amount recognized at December 31 | | $ | (63 | ) | | $ | 533 | | | $ | (403 | ) | | $ | (422 | ) |
|
The assumptions used in the determination of the domestic retirement and postretirement benefit obligation at December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 |
| Discount rate | | | 5.88 | % | | | 6.00 | % | | | 6.25 | % | | | 6.00 | % | | | 6.00 | % | | | 6.25 | % |
| Salary progression | | | 4.25 | % | | | 4.00 | % | | | 4.00 | % | | | — | | | | — | | | | — | |
|
The assumptions used in the determination of the net periodic benefit cost for the domestic retirement and postretirement plans for the years ended December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Postretirement Plans |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 |
| Discount rate | | | 6.00 | % | | | 6.25 | % | | | 6.75 | % | | | 6.00 | % | | | 6.25 | % | | | 6.75 | % |
| Return on assets | | | 9.00 | % | | | 9.00 | % | | | 9.00 | % | | | — | | | | — | | | | — | |
| Salary progression | | | 4.25 | % | | | 4.25 | % | | | 4.25 | % | | | — | | | | — | | | | — | |
|
49
The return on assets reflects the long-term rate of return on plan assets expected to be realized over a ten-year or longer period. As such, it will normally not be adjusted for short-term trends in the stock or bond markets. In addition, the rate of return will reflect the investment allocation currently used to manage the pension portfolio. The Company’s pension assumptions currently include a 9% long-term annual rate of return, which is based upon the current portfolio allocation, long-term rates of return for similar investment vehicles and economic and other indicators of future performance.
The assumptions used to develop domestic postretirement plan healthcare costs at December 31 are as follows:
| | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| Initial trend rate | | | 12.00 | % | | | 9.00 | % | | | 10.0 | % |
| Ultimate trend rate | | | 9.00 | % | | | 5.00 | % | | | 5.00 | % |
| Years to ultimate trend | | | 3 | | | | 7 | | | | 8 | |
|
Assumed healthcare cost trend rates can have an effect on the amounts reported as expense for the healthcare plan. A one-percentage point change in the assumed healthcare cost trend rates would have a $0.1 thousand effect on total service and interest cost components and an immaterial effect on the post retirement benefit obligation.
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 $31.2 million, $31.0 million and $24.1 million as of December 31, 2005 and $30.4 million, $30.3 million and $23.5 million as of December 31, 2004, respectively.
Benefits expected to be paid to participants under the Company’s defined benefit pension plans are $2.2 million in 2006, $2.2 million in 2007, $2.4 million in 2008, $2.5 million in 2009, $2.6 million in 2010 and $13.9 million between 2011 and 2015.
Under the Company’s postretirement plans, expected benefit payments are $64 thousand in 2006, $66 thousand in 2007, $48 thousand in 2008, $28 thousand in 2009, $25 thousand in 2010 and $108 thousand between 2011 and 2015.
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 | | 2005 | | 2004 |
| Equity securities | | | 70 | % | | | 71 | % | | | 72 | % |
| Debt securities | | | 30 | % | | | 29 | % | | | 28 | % |
| 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 benefit 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 2006, the Company currently estimates that pension contributions will be $3.3 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 $0.5 million in 2005 and $0.4 million in 2004 and 2003.
Foreign Plans: As a result of the Modine Aftermarket merger, the Company has defined-benefit plans and/or termination indemnity plans covering substantially all of the eligible foreign employees.
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Benefits under these plans are based on years of service and final average compensation levels. Funding is limited to statutory requirements. The Company uses December 31 as the measurement date for the plans in Mexico and November 30 for the plans in Europe.
Components of net foreign plan periodic benefit cost for the period July 22, 2005 (the merger date) through December 31, 2005 is as follows:
| | | | | | |
| | | (in thousands) |
| Service cost | | $ | 95 | |
| Interest cost | | | 120 | |
| Expected return on plan assets | | | (48 | ) |
| Amortization of net loss (gain) | | | — | |
| Net periodic benefit cost | | $ | 167 | |
|
The following tables set forth the foreign plans combined funded status and amounts recognized in the Company’s consolidated balance sheets at December 31, 2005:
| | | | | | |
| | | (in thousands) |
| Change in benefit obligation: | | |
| Benefit obligation at July 22 | | $3,793 |
| Service cost | | 95 |
| Interest cost | | 120 |
| Actuarial loss | | (10) |
| Actual gross benefits paid | | (23) |
| Benefit obligation at December 31 | | $3,975 |
| Change in plan assets: | | |
| Fair value of plan assets at July 22 | | $1,809 |
| Actual return on plan assets | | 21 |
| Company contributions | | 349 |
| Actual gross benefits paid | | (23) |
| Fair value of plan assets at December 31 | | $2,156 |
| Reconciliation of funded status: | | |
| Funded status at December 31 | | $(1,819) |
| Unrecognized net loss | | 17 |
| (Accrued) benefit cost | | $(1,802) |
| Amounts recognized in statements of financial position: | | |
| Long-term pension asset | | $— |
| Accrued benefit liability | | (1,802) |
| Intangible asset | | — |
| Accumulated other comprehensive loss | | — |
| Net amount recognized at December 31 | | $(1,802) |
|
The assumptions used in the determination of the foreign retirement benefit obligation at December 31, 2005 are a discount rate of 4.0% and salary progression of 2.5% in Europe and a discount rate of 10.25% and salary progression of 6.25% in Mexico.
The assumptions used in the determination of the net periodic benefit cost for the foreign retirement plans for the year ended December 31, 2005 were a discount rate of 4.0%, an expected rate of return of 4% and salary progression of 2.5% in Europe and a discount rate of 10.25%, an expected rate of return of 11.25% and salary progression of 6.25% in Mexico.
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The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the foreign pension plans with accumulated benefit obligations in excess of plan assets were $4.0 million, $3.2 million and $2.1 million as of December 31, 2005.
Company contributions to foreign plans in 2006 are estimated to be $0.4 million.
Benefits expected to be paid to participants under the Company’s foreign defined benefit pension plans are $0.4 million in 2006, $0.1 million in 2007, $0.1 million in 2008, $1.3 million in 2009, $0.2 million in 2010 and $1.2 million between 2011 and 2015.
Assets of the Company’s pension plans and target allocations by category of investment are as follows:
| | | | | | | | | | |
| Asset Category | | Target Allocation | | As of December 31, 2005
Actual Allocation |
| Equity securities | | | 0 | % | | | 0 | % |
| Debt securities | | | 100 | % | | | 100 | % |
| Total | | | 100 | % | | | 100 | % |
|
Note 13 Stock Compensation Plans
Stock Options: At December 31, 2005 the Company had three stock option plans (Equity Incentive Plan, 1995 Stock Plan, Non-Employee Directors Stock Option Plan) under which key employees and directors have been granted options to purchase Proliance common stock. At the Company’s annual shareholders’ meeting, held on July 22, 2005, shareholders approved the Company’s new Equity Incentive Plan (the ‘‘Incentive Plan’’). The Incentive Plan became operative immediately after the merger. The Incentive Plan permits awards of incentive stock options, nonqualified stock options, restricted stock, stock units, performance shares, performance units, deferred shares and units, stock appreciation rights and other equity-linked awards, payable in cash or in shares of the Company stock. Under the Incentive Plan equity-based awards relating to up to 1.4 million shares of the Company’s common stock may be granted, in addition to 56,400 shares available for options replacing options under the Non-Employee Directors Stock Option Plan (the ‘‘Directors Plan’’). Awards under the Incentive Plan can be made to directors, officers or other key employees. Under the Plan, up to 200,000 shares, in addition to shares available for options replacing options issued under the Directors Plan, may be utilized for grants to non-employee directors. No new awards may be granted under the Company’s previously adopted equity-based plans, which expired in September, 2005. Under the 1995 Stock Plan (the ‘‘Stock Plan’’) options were granted at fair market value on the date of grant and were generally exercisable cumulatively at the rate of 25% one year from the date of grant, 50% two years from the date grant, 75% three years from the date of grant, and 100% four years from the date of grant. As a result of the Modine merger, all unvested outstanding options granted to key employees as of July 22, 2005 became fully vested. Options granted under the Stock Plan generally expire ten years from the date of the grant. 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 was not to exceed 600,000. At December 31, 2005 and 2004, respectively, 534,359 and 544,359 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 was not to exceed 100,000 shares. At December 31, 2005 and 2004, respectively, 36,800 and 99,200 common shares were reserved for stock options granted under the Directors Plan.
In connection with the consummation of the merger, outstanding options under the Directors Plan that had an exercise price greater than or equal to the closing price of Company common stock on the day before the merger were, at the option of each director, replaced with options issued under the
52
Incentive Plan having the same terms as the prior options, except that (1) the term of each option that would otherwise expire prior to the third anniversary of the merger was extended to the third anniversary of the merger closing and (2) the period during which such options may be exercised following the cessation of a director’s service was increased from three months to the earlier of the third anniversary of such cessation of service and the end of the remaining term of the options. Outstanding options under the Directors Plan that had an exercise price less than the closing price of Company common stock on the day before the merger remain outstanding. On July 22, 2005, non-employee directors exchanged options to purchase an aggregate of 56,400 Company shares with exercise prices ranging from $7.75 to $11.75 per share.
Information regarding the Stock Plan, the Directors Plan and Incentive Plan is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | Option Price Range |
| Stock Plan | | Number of
Options | | Low | | Weighted
Average | | High |
| 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 | |
| Exercised | | | (2,500 | ) | | | 4.51 | | | | 4.51 | | | | 4.51 | |
| Cancelled | | | (7,500 | ) | | | 4.51 | | | | 4.51 | | | | 4.51 | |
| Outstanding at December 31, 2005 | | | 534,359 | | | | 2.50 | | | | 3.99 | | | | 5.88 | |
| Exercisable at December 31, 2005 | | | 534,359 | | | | 2.50 | | | | 3.99 | | | | 5.88 | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | Option Price Range |
| Directors Plan | | Number of
Options | | Low | | Weighted
Average | | High |
| 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 | |
| Exercised | | | (1,500 | ) | | | 2.70 | | | | 2.70 | | | | 2.70 | |
| Cancelled | | | (60,900 | ) | | | 4.72 | | | | 9.37 | | | | 11.75 | |
| Outstanding at December 31, 2005 | | | 36,800 | | | | 2.70 | | | | 4.61 | | | | 5.50 | |
| Exercisable at December 31, 2005 | | | 34,500 | | | | 2.70 | | | | 4.60 | | | | 5.50 | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | Option Price Range |
| Equity Incentive Plan | | Number of
Options | | Low | | Weighted
Average | | High |
| Outstanding at December 31, 2004 | | | 0 | | | | — | | | | — | | | | — | |
| Granted | | | 56,400 | | | | 7.75 | | | | 9.70 | | | | 11.75 | |
| Outstanding at December 31, 2005 | | | 56,400 | | | | 7.75 | | | | 9.70 | | | | 11.75 | |
| Exercisable at December 31, 2005 | | | 56,400 | | | | 7.75 | | | | 9.70 | | | | 11.75 | |
|
Total options exercisable at December 31, 2004 and 2003 were 370,024 and 243,679, respectively.
53
Additional information relating to outstanding options under the plans as of December 31, 2005 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 | | | 229,059 | | | | 5.4 | | | $ | 2.98 | | | | 229,059 | | | $ | 2.98 | |
| 3.53 - 4.70 | | | 95,000 | | | | 8.2 | | | | 4.51 | | | | 95,000 | | | | 4.51 | |
| 4.70 - 5.88 | | | 247,100 | | | | 6.1 | | | | 4.80 | | | | 244,800 | | | | 4.81 | |
| 7.05 - 8.23 | | | 10,700 | | | | 2.6 | | | | 7.75 | | | | 10,700 | | | | 7.75 | |
| 8.23 - 9.40 | | | 10,700 | | | | 2.6 | | | | 8.38 | | | | 10,700 | | | | 8.38 | |
| 9.40 - 10.58 | | | 14,000 | | | | 2.6 | | | | 10.00 | | | | 14,000 | | | | 10.00 | |
| 10.58 - 11.75 | | | 21,000 | | | | 2.6 | | | | 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:
| | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| Dividend yield | | 0% | | 0% | | | — | |
| Expected volatility | | 52.94% | | 54.8% | | | — | |
| Risk-free interest rate | | 4.5% | | 4.7% | | | — | |
| Expected life | | 3 Years | | 6 Years | | | — | |
|
The fair value per share of options granted in 2005 and 2004 was $1.67 and $2.89, respectively.
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, 2005, 2004 and 2003, there were no outstanding restricted stock awards.
Note 14 Income Taxes
The (benefit from) provision for income taxes for the three years ended December 31 is as follows:
| | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| | | (in thousands) |
| Current: | | | | | | | | | | | | |
| Federal | | $ | — | | | $ | 43 | | | $ | (1,442 | ) |
| Foreign | | | 338 | | | | 236 | | | | 276 | |
| State and local | | | 390 | | | | 199 | | | | 3 | |
| Total current | | | 728 | | | | 478 | | | | (1,163 | ) |
| Deferred: | | | | | | | | | | | | |
| Federal | | | (6,851 | ) | | | 1,264 | | | | (753 | ) |
| Foreign | | | 253 | | | | — | | | | — | |
| State and local | | | (1,325 | ) | | | (16 | ) | | | (326 | ) |
| Valuation allowance | | | 9,046 | | | | (2,118 | ) | | | 1,079 | |
| Total deferred | | | 1,123 | | | | (870 | ) | | | — | |
| (Benefit from) income taxes | | | 1,851 | | | | (392 | ) | | | (1,163 | ) |
| Provision for income taxes allocated to discontinued operation | | | 506 | | | | 200 | | | | 478 | |
| Provision for income taxes allocated to gain on sale of discounted operation | | | 2,331 | | | | — | | | | — | |
| (Benefit from) income taxes allocated to continuing operations | | $ | (986 | ) | | $ | (592 | ) | | $ | (1,641 | ) |
|
54
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 2005, 2004 and 2003 is as follows:
| | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| | | (in thousands) |
| Provision (benefit) computed at the Federal statutory rate | | $ | (2,748 | ) | | $ | 1,627 | | | $ | (1,938 | ) |
| State and local income taxes, net of Federal income tax benefit | | | (935 | ) | | | 183 | | | | (323 | ) |
| Foreign tax rate differential | | | 103 | | | | 63 | | | | 112 | |
| Permanent difference—negative goodwill | | | (4,347 | ) | | | — | | | | — | |
| Permanent differences—other | | | 69 | | | | 63 | | | | 55 | |
| Reduction in tax reserves based on tax review | | | — | | | | — | | | | (108 | ) |
| Valuation allowance included in provision | | | 9,046 | | | | (2,118 | ) | | | 1,079 | |
| Other | | | 663 | | | | (210 | ) | | | (40 | ) |
| (Benefit from) income taxes | | | 1,851 | | | | (392 | ) | | | (1,163 | ) |
| Provision for income taxes allocated to discontinued operation | | | 506 | | | | 200 | | | | 478 | |
| Provision for income taxes allocated to gain on sale of discontinued operation | | | 2,331 | | | | — | | | | — | |
| (Benefit from) income taxes allocated to continuing operations | | $ | (986 | ) | | $ | (592 | ) | | $ | (1,641 | ) |
|
Significant components of deferred income tax assets and liabilities as of December 31 are as follows:
| | | | | | | | | | |
| | | 2005 | | 2004 |
| | | (in thousands) |
| Deferred tax assets: | | | | | | | | |
| Pensions | | $ | 2,578 | | | | 1,935 | |
| Postretirement benefits | | | 162 | | | | 172 | |
| Inventories | | | 2,134 | | | | — | |
| Allowance for bad debts | | | 2,013 | | | | 1,374 | |
| Self insurance reserves | | | 943 | | | | 1,021 | |
| Warranty reserves | | | 1,393 | | | | 281 | |
| Accrued vacation | | | 743 | | | | 713 | |
| Federal and state net operating loss | | | 13,755 | | | | 4,914 | |
| Deferred charges | | | 364 | | | | 478 | |
| Depreciation | | | 2,559 | | | | — | |
| Other | | | 2,714 | | | | 386 | |
| Valuation reserve | | | (24,285 | ) | | | (5,843 | ) |
| Total deferred tax assets | | | 5,073 | | | | 5,431 | |
| Deferred tax liabilities: | | | | | | | | |
| Depreciation | | | — | | | | (3,649 | ) |
| Inventories | | | — | | | | (23 | ) |
| Other | | | (1,473 | ) | | | (889 | ) |
| Total deferred tax liabilities | | | (1,473 | ) | | | (4,561 | ) |
| Net deferred tax assets | | $ | 3,600 | | | $ | 870 | |
|
The net deferred tax asset at December 31, 2005 relates to the foreign operations and management believes that it is more likely than not that the deferred tax asset will be realized. The deferred tax assets associated with foreign operations ($4.5 million) are included in other assets in the accompanying balance sheet.
The Company’s federal net operating loss carry forwards at December 31, 2005 of approximately $30.6 million expire through 2025. The net operating losses prior to the merger are subject to limitation under Internal Revenue Code Section 382.
As a result of the Modine Aftermarket merger in July, 2005, the tax valuation reserve was increased by $9.4 million. The valuation reserve related to the minimum pension liability at December 31, 2005
55
was $2.3 million. During the fourth quarter of 2004, the Company reversed $0.9 million of its tax valuation reserve in anticipation of the gain 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.
The earnings of foreign subsidiaries are considered permanently reinvested in the foreign operations and therefore no provision has been made for U.S. taxes related to these subsidiaries.
(Loss) income from continuing operations before taxes from United States and foreign sources for the three years ended December 31 is as follows:
| | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| | | (in thousands) |
| United States | | $ | (30,150 | ) | | $ | (1,451 | ) | | $ | (7,430 | ) |
| Foreign | | | 1,433 | | | | 510 | | | | 482 | |
| Loss before taxes | | $ | (28,717 | ) | | $ | (941 | ) | | $ | (6,948 | ) |
|
Net income taxes paid (refunded) during 2005, 2004 and 2003 were $1.2 million, $0.4 million, and $(1.9) million, respectively.
56
Note 15 (Loss) Income Per Share
The following table sets forth the computation of basic and diluted (loss) income per common share for the years ended December 31:
| | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| | | (in thousands, except per share amounts) |
| Numerator: | | | | | | | | | | | | |
| Loss from continuing operations | | $ | (27,731 | ) | | $ | (349 | ) | | $ | (5,307 | ) |
| Less: preferred stock dividends | | | (64 | ) | | | (64 | ) | | | (64 | ) |
Loss from continuing operations attributable to
common stockholders | | | (27,795 | ) | | | (413 | ) | | | (5,371 | ) |
| Income from discontinued operation, net of tax | | | 848 | | | | 5,527 | | | | 771 | |
| Gain on sale of discontinued operation, net of tax | | | 3,899 | | | | — | | | | — | |
| Extraordinary income – negative goodwill | | | 13,053 | | | | — | | | | — | |
Net (loss) income (attributable) available to common
stockholders – basic | | | (9,995 | ) | | | 5,114 | | | | (4,600 | ) |
| Add back: preferred stock dividend | | | — | | | | — | | | | — | |
Net (loss) income (attributable) available to common
stockholders – diluted | | $ | (9,995 | ) | | $ | 5,114 | | | $ | (4,600 | ) |
| Denominator: | | | | | | | | | | | | |
| Weighted average common shares – basic | | | 10,714 | | | | 7,106 | | | | 7,106 | |
| Dilutive effect of stock options | | | — | | | | — | | | | — | |
| Dilutive effect of Series B Preferred Stock | | | — | | | | — | | | | — | |
| Weighted average common shares – diluted | | | 10,714 | | | | 7,106 | | | | 7,106 | |
| Basic (loss) income per common share: | | | | | | | | | | | | |
| From continuing operations | | $ | (2.59 | ) | | $ | (0.06 | ) | | $ | (0.76 | ) |
| From discontinued operation | | | 0.08 | | | | 0.78 | | | | 0.11 | |
| From gain on sale of discontinued operation | | | 0.36 | | | | — | | | | — | |
| From extraordinary income – negative goodwill | | | 1.22 | | | | — | | | | — | |
| Net (loss) income per common share | | $ | (0.93 | ) | | $ | 0.72 | | | $ | (0.65 | ) |
| Diluted (loss) income per common share: | | | | | | | | | | | | |
| From continuing operations | | $ | (2.59 | ) | | $ | (0.06 | ) | | $ | (0.76 | ) |
| From discontinued operation | | | 0.08 | | | | 0.78 | | | | 0.11 | |
| From gain on sale of discontinued operation | | | 0.36 | | | | — | | | | — | |
| From extraordinary income – negative goodwill | | | 1.22 | | | | — | | | | — | |
| Net (loss) income per common share | | $ | (0.93 | ) | | $ | 0.72 | | | $ | (0.65 | ) |
|
57
The weighted average basic common shares outstanding was used in the calculation of the diluted loss per common share for the years ended December 31, 2005, 2004 and 2003 as the use of weighted average diluted common shares outstanding would have an anti-dilutive effect on the loss from continuing operations per share. None of the options outstanding at December 31, 2005, 2004, or 2003 or Series B preferred stock were included in the loss per share calculation.
Note 16 Commitments and Contingencies
Leases: The Company’s leases consist primarily of manufacturing and distribution facilities and equipment, which expire between 2006 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 $8.2 million in 2005, $4.8 million in 2004 and $4.8 million in 2003.
Future minimum annual rental payments under non-cancelable operating leases as of December 31, 2005 were as follows: $8.3 million in 2006, $5.8 million in 2007, $4.5 million in 2008, $3.4 million in 2009, $1.6 million in 2010 and $2.3 million thereafter.
Insurance: The Company is self-insured for healthcare, workers compensation, general liability and product liability claims up to predetermined amounts above which third party insurance applies. The Company has reserved approximately $2.7 million and $2.8 million to pay such claims as of December 31, 2005 and 2004, respectively.
Product Warranties: As a result of programs offered by Modine Aftermarket, the Company now provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. The most significant warranty expense estimates are forecasts based on the best information available using statistical analysis of both historical and current claim data.
Changes in the warranty liability are as follows:
| | | | | | |
| | | (in thousands) |
| Merger acquisition balance sheet | | $ | 2,866 | |
| Accruals for warranties issued in current year | | | 1,119 | |
| Settlements made | | | (1,100 | ) |
| Balance at December 31, 2005 | | $ | 2,885 | |
|
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 2006. 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.
Environmental Matters: The Company is subject to Federal, foreign, state and local laws designed to protect the environment and believes that, as a general matter, its policies, practices and procedures
58
are properly designed to reasonably prevent risk of environmental damage and financial liability to the Company. On January 27, 2003, the Company announced that it had signed a Consent Agreement with the State of Connecticut Department of Environmental Protection. Under the agreement, the Company will voluntarily initiate the investigation and cleanup of environmental contamination on property occupied by a wholly-owned subsidiary of the Company over 20 years ago. The Company believes there will not be a material adverse impact to its financial results due to the investigation and cleanup activities. The 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.
In conjunction with the merger, Modine retained the environmental liability for environmental remediation of soil and groundwater contamination at the Mill facility in The Netherlands, which existed at the time of the merger. As part of the agreement to sell the Company’s Heavy Duty OEM business to Modine in March 2005, the Company retained responsibility for any environmental remediation which would result from contamination existing on the date of the sale at the facility in Jackson, Mississippi, which was included in the transaction.
Note 17 Supplemental Cash Flow Information
Supplemental cash flow information is as follows:
| | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2005 | | 2004 | | 2003 |
| | | (in thousands) |
| Non-cash investing and financing activity: | | | | | | | | | | | | |
| Entered into capital lease obligation | | $ | 1,713 | | | $ | 288 | | | $ | — | |
| Common stock issued for net assets of Modine Aftermarket business | | $ | 50,667 | | | $ | — | | | $ | — | |
| Accrued expenses for unpaid merger transaction costs | | $ | 912 | | | $ | 370 | | | $ | — | |
| Sale of inventory on fixed assets to reduce accounts payable | | $ | — | | | $ | 1,554 | | | $ | — | |
| Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
| Cash paid for interest | | $ | 6,968 | | | $ | 3,898 | | | $ | 2,853 | |
| Cash paid for income taxes | | $ | 1,303 | | | $ | 452 | | | $ | 331 | |
|
Note 18 Business Segments
Subsequent to the merger with Modine Aftermarket and the sale of the Heavy Duty OEM business, the Company has been reorganized into two reporting segments, based upon the geographic area served – Domestic and International. The Domestic marketplace supplies heat exchange and air conditioning products to the automotive and light truck aftermarket and heat exchange products to the heavy duty aftermarket in the United States and Canada. The International segment includes heat exchange and air conditioning products for the automotive and light truck aftermarket and heat exchange products for the heavy duty aftermarket in Mexico, Europe and Central America. Each product group within the Domestic segment constitutes an operating segment and have been aggregated for reporting business segment information.
The table below sets forth information about the reported segments. Previous years’ data has been restated based upon the new segments.
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 plus a normal manufacturing profit margin.
59
The tables below set forth information about continuing operations reported segments for the three years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated Revenues | | Operating Income (Loss) |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 |
| | | (in thousands) | | (in thousands) |
| Domestic | | $ | 265,241 | | | $ | 218,433 | | | $ | 198,862 | | | $ | (12,265 | ) | | $ | 11,716 | | | $ | 1,359 | |
| International | | | 31,597 | | | | — | | | | — | | | | 1,370 | | | | — | | | | — | |
| Inter-segment revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
| Domestic | | | 646 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| International | | | 6,741 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Elimination of inter-segment revenues | | | (7,387 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Corporate expenses | | | — | | | | — | | | | — | | | | (9,864 | ) | | | (7,845 | ) | | | (4,568 | ) |
| Consolidated continuing operations total | | $ | 296,838 | | | $ | 218,433 | | | $ | 198,862 | | | $ | (20,759 | ) | | $ | 3,871 | | | $ | (3,209 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total Assets | | Capital Expenditures | | Depreciation and
Amortization Expense |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 |
| | | (in thousands) | | (in thousands) | | (in thousands) |
| Domestic | | $ | 162,216 | | | $ | 126,518 | | | $ | 134,762 | | | $ | 7,852 | | | $ | 3,188 | | | $ | 4,476 | | | $ | 4,458 | | | $ | 4,686 | | | $ | 4,530 | |
| International | | | 52,021 | | | | — | | | | — | | | | 1,040 | | | | — | | | | — | | | | 47 | | | | — | | | | — | |
| Corporate | | | 3,102 | | | | 5,624 | | | | 8,737 | | | | — | | | | — | | | | — | | | | 42 | | | | 21 | | | | 96 | |
| Consolidated continuing operations totals | | $ | 217,539 | | | $ | 132,142 | | | $ | 143,499 | | | $ | 8,892 | | | $ | 3,188 | | | $ | 4,476 | | | $ | 4,547 | | | $ | 4,707 | | | $ | 4,626 | |
|
Restructuring and other special charges included in operating income (loss) for the three years ended December 31 are as follows:
| | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| | | (in thousands) |
| Domestic | | $ | 4,024 | | | $ | — | | | $ | 1,490 | |
| International | | | 256 | | | | — | | | | — | |
| Total restructuring and other special charges | | $ | 4,280 | | | $ | — | | | $ | 1,490 | |
|
In 2005, 2004 and 2003 sales to AutoZone accounted for approximately 17%, 25% and 23% of net sales, respectively. In addition, Advance Auto Parts accounted for approximately 13%, 17% and 14% of net sales for 2005, 2004 and 2003 respectively. These sales were in the Domestic segment. No other customer individually represented more than 10% of net trade sales from continuing operations in any of the years reported. The loss of one of the major Domestic customers, indicated above, could have a material adverse effect on the Company’s results of operations.
Trade sales by the Company’s product lines for the three years ended December 31 are as follows:
| | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| Heat exchange products | | $ | 255,202 | | | $ | 197,941 | | | $ | 178,917 | |
| Temperature control products | | | 41,636 | | | | 20,492 | | | | 19,945 | |
| Trade sales of continuing operations | | $ | 296,838 | | | $ | 218,433 | | | $ | 198,862 | |
|
The principal raw materials used by the Company in its Domestic and International 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 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.
60
Note 19 Quarterly Financial Data (Unaudited)
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2005 |
| | | 1st Qtr | | 2nd Qtr | | 3rd Qtr | | 4th Qtr |
| | | (in thousands, except per share amounts) |
| Net sales | | $ | 48,308 | | | $ | 58,962 | | | $ | 101,953 | | | $ | 87,615 | |
| Gross margin | | | 8,967 | | | | 11,425 | | | | 15,060 | | | | 13,956 | |
| (Loss) income from continuing operations | | | (2,272 | ) | | | (2,091 | ) | | | (9,869 | ) | | | (13,499 | ) |
| (Loss) income from discontinued operation | | | 848 | | | | — | | | | — | | | | — | |
| Gain on sale of discontinued operation | | | 3,899 | | | | — | | | | — | | | | — | |
| Extraordinary item – negative goodwill | | | — | | | | — | | | | 13,207 | | | | (154 | ) |
| Net (loss) income | | $ | 2,475 | | | $ | (2,091 | ) | | $ | 3,338 | | | $ | (13,653 | ) |
| Basic (loss) income per common share: | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (0.32 | ) | | $ | (0.30 | ) | | $ | (0.75 | ) | | $ | (0.89 | ) |
| Discontinued operation | | | 0.12 | | | | — | | | | — | | | | — | |
| Gain on sale of discontinued operation | | | 0.55 | | | | — | | | | — | | | | — | |
| Extraordinary item – negative goodwill | | | — | | | | — | | | | 1.00 | | | | (0.01 | ) |
| Net (loss) income | | $ | 0.35 | | | $ | (0.30 | ) | | $ | 0.25 | | | $ | (0.90 | ) |
| Diluted (loss) income per common share: | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (0.32 | ) | | $ | (0.30 | ) | | $ | (0.75 | ) | | $ | (0.89 | ) |
| Discontinued operation | | | 0.12 | | | | — | | | | — | | | | — | |
| Gain on sale of discontinued operation | | | 0.55 | | | | — | | | | — | | | | — | |
| Extraordinary item – negative goodwill | | | — | | | | — | | | | 1.00 | | | | (0.01 | ) |
| Net (loss) income | | $ | 0.35 | | | $ | (0.30 | ) | | $ | 0.25 | | | $ | (0.90 | ) |
|
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2004 |
| | | 1st Qtr | | 2nd Qtr | | 3rd Qtr | | 4th Qtr |
| | | (in thousands, except per share amounts) |
| Net sales | | $ | 49,436 | | | $ | 60,400 | | | $ | 58,004 | | | $ | 50,593 | |
| Gross margin | | | 8,817 | | | | 10,940 | | | | 13,006 | | | | 11,095 | |
| (Loss) income from continuing operations | | | (1,384 | ) | | | (161 | ) | | | 1,388 | | | | (192 | ) |
| Income from discontinued operation | | | 741 | | | | 964 | | | | 1,270 | | | | 2,552 | |
| Net (loss) income | | $ | (643 | ) | | $ | 803 | | | $ | 2,658 | | | $ | 2,360 | |
| Basic (loss) income per common share: | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (0.19 | ) | | $ | (0.03 | ) | | $ | 0.19 | | | $ | (0.03 | ) |
| Discontinued operation | | | 0.10 | | | | 0.14 | | | | 0.18 | | | | 0.36 | |
| Net (loss) income | | $ | (0.09 | ) | | $ | 0.11 | | | $ | 0.37 | | | $ | 0.33 | |
| Diluted (loss) income per common share: | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (0.19 | ) | | $ | (0.03 | ) | | $ | 0.19 | | | $ | (0.03 | ) |
| Discontinued operation | | | 0.10 | | | | 0.14 | | | | 0.17 | | | | 0.36 | |
| Net (loss) income | | $ | (0.09 | ) | | $ | 0.11 | | | $ | 0.36 | | | $ | 0.33 | |
|
Restructuring expenses for the quarters ended December 31, 2005 were $0.3 million – 1st quarter; $1.1 million – 2nd quarter; $2.0 million – 3rd quarter; and $0.9 million – 4th quarter. There were no restructuring expenses in 2004.
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 4.
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SCHEDULE II
Proliance International, Inc.
Valuation and Qualifying Accounts
| | | | | | | | | | | | | | | | | | | | | | |
| | | Balance at
Beginning of
Period(a) | | Charged to
Costs and
Expenses(a) | | Write-Offs(a) | | Other(a) | | Balance at
End of
Period(a) |
| | | (in thousands) |
| Year Ended December 31, 2005 | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 2,746 | | | $ | 2,433 | (e) | | $ | (1,037 | ) | | $ | 1,249 | (b) | | $ | 5,391 | |
| Allowance for excess/slow moving inventory | | | 2,485 | | | | 4,725 | | | | (1,831 | ) | | | 6,196 | (b) | | | 11,575 | |
| Tax valuation reserve | | | 5,843 | | | | 9,046 | | | | — | | | | 9,396 | (b) | | | 24,285 | |
| Year Ended December 31, 2004 | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 2,353 | | | $ | 509 | | | $ | (116 | ) | | $ | — | | | $ | 2,746 | |
| Allowance for excess/slow moving inventory | | | 1,681 | | | | 2,278 | | | | (1,474 | ) | | | — | | | | 2,485 | |
| Tax valuation reserve | | | 7,961 | | | | (2,118) | (c) | | | — | | | | — | | | | 5,843 | |
| Year Ended December 31, 2003 | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 2,348 | | | $ | 499 | | | $ | (494 | ) | | $ | — | | | $ | 2,353 | |
| Allowance for excess/slow moving inventory | | | 3,160 | | | | 1,450 | | | | (2,929 | ) | | | — | | | | 1,681 | |
| Tax valuation reserve | | | 6,875 | | | | 1,079 | | | | — | | | | 7 | (d) | | | 7,961 | |
|
| |
| (a) | Amounts reflect activity of continuing operations. |
| |
| (b) | Amounts represent balances from the Modine Aftermarket business acquisition balance sheet. |
| |
| (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. |
| |
| (e) | Represents reserve required for adjustments associated with new customer added in 2005 and normal provisions. |
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 recognizes 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 is 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, 2005. Based upon the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.
62
On July 22, 2005, the Company completed its merger with the aftermarket business of Modine Manufacturing Company. This acquired business contained over 150 facilities located in North America, Central America and Europe and involved the addition of 1,400 employees. As part of the post-closing integration of the merged entity, the Company is engaged in a process of refining and harmonizing the internal controls and processes of the acquired business with those of the Company’s historical operations in addition to closing and consolidating facilities. This process was ongoing during the quarter ended December 31, 2005, and the Company believes that it will be completed in 2006.
In addition, during 2005, the Company has begun its project to become compliant with the requirements of Section 404 of the Sarbanes-Oxley Act at the end of 2006. To date this involves reviewing the Company’s documentation of control procedures being followed and improving or strengthening these controls as appropriate.
Except as provided in the prior paragraphs, there have been no changes in the Company's internal controls over financial reporting during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Portions of the information required by this item are included in Part I of this Report. Other information required by this item will be contained in the Company’s 2006 Proxy Statement under the headings ‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’, ‘‘Code of Ethics’’, ‘‘Board Information and Committees’’ and ‘‘Proposal 1: Election of Directors’’ and is incorporated herein by reference.
Item 11. Executive Compensation
The information contained in the Company’s 2006 Proxy Statement under the headings ‘‘Executive Officer Compensation’’, ‘‘Executive Contracts and Severance and Change of Control Arrangements’’, ‘‘Retirement Plan’’, Directors’ Compensation’’ and ‘‘Compensation Committee Interlocks and Insider Participation’’ is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information contained in the Company’s 2006 Proxy Statement under the headings ‘‘Which stockholders own at least 5% of Proliance?’’, ‘‘How much stock is owned by directors and executive officers?’’ and ‘‘Table III Equity Compensation Plan Information’’ is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information contained in the Company’s 2006 Proxy Statement under the heading ‘‘Additional Information-Certain Transactions’’ is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information contained in the Company’s 2006 Proxy Statement under the headings ‘‘Proposal 2: Approval of Appointment of Proliance’s Independent Accountants’’ and ‘‘Audit Committee Pre-Approval Policy’’ is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
| |
| (a) (1) | Financial Statements of the Registrant |
63
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 and Plan of Merger, dated as of January 31, 2005, among Modine Manufacturing Company, Modine Aftermarket Holdings, Inc. and Transpro.(8) |
| 2.2 | | Contribution Agreement, dated as of January 31, 2005, among Modine Aftermarket Holdings, Inc., Modine Manufacturing Company, Modine, Inc. and Transpro.(8) |
| 2.3 | | OEM Acquisition Agreement, dated as of January 31, 2005, between Modine Manufacturing Company and Transpro.(8) |
| 2.4 | | Amendment to OEM Acquisition Agreement, dated as of March 1, 2005, between Modine Manufacturing Company and Transpro.(9) |
| 2.5 | | Amendment to Agreement and Plan of Merger by letter dated June 16, 2005 between Transpro, Inc., Modine Manufacturing Company and Modine Aftermarket Holdings, Inc.(15) |
| 3.1(i) | | Restated Certificate of Incorporation of Proliance International, Inc.(14) |
| 3.1(ii) | | By-laws of Proliance International, Inc., as amended.(14) |
| 4.1 | | 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.(2) |
| 4.2 | | First Amendment to Loan and Security Agreement with Congress Financial Corporation.(3) |
| 4.3 | | Second Amendment to Loan and Security Agreement with Congress Financial Corporation.(3) |
| 4.4 | | Third Amendment to Loan and Security Agreement with Congress Financial Corporation.(4) |
| 4.5 | | Fourth Amendment to Loan and Security Agreement with Congress Financial Corporation.(4) |
| 4.6 | | Fifth Amendment to Loan and Security Agreement with Congress Financial Corporation.(4) |
| 4.7 | | Sixth Amendment to Loan and Security Agreement with Congress Financial Corporation.(4) |
| 4.8 | | Seventh Amendment to Loan and Security Agreement with Congress Financial Corporation.(5) |
| 4.9 | | Eighth Amendment to Loan and Security Agreement with Congress Financial Corporation.(6) |
| 4.10 | | Ninth Amendment to Loan and Security Agreement with Congress Financial Corporation.(7) |
| 4.11 | | Tenth Amendment to Loan and Security Agreement with Congress Financial Corporation.(10) |
| 4.12 | | Eleventh Amendment to Loan and Security Agreement with Congress Financial Corporation.(9) |
| 4.13 | | Twelfth Amendment to Loan and Security Agreement with Congress Financial Corporation.(14) |
|
64
| | | | | | |
| 4.14 | | Thirteenth Amendment to Loan and Security Agreement with Congress Financial Corporation.(12) |
| 10.1 | | Transpro, Inc. 1995 Stock Plan.(1) |
| 10.2 | | Form of Stock Option Agreement under the 1995 Stock Plan.(1) |
| 10.3 | | 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 Key Employee Severance Policy.(1) |
| 10.6 | | Letter Agreement, dated December 15, 1992 between Jeffrey J. Jackson and GO/DAN Industries.(1) |
| 10.7 | | Employment Agreement between the Company and Charles E. Johnson.(3) |
| 10.8 | | Amendment No. 1 to Employment Agreement between the Company and Charles E. Johnson.(11) |
| 10.9 | | Form of Nonqualified Stock Option Agreement (Director Replacement Option).(13) |
| 10.10 | | Director and Officer Indemnification Agreement.(14) |
| 10.11 | | Aftermarket License Agreement between Modine Manufacturing Company and Modine Aftermarket Holdings, Inc.(14) |
| 10.12 | | Proliance International, Inc. Equity Incentive Plan.(14) |
| 10.13 | | Tax Sharing Agreement between Modine Manufacturing Company and Transpro, Inc.(16) |
| 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 2000 Form 10-K. |
| |
| (3) | Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 2001. |
| |
| (4) | Incorporated by reference to the Company’s 2001 Form 10-K. |
| |
| (5) | Incorporated by reference to the Company’s Form 8-K filed September 20, 2002. |
| |
| (6) | Incorporated by reference to the Company’s Form 8-K filed November 22, 2002. |
| |
| (7) | Incorporated by reference to the Company’s Form 8-K filed December 27, 2002. |
| |
| (8) | Incorporated by reference to the Company’s Form 8-K filed February 1, 2005. |
| |
| (9) | Incorporated by reference to the Company’s Form 8-K filed March 7, 2005. |
65
| |
| (10) | Incorporated by reference to the Company’s Form 8-K filed November 19, 2004. |
| |
| (11) | Incorporated by reference to the Company’s Form 8-K filed November 3, 2004. |
| |
| (12) | Incorporated by reference to the Company’s Form 8-K filed October 21, 2005. |
| |
| (13) | Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 2005. |
| |
| (14) | Incorporated by reference to the Company’s Form 8-K filed July 28, 2005. |
| |
| (15) | Incorporated by reference to the Company’s Form 8-K filed June 20, 2005. |
| |
| (16) | Incorporated by reference to the Company’s Form S-4 filed May 2, 2005. |
| |
| (c) | Other Financial Information |
None.
66
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.
| | | | | | | | | | |
| | | Proliance International, Inc. |
| Date: March 31, 2006 | | By | | /s/ CHARLES E. JOHNSON |
| | | | | Charles E. Johnson
President and Chief Executive Officer |
|
POWER OF ATTORNEY
Each of the undersigned hereby appoints Paul R. Lederer 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 31, 2006 |
|
| William J. Abraham, Jr., Director |
|
| /s/ BARRY R. BANDUCCI | | | | March 31, 2006 |
|
| Barry R. Banducci, Director |
|
| /s/ PHILIP WM. COLBURN | | | | March 31, 2006 |
|
| Philip Wm. Colburn, Director |
|
| /s/ CHARLES E. JOHNSON | | | | March 31, 2006 |
|
Charles E. Johnson, President,
Chief Executive Officer and Director |
|
| /s/ PAUL R. LEDERER | | | | March 31, 2006 |
|
| Paul R. Lederer, Director |
|
| /s/ VINCENT L. MARTIN | | | | March 31, 2006 |
|
| Vincent L. Martin, Director |
|
| /s/ BRADLEY C. RICHARDSON | | | | March 31, 2006 |
|
| Bradley C. Richardson, Director |
|
| /s/ JAMES R. RULSEH | | | | March 31, 2006 |
|
| James R. Rulseh, Director |
|
| /s/ F. ALAN SMITH | | | | March 31, 2006 |
|
| F. Alan Smith, Director |
|
| /s/ RICHARD A. WISOT | | | | March 31, 2006 |
|
Richard A. Wisot
Vice President, Treasurer,
Secretary and Chief Financial Officer
Principal Financial and Accounting Officer |
|
| /s/ MICHAEL T. YONKER | | | | March 31, 2006 |
|
| Michael T. Yonker, Director |
|
67
