10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|
|
|
(Mark One)
|
|
x
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF
1934
|
For the fiscal year ended December 31, 2008
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
|
For the transition period
from to .
|
Commission file number 1-13894
PROLIANCE INTERNATIONAL,
INC.
(Exact name of Registrant as
specified in its charter)
|
|
|
Delaware
|
|
34-1807383
|
(State or other jurisdiction
of incorporation or organization)
|
|
(IRS Employer
Identification No.)
|
100 Gando
Drive, New Haven, Connecticut 06513
(Address
of principal executive offices, including zip code)
(203) 401-6450
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of each class
|
|
Name of each exchange on which registered
|
|
Common Stock, $.01 Par Value
|
|
NYSE Amex (formerly American Stock Exchange)
|
Securities registered pursuant to Section 12(g) of the
Act:
NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No x
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated
filer, and smaller reporting company in
Rule 12b-2
of the Exchange Act.
Check one: Large accelerated
filer o Accelerated
filer o Non-accelerated
filer o Smaller
reporting
company x.
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
The aggregate market value of voting and non-voting common stock
held by non-affiliates of the Registrant at June 30, 2008
was $14,502,671.
On March 1, 2009, there were 15,780,489 outstanding shares
of the registrants common stock.
Documents
Incorporated by Reference
Portions of the Proxy Statement for the 2009 Annual Meeting of
Stockholders are incorporated by reference into Part III of
this report.
PROLIANCE
INTERNATIONAL, INC.
INDEX TO ANNUAL REPORT ON
FORM 10-K
YEAR ENDED DECEMBER 31, 2008
ii
PART I
Proliance International, Inc. (the Company) designs,
manufactures and markets heat exchange products (including
radiators, heater cores and complete heaters) and temperature
control parts (including condensers, compressors,
accumulators/driers and evaporators) for the automotive and
light truck aftermarket. In addition, we design, manufacture and
distribute heat exchange products (including radiators, radiator
cores, condensers, charge air coolers, oil coolers, marine
coolers and other specialty heat exchangers) primarily for the
heavy duty aftermarket.
Origins
of the Business
Our origins date back to 1915 when a predecessor of the
Companys former G&O division commenced operations in
New Haven, Connecticut, as a manufacturer of radiators for
custom built automobiles, fire engines and original equipment
manufacturers. Allen Telecom Inc. (Allen, formerly
The Allen Group Inc.) acquired G&O in 1970 as part of its
strategy to become a broad-based automotive supplier. In
September 1995, Transpro, Inc was formed when Allen spun off the
Company to Allens stockholders.
Management has looked to grow the business through a combination
of internal growth, including the addition of new customers and
new products, and strategic acquisitions. Replacement automotive
air conditioning condensers were added to our aftermarket
product line in August 1996 with the acquisition of
substantially all of the assets of Rahn Industries, other
replacement automotive air conditioning parts were added with
the acquisition of the outstanding stock of Evap, Inc., in
August 1998 and remanufactured automotive air conditioning
compressors were added in February 1999 with the purchase of the
outstanding stock of A/C Plus, Inc. In December 2002, certain
heater assets of Fedco Automotive Components Company were
acquired. This acquisition strengthened our position in the
complete heater market and provided us with a new major customer
relationship and the capability to produce aluminum heaters
in-house and the ability to maximize the benefits generated by
the in-house production of copper/brass heater cores in Nuevo
Laredo, Mexico.
On March 1, 2005, our Heavy Duty OEM business, which
manufactured and distributed heat exchangers to heavy duty truck
and industrial and off-highway original equipment manufacturers,
was sold to Modine Manufacturing Company (Modine).
On July 22, 2005, a transaction was completed pursuant to
which Modine Aftermarket Holdings, Inc. (Modine
Aftermarket) merged into the Company (the
merger). Modine Aftermarket was spun off from Modine
immediately prior to the merger and held Modines
aftermarket business. Upon effectiveness of the merger,
Transpro, Inc.s name was changed to Proliance
International, Inc. (Proliance). In connection with
the merger, 8,145,810 shares of Proliance common stock were
issued to Modine shareholders. Immediately after the
effectiveness of the merger, prior Proliance shareholders owned
48% of the combined company on a fully diluted basis, while
Modine shareholders owned the remaining 52%. For accounting
purposes, Proliance was the acquirer.
As a result of the Modine Aftermarket merger and the Heavy Duty
OEM sale, we are predominantly a supplier of heating and cooling
components and systems to the automotive and light truck and
heavy duty aftermarkets in North and Central America and Europe.
Operating
Structure
We are organized into two reporting segments, based upon the
geographic area served Domestic and International.
The Domestic segment 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 supplies heat
exchange and air conditioning
1
products for the automotive and light truck aftermarket and heat
exchange products for the heavy duty aftermarket in Mexico,
Europe and Central America.
Markets
The automotive and heavy duty parts industries target two
distinct markets, the aftermarket and the original equipment
manufacturer (OEM) market. The products and services
used to maintain and repair automobiles, vans, light trucks,
heavy trucks and other industrial and marine applications, as
well as accessories not supplied with these products when
manufactured, form the respective automotive and light truck and
heavy duty aftermarkets. The manufacture of individual component
parts for use in the original equipment manufacturing process of
automobiles, vans, light trucks, heavy trucks and heavy duty
equipment form the automotive and heavy duty OEM markets. We
sell products and services predominantly to the automotive and
light truck and heavy duty aftermarkets.
In addition, our NRF subsidiary in Europe, supplies specialty
coolers for OEM marine applications. These products are
primarily used on inland and smaller sea-going vessels such as
tugs, ferries, barges and service vessels and are considered
part of our heavy duty aftermarket product offering.
Principal
Products and Services
We design, manufacture and distribute heat exchange products
(including radiators, heater cores and complete heaters) and
temperature control parts (including condensers, compressors,
accumulators/driers and evaporators) for the automotive and
light truck aftermarket. In addition, we design, manufacture and
distribute heat exchange products (including radiators, radiator
cores, charge air coolers, condensers, oil coolers, marine
coolers and other specialty heat exchangers) primarily for the
heavy duty aftermarket.
Product line trade sales for the three years ended December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Automotive and light truck aftermarket heat exchange products
|
|
$
|
215,644
|
|
|
$
|
257,358
|
|
|
$
|
264,703
|
|
Automotive and light truck aftermarket temperature control
products
|
|
|
38,291
|
|
|
|
46,796
|
|
|
|
63,832
|
|
Heavy duty aftermarket heat exchange products
|
|
|
96,132
|
|
|
|
89,788
|
|
|
|
87,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade sales
|
|
$
|
350,067
|
|
|
$
|
393,942
|
|
|
$
|
416,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A description of the particular products offered in each of our
markets is set forth below.
Automotive
and Light Truck Aftermarket Heat Exchange Products
We provide one of the most extensive product ranges of
high-quality radiators and heater cores to the automotive and
light truck aftermarket.
The purpose of a radiator is to cool the engine. A radiator acts
as a heat exchanger, removing heat from engine coolant as it
passes through the radiator. The construction of a radiator
usually consists of: the radiator core, which consists of
coolant-carrying tubes and a large cooling area made up of metal
fins, a receiving (inlet) tank, a dispensing (outlet) tank and
side columns. In operation, coolant is pumped from the engine to
the inlet tank where it spreads through the tubes. As the engine
coolant passes through the tubes, it loses its heat to the air
stream through the fins connected to the tubes. After passing
through the tubes, the reduced temperature coolant enters the
outlet tank and is then re-circulated through the engine.
Complete Radiators. Our domestic line of
complete radiators for automobile and light truck applications
consists of more than 900 models, which are able to service
approximately 95% of the automobiles and light trucks in the
United States. We have established ourselves as an industry
leader with our well-recognized line of
Ready-Rad®
radiators. In addition, the Ready
Rad®
Plus line with
2
adaptable fittings has become popular because of its ability to
fit the requirements of a broad line of vehicles, enabling
distributors to service a larger number of vehicles with lower
inventory levels. Our
HBX®
Line supplements the Ready
Rad®
Plus Line by offering superior heat transfer performance and
structural durability for selected high performance
applications. Complete radiators are constructed of both
aluminum with plastic tanks and copper/brass. Complete radiators
are sold throughout Europe under the
NRFtm
brand and in Mexico and Central America through our MexPar
subsidiary.
Complete Heaters . A complete heater is part
of a vehicles heater system through which heated coolant
from the engine cooling system flows. The warm air generated as
the liquid flows through the heater is then propelled into the
vehicles passenger compartment by a fan. We supply more
than 400 different heater models, which service approximately
95% of the domestic and foreign cars and light trucks on the
road today in the United States and Canada. Heaters are offered
using both copper/brass and aluminum construction. Our
Ready-Aire®
line of heaters, which utilizes both cellular and tubular
technology, is recognized as an industry leader in the United
States. Heaters are also sold on a limited basis throughout
Europe.
Automotive
and Light Truck Aftermarket Temperature Control
Products
While automotive and light truck aftermarket temperature control
products are sold primarily in the Domestic segment, demand for
these products in Europe has been increasing. Temperature
control products are marketed under the
Ready-Aire®
and Air Pro Quality
Parts®
brands in the Domestic segment and under the
NRFtm
or original equipment manufacturer brands in Europe.
Air Conditioning Compressors. The compressor
is designed to compress low-pressure vapor refrigerant, which is
drawn from the evaporator into a high-pressure gas, and then
pumped to the condenser. We distribute more than 1,400 models of
new and re-manufactured air conditioning compressors which cover
approximately 80% of the domestic and import applications in the
domestic automotive and light truck aftermarket. We believe this
is one of the most comprehensive programs in the domestic
automotive and light truck aftermarket. A line of compressors is
also offered by our NRF subsidiary throughout Europe.
Air Conditioning Condensers. The air
conditioning condenser is a component of a vehicles air
conditioning system designed to convert the air conditioner
refrigerant from a high-pressure gas to a high-pressure liquid
by passing it through the air-cooled condenser. We currently
catalog and distribute more than 540 condenser part numbers in
the domestic automotive and light truck aftermarket. Our NRF
subsidiary also offers condenser parts in Europe.
Air Conditioning Accumulators/Driers. An
accumulator/drier acts as a reservoir that prevents liquid
refrigerant from reaching the compressor. The accumulator/drier
uses a drying agent to remove moisture from the system and a
filter screen to trap any solid contaminants. We offer over 900
accumulator/drier models which cover approximately 80% of the
applications in the domestic automotive and light truck
aftermarket and also distribute accumulators/driers in Europe.
Air Conditioning Evaporators. An air
conditioning evaporator is designed to remove heat from the
passenger compartment. The evaporator is generally located under
the dashboard or adjacent to the firewall and functions as a
heat exchanger by passing low pressure liquid refrigerant
through its passageways. Warm air is forced from the passenger
compartment over the evaporator which cools the air for the
vehicle cabin. The refrigerant becomes a low-pressure vapor and
is then re-compressed by the compressor and re-circulated. We
offer over 700 evaporator models which cover approximately 90%
of the applications in the domestic automotive and light truck
aftermarket and also distribute evaporators in Europe.
Air Conditioning Parts and Supplies. We sell
an extensive line of other air conditioning parts and supplies
which include hose and tube assemblies, expansion valves,
blowers and fan clutches.
3
Heavy
Duty Aftermarket Heat Exchange Products
We design, manufacture and distribute complete radiators,
radiator cores and charge air coolers to customers in the heavy
duty aftermarket. Some products are custom designed and produced
to support a variety of unique engine cooling configurations for
heavy-duty trucks, buses, specialty equipment, industrial and
marine applications such as agricultural, construction and
military vehicles, oil rigs, stationary power generation
equipment and inland sea-going vessels.
Complete Radiators. We custom design,
manufacture and sell a wide range of heavy duty radiator models
to meet customer specifications. Some are sold under the
widely-recognized
Ultra-Fused®
and Beta
Weld®
brand names, which utilize welded tube-to-header core
construction and are expressly engineered to meet customer
specifications and withstand a variety of demanding customer
applications. We offer a line of more than 230 models of
complete truck radiators designed for the domestic
over-the road market. In addition, our line of
tractor radiators, which offers over 50 models, are designed to
meet the needs of customers marketing to the domestic
agricultural/farm market. Domestically, radiators are sold under
the Truck
Tough®
and Tractor
Tough®
brands. We also sell complete heavy duty radiators in Europe
through our NRF subsidiary and in Mexico and Central America
through our MexPar subsidiary.
Radiator Cores. Heavy truck and industrial
radiator cores are constructed of extremely durable components
in order to meet the demands of the heavy duty commercial
marketplace. Domestically we offer approximately 8,500 models of
heavy duty radiator cores to serve different needs in a variety
of markets. These include special order radiator
cores constructed to serve specific customer requirements, which
are in addition to the models included in our catalog. A heavy
truck or industrial radiator core is normally much larger than
an automotive core and typically sells for three to four times
the price of an automotive core. We also sell heavy duty
radiator cores in Europe through our NRF subsidiary and in
Mexico and Central America through our MexPar subsidiary.
Charge Air Coolers. We offer heavy duty
customers a wide range of custom-designed charge air cooler
models. A charge air cooler is a heat exchanger that is used to
lower the temperature of air from a turbocharger that will be
used in the engine combustion process, thus improving engine
operating efficiency and lowering emissions. We believe that the
demand for charge air coolers will continue to increase as
customers face increasing pressure to produce vehicles and
equipment that are more fuel efficient and less polluting. We
have received U.S. and foreign patents relating to our
proprietary
Ultra-Seal®
grommeted charge air cooler. This product offers significant
improvements in performance and exceeds current industry
guidelines for durability. The current line of complete charge
air coolers for the domestic aftermarket has over 135 models
available for sale. A line of charge air coolers is also
distributed by our NRF subsidiary throughout Europe.
Marine Products. Our NRF subsidiary in Europe
manufactures and distributes specialty coolers for OEM marine
installation on inland sea-going vessels such as tugs, ferries,
barges and service vessels.
Financial
Information About Industry Segments, Export Sales and Domestic
and Foreign Operations
Applicable business segment, product line and foreign operation
information appears in Note 17 of the Notes to Consolidated
Financial Statements contained in Item 8 of this Report.
Export sales from North America were below 10% of net sales in
the years ended December 31, 2008, 2007 and 2006.
Customers
Our products and services are sold within the Domestic segment
to a wide variety and large number of industrial and commercial
customers. Automotive and light truck products are sold to
national retailers of aftermarket automotive products (such as
AutoZone, Advance Auto Parts, Pep Boys and OReilly),
warehouse distributors, radiator shops, hard parts jobbers
(including Carquest, Aftermarket AutoParts Alliance, NAPA, the
Automotive Parts Group of Genuine Parts Company and Radiator
Express Warehouse) and other manufacturers. We also sell to
commercial customers through our branch and
4
agency locations in the United States. In addition, heavy duty
heat exchange products are supplied to a range of large to small
customers doing business in the heavy truck and industrial
equipment aftermarkets.
Likewise, in Europe, Central America and Mexico, our customer
base is serviced through branch and manufacturing locations
operated by our NRF and MexPar subsidiaries.
AutoZone accounted for approximately 8%, 10% and 13% of
consolidated net sales for 2008, 2007 and 2006, respectively.
Sales to Autozone in 2008 and 2007 were lower than in 2006 as we
were shipping radiator product to a smaller number of Autozone
distribution centers. During the third quarter of 2008, Autozone
stopped purchasing radiator product for the remaining
distribution centers. However, we continue to supply Autozone
distribution centers with heaters and temperature control
products as well as radiators on customer direct orders. While
the action by Autozone did result in a reduction of net sales,
it is not expected to have a material impact on future operating
results in part due to cost reduction actions we have taken and
the expansion of products manufactured at our facility in Nuevo
Laredo, Mexico which are expected to offset any lost
contribution margin. No other customer individually represented
more than 10% of net trade sales in any of the years reported.
The loss of a major customer could result in the initiation of
cost reduction actions in order to avoid a material adverse
effect on our results of operations.
Sales and
Marketing
An in-house sales and marketing department is maintained to
serve domestic markets. The sales staff focuses its attention on
developing a thorough understanding of technical and production
capabilities and the overall markets in which each customer
operates. At December 31, 2008, we had approximately 140
individuals involved in sales and marketing efforts in the
United States and Canada, which included 130 employees
associated with operating our branch operations. Independent
manufacturers sales representatives are also utilized to
aid sales efforts in certain domestic aftermarket channels.
As of December 31, 2008 there were 29 branch and plant
locations and 5 agency sales locations in the United States
serving domestic customers. The employees who operate these
branch and agency locations stock heat exchange, temperature
control and certain heavy duty products, take orders from local
customers, generally over the telephone or by fax, and supply
product to those customers through local deliveries. The number
of branch, plant and agency locations was reduced from 94 at
December 31, 2006 to 34 at December 31, 2008 as part
of our branch realignment process which was announced in
September 2006. This process included the relocation,
consolidation or closure of branch locations and the
establishment of expanded relationships with key distribution
partners in some areas. These actions allowed us to continue
serving customers in those markets while at the same time we
streamlined our go-to-market approach and improved our market
position and business performance.
A majority of our domestic heat exchange sales are distributed
from a warehouse located in Southaven, Mississippi, while
temperature control products are distributed from a warehouse in
Arlington, Texas. Heavy duty product sales are distributed out
of our branch and regional plant locations as well as from
Arlington, Texas.
In Europe, NRF has 13 locations, including the main warehouse in
Mill, The Netherlands, through which 56 sales and marketing
personnel stock product, take orders from customers and
distribute product. In Mexico and Central America, there are
seven locations, including the main warehouse in Mexico City,
Mexico through which orders are taken and product is shipped to
customers.
Competition
We face significant competition within each of the markets in
which we operate. Our domestic automotive and light truck
aftermarket heat exchange product lines are among the leaders in
that marketplace. We compete with the national producers of heat
transfer products, internal operations of
5
the OEMs, offshore suppliers and, to a lesser extent, local and
regional manufacturers. In recent years, the domestic heat
exchange aftermarket has experienced a significant increase in
competitive pricing pressure, changes in product composition, a
changing customer base resulting in fewer but larger customers,
improved original equipment manufacturer quality and an increase
in imports from China and other Asian countries. Our primary
competition in the domestic temperature control aftermarket
includes Four Seasons, a division of Standard Motor Products
Inc., international and offshore suppliers and numerous regional
operators. The domestic temperature control aftermarket has been
influenced in recent years by excess customer inventory, an
increase in imports, technology changes, improved original
equipment manufacturer quality and a shift in product demand
from remanufactured to new compressors. Our principal methods of
competition in the domestic markets are by emphasizing product
design, performance and reliability, breadth of product
coverage, customer service, product availability and timely
delivery.
The Companys primary competitors in the domestic heavy
duty aftermarket are small regional manufacturers and offshore
suppliers.
In Europe, Mexico and Central America, we face competition from
affiliates of the major automotive OEMs and from
automotive aftermarket parts manufacturers located in the
individual countries.
Intellectual
Property
We own 39 U.S. and foreign patents and 42 U.S. and
foreign trademarks. The patents expire on various dates from
2009 to 2030, while trademarks expire on various dates between
2009 and 2022. In addition, approximately 40 U.S. and
foreign patents and 13 U.S. and foreign trademark
registrations are pending. Patents cover certain radiator,
heater, charge air cooler and air conditioning products, methods
and manufacturing processes. We have also entered into licensing
and other agreements with respect to certain patents, trademarks
and manufacturing processes used in the operation of our
business. In conjunction with the Modine merger, a License
Agreement was signed with Modine under which the right to
utilize certain patents and trademarks, owned by Modine, in the
conduct of the Aftermarket business was obtained. While we
believe that we own or have the rights to all patents and other
technology necessary for the operation of the business, we do
not consider any single patent or trademark or group of patents
or trademarks to be material to our business as a whole.
Manufacturing
Manufacturing of product for the domestic automotive and light
truck marketplace has been centralized with copper/brass
radiator production performed at our facility in Mexico City and
aluminum radiators, copper/brass and aluminum heaters and air
conditioning parts produced at our facility in Nuevo Laredo,
Mexico. During 2008, we undertook a program to increase the
amount of aluminum radiators produced in Nuevo Laredo as opposed
to purchasing them from Asian vendors in an effort to lower
product costs and shorten the inventory supply chain. Domestic
segment customer returns are also processed at the Nuevo Laredo
location. Heat exchange product for the domestic heavy duty
aftermarket is produced at our eight regional plant facilities
and at our manufacturing plants in Nuevo Laredo and Mexico City,
Mexico.
In Europe, there are three regional manufacturing facilities in
Spain, England and France, in addition to the main radiator
manufacturing facility is located in Mill, The Netherlands.
In addition to the copper/brass radiator manufacturing plant
located in Mexico City, we also have three smaller regional
manufacturing facilities in Mexico and El Salvador.
Raw
Materials and Suppliers
The principal raw materials used in the automotive and light
truck and heavy duty product lines are copper, brass and
aluminum. Although copper, brass, aluminum and other primary
materials are available from a number of vendors; we have chosen
to concentrate sources through supply agreements
6
with a limited number of long-term suppliers in order to obtain
purchasing and operating economies. Most of our aluminum needs
during 2008, 2007 and 2006 were sourced from Alcoa Inc., a
U.S. corporation, and Sapa Heat Transfer, a Swedish
corporation. While Luvata, a Swedish corporation, supplied
approximately 100% of our copper and brass requirements in 2007
and 2006, during 2008 we sourced requirements from Luvata and
Nacobre, a Mexican corporation. We have not experienced any
significant supply problems with respect to these commodities,
other than those associated with ongoing cash flow constraints
arising initially from the Southaven Casualty Event and the
reduction of liquidity caused by the Companys lenders (see
Note 3 in the attached Notes to Consolidated Financial
Statements).
Purchase prices for commodities have fluctuated significantly
over the past several years. We typically execute purchase
orders for anticipated copper and brass requirements three
months prior to the actual delivery date. The purchase price for
copper and brass purchases is established at the time orders are
placed and not at the time of delivery. In the case of aluminum
purchases, we normally execute contracts up to three months
prior to the actual delivery date and the purchase price is
established at the time the purchase order is placed. We
currently do not purchase hedge contracts in conjunction with
our commodity purchases.
Some heat exchange and air conditioning products are purchased
utilizing supplier relationships with companies located in China
and other Asian countries.
Backlog
The automotive and light truck and heavy duty aftermarkets
typically operate on a short lead time order basis. As such,
backlog is not material and is not indicative of future overall
sales levels. Backlog is indicative of future demand or trends
in the marine marketplace in which NRF participates. At
December 31, 2008, the marine cooler backlog was at levels
similar to a year ago.
Seasonality
We typically experience stronger second and third calendar
quarters and weaker first and fourth calendar quarters due to
the seasonal fluctuations in our sales volumes. Higher sales are
reported during the spring and summer months, as the demand for
replacement radiators and temperature control parts and supplies
in the automotive and light truck aftermarket increase, while
lower sales levels are reported during the fall and winter
months when only heater core products are in significant demand.
Demand for our heavy duty product offering does not experience
significant seasonal volume fluctuations due to the nature of
the products.
Customer demand for heat exchange and temperature control
products is also influenced by weather. Extremes in weather, hot
and cold, along with prolonged periods of hot and cold weather
increase the need for replacement parts.
In recent years, we have seen a change in the seasonality of
customers buying habits. Previously, customers would
purchase product from vendors prior to a selling season based
upon their estimated requirements. Customers now purchase
product in smaller quantities closer to the selling seasons,
thus requiring vendors to potentially carry more inventory or
better manage their inventory in order to timely respond to
customer demands. This has added to the challenges we face in
order to service aftermarket customers.
The seasonality of our business results in significant
operational challenges to our production and inventory control
functions.
Research
and Development
Research and development expenses were approximately
$0.3 million, $0.3 million and $0.4 million in
2008, 2007 and 2006, respectively.
7
Employees
At December 31, 2008, we had 1,546 employees compared
to 1,574 at December 31, 2007 and 1,950 at
December 31, 2006. The headcount reduction during the
period reflects the elimination of administrative and
manufacturing positions and changes in our branch operating
structure in order to lower operating costs, which offset the
129 employee increase in Nuevo Laredo, Mexico during 2008
due to the shift from purchased to manufactured products. Of the
981 employees at December 31, 2008 covered by
collective bargaining agreements, 60% are employed at our
Mexican plants and are represented by local Mexican labor
unions, 38% are located in Europe, and 2% are employed in the
United States and are represented by several different labor
unions. Our collective bargaining agreements are independently
negotiated and expire at different times. While we have
historically been successful in renegotiating collective
bargaining agreements and believe that labor relations are
currently good, there can be no assurance that there will not be
work stoppages in the future.
Environmental
Matters
As is the case with other manufacturers of similar products,
hazardous substances are used in our manufacturing process,
including solvents, lubricants, acids, paints and lead, which
are subject to a variety of environmental laws and regulations
governing discharges into air and water, the handling, storage
and disposal of hazardous or solid waste materials and the
remediation of contamination associated with releases of
hazardous substances. These laws include the Resource
Conservation and Recovery Act (as amended), the Clean Air Act
(as amended), the Clean Water Act of 1990 (as amended) and the
Comprehensive Environmental Response, Compensation and Liability
Act (as amended). We believe that, as a general matter, our
policies, practices and procedures are properly designed to
reasonably prevent risk of environmental damage and financial
liability. On January 27, 2003, a Consent Agreement was
signed with the State of Connecticut Department of Environmental
Protection under which we voluntarily initiated the
investigation and cleanup of environmental contamination on
property occupied by a wholly-owned subsidiary over
20 years ago. We believe there will not be a material
adverse impact on our financial results due to these
investigation and cleanup activities. While it is reasonably
possible that environmental related liabilities may exist with
respect to other formerly occupied industrial sites, based upon
information currently available, the cost of any potential
remediation for which we may be responsible is not expected to
have a material adverse effect on our consolidated financial
position, results of operation or liquidity.
In conjunction with the Modine Aftermarket merger in 2005,
Modine retained the liability for environmental remediation of
soil and groundwater contamination which existed at the time of
the merger at the facility located in Mill, The Netherlands. As
part of the agreement to sell our Heavy Duty OEM business to
Modine in March 2005, we retained responsibility for any
environmental remediation which would result from contamination
existing at our former Jackson, Mississippi facility on the date
of the sale.
We currently do not anticipate any material adverse effect to
our 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 our business, and there can be no assurance
that material environmental liabilities or compliance charges
will not arise in the future.
Available
Information
Copies of any of our filings made with the Securities and
Exchange Commission may be obtained at no charge by visiting our
website at www.pliii.com, the SECs website at
www.sec.gov or by writing to Investor Relations Department,
Proliance International, Inc., 100 Gando Drive, New Haven,
Connecticut 06513.
8
Our business is subject to a number of risks, some of which are
discussed below. Other risks are presented elsewhere in this
report and in the information incorporated by reference into
this report. You should carefully consider the following risks
in addition to the other information contained in this report
and our other filings with the SEC, including our subsequent
reports on
Forms 8-K
and 10-Q,
before deciding to buy, sell or hold our common stock. The risks
and uncertainties described below are not the only ones which we
face. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also affect our
business operations. Any of these risks could materially and
adversely affect our business, financial condition and results
of operations, which in turn could materially and adversely
affect the price of our common stock.
The
Company faces short-term liquidity risks.
On February 5, 2008, our central distribution facility in
Southaven, Mississippi sustained significant damage as a result
of strong storms and tornadoes (the Southaven Casualty
Event). During the storm, a significant portion of our
automotive and light truck heat exchange inventory was also
destroyed. While we had insurance covering damage to the
facility and its contents, as well as any business interruption
losses, up to $80 million, this incident has had a
significant impact on our short term cash flow as our secured
lenders would not give credit to the insurance proceeds in the
Borrowing Base, as such term is defined in the Credit and
Guaranty Agreement (the Silver Point Agreement) by
and among the Company and certain domestic subsidiaries of the
Company, as guarantors, the lenders party thereto from time to
time (collectively, the Lenders), Silver Point
Finance, LLC (Silver Point), as administrative agent
for the Lenders, collateral agent and as lead arranger, and
Wachovia Capital Finance Corporation (New England)
(Wachovia), as borrowing base agent. Under the
Silver Point Agreement, the damage to the inventory and fixed
assets resulted in a significant reduction in the Borrowing Base
because the Borrowing Base definition excludes the damaged
assets without giving effect to the related insurance proceeds.
In order to provide access to funds to rebuild and purchase
inventory damaged by the Southaven Casualty Event, a Second
Amendment of the Silver Point Agreement was signed on
March 12, 2008 (see Note 7). Pursuant to the Second
Amendment, and upon the terms and subject to the conditions
thereof, the Lenders agreed to temporarily increase the
aggregate principal amount of Revolving B Commitments available
from $25 million to $40 million. Pursuant to the
Second Amendment, the Lenders agreed to permit us to borrow
funds in excess of the available amounts under the Borrowing
Base definition in an amount not to exceed $26 million. We
were required to reduce this Borrowing Base Overadvance
Amount, as defined in the Silver Point Agreement, to zero
by May 31, 2008. The Borrowing Base Overadvance Amount of
$26 million was reduced to $24.2 million in the Third
Amendment of the Silver Point Agreement (see Note 7), which
was signed on March 26, 2008. While the Borrowing Base
Overadvance reduction was achieved by the May 31, 2008 date
through a combination of operating results, working capital
management and insurance proceeds, we continue to face
significant liquidity constraints. As part of the insurance
claim process, a $10.0 million preliminary advance was
received during the first quarter of 2008, additional
preliminary advances of $24.7 million during the second
quarter of 2008 and $17.3 million during the third quarter
of 2008, which were used to reduce obligations under the Silver
Point Agreement. On July 30, 2008, a global settlement of
$52.0 million was reached with our insurance company
regarding all damage claims.
Of the $52.0 million insurance settlement amount,
$25.8 million represents the estimated recovery on
inventory damaged by the Southaven Casualty Event,
$3.4 million represents the estimated recovery on damaged
fixed assets and $22.8 million represents the business
interruption reimbursement of margin on lost sales, incremental
costs for travel, product procurement and reclamation,
incremental customer costs and other items resulting from the
tornado, incurred through December 31, 2008. The Company
was required by its lenders to make repayments of the term loan,
maintain an availability block of between $2.5 million and
$5.0 million, and pay fees and expenses from the insurance
proceeds resulting in the loss of approximately
$20.0 million of liquidity. As a portion of the insurance
claim
9
proceeds were used to meet these requirements under the Silver
Point Agreement, instead of being used to fund the replacement
of inventory destroyed by the tornadoes, we have been forced to
extend vendor payables in an effort to maintain short-term cash
flow. As a result of extending vendor payables, delays in
obtaining inventory required to maintain historic customer line
fill levels have been encountered which have had an adverse
impact on net sales and the results of operations during 2008
and continue to impact 2009.
We are also continuing to work toward raising debt
and/or
equity to reduce or possibly replace the current Silver Point
Credit Agreement and to provide additional working capital as
the Silver Point Credit Agreement provides the Company with
insufficient liquidity. We are using an investment banking firm
to assist in obtaining this new debt or equity capital. To date
we have not been able to consummate the desired refinancing, due
in part to the current conditions in the financing marketplace,
and there can be no assurance that we will be able to do so on
acceptable terms, or at all. The violation of any covenant of
the Silver Point Agreement requires the negotiation of a waiver
to cure the default. We were able to obtain waivers for the
covenant violations at December 31, 2008 with respect to
the consolidated and U.S. senior leverage ratio
calculations, the amount of NRF operating leases and the
explanatory paragraph in the accountants opinion. However,
if a default, which occurs in the future, could not be
successfully resolved with the Lenders, the entire amount of any
indebtedness under the Silver Point Agreement at that time could
become due and payable, at the Lenders discretion. This
results in uncertainties concerning our ability to retire the
debt. The financial statements do not include any adjustments
that might be necessary if we were unable to continue as a going
concern. As there can be no assurance that additional funds will
be obtained from the proposed debt refinancing or that further
Lender accommodations would be available, on acceptable terms or
at all should there be covenant violations, the remaining
balance of the term loan has been classified as short-term debt
in the consolidated financial statements at December 31,
2008. At December 31, 2007, the remaining balance of the
term loan had been classified as short-term debt as a result of
the uncertainties existing at that time concerning our ability
to reduce the Borrowing Base Overadvance Amount to zero by
May 31, 2008.
As a result of the uncertainties regarding our ability to
refinance or otherwise retire the debt outstanding under the
Credit Agreement, the auditors opinion for the year ended
December 31, 2008 included an explanatory paragraph
concerning our ability to continue as a going concern. The
auditors opinion for the year ended December 31, 2007
included an explanatory paragraph concerning our ability to
continue as a going concern as a result of the uncertainty
concerning our ability to reduce the overadvance to zero by
May 31, 2008.
Our
business is impacted by customer concentration.
Our five largest customers accounted for approximately 33%, 33%,
and 28% of consolidated net sales in 2008, 2007, and 2006,
respectively. Among these customers, Autozone, accounted for
approximately 8%, 10% and 13% of consolidated net sales for
2008, 2007 and 2006, respectively. Sales to Autozone in 2008 and
2007 were lower than in 2006 as we were shipping radiator
product to a smaller number of Autozone distribution centers.
During the third quarter of 2008, Autozone stopped purchasing
radiator product for the remaining distribution centers.
However, we continue to supply Autozone distribution centers
with heaters and temperature control products as well as
radiators on customer direct orders. While the action by
Autozone did result in a reduction of net sales, it is not
expected to have a material impact on future operating results
in part due to cost reduction actions we have taken and the
expansion of products manufactured at our facility in Nuevo
Laredo, Mexico which are expected to offset any lost
contribution margin. The loss of one of the major customers
indicated above could result in the implementation of new cost
reduction initiatives or other actions in order to avoid a
material adverse effect on our results of operations. The five
largest customers included in the sales concentration amount
above, comprise 43% of trade accounts receivable at
December 31, 2008. If one or more of these major customers
were to initiate bankruptcy or insolvency proceedings, it could
10
render a material portion of our accounts receivable
uncollectible or substantially impaired, which could have a
material adverse effect on our financial condition and results
of operations.
We are
facing ongoing competitive pricing pressure.
We are experiencing ongoing pressure from customers to reduce
our products selling prices. This is the result of a
number of industry trends, including the impact of offshore
suppliers in the marketplace, the consolidated purchasing power
of large customers and actions taken by some of our competitors
in an effort to win over new business. To the extent
this pricing pressure continues, operating margins could be
impacted, which could have a material adverse effect on our
financial condition and results of operations. In addition, this
pricing pressure makes it more difficult to pass along to
customers the effects of rising commodity costs experienced
during the past several years or to recognize the benefits of
declining commodity costs, as applicable.
We
operate in a mature and highly competitive
industry.
The principal markets in which we compete are relatively mature,
therefore, future increases in net sales attributable to volume
will be partially dependent upon our ability to increase market
share by displacing sales currently made by competitors. As a
result, it is not possible to predict whether we will be able to
increase market share in the markets in which we compete.
In some cases, we also face significant competition in our
markets from divisions of larger companies and independent
companies who may have more financial resources. Our domestic
automotive and light truck heat exchange product lines are
considered to be among the best in a marketplace which is highly
competitive. We compete with national producers of heat transfer
products, internal operations of the OEMs, international and
offshore suppliers and, to a lesser extent, local and regional
manufacturers. The primary competition in the temperature
control aftermarket is from national producers, offshore
suppliers and numerous regional operators. While some
competitors may achieve economic advantages such as lower labor
and health care costs, we compete against them using product
design, performance, and price, breath of product line, customer
service, warranty, product availability and timely delivery.
Increased competition may result in price reductions, reduced
gross margins or loss of market share, any of which could
seriously harm our financial condition and results of operations.
We are
subject to risks related to future liquidity.
Our future liquidity and ordinary capital needs excluding the
impact of the Southaven Casualty Event, described above, are
expected to be met from a combination of cash flows from
operations and borrowings under a new credit agreement. However,
future cash flow may be impacted by a number of factors,
including changing market conditions, failure to meet financial
covenants under our current or future loan agreement, industry
trends lengthening customer payment terms or the discontinuance
of currently utilized customer sponsored payment programs.
Changes in payment terms to one or more major suppliers could
also have a material adverse effect on our results of operations
and future liquidity. While we currently utilize
customer-sponsored programs administered by financial
institutions in order to accelerate the collection of funds and
offset the impact of lengthening customer payment terms, there
can be no assurance that customers will continue to make these
programs available. We believe that the amount of borrowings
available under our current loan agreement are not sufficient to
meet the funding needed for all vendor payables or the capital
which might be required for major growth initiatives, such as
significant acquisitions. Any major growth initiatives would
require us to seek other sources or forms of capital. There can
be no assurance that we will be successful in obtaining a new
credit agreement or that we would be successful in securing
additional sources or forms of capital for major initiatives.
11
We are
subject to market risks regarding raw materials.
Copper, brass and aluminum are used in the manufacture of most
of our products. Although these commodities are available from a
number of vendors; we have chosen to concentrate our sources
through supply agreements with a limited number of long-term
suppliers. If a supply problem were to occur, it could have a
material adverse effect on our financial condition. In addition,
commodity prices are subject to changes based on availability
and other factors outside our control. While copper, brass and
aluminum commodity prices have fluctuated significantly in the
past several years; we have been generally unable to pass
through price increases to customers in the automotive and light
truck aftermarket to offset these increases. As a result,
operating margins have been adversely impacted and we have had
to look to other cost reduction actions in order to offset any
commodity price increases. Continued commodity price
fluctuations could have a material adverse effect on our results
of operations and financial condition.
Our
business is dependent on overall economic factors beyond our
control.
The overall demand for automotive and light truck aftermarket
parts is closely correlated to overall miles driven by vehicle
users. Therefore, a substantial increase in fuel prices or a
general economic slowdown could adversely impact the demand for
our products. Concerns about inflation, loss of jobs, decreased
consumer confidence, reduced corporate profits and capital
spending, and recent international conflicts and terrorist and
military actions have resulted in a downturn in worldwide
economic conditions, particularly in the United States. These
unfavorable economic conditions may have a negative impact on
customer buying habits, market trends and availability of
financing in the worldwide capital markets. If overall market
conditions worsen, our financial condition and results of
operations may be materially and adversely affected.
We are
subject to risks relating to outsourcing.
We purchase certain products from third parties and rely on
those third parties to provide quality products and services on
a timely and effective basis. While performance of these third
parties is closely monitored and
back-up
plans are maintained in case third parties are unable to perform
as agreed, we do not ultimately control the performance of
outsourcing partners. The failure of third-party outsourcing
partners to perform as expected or as required by contract could
have a material adverse effect on our ability to properly
carry-out business on a correct and timely basis. In addition,
third party suppliers could refuse to supply required products
due to our current cash flow constraints, which could have a
materially adverse impact on our business, financial condition
or results of operations.
We are
subject to interest rate and foreign currency
risks.
Our interest expense is sensitive to changes in interest rates.
At December 31, 2008, borrowings under the Silver Point
Agreement included $0.7 million of revolving credit
borrowings at a 14% per annum interest rate, $6.0 million
of revolving credit borrowings at an interest rate of 12% per
annum and a term loan of $33.4 million at an interest rate
of 12% per annum. The Second Amendment of the Silver Point
Agreement, signed on March 12, 2008, increased the interest
rate on outstanding indebtedness to the greater of (i) the
Adjusted Libor Rate, as defined in the Silver Point Agreement,
plus 8%, or (ii) 12%, for LIBOR borrowings, or the greater
of (x) the Adjusted Base Rate, as defined in the Second
Amendment, plus 7%, or (y) 14%, for Base Rate borrowings.
Factors outside of the Companys control cause changes in
both the Eurodollar loan rate and the prime rate.
As a result of having sales and manufacturing facilities in
Europe and Mexico, changes in the foreign currency exchange
rates and changes in the economic conditions in the countries in
which we do business could favorably or unfavorably affect
financial results. While factors influencing both foreign
currency exchange rates and general economic conditions are
outside our control, fluctuations in
12
exchange rates and foreign economic conditions could have a
material adverse effect on our international operations and on
our consolidated financial condition and results of operations.
Our
business could be subject to environmental
liabilities.
As is the case with manufacturers of similar products, certain
hazardous substances are utilized in our manufacturing
processes. While we currently do not anticipate any material
adverse effect on consolidated results of operations, financial
condition or competitive position as a result of compliance with
Federal, state, local or foreign environmental laws or
regulations, the risk of environmental liability and charges
associated with maintaining compliance with environmental laws
is inherent in the nature of our business, and there is no
assurance that material environmental liabilities and compliance
charges will not arise in the future.
We
could be subject to material legal proceedings.
In the ordinary course of business, various legal actions are
pending with respect to such matters as product liability,
casualty, environmental and employment-related claims. While
none of the pending actions of this nature are material, there
can be no assurance a material action will not be asserted in
the future.
Changes in laws and regulations that affect the governance
of public companies have increased our operating expenses and
will continue to do so.
Changes in the laws and regulations affecting public companies
included in the Sarbanes-Oxley Act of 2002 have imposed new
duties on us and on our executives, directors, attorneys and
independent registered public accounting firm. In order to
comply with these new rules, we have internally added staff
positions and hired consulting advisory firms to assist us in
the process, which have impacted operating expenses. In
particular, we have incurred additional administrative expenses
as we implemented Section 404 of the Sarbanes-Oxley Act,
which requires management to report on the Companys
internal controls, and these expenses will rise further when our
independent registered public accounting firm has to attest to
our internal controls. We have incurred significant expenses in
connection with the implementation, documentation and testing of
our existing control systems and possible establishment of new
controls and systems. Management time associated with these
compliance efforts necessarily reduces time available for other
operating activities, which could adversely affect operating
results. If we are unable to achieve full and timely compliance
with these regulatory requirements, we could be required to
incur additional costs, expend additional management time on
remedial efforts and make related public disclosures that could
adversely affect our stock price.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
13
Our corporate headquarters are located in New Haven, Connecticut
and we conduct operations through the following principal
facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Square
|
|
|
Owned/
|
|
|
|
Lease
|
Location
|
|
Footage
|
|
|
Leased
|
|
Product Line and Use
|
|
Expiration
|
|
Southaven, Mississippi
|
|
|
390,000
|
|
|
Leased
|
|
Distribution and warehouse of heat exchange products
|
|
2013
|
Mill, The Netherlands
|
|
|
274,400
|
|
|
Owned
|
|
Office and manufacturing, distribution and warehouse of heat
exchange products
|
|
|
Nuevo Laredo, Mexico
|
|
|
180,300
|
|
|
Leased
|
|
Manufacturing of heat exchange products
|
|
2012
|
Arlington, Texas
|
|
|
174,700
|
|
|
Leased
|
|
Warehouse and distribution of air conditioning parts and heavy
duty heat exchange products
|
|
2012
|
Mexico City, Mexico
|
|
|
129,100
|
|
|
Owned
|
|
Office and manufacturing, distribution and warehouse of heat
exchange products
|
|
|
Dallas, Texas
|
|
|
77,900
|
|
|
Leased
|
|
Manufacturing of heavy duty heat exchange products and
distribution and warehouse of heat exchange
|
|
2012
|
Granada, Spain
|
|
|
67,000
|
|
|
Leased
|
|
Manufacturing, distribution and warehouse for heat exchange
products
|
|
2015
|
Laredo, Texas
|
|
|
60,000
|
|
|
Owned
|
|
Warehouse of heat exchange products and manufacturing of
components for radiators
|
|
|
Laredo. Texas
|
|
|
50,800
|
|
|
Leased
|
|
Warehouse of raw material used in the manufacturing of heat
exchange products
|
|
2011
|
New Haven, Connecticut
|
|
|
44,000
|
|
|
Leased
|
|
Corporate headquarters and test facility
|
|
2009
|
Our property and equipment are in good condition and suitable
for current needs. We also have sufficient capacity to increase
production with respect to our aftermarket heat exchange and
temperature control product lines. We are currently negotiating
a renewal of the lease on our corporate headquarters and test
facility. Domestically, a network of 21 branch locations,
excluding independently owned or leased agency locations, is
maintained as of December 31, 2008, which generally enables
us to provide customers with same day delivery service. In
addition, the domestic heavy duty aftermarket is served through
8 regional manufacturing and distribution locations, including
Dallas which is shown in the table above. These 29 branch and
plant facilities are leased and generally vary in size from
1,000 square feet to 30,000 square feet.
Internationally, a network of owned and leased facilities is
maintained to serve those local markets. Information about
long-term lease commitments appears in Note 15 of the Notes
to Consolidated Financial Statements contained in Item 8 of
this Report.
|
|
Item 3.
|
Legal
Proceedings
|
In the ordinary course of business, various legal actions are
pending with respect to such matters as product liability,
casualty, environmental and employment-related claims. While
none of the pending
14
actions of this nature are material, there can be no assurance a
material action will not be asserted in the future.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of the year ended December 31, 2008.
Executive Officers of the Registrant:
|
|
|
|
|
|
|
|
|
|
|
|
|
Served as
|
|
Position or Office with the Company & Business
|
Name
|
|
Age
|
|
Officer Since
|
|
Experience During Past
Five-Year Period
|
|
Charles E. Johnson
|
|
|
63
|
|
|
March 2001
|
|
President, Chief Executive Officer and Director of Proliance
International, Inc., since 2001; Chief Executive Officer and
Director of Canadian General-Tower, Ltd., 1997 through 2001 and,
from 1996 President and Director; President and Chief Operating
Officer of Equion Corporation, 1993 through 1996.
|
|
|
|
|
|
|
|
|
|
Arlen F. Henock
|
|
|
52
|
|
|
June 2007
|
|
Executive Vice President and Chief Financial Officer of
Proliance International, Inc. since June 2007; previously,
President of Pitney Bowes Legal Solutions from 2005 to June
2007; Vice President of Finance of Pitney Bowes Global
Enterprise Solutions from 2003 to 2005; and various executive
positions with Pitney Bowes Inc. from 1980 to 2003.
|
|
|
|
|
|
|
|
|
|
Jeffrey L. Jackson
|
|
|
61
|
|
|
August 1995
|
|
Vice President, Human Resources and Assistant Secretary of
Proliance International, Inc. since July 2001; Vice
President, Human Resources of Proliance International, Inc.,
1995 to July 2001.
|
|
|
|
|
|
|
|
|
|
Chester L. Latin
|
|
|
59
|
|
|
October 2006
|
|
Vice President and Corporate Controller of Proliance
International, Inc. since October 2006; formerly Director of
Financial Controls of Proliance International, Inc., December
2004 to October 2006; Principal of C.L. Latin Consulting, a
business planning and management consulting firm, from 2000 to
2004; Senior Vice President and Chief Financial Officer of
FamilyMeds, Inc. from 1998 to 2000; previously a partner at
Coopers & Lybrand.
|
|
|
|
|
|
|
|
|
|
William J. Long III
|
|
|
55
|
|
|
August 2006
|
|
Executive Vice President of Proliance International, Inc. since
August 2006; previously, Vice President of Marketing of
Proliance International, Inc. from October 2005 to August 2006;
Vice President of Marketing for the Indy Racing League from 2002
to 2005; various executive positions at Dana Corporation and
Echlin, Inc. (which was acquired by Dana Corporation) from
1975-2002.
|
|
|
|
|
|
|
|
|
|
Richard A. Wisot
|
|
|
63
|
|
|
June 2001
|
|
Vice President, Treasurer and Secretary of Proliance
International, Inc. since 2001; also served as Chief Financial
Officer of Proliance International, Inc., 2001 through June
2007; Vice President, Treasurer and Chief Financial Officer of
Ecoair Corp., 1997 through 2001; Vice President, Controller,
Chief Accounting Officer of Echlin Inc., 1990 through 1996.
|
All officers are elected annually by the Board of Directors.
15
PART II
Item 5. Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Our common stock is traded on the NYSE Amex exchange (formerly
known as the American Stock Exchange). The number of beneficial
holders of common stock as of the close of business on
March 1, 2009, was approximately 8,100. Information
regarding common stock per share market prices is shown below
for 2008 and 2007. Market prices are the daily high and low
sales prices quoted on the NYSE Amex exchange (formerly known as
the American Stock Exchange).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
1st
Quarter
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
4th
Quarter
|
|
|
Market price of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
3.05
|
|
|
$
|
1.85
|
|
|
$
|
1.32
|
|
|
$
|
0.80
|
|
Low
|
|
$
|
1.67
|
|
|
$
|
0.89
|
|
|
$
|
0.55
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
1st
Quarter
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
4th
Quarter
|
|
|
Market price of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
5.08
|
|
|
$
|
3.85
|
|
|
$
|
3.27
|
|
|
$
|
3.25
|
|
Low
|
|
$
|
3.75
|
|
|
$
|
2.27
|
|
|
$
|
1.91
|
|
|
$
|
1.75
|
|
Quarterly common stock cash dividends were discontinued in
September 2000. Under the provisions of the Silver Point
Agreement common stock dividends may not be paid and common
shares may not be redeemed.
16
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data should be read in
conjunction with
Item 7-Managements
Discussion and Analysis of Financial Condition and Results of
Operations and
Item 8-Financial
Statements and Supplementary Data. The results of
operations of our Heavy Duty OEM business unit prior to its sale
on March 1, 2005 have been shown as income from
discontinued operation in the consolidated financial statement
information presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands, except per share data)
|
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
350,067
|
|
|
$
|
393,942
|
|
|
$
|
416,095
|
|
|
$
|
296,838
|
|
|
$
|
218,433
|
|
Gross
margin(1)
|
|
|
65,396
|
|
|
|
82,979
|
|
|
|
91,833
|
|
|
|
49,408
|
|
|
|
43,858
|
|
Restructuring charges
|
|
|
172
|
|
|
|
4,117
|
|
|
|
3,129
|
|
|
|
3,854
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(4,062
|
)
|
|
|
(16,804
|
)
|
|
|
(18,055
|
)
|
|
|
(27,731
|
)
|
|
|
(349
|
)
|
Income from discontinued operation, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
848
|
|
|
|
5,527
|
|
Gain on sale of discontinued operation, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,899
|
|
|
|
|
|
Extraordinary item negative goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,053
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(4,062
|
)
|
|
$
|
(16,804
|
)
|
|
$
|
(18,055
|
)
|
|
$
|
(9,931
|
)
|
|
$
|
5,178
|
|
Basic (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.27
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(1.19
|
)
|
|
$
|
(2.59
|
)
|
|
$
|
(0.06
|
)
|
Discontinued operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.08
|
|
|
|
0.78
|
|
Gain on sale of discontinued operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.36
|
|
|
|
|
|
Extraordinary item negative goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.22
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.27
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(1.19
|
)
|
|
$
|
(0.93
|
)
|
|
$
|
0.72
|
|
Diluted (loss) income per common
share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.27
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(1.19
|
)
|
|
$
|
(2.59
|
)
|
|
$
|
(0.06
|
)
|
Discontinued operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.08
|
|
|
|
0.78
|
|
Gain on sale of discontinued operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.36
|
|
|
|
|
|
Extraordinary item negative goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.22
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.27
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(1.19
|
)
|
|
$
|
(0.93
|
)
|
|
$
|
0.72
|
|
Balance sheet
data(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital(4)(5)
|
|
$
|
21,939
|
|
|
$
|
34,727
|
|
|
$
|
47,740
|
|
|
$
|
68,504
|
|
|
$
|
25,358
|
|
Total assets
|
|
$
|
187,205
|
|
|
$
|
208,893
|
|
|
$
|
224,362
|
|
|
$
|
217,339
|
|
|
$
|
149,859
|
|
Total debt
|
|
$
|
44,837
|
|
|
$
|
67,453
|
|
|
$
|
55,202
|
|
|
$
|
41,933
|
|
|
$
|
44,024
|
|
Stockholders equity
|
|
$
|
42,189
|
|
|
$
|
63,026
|
|
|
$
|
74,473
|
|
|
$
|
87,249
|
|
|
$
|
46,835
|
|
|
|
|
(1) |
|
Gross margin includes
$0.4 million of restructuring charges in 2005.
|
|
(2) |
|
For the years ended
December 31, 2008, 2007, 2006, 2005 and 2004, the weighted
average number of shares of common stock outstanding used for
basic earnings per share was also used in computing diluted
earnings per share due to the anti-dilutive impact of common
share equivalents on the loss per common share from continuing
operations.
|
|
(3) |
|
As of the end of each period.
|
|
(4) |
|
Working capital represents the
excess of current assets over current liabilities.
|
|
(5) |
|
The outstanding term loan at
December 31, 2008 and 2007 in the amounts of
$33.4 million and $49.6 million, respectively, was
classified as short-term debt (see Note 7).
|
17
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Introduction
The Company designs, manufactures and markets heat exchange
products (including radiators, heater cores and complete
heaters) and temperature control parts (including condensers,
compressors, accumulators/driers and evaporators) for the
automotive and light truck aftermarket. In addition, the Company
designs, manufactures and distributes heat exchange products
(including radiators, radiator cores, charge air coolers,
condensers, oil coolers, marine coolers and other specialty heat
exchangers) primarily for the heavy duty aftermarket.
The Company is organized into two segments based upon the
geographic area served Domestic and International.
The Domestic segment includes sales to customers located in the
United States and Canada, while the International segment
includes sales to customers located in Mexico, Europe and
Central America. Management evaluates the performance of its
reportable segments based upon operating income (loss) before
taxes as well as cash flow from operations which reflects
operating results and asset management.
In order to evaluate market trends and changes, management
utilizes a variety of economic and industry data including miles
driven by vehicles, average age of vehicles, gasoline usage and
pricing and automotive and light truck vehicle population data.
In addition, Class 7 and 8 truck production data and
industrial and off-highway equipment production data are also
utilized.
Management looks to grow the business through a combination of
internal growth, including the addition of new customers and new
products, and strategic acquisitions. On July 22, 2005, the
Company completed a merger transaction pursuant to which Modine
Aftermarket Holdings, Inc. (Modine Aftermarket)
merged into the Company (the merger). The
transaction provided the Company with additional manufacturing
and distribution locations in the U.S., Europe, Mexico and
Central America. As a result of the merger and the sale of the
Companys Heavy Duty OEM business to Modine on
March 1, 2005, the Company became focused predominantly on
supplying heating and cooling components and systems to the
automotive and light truck and heavy duty aftermarkets in North
and Central America and Europe. In conjunction with the merger,
the Company undertook a $14 million restructuring program,
which was completed in 2006. The savings from these programs
were offset by rising commodity costs, changes in market sales
mix and continued competitive price pressure which all adversely
impacted gross margin. As a result, during 2006, the Company
undertook additional restructuring actions to lower costs, which
resulted in the expenditure of $3.1 million. These
additional actions included product construction conversions
from copper/brass to aluminum, the closure of the Racine
administrative office and a realignment of the existing branch
structure. In 2006, the Company also announced that it
anticipated spending $2.0 million to $3.0 million on
new restructuring programs associated with changes to the
Companys branch operating structure and headcount
reductions in the United States and Mexico. These additional
actions were all completed prior to 2007 and resulted in cost
savings in excess of the restructuring costs which were incurred.
In response to soft 2007 second quarter sales, and expectations
of lower than expected results for the full year due to market
conditions, management undertook a broad range of strategic
actions to right size the operational and administrative
structure of the business going forward. These actions resulted
in a reduction in the North American workforce and a
streamlining of distribution and manufacturing facilities in
North America. In addition, these restructuring programs
included additional actions to change the Companys
go-to-market strategy through its branch operations,
which reduced branch operating costs while enhancing the
Companys capability to more efficiently service its local
customers.
Between December 31, 2006 and December 31, 2008 the
Companys cost reduction programs have resulted in a
reduction in the number of branch, plant and agency locations
from 94 to 34, an employee headcount reduction of approximately
30%, in addition to other product cost and spending
18
reductions . In taking these restructuring actions, management
is attempting to position the Company for profitability in the
future, not withstanding changes in market conditions.
On February 5, 2008, the Companys central
distribution facility in Southaven, Mississippi sustained
significant damage as a result of strong storms and tornadoes
(the Southaven Casualty Event). During the storm, a
significant portion of the Companys automotive and light
truck heat exchange inventory was also destroyed. See
Note 3 of the Notes to Consolidated Financial Statements,
contained in item 8 herein, for more details. Management
has been required to devote a significant amount of time during
2008 to the impacts of the Southaven Casualty Event, including
relocation of the facility, insurance claim issues, liquidity
issues, customer line fill issues and inventory availability and
vendor relations. In addition, efforts have been directed
towards raising new capital for the Company. The Southaven
Casualty Event did have a material adverse impact on the results
of operations for 2008 and the Companys financial
condition at December 31, 2008 and will continue to impact
2009 until the Companys cash flow issues are resolved.
Results
of Operations
Comparison
of Year Ended December 31, 2008 to 2007
The following table sets forth information with respect to the
Companys consolidated statement of operations for the
years ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
Increase (Decrease)
|
|
|
|
Amount
|
|
|
of Net Sales
|
|
|
Amount
|
|
|
of Net Sales
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(in thousands of dollars)
|
|
|
Net sales
|
|
$
|
350,067
|
|
|
|
100.0
|
%
|
|
$
|
393,942
|
|
|
|
100.0
|
%
|
|
$
|
(43,875
|
)
|
|
|
(11.1
|
)%
|
Cost of sales
|
|
|
284,671
|
|
|
|
81.3
|
|
|
|
310,963
|
|
|
|
78.9
|
|
|
|
(26,292
|
)
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
65,396
|
|
|
|
18.7
|
|
|
|
82,979
|
|
|
|
21.1
|
|
|
|
(17,583
|
)
|
|
|
(21.2
|
)
|
Selling, general and administrative expenses
|
|
|
48,611
|
|
|
|
13.9
|
|
|
|
76,031
|
|
|
|
19.3
|
|
|
|
(27,420
|
)
|
|
|
(36.1
|
)
|
Arbitration earn-out decision
|
|
|
|
|
|
|
|
|
|
|
3,174
|
|
|
|
0.8
|
|
|
|
(3,174
|
)
|
|
|
(100.0
|
)
|
Restructuring charges
|
|
|
172
|
|
|
|
0.1
|
|
|
|
4,117
|
|
|
|
1.1
|
|
|
|
(3,945
|
)
|
|
|
(95.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
16,613
|
|
|
|
4.7
|
|
|
|
(343
|
)
|
|
|
(0.1
|
)
|
|
|
16,956
|
|
|
|
Nm
|
|
Interest expense
|
|
|
15,764
|
|
|
|
4.5
|
|
|
|
13,838
|
|
|
|
3.5
|
|
|
|
1,926
|
|
|
|
13.9
|
|
Debt extinguishment costs
|
|
|
2,829
|
|
|
|
0.8
|
|
|
|
891
|
|
|
|
0.2
|
|
|
|
1,938
|
|
|
|
217.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,980
|
)
|
|
|
(0.6
|
)
|
|
|
(15,072
|
)
|
|
|
(3.8
|
)
|
|
|
13,092
|
|
|
|
86.9
|
|
Income tax provision
|
|
|
2,082
|
|
|
|
0.6
|
|
|
|
1,732
|
|
|
|
0.5
|
|
|
|
350
|
|
|
|
20.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,062
|
)
|
|
|
(1.2
|
)%
|
|
$
|
(16,804
|
)
|
|
|
(4.3
|
)%
|
|
$
|
12,742
|
|
|
|
75.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nm-not meaningful percent change.
19
The following table compares net sales and gross margin by the
Companys two business segments (Domestic and
International) for the years ended December 31, 2008 and
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
of Net Sales
|
|
|
Amount
|
|
|
of Net Sales
|
|
|
|
(in thousands of dollars)
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic segment
|
|
$
|
227,876
|
|
|
|
65.1
|
%
|
|
$
|
286,665
|
|
|
|
72.8
|
%
|
International segment
|
|
|
122,191
|
|
|
|
34.9
|
%
|
|
|
107,277
|
|
|
|
27.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
350,067
|
|
|
|
100.0
|
%
|
|
$
|
393,942
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic segment
|
|
$
|
35,754
|
|
|
|
15.7
|
%
|
|
$
|
58,346
|
|
|
|
20.4
|
%
|
International segment
|
|
|
29,642
|
|
|
|
24.3
|
%
|
|
|
24,633
|
|
|
|
23.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
65,396
|
|
|
|
18.7
|
%
|
|
$
|
82,979
|
|
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic sales in 2008 were $58.8 million or 20.5% lower
than 2007. The majority of this decline is attributable to
automotive and light truck sales lost as a result of the
Southaven Casualty Event. While heat exchange product sales were
lowered as a result of unavailable product destroyed by the
tornadoes, heat exchange and temperature control product sales
have also been lowered as a result of the cash flow constraints
resulting from the Southaven Casualty Event. The Company has
been forced to extend vendor payables because it was required by
its lender to utilize a portion of the insurance proceeds to
repay its Silver Point term loan, increase its availability
block and pay fees and expenses, as opposed to replenishing the
inventory which was destroyed. As a result of extending
payables, some vendors have been withholding shipments resulting
in lower than historic line fill percentages to customers and
the loss of some sales. The Company is working to raise
additional capital in order to repay vendors and improve cash
flow, increase inventory levels and recover the sales volume
lost due to the constrained liquidity which resulted in
unavailable product. However, there can be no assurance that
these efforts will be successful. The insurance recovery of lost
margin through the business interruption coverage of the
Southaven Casualty Event is included as a reduction of selling,
general and administrative expenses in the consolidated
statement of operations. Heat exchange and temperature control
product sales were also lowered as a result of the 60 branch and
agency closures which occurred during 2008 and 2007. The sales
of closed branches have been replaced, where possible, with
sales to other customers which have resulted in lower average
selling prices. The impact on sales and gross profit due to the
branch closures is offset by the elimination of branch operating
expenses included in selling, general and administrative
expenses. Throughout 2008, the Domestic automotive and light
truck product lines also continued to experience the impact of
ongoing competitive pricing pressure. Domestic heat exchange
sales in 2008 were also lowered as the Company was shipping
radiator product to a smaller number of Autozone distribution
centers and during the third quarter of 2008, Autozone stopped
purchasing radiator product for the remaining distribution
centers. The Company, however, continues to supply Autozone with
heaters and temperature control products as well as radiators on
customer direct orders. Although this action by Autozone
resulted in a reduction of revenue, it is not expected to have a
material impact on future operating results in part due to cost
reduction actions by the Company and the expansion of products
manufactured in Nuevo Laredo, which are expected to offset any
lost contribution margin. Domestic heavy duty product sales were
lower than a year ago reflecting soft market conditions,
particularly in the heavy truck marketplace along with the
impact of branch closures. Domestic sales, both automotive and
light truck and heavy duty, for 2008 have also been adversely
affected by the general economic conditions which impact buying
and driving habits and the September Gulf Coast hurricanes which
resulted in lower sales volume. International segment sales for
2008 were $14.9 million or 13.9% above 2007 levels,
including $7.9 million resulting from a stronger Euro in
relation to the U.S. dollar. The remaining improvement
20
in International segment sales was caused primarily by higher
marine product volume in Europe reflecting stronger market
conditions. Declines in the automotive and light truck
aftermarket heat exchange and temperature control products
between 2008 and 2007 of 16.2% and 18.2%, respectively, were the
result of the conditions discussed above. Heavy duty aftermarket
sales increased 7.1% as the growth of the European marine
business more than offset the declines experienced in the
domestic markets.
Gross margins, as a percentage of net sales, for 2008 were 18.7%
compared with 21.1% a year ago. Reduced sales volumes and
increased levels of manufacturing costs as a result of the
Southaven Casualty Event have adversely impacted margins in
2008. The business interruption recovery of costs and lost
margin associated with the Southaven Casualty Event of
$14.5 million, as noted below, is recorded as a reduction
of selling, general and administrative expenses. This recovery
only partially offset the lost margin and costs incurred as a
result of the Southaven Casualty Event. In addition, as noted
above, the closure of branch and agency locations resulted in
lower average selling prices and lower gross margin, the impact
of which is offset by a reduction in operating expenses. Margins
in 2008 were also lowered by the continued impact of competitive
pricing pressure. While commodity prices experienced during the
first half of 2008 were higher than those in 2007, during the
second half of the year we have experienced lower prices,
resulting in comparable average prices for the year. Commodity
prices going into 2009 will be at lower levels than those
experienced in the first part of 2008. In an effort to offset in
part the declines in gross margin experienced in 2008, the
Company continued to initiate new action plans under its
on-going cost reduction program. These cost reduction actions
included product cost reductions and the shift of production to
Nuevo Laredo of certain heat exchange product which was
previously purchased. The impacts identified above, principally
the Southaven Casualty Event and the branch closures, combined
to result in a decline in 2008s domestic segment gross
margin to 15.7% of trade sales from 20.4% in 2007. International
segment gross margin as a percentage of sales improved to 24.3%
in 2008 compared to 23.0% in 2007 due to pricing and cost
reduction actions which have been initiated principally in
Europe.
Selling, general and administrative expenses for 2008 decreased
to 13.9% of sales versus 19.3% of sales a year ago. The net
tornado insurance recovery impact discussed below of
$15.3 million, which represented 4.4% of sales, along with
cost reduction actions initiated during 2007 and 2008 account
for the majority of the improvement. These actions include the
closure of 60 branch locations during 2007 and 2008 and other
headcount and expense reductions. Freight expenses during 2008
rose approximately $2.0 million reflecting the higher cost
of fuel and the Companys provision for bad debts was
increased approximately $1.0 million due to the insolvency
of a customer. Expenses in 2008 were lowered by the
$1.5 million gain resulting from the sale of our unused
Emporia, Kansas facility which had been acquired in the Modine
Aftermarket merger in 2005. Expense levels in 2007 were lowered
by the recording of a $0.7 million gain on the sale of a
building vacated as a result of the branch consolidation actions
and by $0.4 million for the reversal of a vendor payable
recorded at the time of the Modine Aftermarket merger, which was
no longer required.
As described in Note 3 of the Notes to Consolidated
Financial Statements, on February 5, 2008, the
Companys central distribution facility in Southaven,
Mississippi sustained significant damage as a result of strong
storms and tornadoes. The storm also destroyed a significant
portion of the Companys automotive and light truck heat
exchange inventory. On July 30, 2008, the Company settled
the claim associated with the Southaven Casualty Event with its
insurance carrier resulting in a total recovery of
$52.0 million. Included in selling, general and
administrative expenses in the condensed consolidated statement
of operations for 2008, is a $15.3 million net gain
resulting from the Southaven Casualty Event reflecting a gain on
the disposal of fixed assets of $2.3 million, as the
insurance recovery was in excess of the damaged assets net book
value, $14.5 million from the recovery of business
interruption losses and a $1.1 million gain resulting from
the recovery of margin on a portion of the destroyed inventory,
which were offset in part by expenses of $2.6 million
incurred as a result of the tornadoes. The insurance recovery
did not completely offset the impacts of lost sales and
additional costs incurred by the Company during 2008.
21
During the second quarter of 2007, the Company received an
arbitration decision regarding an earn-out calculation
associated with the acquisition of EVAP, Inc. in 1998 (see
Note 11 of the Notes to Consolidated Financial Statements).
As a result of the arbitrators decision, the Company
recorded a non-cash charge of $3.2 million, which amount
resulted from an increase in the liquidation preference of the
Companys Series B Preferred Stock.
Restructuring charges in 2008 of $0.2 million represent
costs associated with the closure of 10 branch locations
partially offset by credits received from the cancellation of
vehicle leases associated with previously closed branch
locations. In September 2006, the Company commenced a process to
realign its branch structure, which included the relocation,
consolidation or closure of some branches and the establishment
of expanded relationships with key distribution partners in some
areas, as well as the opening of new branches, as appropriate.
Actions during 2007 and 2008 have resulted in the reduction of
branch and agency locations from 94 at December 31, 2006 to
34 at December 31, 2008 and the establishment of supply
agreements with distribution partners in certain areas. These
actions have improved the Companys market position and
business performance by achieving better local branch
utilization where multiple locations were involved, and by
establishing in some cases, relationships with distribution
partners to address geographic locations which do not justify
stand-alone branch locations. Annual savings from these actions
have exceeded the costs incurred. In 2007, the Company reported
restructuring costs of $4.1 million primarily associated
with the closure of branch locations and operating support
headcount reductions in the United States and production
headcount reductions at the Companys Mexican facilities.
Restructuring actions during 2007 and 2008 have resulted in a
reduction in the number of employees by approximately 30%.
The Domestic segment operating income for 2008 increased to
$18.3 million from $7.2 million in 2007 as the impact
of cost reduction actions, which lowered operating expenses and
product costs, and lower levels of restructuring costs were
offset by lower net trade sales due to the impacts of the
Southaven Casualty Event and the reduction in the number of
branch locations. The net recovery of $15.3 million
associated with the Southaven Casualty Event is included in the
domestic segment operating income for the period, partially
offsetting the impact of lost sales and costs which were
incurred. The International segment operating income improved to
$5.7 million compared to $3.5 million in 2007 due to
increased sales, primarily of marine product, and cost reduction
actions at our European operations. In 2007, there were also
$0.2 million of restructuring costs impacting the
International segment which did not occur in 2008. Corporate
expenses in 2008 were $0.5 million below 2007 largely as a
result of cost reduction actions.
Interest costs in 2008 were $1.9 million above last year
due to higher average interest rates and increased amortization
of deferred debt costs which more than offset the impacts of
lower average debt levels and lower discounting expense
associated with customer sponsored payment programs. Average
interest rates on our Domestic Credit Facility were 11.8% in
2008 compared to 8.9% in 2007. In addition, the
$3.3 million of borrowings by NRF under its credit facility
at December 31, 2008 were borrowed at an interest rate of
4.29%, while at December 31, 2007 there were no borrowings
outstanding. Deferred debt cost amortization is
$3.2 million higher in 2008 compared to last year due to
costs associated with the Credit Facility entered into in 2007
and the amendments which have been made to it during 2008. The
costs added in 2008 included the fair value of the warrants
issued to Silver Point and cash payments associated with several
of the amendments. Average total debt levels in 2008 were
$58.2 million compared to $67.6 million in the same
period of 2007 due to required term loan repayments using funds
received from the Southaven Casualty Event insurance claim.
Discounting fees for 2008 were $2.8 million compared to
$5.2 million in 2007. This $2.4 million decline mainly
reflects lower levels of customer receivables being collected
utilizing these programs, the majority of which is due to the
decline in sales to Autozone and the fact that another customer
discontinued offering this program to all of its vendors.
Interest expense in 2007 included $0.2 million of interest
on unpaid dividends associated with the arbitration decision
(see Note 11 of the Notes to Consolidated Financial
Statements).
22
Debt extinguishment costs of $2.8 million during 2008
included $0.9 million for prepayment penalties required by
the Silver Point Agreement and $1.9 million from the
non-cash write-off of deferred debt costs, which were previously
capitalized, as a result of the Fourth Amendment replacement of
Wachovia Capital Finance Corporation (New England)
(Wachovia) by Wells Fargo as borrowing base agent
and lender under the Credit Agreement and the term loan
repayments during 2008 from the receipt of insurance proceeds
and extraordinary receipts. On July 19, 2007, the Company
entered into the Silver Point Agreement and utilized a majority
of the proceeds to repay all existing indebtedness under the
Companys Agreement with Wachovia Capital Finance
Corporation. As a result of the Wachovia debt repayment, the
Company recorded $0.9 million as debt extinguishment costs
during the year ended December 31, 2007.
For 2008 and 2007, the effective tax rate included only a
foreign provision, as the reversal of the Companys
deferred tax valuation allowances offset a majority of the state
and any federal income tax provisions. The 2008 tax provision
also includes a $0.2 million benefit from a Mexican tax
credit realized upon the filing of the 2007 tax return. The 2007
provision also included $0.1 million associated with the
adjustment of the NRF deferred tax asset as a result of changes
in statutory income tax rates.
Net loss for the year ended December 31, 2008 was
$4.1 million or $0.27 per basic and diluted share compared
to a net loss of $16.8 million or $1.18 per basic and
diluted share for the same period a year ago.
Comparison
of Year Ended December 31, 2007 to 2006
The following table sets forth information with respect to the
Companys consolidated statement of operations for the
years ended December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
Increase (Decrease)
|
|
|
|
Amount
|
|
|
of Net Sales
|
|
|
Amount
|
|
|
of Net Sales
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(in thousands of dollars)
|
|
|
Net sales
|
|
$
|
393,942
|
|
|
|
100.0
|
%
|
|
$
|
416,095
|
|
|
|
100.0
|
%
|
|
$
|
(22,153
|
)
|
|
|
(5.3
|
)%
|
Cost of sales
|
|
|
310,963
|
|
|
|
78.9
|
|
|
|
324,262
|
|
|
|
77.9
|
|
|
|
(13,299
|
)
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
82,979
|
|
|
|
21.1
|
|
|
|
91,833
|
|
|
|
22.1
|
|
|
|
(8,854
|
)
|
|
|
(9.6
|
)
|
Selling, general and administrative expenses
|
|
|
76,031
|
|
|
|
19.3
|
|
|
|
93,811
|
|
|
|
22.5
|
|
|
|
(17,780
|
)
|
|
|
(19.0
|
)
|
Arbitration earn-out decision
|
|
|
3,174
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
3,174
|
|
|
|
Nm
|
|
Restructuring charges
|
|
|
4,117
|
|
|
|
1.1
|
|
|
|
3,129
|
|
|
|
0.8
|
|
|
|
988
|
|
|
|
31.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(343
|
)
|
|
|
(0.1
|
)
|
|
|
(5,107
|
)
|
|
|
(1.2
|
)
|
|
|
4,764
|
|
|
|
93.3
|
|
Interest expense
|
|
|
13,838
|
|
|
|
3.5
|
|
|
|
11,228
|
|
|
|
2.7
|
|
|
|
2,610
|
|
|
|
23.2
|
|
Debt extinguishment costs
|
|
|
891
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
891
|
|
|
|
Nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(15,072
|
)
|
|
|
(3.8
|
)
|
|
|
(16,335
|
)
|
|
|
(3.9
|
)
|
|
|
1,263
|
|
|
|
7.7
|
|
Income tax provision
|
|
|
1,732
|
|
|
|
0.5
|
|
|
|
1,720
|
|
|
|
0.4
|
|
|
|
12
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,804
|
)
|
|
|
(4.3
|
)%
|
|
$
|
(18,055
|
)
|
|
|
(4.3
|
)%
|
|
$
|
1,251
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nm-not meaningful percent change.
23
The following table compares net sales and gross margin by the
Companys two business segments (Domestic and
International) for the years ended December 31, 2007 and
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
Amount
|
|
|
of Net Sales
|
|
|
Amount
|
|
|
of Net Sales
|
|
|
|
(in thousands of dollars)
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic segment
|
|
$
|
286,665
|
|
|
|
72.8
|
%
|
|
$
|
321,256
|
|
|
|
77.2
|
%
|
International segment
|
|
|
107,277
|
|
|
|
27.2
|
%
|
|
|
94,839
|
|
|
|
22.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
393,942
|
|
|
|
100.0
|
%
|
|
$
|
416,095
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic segment
|
|
$
|
58,346
|
|
|
|
20.4
|
%
|
|
$
|
68,310
|
|
|
|
21.3
|
%
|
International segment
|
|
|
24,633
|
|
|
|
23.0
|
%
|
|
|
23,523
|
|
|
|
24.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
82,979
|
|
|
|
21.1
|
%
|
|
$
|
91,833
|
|
|
|
22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic segment sales for 2007 were $34.6 million or 10.8%
lower than the sales level reported in 2006. Within the domestic
segment, lower sales of both heat exchange and temperature
control products was driven by branch closures which occurred
during the fourth quarter of 2006 and throughout 2007, customer
efforts to lower inventory levels and soft market demand. The
customer inventory actions and soft market demand was
attributable to economic and weather conditions which lead to a
soft and short selling season. The shift in customer mix due to
lower sales through the Companys branch locations resulted
in lower average selling prices for domestic products. The
Company also continued to experience the impact of ongoing
competitive pricing pressure on its domestic heat exchange
products. In the domestic temperature control product line, the
sales decline from a year ago also reflected higher pre-season
orders from several major customers during the first quarter of
2006, which did not occur in 2007. Domestic heavy duty
aftermarket heat exchange product sales were lower than 2006
reflecting soft market conditions, particularly in the heavy
truck marketplace. International segment sales for 2007 were
$12.4 million or 13.1% above 2006, including
$6.6 million resulting from year-over-year differences in
exchange rates principally between the Euro and the
U.S. dollar. The remaining improvement in international
sales was caused by higher marine and heat exchange product
sales in Europe during 2007. Worldwide automotive and light
truck heat exchange sales of $257.3 million were
$7.4 million or 2.8% lower than 2006, automotive and light
truck temperature control sales of $46.8 million were
$17.0 million or 26.7% below the prior year, and heavy duty
heat exchange product sales of $89.8 million were
$2.2 million or 2.5% above sales in 2006. The automotive
and light truck heat exchange and temperature control declines
are largely driven by the domestic declines described above
while the heavy duty improvement reflects higher marine product
sales in the international segment.
Gross margins, as a percentage of net sales, for 2007 were 21.1%
compared with 22.1% in 2006. Gross margins continue to be
adversely affected by the impact of higher commodity prices,
competitive pricing pressure and the shift in customer mix of
sales away from the branch locations, due to branch closures,
and to our wholesale customer base. This change in mix towards
wholesale customers resulted in a lower gross margin as a
percentage of sales. While the gross margin percentage was
lowered by branch closures, this effect was offset by reductions
in operating expense levels. Margins in 2007 were also reduced
by product mix changes in Europe. Copper and aluminum market
costs reflected in gross margin during 2007 were approximately
31% and 14%, respectively, over their levels in 2006. The
conditions described above more than offset the benefits
realized from cost reduction actions implemented by the Company
to lower manufacturing costs. During the fourth quarter of 2006,
$1.8 million of unabsorbed overhead variances were included
in cost of sales as a result of production cutbacks made at
manufacturing facilities in order to lower inventory levels and
reflect the shift of production from copper/brass to aluminum
radiator construction. These production cutbacks did not
24
recur in 2007. In addition, during the fourth quarter of 2006,
the Company changed the way that it estimated the period over
which capitalized product cost variances should be written off
in order to have costs more closely match the turnover and sale
of product. As a result of this change, $1.8 million of
costs which would have been included in inventory at
December 31, 2006, were included in cost of sales.
Selling, general and administrative expenses for 2007 compared
to 2006 decreased by $17.8 million to 19.3% of sales versus
22.5% of sales in 2006. The reduction in expenses reflected
lower administrative spending, as a result of cost reduction
actions implemented during the fourth quarter of 2006 and during
2007, including the elimination of the Racine administrative
office and the consolidation of these functions into the
Companys New Haven corporate office and other operating
support headcount reductions. Branch spending expenses for 2007
were lower than those incurred in 2006 due to the impact of the
program initiated during the third quarter of 2006 to better
align the Companys go-to-market strategy with customer
needs. This program, which included the relocation,
consolidation or closure of some branches and the establishment
of expanded relationships with key distribution partners in some
areas, resulted in a reduction in the number of branch and
agency locations from 123 at the beginning of 2006 to 46 at
December 31, 2007. Expense levels during 2007 were also
lowered by $0.7 million for the recording of a gain on the
sale of a building vacated as a result of the branch
consolidation actions and by $0.4 million as a result of
the reversal of a vendor payable, recorded at the time of the
Modine Aftermarket merger, which was no longer required
During the second quarter of 2007, as described in Note 11
of the Notes to Consolidated Financial Statements, the Company
received an arbitration decision regarding an earn-out
calculation associated with the acquisition of EVAP, Inc. in
1998. As a result of the arbitrators decision, the Company
recorded in the second quarter of 2007, a non-cash charge of
$3.2 million, which amount resulted from an increase in the
liquidation preference of the Companys Series B
Preferred Stock.
In 2007, the Company reported restructuring costs of
$4.1 million primarily associated with the closure of 48
branch locations during the year, operating support headcount
reductions in the United States and production headcount
reductions at the Companys Mexican facilities. The branch
closures were part of the previously announced program to change
the Companys go-to-market strategy through its
branch operations, in order to further reduce branch operating
costs while enhancing the Companys capability to more
efficiently service its local customers, while the headcount
reductions were part of the strategic actions announced on
July 25, 2007. In response to soft 2007 second quarter
sales and expectations of lower-than-expected results for the
full year, due to market conditions, the Company indicated that
it was finalizing and acting upon a broad range of strategic
actions to right size its operational and administrative
structure going forward. Salaried headcount in the U.S. was
reduced by approximately 200 during 2007 and total headcount at
the Companys manufacturing locations in Mexico was reduced
by approximately 100. Benefits realized from these restructuring
actions exceeded the costs incurred. During 2006, the Company
reported $3.1 million of restructuring costs. These costs
were associated with the completion of the relocation of Nuevo
Laredo copper/brass radiator production to Mexico City, the
relocation of a portion of the air conditioning parts
manufacturing operation located in Arlington, Texas to Nuevo
Laredo, Mexico, workforce reductions at our MexPar manufacturing
facility in Mexico City, Mexico associated with the conversion
of radiator production from copper/brass construction to
aluminum, the closure of the Racine office and changes in our
go-to-market distribution strategy which has resulted in our
decision to close some branch locations. These costs were
attributable to one-time workforce related costs, facility
consolidation costs and the write-down to net realizable value
of fixed assets which have no future use and were part of the
restructuring program which the Company announced in 2005 in
conjunction with the Modine Aftermarket merger.
The Domestic segment operating income in 2007 increased to
$8.3 million from $2.7 million in 2006 as the impact
of cost reduction actions, which lowered operating expenses and
product costs, offset an increase in restructuring costs from
$2.2 million in 2006 to $3.9 million in 2007.
International segment operating income in 2007 improved to
$3.5 million compared to $2.9 million in 2006
reflecting a
25
reduction in restructuring charges from $0.9 million in
2006 to $0.2 million in 2007. Corporate expenses in 2007
were lower than 2006 due to cost reduction actions.
Interest expense in 2007 was $2.6 million above levels in
2006 reflecting a combination of higher average interest rates
and higher average debt levels. Average interest rates on the
Companys domestic revolving credit and term loan
borrowings were 8.94% in 2007 compared to 7.40% in 2006. Higher
interest rates in 2007 reflect the impact of the Companys
Credit and Guaranty Agreement, as described in Note 7 of
the attached Notes to Consolidated Financial Statements. Average
debt levels were $67.6 million in 2007, compared to
$56.9 million in 2006. The increase in average debt levels
primarily reflected borrowings by the Companys NRF
subsidiary under its available credit facility during the year
along with increased borrowing levels as a result of the Silver
Point Agreement. Discounting expense, associated with the
Companys participation in customer-sponsored vendor
payment programs, was $5.2 million in 2007, compared to
$5.8 million in 2006, mainly reflecting a decline in the
level of customer receivable collections utilizing these
programs. Interest expense in 2007 also included
$0.3 million from the settlement of interest charges
related to inventory purchases and $0.2 million of interest
on unpaid dividends associated with the arbitration decision
described in Note 11 of the attached Notes to Consolidated
Financial Statements. Amortization of deferred debt costs in
2007 was higher than 2006 due to costs associated with the
Silver Point debt financing. As a result of specific events of
default, as defined in the Silver Point Agreement, effective
November 30, 2007, the Company was charged an additional 2%
default interest. Results for the year ended December 31,
2007 included $0.1 million of default interest. The Second
Amendment to the Agreement (the Second Amendment),
signed on March 12, 2008, contained a waiver of the 2007
events of default resulting in the elimination of the default
interest, as of the Second Amendment date. Interest expense in
2006 was lowered by $0.2 million of interest income
associated with the settlement of litigation.
As described in Note 7 of the Notes to Consolidated
Financial Statements, on July 19, 2007, the Company entered
into the Silver Point Agreement and utilized a majority of the
proceeds to repay all indebtedness under the Companys
Amended and Restated Loan and Security Agreement with Wachovia
Capital Finance Corporation. As a result of the Wachovia debt
repayment, the Company recorded $0.9 million as debt
extinguishment costs during the year ended December 31,
2007. This reflected the non-cash write-off of a portion of the
deferred debt costs associated with the Wachovia Agreement which
had been capitalized and were being amortized over the life of
the Wachovia Agreement.
In 2007 and 2006, the effective tax rate included only a foreign
provision, as the reversal of the Companys
U.S. deferred tax valuation allowances offset a majority of
the state and any federal income tax provisions. The 2007
provision also included $0.1 million associated with the
adjustment of the NRF deferred tax asset as a result of changes
in statutory income tax rates.
The net loss for 2007 was $16.8 million or $1.18 per basic
and diluted share, compared to a net loss of $18.1 million
or $1.19 per basic and diluted share for the same period in 2006.
Financial
Condition, Liquidity and Capital Resources
In 2008, the Company generated $32.6 million from operating
activities which principally reflected the impact of increased
vendor accounts payable, the Southaven Casualty Event which
resulted in lower levels of inventory and lower spending levels
due to cost reduction initiatives during the year which resulted
in improved operating income. Accounts receivable increased by
$1.7 million as the impact of lower receivable balances as
a result of lower sales to Autozone was offset by higher
balances with a retail customer who discontinued offering its
customer sponsored vendor payment program to all of its vendors
during the year. Inventories were reduced by $17.6 million
as the elimination of $25.6 million of inventory destroyed
by the Southaven Casualty Event was partially offset by
expenditures to replenish the damaged inventory. Accounts
payable grew by $18.7 million as the Company has extended
its normal vendor payment terms in light of the payments it has
been required to make
26
under the Silver Point Agreement, utilizing funds received from
the insurance claim associated with the Southaven Casualty
Event. As indicated in Note 3 of the Notes to Consolidated
Financial Statements included in this
Form 10-K,
the Company was required by its lenders to make repayments of
the term loan, maintain an availability block of between
$2.5 million and $5.0 million, and pay fees and
expenses resulting in the loss of approximately
$20.0 million of liquidity. Accrued liability outflows of
$5.1 million reflect the timing of payments to customers
for sales rebates, allowances and customer acquisition costs and
payments of restructuring costs.
During 2007 the Company used $5.5 million of cash for
operating activities. Cash was utilized to fund operations and
to lower liability levels. Trade accounts receivable rose by
$2.6 million due to the timing of receipts from several
major U.S. customers. Inventories declined by
$14.4 million reflecting the Companys ongoing
inventory reduction efforts. During 2007, the Company took
additional steps to right-size its North American manufacturing
operations and to reduce levels of excess or slow moving
inventory, which contributed to the inventory decline. Accounts
payable and accrued liabilities were lowered by
$6.0 million and $4.9 million, respectively, as the
Company utilized funds provided by the Silver Point Agreement to
reduce trade indebtedness and pay restructuring costs.
During 2006, cash used in operating activities was
$5.2 million. Accounts receivable levels increased by
$1.0 million due primarily to a higher level of net trade
sales during the fourth quarter of 2006 than in the same period
of 2005. Inventory levels decreased by $4.0 million
reflecting inventory reduction actions taken during the fourth
quarter of 2006, which more than offset the impact of rising
commodity costs. The Company lowered inventory by
$18.1 million during the fourth quarter of 2006 from the
balance at the end of the third quarter of 2006 by initiating
actions to reduce production at its manufacturing locations and
lower product purchases in order to reduce inventory to more
appropriate levels. The inventory reduction actions were
necessary due to the higher inventory levels on hand because of
the shorter summer selling season and the
Companys desire to reduce working capital by improving
inventory through-put and lowering restocking levels. The fourth
quarter and full-year inventory reductions included
$1.8 million due to the Companys decision to change
the way it estimated the period over which capitalized product
cost variances were written off. As a result of the change in
estimate, inventory was lowered and cost of sales increased
during the fourth quarter of 2006. Accounts payable levels rose
by $6.8 million reflecting the Companys attempts to
balance vendor payments with incoming receipts and increased
activity to support the higher sales level. The change in other
operating assets and liabilities primarily reflects a
$5.2 million advance to several vendors made by the
Companys European subsidiary in anticipation of estimated
future purchase requirements.
During 2008, capital expenditures of $5.2 million resulted
from cost reduction activities and the replacement of assets
destroyed by the Southaven Casualty Event. Capital expenditures
during 2007 of $3.0 million were primarily to support cost
reduction activities in North America and Europe. In 2006, the
Company had $7.6 million of capital expenditures primarily
for cost reduction activities, product construction conversions
from copper/brass to aluminum, the conversion of an existing
copper/brass tube mill to aluminum and computer system upgrades
in the U.S. and in Europe. Capital expenditures are
expected to approximate $5.0 million in 2009, which will
primarily reflect expenditures associated with cost reduction
actions. It is anticipated that these expenditures will either
be funded by operations, leasing actions or from borrowings
under the Silver Point Agreement or the credit agreement
existing at the time of the expenditures.
During 2008 the Company sold an unused facility which had been
acquired as part of the Modine Aftermarket merger in 2005,
resulting in the generation of $1.5 million of cash. This
facility had been written down to a zero net book value as part
of the Modine Aftermarket merger purchase accounting entries. In
2007, $0.8 million of cash was generated by the sale of a
facility which had been closed in conjunction with the
Companys cost reduction initiatives.
As a result of the Southaven Casualty Event (see Note 3 of
the Notes to Consolidated Financial Statements) a
$3.4 million insurance claim was recorded for the recovery
with respect to fixed assets
27
which were destroyed. Cash for this insurance claim was received
from the insurance company during 2008.
In a 2008 fourth quarter non-cash transaction, the Company
entered into a $2.2 million capital lease to finance the
acquisition of new racking for its Southaven, Mississippi
warehouse to replace assets damaged by the Southaven Casualty
Event. In a 2007 non-cash transaction, the Company utilized
$4.4 million of a vendor advance made in 2006 to offset
accounts payable. During the fourth quarter of 2006, the Company
recorded the settlement of litigation with the former financial
controller of its Nuevo Laredo, Mexico facility concerning the
embezzlement of funds. The settlement included the non-cash
recovery from the former controller of $1.0 million
reflecting the embezzled funds ($0.5 million), interest
income ($0.2 million) and the recovery of previously
expensed legal and professional fees ($0.3 million) and the
payment by the Company of $1.2 million in cash to the bank
in return for title to the warehouse building in Laredo, Texas
which the Company previously leased from the financial
controller. In addition, in the fourth quarter of 2006, the
Company entered into a lease agreement to replace and upgrade
its U.S. computer system at a lower ongoing cost.
On July 22, 2005, the Company completed its merger with
Modine Aftermarket. Transaction costs associated with the
merger, approximated $8.7 million, of which
$0.9 million were paid in 2006. During the years ended
December 31, 2008, 2007 and 2006, the Company had
expenditures of $0.1 million, $0.3 million and
$1.0 million, respectively, for restructuring activities
impacting Modine facilities which were accrued on the
acquisition balance sheet.
Cash dividends paid to a preferred shareholder were
approximately $0.2 million, $1.2 million and
$0.1 million in 2008, 2007 and 2006, respectively. The
increase in 2007 reflected accumulated dividends paid as a
result of the arbitration earn-out decision (see note 11 of
the Notes to Consolidated Financial Statements).
Total debt outstanding at December 31, 2008 was
$44.8 million; $22.6 million lower than at the end of
2007. This decrease reflects the required pay-downs of the
outstanding borrowings under the Silver Point Agreement using
the insurance proceeds, the proceeds from the sale of an idle
facility and other receipts, partially offset by NRFs
increased borrowings against its credit facility.
Credit
and Guaranty Agreement with Silver Point Finance, LLC
Effective July 19, 2007, the Company entered into a Credit
and Guaranty Agreement (the Silver Point Agreement)
by and among the Company and certain domestic subsidiaries of
the Company, as guarantors, the lenders party thereto from time
to time (collectively, the Lenders), Silver Point
Finance, LLC (Silver Point), as administrative agent
for the Lenders, collateral agent and as lead arranger, and
Wachovia Capital Finance Corporation (New England)
(Wachovia), as borrowing base agent.
Pursuant to the Silver Point Agreement, and upon the terms and
subject to the conditions thereof, the Lenders agreed to extend
certain credit facilities (the Facilities) to the
Company in an aggregate principal amount not to exceed
$100 million, consisting of (a) $50 million
aggregate principal amount of Tranche A Term Loans,
(b) up to $25 million aggregate principal amount of
Revolving A Commitments (including a $7.5 million letter of
credit subfacility), and (c) up to $25 million
aggregate principal amount of Revolving B Commitments.
Availability under the Revolving Commitments is determined by
reference to a borrowing base formula. The Tranche A Term
Loans and any Revolving Loans are due and the commitments
terminate on the five-year anniversary of the closing,
July 19, 2012. Subject to customary exceptions and
limitations, the Company could elect to borrow at a per annum
Base Rate (as defined in the Silver Point Agreement) plus
375 basis points or a per annum LIBOR Rate (as defined in
the Silver Point Agreement) plus 475 basis points. The
proceeds from the borrowings under the Silver Point Agreement at
closing on July 19, 2007 were used to repay all Company
indebtedness under the Companys Amended and Restated Loan
and Security Agreement, dated February 28, 2007 (the
Wachovia Agreement), with Wachovia Capital Finance
Corporation (New England), formerly known as Congress Financial
Corporation (New England), as agent, and fees
28
and expenses related thereto. As with the prior Wachovia
Agreement, all borrowings under the Silver Point Agreement are
secured by substantially all of the assets of the Company
(including a pledge of 65% of the shares of the Companys
NRF and Mexican subsidiaries). The Silver Point Agreement
provides call protection to the Lenders (subject to certain
exceptions) by way of the lesser of a make-whole amount and
prepayment premium ranging from 5% to 3% to 1%, respectively, of
outstanding loans prepaid over years 2, 3, and 4. Mandatory
prepayments in year 1 are subject to such make-whole amount
(subject to certain exceptions). Voluntary prepayments of
Revolving Loans are first applied to the Revolving A Loans
outstanding. While voluntary prepayments of the Tranche A
Term Loan are permitted after year 1, resulting availability
must be at least $5 million. The Agreement requires
mandatory prepayments of the loans with the proceeds of
issuances of debt and equity of the Company or its subsidiaries,
as well as an annual 75% excess cash flow sweep (subject to
availability minimums) (in each of the foregoing cases, the
proceeds of which are applied first, to the Tranche A Term
Loans, second, to the Revolving A Loans and third, to the
Revolving B Loans) and in respect of asset sales and following
the incurrence of debt from the Lenders at its NRF subsidiary.
Generally, mandatory prepayment with proceeds of inventory or
accounts are applied first to the Revolving A Loans, second, to
the Revolving B Loans and third, to the Tranche A Term
Loan, and mandatory prepayments with proceeds of other
collateral are applied first, to the Tranche A Term Loans
second, to the Revolving A Loans and third, to the Revolving B
Loans. Holders of Tranche A Term Loans may waive their
mandatory prepayment right, in which case such proceeds will be
applied pro rata to the remaining holders of the Tranche A
Term Loans.
At December 31, 2008, borrowings under the Silver Point
Agreement included $0.7 million of revolving credit
borrowings at a 14% per annum interest rate, $6.0 million
of revolving credit borrowings at 12% per annum and a term loan
of $33.4 million at an interest rate of 12% per annum. The
Second Amendment of the Silver Point Agreement, signed on
March 12, 2008, increased the interest rate on outstanding
indebtedness to the greater of (i) the Adjusted Libor Rate,
as defined in the Silver Point Agreement, plus 8%, or
(ii) 12%, for LIBOR borrowings, or the greater of
(x) the Adjusted Base Rate, as defined in the Second
Amendment, plus 7%, or (y) 14%, for Base Rate borrowings.
As a result of uncertainties concerning the Companys
ability to continue to meet or obtain waivers for violations of
covenants in the future and to obtain additional funding, the
outstanding term loan in the amount of $33.4 million at
December 31, 2008 was classified as short-term debt in the
consolidated financial statements included in this
Form 10-K.
Borrowings under the Silver Point Agreement as of
December 31, 2007 included $17.1 million of revolving
credit obligations at interest rates of 9.896% and 11.0% per
annum and a term loan of $49.6 million at an interest rate
of 10.125% per annum. As a result of the uncertainties
concerning the Companys ability to reduce the Borrowing
Base Overadvance to zero by May 31, 2008 (see Note 3),
the outstanding term loan at December 31, 2007 in the
amount of $49.6 million was classified as short-term debt
in the consolidated financial statements included in this
Form 10-K.
The Silver Point Agreement contains customary representations,
warranties, affirmative covenants for financing transactions of
this nature (including, without limitation, covenants in respect
of financial and other reporting and a covenant to hedge
interest in the future in respect of up to $25 million
principal of the Tranche A Term Loan for up to two years),
negative covenants (including limitation on debt, liens,
restricted payments, investments, sale-leaseback transactions),
fundamental changes (including an annual $10 million limit
on asset sales), affiliate transactions (including prohibition
on transfers of assets to subsidiaries of the Company that are
not guarantors of the Facilities) and events of default
(including any pledge of assets of NRF or its subsidiaries or
any change of control).
The Silver Point Agreement also has quarterly and annual
covenants relating to leverage, capital expenditures, EBITDA,
and a fixed charge coverage ratio. Certain financial covenants
are tested on a consolidated basis as well as in respect of the
Companys domestic subsidiaries and a Mexican subsidiary
and in respect of its European operations on a stand alone
basis. At September 30, 2007, the Company was in violation
of the consolidated senior leverage and NRF total debt covenants
contained in the Silver Point Agreement. The Company obtained
waivers for these violations. As of
29
November 30, 2007, the Company was in violation of the
EBITDA covenant for its domestic subsidiaries and at
December 31, 2007, the Company was in violation of the
consolidated EBITDA, senior leverage and fixed charge covenants
and the domestic EBITDA, fixed charge and senior leverage
covenants. As a result of these specific events of default, as
defined in the Silver Point Agreement, effective
November 30, 2007, the Company was charged an additional 2%
default interest until the date the events of default were cured
or waived. Results for the year ended December 31, 2007
included $0.1 million of default interest. The Second
Amendment to the Silver Point Agreement (the Second
Amendment), signed on March 12, 2008, described in
more detail below, contained a waiver of the 2007 events of
default resulting in the elimination of the default interest, as
of the Second Amendment date. During the twelve months ended
December 31, 2008, $0.3 million of default interest
was included in interest expense in the consolidated statement
of operations. At December 31, 2008, the Company was in
compliance with all financial covenants of the Silver Point
Agreement except the U.S. and consolidated senior leverage
ratio covenants and the NRF operating lease covenant. In
addition, as a result of the explanatory paragraph in the
accountants opinion for the year ended December 31,
2008 concerning the Companys ability to continue as a
going concern, the Company was in default of the Silver Point
Agreement. The Twenty-Second Amendment to the Silver Point
Agreement (see Note 19), signed as of March 17, 2009
contained a waiver of these events of default.
During the twelve months ended December 31, 2008, as
required by the Silver Point Agreement, the term loan was
reduced by $14.7 million from the receipt of insurance
proceeds associated with the Southaven Casualty Event, by
$0.5 million from the receipt of Extraordinary Receipts, as
defined in the Silver Point Agreement, and by $1.0 million
from the receipt of proceeds from the sale of an unused facility
in Emporia, Kansas. The term loan was reduced by
$0.4 million during the year ended December 31, 2007
from the receipt of Extraordinary Receipts. As a result of the
term loan reductions from the receipt of the insurance proceeds,
the Company incurred prepayment premiums, as required by the
Silver Point Agreement, of $0.9 million, which were
recorded in debt extinguishment costs in the consolidated
statement of operations for the year ended December 31,
2008. In addition, as a result of the prepayments,
$0.8 million of deferred debt costs, which were previously
capitalized, have been expensed as debt extinguishment costs for
the year ended December 31, 2008.
On November 9, 2007, the First Amendment and Waiver to the
Silver Point Agreement (the First Amendment) was
signed. The First Amendment contained a waiver of the
Consolidated Senior Leverage Ratio and NRF Total Debt Ratio
covenant violations for the applicable periods ended
September 30, 2007 and required that any funds received by
the Company under the terms of the agreement relating to the
closure of 36 branches, signed on September 28, 2007, which
are reimbursement of closure expenses, will be treated as
Extraordinary Receipts and utilized to pay down the
outstanding indebtedness under the Term Loan.
On March 12, 2008, the Second Amendment of the Silver Point
Agreement (the Second Amendment) was signed.
Pursuant to the Second Amendment, and upon the terms and subject
to the conditions thereof, the Lenders agreed to temporarily
increase the aggregate principal amount of Revolving B
Commitments available to the Company from $25 million to
$40 million. This additional liquidity allowed the Company
to restore its operations in Southaven, Mississippi that were
severely damaged by two tornadoes on February 5, 2008 (the
Southaven Casualty Event). Under the Silver Point
Agreement, the damage to the inventory and fixed assets caused
by the Southaven Casualty Event, resulted in a dramatic
reduction in the Borrowing Base, as such term is defined in the
Silver Point Credit Agreement, because the Borrowing Base
definition excludes the damaged assets without giving effect to
the related insurance proceeds. Pursuant to the Second
Amendment, the Lenders agreed to permit the Company to borrow
funds in excess of the available amounts under the Borrowing
Base definition in an amount not to exceed $26 million. The
Company was required to reduce this Borrowing Base
Overadvance Amount, as defined in the Silver Point
Agreement, to zero by May 31, 2008. The Company was able to
achieve this reduction prior to May 31, 2008 through a
combination of insurance proceeds, operating results and working
capital management. In addition,
30
pursuant to the Second Amendment, the Company has been working
to strengthen its capital structure by raising additional debt
and/or
equity. An investment banking firm is assisting the Company in
obtaining such funds.
As previously reported a number of Events of Default, as defined
in the Silver Point Agreement, had occurred and were continuing
relating to, among other things, the Southaven Casualty Event.
Pursuant to the Second Amendment, the Lenders waived such Events
of Default including the 2007 covenant violations, effective as
of the Second Amendment date, resulting in the cessation of the
2% default interest, which had been charged effective
November 30, 2007. The Second Amendment also increased the
interest rate on outstanding indebtedness to the Lenders,
consistent with current market conditions for similar
borrowings, to the greater of (i) the Adjusted LIBOR Rate,
as defined in the Second Amendment, plus 8%, or (ii) 12%,
for LIBOR borrowings, or the greater of (x) the Adjusted
Base Rate, as defined in the Second Amendment, plus 7%, or
(y) 14%, for Base Rate borrowings. In connection with the
Second Amendment, the Company paid the Lenders a fee of
$3.0 million, which has been deferred and is being
amortized over the remaining term of the outstanding obligations.
The Company entered into the Third Amendment to the Silver Point
Agreement (the Third Amendment) on March 26,
2008. The Third Amendment reset the 2008 financial covenants
contained in the Silver Point Agreement in light of, among other
things, the Southaven Casualty Event. Among the covenants
adjusted were those relating to leverage, capital expenditures,
consolidated EBITDA, and the fixed charge coverage ratio. In
addition, the Third Amendment reduced the maximum Borrowing Base
Overadvance Amount, which had been fixed at $26.0 million
in the Second Amendment, to $24.2 million to reflect a
small portion of the inventory in Southaven which had not been
damaged by the tornadoes, and could be returned to the
Companys inventory (and, consequently, to the Borrowing
Base). The Third Amendment also provided the Company with a
waiver for the default resulting from the explanatory paragraph
in the accountants opinion for the year ended
December 31, 2007 concerning the Companys ability to
continue as a going concern.
As contemplated by the Second Amendment, on March 26, 2008
the Company issued warrants to purchase up to the aggregate
amount of 1,988,072 shares of Company common stock
(representing 9.99% of the Companys common stock on a
fully-diluted basis) to two affiliates of Silver Point
(collectively, the Warrants). Warrants to purchase
993,040 shares were subject to cancellation if the Company
had raised $30 million of debt or equity capital pursuant
to documents in form and substance satisfactory to Silver Point
on or prior to May 31, 2008. Since such financing did not
occur prior to the May 31, 2008 deadline, the warrants
remain outstanding. To reflect the issuance of the Warrants, the
Company recorded additional paid-in capital and deferred debt
costs of $3.0 million. This represents the estimated fair
value of the Warrants, based upon the terms and conditions of
the Warrants and the market value of the Companys common
stock. (See Note 4 included in this
Form 10-K
for the impact in 2009 of adopting the Emerging Issues Task
Force Issue
07-5
relating to a change in how the Warrants will be accounted.)
This increase in deferred debt costs is being amortized over the
remaining term of the outstanding obligations under the Silver
Point Agreement. The Warrants have a term of seven years from
the date of grant and have an exercise price equal to 85% of the
lowest average dollar volume weighted average price of the
Companys common stock for any 30 consecutive trading day
period prior to exercise commencing 90 trading days prior to
March 12, 2008 and ending 180 trading days after
March 12, 2008. The exercise price calculated in accordance
with the warrant terms was fixed at $0.3178 per share. The
Warrants contain a full ratchet anti-dilution
provision providing for adjustment of the exercise price and
number of shares underlying the Warrants in the event of certain
share issuances below the exercise price of the Warrants;
provided that the number of shares issuable pursuant to the
Warrants is subject to limitations under applicable NYSE Amex
(formerly known as American Stock Exchange) rules (the 20%
Issuance Cap). If the anti-dilution provision results in
the issuance of shares above the 20% Issuance Cap, the Company
would provide a cash payment in lieu of the shares in excess of
the 20% Issuance Cap. The Warrants also contain a cashless
exercise provision. In the event of a change of control or
similar transaction (i) the Company has the right to redeem
the Warrants for cash at a price based upon a formula set forth
in
31
the Warrant and (ii) under certain circumstances, the
Warrant holders have a right to require the Company to purchase
the Warrants for cash during the 90 day period following
the change of control at a price based upon a formula set forth
in the Warrants.
In connection with the issuance of the Warrants, the Company
entered into a Warrantholder Rights Agreement dated
March 26, 2008 (the Warrantholder Rights
Agreement) containing customary representations and
warranties. The Warrantholder Rights Agreement also provided the
Warrant holders with a preemptive right to purchase any
preferred stock the Company issued prior to December 31,
2008 that was not convertible into common stock. There was no
preferred stock issued which would be subject to this provision.
The Company also entered into a Registration Rights Agreement
dated March 26, 2008 (the Registration Rights
Agreement), pursuant to which it agreed to register for
resale pursuant to the Securities Act of 1933, as amended, 130%
the shares of common stock initially issuable pursuant to the
Warrants. On April 21, 2008, a
Form S-3
was filed with the Securities and Exchange Commission with
respect to the resale of 2,584,494 shares of common stock
issuable upon exercise of the Warrants. The Registration
Statement was declared effective on June 24, 2008. The
Registration Rights Agreement also requires payments to be made
by the Company under specified circumstances if (i) a
registration statement was not filed on or before April 25,
2008, (ii) the registration statement was not declared
effective on or prior to June 24, 2008, (iii) after
its effective date, such registration statement ceases to remain
continuously effective and available to the holders subject to
certain grace periods, or (iv) the Company fails to satisfy
the current public information requirement under Rule 144
under the Securities Act of 1933, as amended. If any of the
foregoing provisions are breached, the Company would be
obligated to pay a penalty in cash equal to one and one-half
percent (1.5%) of the product of (x) the market price (as
such term is defined in the Warrants) of such holders
registrable securities and (y) the number of such
holders registrable securities, on the date of the
applicable breach and on every thirtieth day (pro rated for
periods totaling less than thirty (30) days) thereafter
until the breach is cured. To date none of the Warrantholder
Rights Agreement provisions have been breached.
As a result of the Fourth Amendment (the Fourth
Amendment) of the Silver Point Agreement, signed on
July 18, 2008, Wells Fargo replaced Wachovia as
(i) the Borrowing Base Agent for the Lenders and
(ii) the issuing bank with respect to issued letters of
credit. In addition, the Fourth Amendment provided for an
increase in the Revolving A Commitment from $25 million to
$35 million and a reduction of the Revolving B Commitment
from $25 million to $15 million. The total revolving
credit line of $50 million under the Silver Point Agreement
remained unchanged as a result of the Fourth Amendment. As a
result of the effectiveness of the Fourth Amendment, Wells Fargo
is the sole Revolving A Lender and Silver Point and certain of
its affiliates remain the Revolving B Lenders. In addition, the
Fourth Amendment provided for an adjustment to certain financial
covenants (and definitions related thereto) to allow for
expenditures relating to the acquisition of replacement fixed
assets at the Companys new Southaven, Mississippi
distribution facility. As a result of Wells Fargo replacing
Wachovia as Issuing Bank, the Company recorded a non-cash debt
extinguishment expense in the year ended December 31, 2008
of $1.1 million reflecting the expensing of amounts
previously capitalized in deferred debt costs.
On July 24, 2008, the Company entered into the Fifth
Amendment (the Fifth Amendment) of the Silver Point
Agreement. The Fifth Amendment clarified that the first
$5.0 million of additional proceeds of insurance in respect
of the Southaven Casualty Event would be applied to repay the
outstanding Tranche A Term Loans. The balances of such
insurance proceeds would be applied on a
50-50
basis to prepay the Revolving Loans outstanding and the
Tranche A Term Loans. In addition, the Fifth Amendment
provided that the Borrowing Base Reserve relating to the
Southaven Casualty Event would be reduced from $5.0 million
to $3.0 million effective on the date of the Fifth
Amendment, and from $3.0 million to zero on the date the
Company delivered to the administrative agent a final insurance
settlement agreement with respect to the Southaven Casualty
Event. However, the Borrowing Base Reserve would be increased to
$5.0 million on August 31, 2008, unless the Capital
Raise, as defined in the Silver Point Agreement, was completed
by that date. Thereafter, such
32
Borrowing Base Reserve would be permanently reduced to zero if
the Capital Raise was consummated on or before
September 30, 2008 (subject to extension with
Administrative Agents consent). Finally, if the Company
did not consummate the Capital Raise by December 31, 2008,
the minimum EBITDA covenant would be increased from
$27.5 million to $28.0 million. The Company agreed to
pay to the Revolving B Lenders an amendment fee (the
Amendment Fee), earned on the date of the Fifth
Amendment and due and payable on the earlier of
September 30, 2008 or the date of consummation of the
Capital Raise. The Amendment Fee was 0.50% (the Fee
Rate) of the sum of the Tranche A Term Loans and the
Revolving Commitments outstanding as of the date the Amendment
Fee was due and payable. Also, the deadline for consummation of
the Capital Raise could be extended by the Administrative Agent
from September 30, 2008 to November 15, 2008 so long
as there existed no event of default and subject to an extension
fee payable to the Revolving B Lenders equal to 0.50% of the
Tranche A Term Loans and Revolving Commitments outstanding
on September 30, 2008.
The Sixth Amendment (the Sixth Amendment) of the
Silver Point Agreement, signed on August 25, 2008, extended
the deadline date for Interest Rate Protection, as defined in
the Silver Point Agreement, to no later than December 31,
2008. In addition, the Sixth Amendment amended the Silver Point
Agreement relating to the concentration of Certain Eligible
Accounts, as defined in the Silver Point Agreement, as a result
of the merger of CSK Auto Corporation and OReilly
Automotive, Inc.
On September 30, 2008, the Company entered into the Seventh
Amendment (the Seventh Amendment) of the Silver
Point Agreement which reduced the Southaven Insurance Proceeds
Reserve, as defined in the Silver Point Agreement, from
$5.0 million to $4.0 million as of September 30,
2008. On October 2, 2008, the Southaven Insurance Proceeds
Reserve was increased back to $5.0 million under the
Seventh Amendment.
On October 2, 2008, the Company entered into the Eighth
Amendment (the Eighth Amendment) of the Silver Point
Agreement. Pursuant to the Eighth Amendment, the Southaven
Insurance Proceeds Reserve (the Reserve)
(i) was reduced from $5.0 million to $2.5 million
effective on October 2, 2008, and (ii) would be
increased to $5.0 million on the earlier of (x) the
occurrence of an Event of Default, or (y) October 31,
2008, provided that, if prior to such time, the Company provided
satisfactory commitment letters in respect of the Mezzanine
Financing and Senior Credit Financing, then subject to certain
conditions described in the Eighth Amendment, the Reserve would
be reduced to $0 until November 30, 2008. If the reduction
was extended until November 30, 2008, the Reserve would be
increased to $5.0 million on the earliest of (w) an
Event of Default, (x) the date the Administrative Agent
determined the Mezzanine Financing and Senior Credit Financing
would not likely to be consummated, (y) the date any
commitment letter for the Mezzanine Financing and Senior Credit
Financing was terminated, and (z) November 30, 2008 if
the Mezzanine Financing and Senior Credit Financing had not been
consummated.
The Ninth Amendment (the Ninth Amendment) of the
Silver Point Agreement, signed on October 29, 2008,
replaced the references contained in the Eighth Amendment to
October 31, 2008 regarding the Southaven Insurance Proceeds
Reserve with November 7, 2008.
The Tenth Amendment (the Tenth Amendment) of the
Silver Point Agreement, signed on November 6, 2008,
replaced the references contained in the Ninth Amendment to
November 7, 2008 regarding the Southaven Insurance Proceeds
Reserve with November 14, 2008.
On November 14, 2008, the Company entered into the Eleventh
Amendment (the Eleventh Amendment) of the Silver
Point Agreement which replaced the references contained in the
Tenth Amendment to November 14, 2008 regarding the
Southaven Insurance Proceeds Reserve with November 21, 2008.
The Twelfth Amendment (the Twelfth Amendment) of the
Silver Point Agreement, signed on November 21, 2008,
replaced the references contained in the Eleventh Amendment to
November 21,
33
2008 regarding the Southaven Insurance Proceeds Reserve with
December 5, 2008 and the deadline of November 30, 2008
contained in the Eighth Amendment was extended to
December 5, 2008.
On December 4, 2008, the Company entered into the
Thirteenth Amendment (the Thirteenth Amendment) of
the Silver Point Agreement which replaced the references
contained in the Twelfth Amendment to December 5, 2008
regarding the Southaven Insurance Proceeds Reserve with
December 19, 2008.
On December 19, 2008, the Company entered into the
Fourteenth Amendment (the Fourteenth Amendment) of
the Silver Point Agreement which replaced the references
contained in the Thirteenth Amendment to December 19, 2008
regarding the Southaven Insurance Proceeds Reserve with
January 5, 2009 and extended the requirement to have
interest rate protection by December 31, 2008 to
January 31, 2009.
The Fifteenth Amendment (the Fifteenth Amendment) of
the Silver Point Agreement, signed on January 5, 2009,
replaced the references contained in the Fourteenth Amendment to
January 5, 2009 regarding the Southaven Insurance Proceeds
Reserve with January 20, 2009.
The Sixteenth Amendment (the Sixteenth Amendment) of
the Silver Point Agreement, signed on January 16, 2009,
replaced the references contained in the Fifteenth Amendment to
January 20, 2009 regarding the Southaven Insurance Proceeds
Reserve with February 6, 2009 and extended the requirement
to have interest rate protection by January 31, 2009 to
February 27, 2009.
On February 5, 2009, the Company entered into the
Seventeenth Amendment (the Seventeenth Amendment) of
the Silver Point Agreement which replaced the references
contained in the Sixteenth Amendment to February 6, 2009
regarding the Southaven Insurance Proceeds Reserve with
February 17, 2009.
On February 17, 2009, the Company entered into the
Eighteenth Amendment (the Eighteenth Amendment) of
the Silver Point Agreement which replaced the references
contained in the Seventeenth Amendment to February 17, 2009
regarding the Southaven Insurance Proceeds Reserve with
February 24, 2009.
On February 23, 2009, the Company entered into the
Nineteenth Amendment (the Nineteenth Amendment) of
the Silver Point Agreement which replaced the references
contained in the Eighteenth Amendment to February 24, 2009
regarding the Southaven Insurance Proceeds Reserve with
March 3, 2009 and extended the requirement to have interest
rate protection by February 27, 2009 to March 31,
2009. In addition, the Nineteenth Amendment amended the Silver
Point Agreement relating to the concentration of Certain
Eligible Accounts, as defined in the Silver Point Agreement, by
adding NAPA.
The Twentieth Amendment (the Twentieth Amendment) of
the Silver Point Agreement, signed on March 3, 2009,
replaced the references contained in the Nineteenth Amendment to
March 3, 2009 regarding the Southaven Insurance Proceeds
Reserve with March 10, 2009.
The Twenty-First Amendment (the Twenty-First
Amendment) of the Silver Point Agreement, signed on
March 10, 2009, replaced the references contained in the
Twentieth Amendment to March 10, 2009 regarding the
Southaven Insurance Proceeds Reserve with March 17, 2009.
The Twenty-Second Amendment (the Twenty-Second
Amendment) of the Silver Point Agreement was signed as of
March 17, 2009. Pursuant to the Twenty-Second Amendment,
and upon the terms and subject to the conditions thereof, the
Borrowing Base definition in Section 1.1 was amended by
replacing the reference to Southaven Insurance Proceeds
Reserve with Waiver Reserve. The Southaven
Insurance Proceeds Reserve required by the Silver Point
Agreement, has been replaced by a Waiver Reserve in the amount
of $2,500,000 which would be increased to $7,500,000 on the
earliest of (x) an Event of Default, and
(y) March 24, 2009. The Twenty-Second Amendment also
contained a waiver of the Events of Default resulting from the
explanatory paragraph in the accountants opinion for the
year ended December 31, 2008 and the financial covenant
violations for the US and
34
consolidated senior leverage ratio and the NRF operating lease
amount for the year ended December 31, 2008. In addition
the Lenders agreed to continue to provide funds under the Silver
Point Agreement during a Forbearance Period and to forbear from
exercising any Remedies during the Forbearance Period as a
result of any non compliance with the financial covenants for
the periods ending March 31, 2009. The Forbearance Period
commences on March 17, 2009 and continues until the earlier
of (i) the occurrence of an Event of Default, other than
from a violation of the financial covenants, and
(ii) May 15, 2009. In connection with the
Twenty-Second Amendment, the Company was charged an amendment
fee of $440,000, $420,000 of which will be added to the
outstanding balance of the term loan and the remainder will be
paid in cash.
As a result of the $3.0 million fee paid at the time of the
Second Amendment, the $0.5 million paid in conjunction with
the Fifth Amendment, the $3.0 million fair value of the
Warrants, and other legal and professional costs associated with
the 2008 amendments to the Silver Point Agreement, offset by the
normal amortization of accumulated costs and the write-off of
debt extinguishment costs, described above, deferred debt costs,
included in other assets in the consolidated balance sheet,
increased from $4.5 million at December 31, 2007 to
$7.5 million at December 31, 2008. This amount is
being amortized over the remaining term of the outstanding
obligations under the Silver Point Agreement, however it would
be written-off as a non-cash debt extinguishment expense if the
Silver Point Agreement was paid in full using the proceeds from
any future new credit agreement.
Refinancing
Process
As noted above, an investment banker is assisting the Company in
the raising of debt
and/or
equity in order to strengthen its capital structure.
On October 6, 2008, the Company announced that it had
signed a letter of intent with a group of institutional lenders
that would provide $30 million of mezzanine financing to
the Company. Completion of this financing, was subject to
various closing conditions, including satisfactory completion of
due diligence, the Company establishing a new senior secured
credit facility with a new lender, a dividend from the
Companys NRF subsidiary in the Netherlands and execution
of definitive agreements. The proposed mezzanine lenders
indicated in February 2009 that due in part to market conditions
and delays encountered in obtaining authorization from the Works
Council (NRF employee representatives) for a credit facility
expansion to enable the NRF dividend, that they would require
the Company to provide additional sources of capital
and/or debt
in order for them to complete their part of the refinancing.
Therefore it is now uncertain whether the Company will be able
to reach agreement with these mezzanine lenders. While the
Company continues to consider and pursue mezzanine financing as
a part of its refinancing program, it is also evaluating all
other options to reduce or eliminate Silver Points current
loan and provide appropriate liquidity for the Company.
On November 18, 2008, the Company announced that it had
signed a proposal letter with a major bank to provide a new
$60 million senior secured credit facility to the Company,
subject to execution of definitive agreements, completion of due
diligence and other closing conditions. The Company is in
continued discussions with this proposed lender.
As part of the refinancing process, the Company has also been
negotiating to obtain an expansion of the existing
5.0 million Euro credit line which the Companys NRF
subsidiary has with a European bank. This expansion would
provide funds which would lower the Companys borrowing
costs in the U.S. After negotiating with the NRF Works
Council for many months to obtain their authorization for the
expansion of the credit line, the Company recently obtained the
necessary consent in order to proceed. Finalization of a credit
line expansion would be subject to completion of the
U.S. refinancing process.
While to date the Company has been unable to consummate the
desired refinancing, due in part to the current financial market
conditions and the delays noted above in gaining approval of the
NRF credit line expansion, the Company believes that a timely
and more flexible alternative to its current financing is
critical to the success of its business and the Company is doing
everything in its control to
35
complete this process as quickly as possible. There can be no
assurance, however, that the Company will be able to do so on
acceptable terms, or at all. If the Company is unable to obtain
refinancing, it could be forced to seek to restructure its
liabilities, substantially curtail operations or otherwise act
to protect the Company.
In conjunction with the negotiation of a new credit agreement,
the Company has incurred legal and other professional fees of
$1.8 million, which have been classified as deferred
financing costs in Other Assets on the consolidated balance
sheet at December 31, 2008. These costs will be written-off
over the term of a new agreement or will be written-off in total
if it is determined that new capital will not be obtained.
Prior
Credit Agreement with Wachovia Capital Finance Corporation (New
England)
On January 3, 2007, the Company amended its then existing
Loan and Security Agreement (the Credit Facility)
with Wachovia Capital Finance Corporation (New England) pursuant
to a Sixteenth Amendment (the Sixteenth Amendment).
The Sixteenth Amendment, which was effective as of
December 19, 2006, revised the inventory loan limits
between December 1, 2007 and February 23, 2007.
Effective January 19, 2007, the Company amended the Credit
Facility pursuant to a Seventeenth Amendment (the
Seventeenth Amendment) reducing the amount of
Minimum Excess Availability which the Company was required to
maintain from $5.0 million to $2.5 million from and
after January 19, 2007.
On February 28, 2007, the Company entered into an Amended
and Restated Loan and Security Agreement with Wachovia Capital
Finance Corporation (New England) (the Wachovia
Agreement). The Wachovia Agreement amended and restated
the Companys then existing Credit Facility to reflect an
additional Term B loan in the amount of $8.0 million. This
additional indebtedness was secured by substantially all of the
assets of the Company, including its owned real property
locations across the United States. The maturity date of the
Term B loan was July 2009. Repayments of the Term B loan were to
be in twenty-two consecutive monthly installments of $167
thousand commencing on October 1, 2007 with the remaining
balance paid on July 21, 2009. The Wachovia Agreement reset
certain financial covenants for 2007 and 2008 and established
minimum EBITDA for the Companys NRF subsidiary, unless
there was excess availability of $15.0 million, for 2007.
The Wachovia Agreement did not affect the amount of minimum
excess availability that the Company was required to maintain.
The Company was not in compliance with the EBITDA and fixed
charge ratio covenants as of June 30, 2007; however, these
were cured when the debt was paid in full during July 2007, as
described above.
Liquidity
Short-term
On February 5, 2008, our central distribution facility in
Southaven, Mississippi sustained significant damage as a result
of strong storms and tornadoes (the Southaven Casualty
Event). During the storm, a significant portion of our
automotive and light truck heat exchange inventory was also
destroyed. While we had insurance covering damage to the
facility and its contents, as well as any business interruption
losses, up to $80 million, this incident has had a
significant impact on our short term cash flow as our secured
lenders would not give credit to the insurance proceeds in the
Borrowing Base, as such term is defined in the Credit and
Guaranty Agreement (the Silver Point Agreement) by
and among the Company and certain domestic subsidiaries of the
Company, as guarantors, the lenders party thereto from time to
time (collectively, the Lenders), Silver Point
Finance, LLC (Silver Point), as administrative agent
for the Lenders, collateral agent and as lead arranger, and
Wachovia Capital Finance Corporation (New England)
(Wachovia), as borrowing base agent. Under the
Silver Point Agreement, the damage to the inventory and fixed
assets resulted in a significant reduction in the Borrowing Base
because the Borrowing Base definition excludes the damaged
assets without giving effect to the related insurance proceeds.
In order to provide access to funds to rebuild
36
and purchase inventory damaged by the Southaven Casualty Event,
a Second Amendment of the Silver Point Agreement was signed on
March 12, 2008 (see Note 7 of the Notes to
Consolidated Financial Statements). Pursuant to the Second
Amendment, and upon the terms and subject to the conditions
thereof, the Lenders agreed to temporarily increase the
aggregate principal amount of Revolving B Commitments available
from $25 million to $40 million. Pursuant to the
Second Amendment, the Lenders agreed to permit us to borrow
funds in excess of the available amounts under the Borrowing
Base definition in an amount not to exceed $26 million. We
were required to reduce this Borrowing Base Overadvance
Amount, as defined in the Silver Point Agreement, to zero
by May 31, 2008. The Borrowing Base Overadvance Amount of
$26 million was reduced to $24.2 million in the Third
Amendment of the Silver Point Agreement (see Note 7), which
was signed on March 26, 2008. While the Borrowing Base
Overadvance reduction was achieved by the May 31, 2008 date
through a combination of operating results, working capital
management and insurance proceeds, we continue to face
significant liquidity constraints. As part of the insurance
claim process, a $10.0 million preliminary advance was
received during the first quarter of 2008, additional
preliminary advances of $24.7 million during the second
quarter of 2008 and $17.3 million during the third quarter
of 2008, which were used to reduce obligations under the Silver
Point Agreement. On July 30, 2008, a global settlement of
$52.0 million was reached with our insurance company
regarding all damage claims.
Of the $52.0 million insurance settlement amount,
$25.8 million represents the estimated recovery on
inventory damaged by the Southaven Casualty Event,
$3.4 million represents the estimated recovery on damaged
fixed assets and $22.8 million represents the business
interruption reimbursement of margin on lost sales, incremental
costs for travel, product procurement and reclamation,
incremental customer costs and other items resulting from the
tornado, incurred through December 31, 2008. The insurance
recovery did not completely offset the impacts of lost sales and
additional costs incurred by the Company during 2008. The
Company was required by its lenders to make repayments of the
term loan, maintain an availability block of between
$2.5 million and $5.0 million, and pay fees and
expenses from the insurance proceeds resulting in the loss of
approximately $20.0 million of liquidity. As a portion of
the insurance claim proceeds were used to meet these
requirements under the Silver Point Agreement, instead of being
used to fund the replacement of inventory destroyed by the
tornadoes, we have been forced to extend vendor payables in an
effort to maintain short-term cash flow. As a result of
stretching vendor payables, delays in obtaining inventory
required to maintain historic customer line fill levels have
been encountered which have had an adverse impact on net sales
and the results of operations during 2008. These impacts on net
sales, results of operations and cash flow are continuing in
2009 and will likely continue until the destroyed inventory is
replenished and vendor payables reduced to normal payment terms
which the Company anticipates will happen only in conjunction
with a refinancing of the existing credit facility.
We are continuing to work toward raising debt
and/or
equity to reduce or possibly replace the current Silver Point
Agreement and to provide additional working capital as the
current Silver Point Agreement provides the Company with
insufficient liquidity. An investment banking firm is assisting
the Company in obtaining this new debt or equity capital. To
date, the Company has been unable to consummate the desired
refinancing, due in part to the current conditions in the
financing marketplace, and there can be no assurance that we
will be able to do so on acceptable terms, or at all. The
violation of any covenant of the Silver Point Agreement would
require the negotiation of a waiver to cure the default. If the
default could not be successfully resolved with the Lenders, the
entire amount of any indebtedness under the Silver Point
Agreement at that time could become due and payable, at the
Lenders discretion. This results in uncertainties
concerning our ability to retire the debt. The financial
statements do not include any adjustments that might be
necessary if we were unable to continue as a going concern. As
there can be no assurance that additional funds can be obtained
from the proposed debt refinancing or that further Lender
accommodations would be available, on acceptable terms or at all
should there be covenant violations, the remaining balance of
the term loan has been classified as short-term debt in the
consolidated financial statements at December 31, 2008. At
December 31, 2007, the remaining balance of the term loan
had been classified as short-term debt
37
as a result of the uncertainties existing at that time
concerning our ability to reduce the Borrowing Base Overadvance
Amount to zero by May 31, 2008.
Longer-term
The future liquidity and ordinary capital needs of the Company,
excluding the impact of the Southaven Casualty Event, described
above, and assuming a refinancing transaction can be completed,
are expected to be met from a combination of cash flows from
operations and borrowings. The Companys working capital
requirements peak during the first and second quarters,
reflecting the normal seasonality in the Domestic segment.
Changes in market conditions, the effects of which may not be
offset by the Companys actions in the short-term, could
have an impact on the Companys available liquidity and
results of operations. While the Company has taken actions
during 2007 and 2008 to improve its liquidity and to afford
additional liquidity and flexibility for the Company to achieve
its operating objectives, there can be no assurance it will be
able to do so in the future. In addition, the Companys
future cash flow may be impacted by the discontinuance of
currently utilized customer sponsored payment programs. The loss
of one or more of the Companys significant customers or
changes in payment terms to one or more major suppliers could
also have a material adverse effect on the Companys
results of operations and future liquidity. The Company utilizes
customer-sponsored programs administered by financial
institutions in order to accelerate the collection of funds and
offset the impact of extended customer payment terms. The
Company intends to continue utilizing these programs as long as
they are a cost effective tool to accelerate cash flow. If the
Company were to implement major new growth initiatives, it would
also have to seek additional sources of capital; however, no
assurance can be given that the Company would be successful in
securing such additional sources of capital.
Managements initiatives over the last three years,
including cost reduction programs and securing additional debt
financing have been designed to improve operating results,
enhance liquidity and to better position the Company for
competition under current and future market conditions. However,
as stated above, the Company may in the future be required to
seek new sources of financing or future accommodations from our
existing lender or other financial institutions. The
Companys liquidity is dependent on implementing cost
reductions and sustaining revenues to achieve consistent
profitable operations. The Company may be required to further
reduce operating costs in order to meet its obligations. No
assurance can be given that managements initiatives will
be successful or that any such additional sources of financing
or lender accommodations will be available.
The following table summarizes the Companys outstanding
material contractual obligations as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Obligation
|
|
1 Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
Over 5 Years
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Revolving credit
facility(1)
|
|
$
|
6,742
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,742
|
|
Short term foreign
debt(2)
|
|
|
3,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,277
|
|
Term loan
|
|
|
|
|
|
|
|
|
|
|
33,377
|
(5)
|
|
|
|
|
|
|
33,377
|
|
Pension plan contributions
|
|
|
2,900
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,900
|
|
Capital lease obligations
|
|
|
564
|
|
|
|
872
|
|
|
|
5
|
|
|
|
|
|
|
|
1,441
|
|
Operating leases
|
|
|
6,163
|
|
|
|
8,777
|
|
|
|
3,331
|
|
|
|
345
|
|
|
|
18,616
|
|
Purchase obligations
|
|
|
23,428
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,074
|
|
|
$
|
9,649
|
|
|
$
|
36,713
|
|
|
$
|
345
|
|
|
$
|
89,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Borrowings classified as a current
liability in the Consolidated Balance Sheet included in this
Report. Based upon year end borrowing levels and interest rates,
annual interest cost would approximate $0.9 million.
|
38
|
|
|
(2) |
|
Borrowings classified as a current
liability in the Consolidated Balance Sheet included in this
Report. Based upon year end borrowing levels and interest rates,
annual interest cost would approximate $0.2 million.
|
|
(3) |
|
Pension plan contributions reflect
expected disbursements in 2009 as calculated by the
Companys third-party actuaries. Estimated contributions
for future years are not currently determinable as they will be
impacted by changes in discount rates, pension plan performance
and other factors. See Note 10 of the Notes to Consolidated
Financial Statements included herein. As a result of actions
taken by the Company effective March 31, 2009 to freeze
pension benefits for one of its plans, 2009 contributions may be
reduced by an estimated $0.5 million.
|
|
(4) |
|
Purchase obligations for goods and
services outstanding at the end of the year which normally are
consumed over a period of less than 12 months. This is not
reflective of total consumption over a
12-month
period.
|
|
(5) |
|
See Note 7 of the Notes to
Consolidated Financial Statements included herein. Payments may
be accelerated due to use of mandatory pre-payments or the
proceeds from a new capital raise. Based upon year end borrowing
levels and interest rates, annual interest cost would
approximate $4.0 million.
|
Critical
Accounting Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires estimates and assumptions that affect the
reported amounts of assets and liabilities, revenues and
expenses, and related disclosures of contingent assets and
liabilities in the consolidated financial statements and
accompanying notes. A companys critical accounting
estimates, as set forth by the U.S. Securities and Exchange
Commission, are those which are most important to the portrayal
of its financial condition and results of operations and often
require the utilization of estimates or subjective judgment.
Based upon this definition, we have identified the critical
accounting estimates addressed below. Although we believe that
our estimates and assumptions are reasonable, they are based
upon information presently available. Actual results may differ
from these estimates under different assumptions or conditions.
The Company also has other key accounting policies, which
involve the use of estimates, which are further described in
Note 2, Summary of Significant Accounting
Policies, of the Notes to Consolidated Financial
Statements contained herein.
Revenue Recognition. Sales are recognized
either when products are shipped to the customer or when
products are received by the customer in accordance with the
invoice shipping terms. Sales are recorded net of sales rebates,
cash discounts, returns and advertising and other allowances.
Accruals for warranty costs, sales returns and allowances are
provided at the time of sale based upon historical experience or
agreements currently in place with customers. The Company will
also accrue for unusual warranty exposures at the time the
exposure is identified and quantifiable based upon analyses of
expected product failure rates and engineering cost estimates.
In connection with multi-year agreements with certain customers,
the Company incurs customer acquisition costs which are
capitalized and amortized over the life of the agreement. The
Company also establishes reserves for uncollectible trade
accounts receivable based upon historical experience,
anticipated business trends and current economic conditions.
Customer account balances are written off at the time they are
deemed fully uncollectible. Changes in our customers
financial condition or other factors could cause our estimates
of uncollectible accounts receivable or the amortization periods
of customer acquisition costs to vary.
Inventory Valuation. Inventories are valued at
the lower of cost
(first-in,
first-out method) or market. This requires the Company to make
judgments about the likely method of disposition of its
inventory and expected recoverable value upon disposition.
Inventories are reviewed on a continuing basis, and provisions
are made for slow moving and obsolete inventory based upon
estimates of historical or expected usage as well as the
expected recoverable value upon disposition.
Impairment of Long-Lived Assets. In the event
that facts and circumstances indicate that the carrying amounts
of a business units long-lived assets may be impaired, an
evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash
flows of the business unit, associated with the long-lived
assets, would be compared to the assets carrying amount to
determine if a write-down is required. If this review indicates
that the assets will not be recoverable, the carrying value of
the Companys assets would be reduced to their estimated
fair value. The
39
estimates used in determining whether an impairment exists
involve future cash flows of each business unit, which are based
upon expected revenue trends, cost of production and operating
expenses.
Income Taxes. Deferred tax assets and
liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is
recorded to reduce the carrying amount of deferred tax assets if
it is more likely than not that those such assets will not be
realized. Changes to the valuation allowance are based on the
evaluation of all available evidence supporting the
Companys ability to utilize tax benefits prior to their
expiration.
Pension Plans. The Company establishes and
periodically reviews the assumptions used in the measurement of
its domestic and foreign retirement plans. The discount rate
used in the assumption will change in relation to increases or
decreases in applicable published bond indices. At
December 31, 2008, the discount rate for domestic plans was
5.9%, based on a review of selected highly rated Aaa or Aa
corporate bond indices. The return on assets for domestic plans
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
target investment allocation used to manage the pension
portfolio. The Companys domestic pension plan assumptions
at December 31, 2008 include an 8.2% long-term annual rate
of return, which is based upon the current target portfolio
allocation, long-term rates of return for similar investment
vehicles and economic and other indicators of future
performance. Each 1% increase or decrease in the expected rate
of return assumption would decrease or increase the net periodic
plan cost by $0.3 million. Differences between actual and
assumed portfolio performance as well as the impact of changes
in discount rates are included in the calculation of the
Companys accrued pension costs by a third-party actuary.
In the future, the domestic plan unrecognized net loss, of
$17.5 million at December 31, 2008, along with changes
in any of the underlying pension assumptions, and the ongoing
performance of the plan assets, will impact future funding
requirements, minimum pension liability adjustments and net
pension cost amounts. The unrecognized net loss increased during
2008 due to the significant decline in the market value of the
pension portfolio experienced during the year. Absent any other
changes, a 1% change in the discount rate increases or decreases
pension expense by $0.1 million per year and the pension
benefit obligation by $3.5 million. Other material
assumptions which are reviewed annually include compensation
increase rates, rates of employee termination and rates of
participant mortality. Pension assumptions for the
Companys foreign plans are reviewed at least annually and
are established taking into consideration financial and economic
conditions impacting the countries in which the plans are
located. During the first quarter of 2009, the Companys
Board of Directors voted to cease all benefit accruals effective
as of March 31, 2009 for all non-collective bargaining
participants in the Companys domestic pension plan. As a
result no new participants will be added to the plan and vested
benefits of active participants will be frozen. This is not a
termination of the plan and the cessation of benefits can be
reversed at any time by vote of the Board of Directors. In
addition, vested benefits under the Companys supplemental
executive retirement plan were also frozen as of March 31,
2009. These actions are expected to lower both the net periodic
benefit cost and the estimated pension contribution in 2009 by
approximately $0.5 million.
Loss Reserves. The Company has other loss
exposures such as self-insurance, environmental and litigation
for which it determines the need and amount of reserves.
Reserves are established using estimates, judgments and
consistent methodologies to determine the exposure and ultimate
potential liability.
Inflation
The overall impact of United States inflation in recent years
has not resulted in a significant change in labor costs or the
cost of general services utilized by the Company. However,
during the last five years, commodity prices have fluctuated
significantly and this in turn has influenced customer product
preferences and buying decisions. The principal raw materials
used in the Companys replacement radiator and heater core
product lines are copper and brass. The Company also uses
aluminum for its
40
radiator, charge air cooler, condenser and heater core product
lines. Copper, brass, aluminum and other primary metals used in
the Companys business are generally subject to commodity
pricing and variations in the market prices for such materials.
The Company typically executes purchase orders for its copper,
brass and aluminum requirements three months prior to the actual
delivery date. The purchase price for such copper, brass and
aluminum is established at the time orders are placed by the
Company and not at the time of delivery. To offset these cost
increases, the Company has been successful in passing through
some price increases on its heavy duty products; however, on its
automotive and light truck heat exchange products, it has been
unable to do so. As a result, the Company has been forced to
generate other cost reduction activities in order to offset
these cost increases. There is no assurance that the Company
will be successful in raising prices to its customers in the
future or that it will be able to generate sufficient cost
reductions to offset rising commodity prices. In addition, there
can be no assurance that the Company will be able to benefit
from any reductions in commodity costs due to pricing pressure
in the marketplace. The Company currently does not use financial
derivatives or other methods to hedge costs with respect to its
metals consumption.
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 are
properly designed to reasonably prevent risk of environmental
damage and financial liability to the Company. On
January 27, 2003, the Company signed a Consent Agreement
with the State of Connecticut Department of Environmental
Protection. Under the agreement the Company voluntarily
initiated 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. It is
reasonably possible that environmental related liabilities may
also exist with respect to other industrial sites formerly owned
or occupied by the Company. Based upon information currently
available, the Company believes that the cost of any potential
remediation 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.
The Company currently does not 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
Companys business, and there can be no assurance that
material environmental liabilities or compliance charges will
not arise in the future.
Recently
Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157),
which defines fair value, provides a framework for measuring
fair value, and expands the disclosures required for assets and
liabilities measured at fair value. SFAS 157 applies to
existing accounting pronouncements that require fair value
measurements; it does not require any new fair value
measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007 and was adopted by the
Company beginning in the first quarter of fiscal 2008 with no
impact on the financial statements. Application of SFAS 157
to non-financial assets and liabilities was deferred by the FASB
until 2009. The Company does not anticipate adoption of
SFAS 157 relating to non-financial assets and liabilities
in 2009 to have a material impact on its financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159), which provides
companies with an option to report selected financial assets and
liabilities at fair value with the changes in fair value
recognized in earnings at each subsequent reporting date.
SFAS 159 provides an opportunity to mitigate potential
volatility in earnings caused by measuring related assets and
liabilities differently, and it may reduce the need for
41
applying complex hedge accounting provisions. SFAS 159 is
effective for fiscal years beginning after November 15,
2007. Adoption of SFAS 159 had no financial statement
impact on the Company.
During December 2007, the FASB issued FASB Statement
No. 141R Business Combinations, which
significantly changed the accounting for business combinations.
Under Statement 141R, the acquiring entity will recognize all
the assets acquired and liabilities assumed at the acquisition
date fair value with limited exceptions. Other changes are that
acquisition costs will generally be expensed as incurred instead
of being included in the purchase price; and restructuring costs
associated with the business combination will be expensed
subsequent to the acquisition date instead of being accrued on
the acquisition balance sheet. Statement 141R applies to
business combinations closing after January 1, 2009.
In December 2007, the FASB issued Statement No. 160
Noncontrolling Interests in Consolidated Financial
Statements (SFAS 160), which clarified
the presentation and accounting for noncontrolling interests,
commonly known as minority interests, in the balance sheet and
income statement. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008, and earlier
adoption is prohibited. Adoption of SFAS 160 will not have
any impact on the Company.
In June 2008, the Emerging Issues Task Force of the FASB
published EITF Issue
07-5
Determining Whether an Instrument Is Indexed to an
Entitys Own Stock
(EITF 07-5)
to address concerns regarding the meaning of indexed to an
entitys own stock contained in FAS Statement
133 Accounting for Derivative Instruments and Hedging
Activities. This related to the determination of whether a
freestanding equity-linked instrument should be classified as
equity or debt. If an instrument is classified as debt, it is
valued at fair value, and this value is remeasured on an ongoing
basis, with changes recorded in earnings in each reporting
period.
EITF 07-5
is effective for years beginning after December 15, 2008
and earlier adoption is not permitted. Effective January 1,
2009 the Company has determined that the warrants issued to
Silver Point in March 2008, which were included in paid-in
capital at December 31, 2008, should be classified as
liabilities due to the full ratchet anti-dilution
provision contained in the warrant agreement at the adoption
date. The impact of adopting
EITF 07-5
in 2009, will be a decrease in
paid-in-capital
by $3.0 million, which was the fair value recorded at the
time the warrants were issued, an increase of long-term
liabilities by the estimated fair value of the warrants as of
January 1, 2009 and a credit to retained earnings for the
difference. The Company is in the process of determining the
fair value of the warrants at January 1, 2009. At the end
of the first quarter of 2009, and all future quarters, the fair
value of the warrants will be re-calculated and any difference
from the previously reported fair value will adjust the carrying
value of the debt with the offset being included in the
determination of net income.
Forward-Looking
Statements and Cautionary Factors
Statements included in this filing, which are not historical in
nature, are forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform
Act of 1995. Statements relating to the future financial
performance of the Company are subject to the detailed factors
set forth in Item 1A Risk Factors, and
elsewhere in this Annual Report on
Form 10-K.
Such statements are based upon the current beliefs and
expectations of Proliance management and are subject to
significant risks and uncertainties. Actual results may differ
from those set forth in the forward-looking statements. When
used in this filing the terms anticipate,
believe, estimate, expect,
may, objective, plan,
possible, potential,
project, will and similar expressions
identify forward-looking statements. The forward-looking
statements contained herein are made as of the date hereof, and
we do not undertake any obligation to update any forward-looking
statements, whether as a result of future events, new
information or otherwise.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We have exposure to market risk related to changes in interest
rates, foreign currency exchange rates, customer credit
concentration and commodity prices.
42
Our interest expense is sensitive to changes in interest rates.
At December 31, 2008, borrowings under the Credit and
Guaranty Agreement with Silver Point Finance, LLC (the
Silver Point Agreement) included $0.7 million
of revolving credit borrowings at a 14% per annum interest rate,
$6.0 million of revolving credit borrowings at 12% and a
term loan of $33.4 million at an interest rate of 12% per
annum. The Second Amendment of the Silver Point Agreement,
signed on March 12, 2008, increased the interest rate on
outstanding indebtedness to the greater of (i) the Adjusted
Libor Rate, as defined in the Silver Point Agreement, plus 8%,
or (ii) 12%, for LIBOR borrowings, or the greater of
(x) the Adjusted Base Rate, as defined in the Second
Amendment, plus 7%, or (y) 14%, for Base Rate borrowings.
The impact of a 10% change in market interest rates would not
have a material impact on our results of operations.
As a result of having sales and manufacturing facilities in
Europe and Mexico, changes in foreign currency exchange rates
and changes in the economic conditions in the countries in which
we do business could favorably or unfavorably affect financial
results. While factors influencing both foreign currency
exchange rates and general economic conditions are outside our
control, fluctuations in exchange rates and foreign economic
conditions could have a material adverse effect on our
international operations and on our consolidated financial
condition and results of operations. Transactions associated
with these foreign operations are accounted for in accordance
with the guidance established under Financial Accounting
Standards No. 52, Foreign Currency Translation.
As of December 31, 2008, our foreign subsidiaries had net
current assets (defined as current assets less current
liabilities) subject to foreign currency translation risk of
$34.8 million. The potential decrease in net current assets
from a hypothetical 10% adverse change in quoted foreign
currency exchange rates at December 31, 2008 would be
$3.5 million. This sensitivity analysis assumes a parallel
shift in foreign currency exchange rates. Exchange rates rarely
all move in the same direction relative to the dollar. This
assumption may overstate or understate the impact of changing
exchange rates on individual assets and liabilities denominated
in a foreign currency. Financial derivatives or other methods
are not currently utilized to hedge foreign currency
transactions or the net current asset position of our foreign
subsidiaries.
We are also subject to a concentration of credit risk primarily
with trade accounts receivable of retail customers in the
Companys Domestic segment. Our top five customers comprise
approximately 33% of net sales in 2008 and 43% of the gross
outstanding trade accounts receivable balance at
December 31, 2008. The loss of one or more of these
customers could have a material adverse effect on our results of
operations. Customers who meet pre-established credit
requirements are normally granted individualized credit limits.
Customer account balances are normally not collateralized.
Estimates of potential credit losses are based upon historical
experience, customer information and managements
expectations of the industry and the overall economy. As of
December 31, 2008, there was no other significant
concentration of credit risk.
Certain risks may arise in the various commodity markets in
which we participate. Commodity prices in the copper, brass and
aluminum markets are subject to changes based on availability
and other conditions which are outside our control. See
Raw Materials and Suppliers in Item 1 of this
Report and Inflation in Item 7 of this Report
for additional information on commodity purchasing.
43
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Financial Statements:
|
|
|
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
Financial Statement Schedule:
|
|
|
|
|
|
|
|
85
|
|
44
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Proliance
International, Inc.:
We have audited the accompanying consolidated balance sheets of
Proliance International, Inc. and subsidiaries as of
December 31, 2008 and 2007 and the related consolidated
statements of operations, changes in stockholders equity,
and cash flows for each of the three years in the period ended
December 31, 2008. We have also audited the information for
each of the three years in the period ended December 31,
2008 set forth in financial statement schedule II included
herein. These consolidated financial statements and the
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
financial statement schedule are free of material misstatement.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and schedule, assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of
the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Proliance International, Inc. and subsidiaries at
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
Also in our opinion, the financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 3 to the financial statements, amounts
payable under the Companys credit agreement have been
classified in current liabilities at December 31, 2008 and
2007 due to the possibility that a loan covenant violation could
result in future periods, requiring, at the lenders
discretion, the Company to repay the entire amount of
indebtedness under the Credit Agreement at that time. There are
uncertainties regarding the Companys ability to refinance
or otherwise retire the debt. This factor raises substantial
doubt about the Companys ability to continue as a going
concern. Managements plans in regard to these matters are
also described in Note 3. The financial statements do not
include any adjustments that might result from the outcome of
these uncertainties.
/s/ BDO Seidman, LLP
Valhalla, NY
March 20, 2009
45
PROLIANCE
INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
$
|
350,067
|
|
|
$
|
393,942
|
|
|
$
|
416,095
|
|
Cost of sales
|
|
|
284,671
|
|
|
|
310,963
|
|
|
|
324,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
65,396
|
|
|
|
82,979
|
|
|
|
91,833
|
|
Selling, general and administrative expenses
|
|
|
48,611
|
|
|
|
76,031
|
|
|
|
93,811
|
|
Arbitration earn-out decision
|
|
|
|
|
|
|
3,174
|
|
|
|
|
|
Restructuring charges
|
|
|
172
|
|
|
|
4,117
|
|
|
|
3,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
16,613
|
|
|
|
(343
|
)
|
|
|
(5,107
|
)
|
Interest expense
|
|
|
15,764
|
|
|
|
13,838
|
|
|
|
11,228
|
|
Debt extinguishment costs
|
|
|
2,829
|
|
|
|
891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,980
|
)
|
|
|
(15,072
|
)
|
|
|
(16,335
|
)
|
Income tax provision
|
|
|
2,082
|
|
|
|
1,732
|
|
|
|
1,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,062
|
)
|
|
$
|
(16,804
|
)
|
|
$
|
(18,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.27
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(1.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic and diluted
|
|
|
15,748
|
|
|
|
15,368
|
|
|
|
15,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
46
PROLIANCE
INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,444
|
|
|
$
|
476
|
|
Accounts receivable (less allowance of $3,938 and $4,601)
|
|
|
57,005
|
|
|
|
60,153
|
|
Inventories
|
|
|
84,586
|
|
|
|
106,756
|
|
Other current assets
|
|
|
5,198
|
|
|
|
7,645
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
149,233
|
|
|
|
175,030
|
|
Property, plant and equipment, net
|
|
|
21,886
|
|
|
|
21,164
|
|
Other assets
|
|
|
16,086
|
|
|
|
12,699
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
187,205
|
|
|
$
|
208,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt and current portion of long-term debt
|
|
$
|
43,960
|
|
|
$
|
67,242
|
|
Accounts payable
|
|
|
64,788
|
|
|
|
48,412
|
|
Accrued liabilities
|
|
|
18,546
|
|
|
|
24,649
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
127,294
|
|
|
|
140,303
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
877
|
|
|
|
211
|
|
Retirement and postretirement obligations
|
|
|
15,778
|
|
|
|
3,603
|
|
Deferred income taxes
|
|
|
948
|
|
|
|
1,212
|
|
Other long-term liabilities
|
|
|
119
|
|
|
|
538
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
17,722
|
|
|
|
5,564
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value: Authorized
2,500,000 shares; issued and outstanding as follows:
|
|
|
|
|
|
|
|
|
Series A junior participating preferred stock,
$.01 par value:
|
|
|
|
|
|
|
|
|
Authorized 200,000 shares; issued and
outstanding none at December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
Series B convertible preferred stock, $.01 par value:
|
|
|
|
|
|
|
|
|
Authorized 30,000 shares; issued and
outstanding 9,913 at December 31, 2008 and
2007, respectively (liquidation preference $3,453 at
December 31, 2008 and 2007)
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value: Authorized
47,500,000 shares, issued 15,840,913 and
15,838,962 shares, outstanding 15,798,977 and
15,797,026 shares at December 31, 2008 and 2007,
respectively
|
|
|
158
|
|
|
|
158
|
|
Paid-in capital
|
|
|
112,434
|
|
|
|
109,145
|
|
Accumulated deficit
|
|
|
(52,274
|
)
|
|
|
(48,039
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
(18,114
|
)
|
|
|
1,777
|
|
Treasury stock, at cost, 41,936 shares at December 31,
2008 and 2007
|
|
|
(15
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
42,189
|
|
|
|
63,026
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
187,205
|
|
|
$
|
208,893
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
PROLIANCE
INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,062
|
)
|
|
$
|
(16,804
|
)
|
|
$
|
(18,055
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,732
|
|
|
|
8,870
|
|
|
|
6,249
|
|
Deferred income taxes
|
|
|
297
|
|
|
|
(209
|
)
|
|
|
510
|
|
Provision for uncollectible accounts receivable
|
|
|
1,610
|
|
|
|
515
|
|
|
|
2,616
|
|
Non-cash debt extinguishment costs
|
|
|
1,939
|
|
|
|
576
|
|
|
|
|
|
Non-cash restructuring (credit) charges
|
|
|
|
|
|
|
(178
|
)
|
|
|
189
|
|
Non-cash stock compensation costs
|
|
|
249
|
|
|
|
176
|
|
|
|
131
|
|
Non-cash arbitration earn-out decision charge
|
|
|
|
|
|
|
3,174
|
|
|
|
|
|
Non-cash litigation settlement
|
|
|
|
|
|
|
|
|
|
|
(969
|
)
|
Gain on disposal of fixed assets
|
|
|
(4,091
|
)
|
|
|
(1,021
|
)
|
|
|
(272
|
)
|
Changes in operating assets and liabilities, net of acquisition
effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,722
|
)
|
|
|
(2,618
|
)
|
|
|
(1,028
|
)
|
Inventories
|
|
|
17,567
|
|
|
|
14,411
|
|
|
|
4,009
|
|
Accounts payable
|
|
|
18,733
|
|
|
|
(5,997
|
)
|
|
|
6,754
|
|
Accrued liabilities
|
|
|
(5,149
|
)
|
|
|
(4,856
|
)
|
|
|
(472
|
)
|
Other
|
|
|
(2,472
|
)
|
|
|
(1,529
|
)
|
|
|
(4,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
32,631
|
|
|
|
(5,490
|
)
|
|
|
(5,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(5,156
|
)
|
|
|
(3,018
|
)
|
|
|
(7,569
|
)
|
Sales and retirements of fixed assets
|
|
|
1,538
|
|
|
|
738
|
|
|
|
116
|
|
Insurance proceeds for fixed assets damaged by tornadoes
|
|
|
3,428
|
|
|
|
|
|
|
|
|
|
Cash expenditures for restructuring costs on acquisition balance
sheet
|
|
|
(115
|
)
|
|
|
(257
|
)
|
|
|
(952
|
)
|
Cash expenditures for merger transaction costs
|
|
|
|
|
|
|
|
|
|
|
(952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(305
|
)
|
|
|
(2,537
|
)
|
|
|
(9,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(173
|
)
|
|
|
(1,240
|
)
|
|
|
(64
|
)
|
Net (repayments) borrowings under revolving credit facilities
|
|
|
(10,336
|
)
|
|
|
(35,595
|
)
|
|
|
13,867
|
|
Borrowings under short-term foreign debt
|
|
|
3,276
|
|
|
|
|
|
|
|
|
|
Borrowings under term loans
|
|
|
|
|
|
|
58,000
|
|
|
|
|
|
Repayments of term loans and capitalized lease obligations
|
|
|
(17,734
|
)
|
|
|
(10,154
|
)
|
|
|
(915
|
)
|
Deferred debt and financing issuance costs
|
|
|
(5,026
|
)
|
|
|
(5,808
|
)
|
|
|
(156
|
)
|
Proceeds from stock option exercises
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(29,993
|
)
|
|
|
5,228
|
|
|
|
12,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(365
|
)
|
|
|
140
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
1,968
|
|
|
|
(2,659
|
)
|
|
|
(1,431
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
476
|
|
|
|
3,135
|
|
|
|
4,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
2,444
|
|
|
$
|
476
|
|
|
$
|
3,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
PROLIANCE
INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit)
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
Balance at December 31, 2005
|
|
$
|
152
|
|
|
$
|
105,642
|
|
|
$
|
(15
|
)
|
|
$
|
(11,848
|
)
|
|
$
|
(6,682
|
)
|
|
$
|
87,249
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,055
|
)
|
|
|
|
|
|
|
(18,055
|
)
|
Adjustment for minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,616
|
|
|
|
2,616
|
|
Foreign currency translation adj.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,508
|
|
|
|
3,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of adopting FASB Statement No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(912
|
)
|
|
|
(912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common stock issued (56,138 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common stock cancelled (6,712 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock from merger cancelled (7,303 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
1
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64
|
)
|
|
|
|
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
153
|
|
|
|
105,772
|
|
|
|
(15
|
)
|
|
|
(29,967
|
)
|
|
|
(1,470
|
)
|
|
|
74,473
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,804
|
)
|
|
|
|
|
|
|
(16,804
|
)
|
Adjustment for minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240
|
)
|
|
|
(240
|
)
|
Foreign currency translation adj.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,487
|
|
|
|
3,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common stock issued (40,491 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cancelled (8,237 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for option exercises (10,000 shares)
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Common stock from merger cancelled (2,255 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
Arbitration settlement
|
|
|
|
|
|
|
3,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,174
|
|
Common stock issued upon conversion of 2,868 Series B
preferred stock shares (459,071 shares)
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,265
|
)
|
|
|
|
|
|
|
(1,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
158
|
|
|
|
109,145
|
|
|
|
(15
|
)
|
|
|
(48,039
|
)
|
|
|
1,777
|
|
|
|
63,026
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,062
|
)
|
|
|
|
|
|
|
(4,062
|
)
|
Adjustment for minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,592
|
)
|
|
|
(12,592
|
)
|
Foreign currency translation adj.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,299
|
)
|
|
|
(7,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common stock issued (5,000 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common stock cancelled (3,049 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249
|
|
Issue 1,988,072 warrants
|
|
|
|
|
|
|
3,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,040
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(173
|
)
|
|
|
|
|
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
158
|
|
|
$
|
112,434
|
|
|
$
|
(15
|
)
|
|
$
|
(52,274
|
)
|
|
$
|
(18,114
|
)
|
|
$
|
42,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
PROLIANCE
INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1
|
Description
of Business
|
Proliance International, Inc. (the Company or
Proliance) designs, manufactures and markets heat
exchange products (including radiators, heater cores and
complete heaters) and temperature control parts (including
condensers, compressors, accumulators/driers and evaporators)
for the automotive and light truck aftermarket. In addition, the
Company designs, manufactures and distributes heat exchange
products (including radiators, radiator cores, condensers,
charge air coolers, oil coolers, marine coolers and other
specialty heat exchangers) primarily for the heavy duty
aftermarket.
|
|
Note 2
|
Summary
of Significant Accounting Policies
|
Basis of Consolidation: The Companys
consolidated financial statements include the accounts of all
subsidiaries. Intercompany balances and transactions have been
eliminated. The operating results of a subsidiary with locations
throughout Europe (NRF) are included in the
Consolidated Financial Statements on a one-month lag.
Cash and Cash Equivalents: The Company
considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents.
Cash overdrafts are classified as current liabilities. The
amount reported in the balance sheet for cash and cash
equivalents approximates its fair value.
Accounts Receivable: The Company participates
in several customer-sponsored payment programs in order to
accelerate the collection of outstanding accounts receivable and
offset the impact of lengthening customer payment terms. When
invoices are submitted to the financial institution designated
in each customer program for payment, this is done without
recourse. At the time cash is received, receivables are reduced,
and a discounting fee, included in interest expense on the
Consolidated Statement of Operations, is recorded. Discounting
fee expense for the years ended December 31, 2008, 2007 and
2006 was $2.8 million, $5.2 million and
$5.8 million, respectively. The reduction in discounting
fee expense in 2008 is attributable to the lower level of trade
receivables being collected under these payment programs.
Reserves for uncollectible trade accounts receivable are
established based upon historical experience, anticipated
business trends and current economic conditions. Customer
account balances are written off at the time they are deemed to
be fully uncollectible. Taxes collected from customers and
remitted to government agencies, such as sales tax and
value-added tax, are recorded at the time of the sale in sales
in the statement of operations on a net basis, and as a tax
liability on the balance sheet.
Inventories: Inventories are valued at the
lower of cost
(first-in,
first-out method) or market. Provisions are made for slow moving
or obsolete inventory based upon historical usage and management
estimates of expected recovery.
Property, Plant and Equipment: Property, plant
and equipment is recorded at cost. Ordinary maintenance and
repairs are expensed, while replacements and betterments are
capitalized. Land improvements, buildings and machinery are
depreciated using the straight-line method over their estimated
useful lives which range up to forty years for buildings and
between three and ten years for machinery and equipment.
Leasehold improvements are amortized over the lease term or the
estimated useful life of the improvement, whichever is shorter.
Upon retirement or disposition of plant and equipment, the cost
and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the
Companys consolidated statement of operations.
Goodwill: Goodwill represents the excess of
cost over the fair value of assets acquired. Goodwill and
certain other intangible assets having indefinite lives are
subject to periodic testing for impairment. Intangible assets
determined to have definitive lives are amortized over their
useful lives. At
50
December 31, 2008 and 2007, there was no goodwill or
intangibles having indefinite lives recorded on the
Companys Consolidated Balance Sheet.
Impairment of Long-Lived Assets: In the event
that facts and circumstances indicate that the carrying amounts
of a business units long-lived assets may be impaired, an
evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the
assets carrying amount to determine if a write-down is
required. If this review indicates that the assets will not be
recoverable, the carrying value of the Companys assets
would be reduced to their estimated fair value. There was no
impairment of long-lived assets at either December 31, 2008
or 2007.
Foreign Currency Translation: Assets and
liabilities of foreign subsidiaries are translated into
U.S. dollars at year-end exchange rates, and income and
expense items are translated at the average exchange rates
during the year. Resulting translation adjustments are reported
as accumulated other comprehensive income (loss) in
Stockholders Equity on the Consolidated Balance Sheet and
remain there until the underlying foreign operation is
liquidated or substantially disposed. Foreign currency
transaction gains or losses which are included in the
Consolidated Statement of Operations under the caption
selling, general and administrative expenses were
not material for the years ended December 31, 2008, 2007
and 2006.
Revenue Recognition: Sales are recognized
either when products are shipped to the customer or when they
are received by the customer in accordance with the invoice
shipping terms. Accruals for warranty costs, sales returns and
allowances are provided at the time of sale based upon
historical experience or in accordance with agreements currently
in place with certain customers. In conjunction with multi-year
agreements with certain customers, the Company incurs customer
acquisition costs which are capitalized and amortized, as a
reduction of net sales, over the life of the agreement. Delivery
charges billed to customers were not significant in 2008, 2007
or 2006. Freight costs for shipments of product to customers are
included in selling, general and administrative expenses and
amounted to $13.6 million, $13.2 million, and
$13.3 million in 2008, 2007 and 2006, respectively.
Advertising Costs: The Company offers certain
customers advertising and marketing allowances as a fixed
percentage of sales. These allowances are recorded as a
reduction to net sales. In addition, the Company incurs costs to
advertise and promote its products. These costs, which are not
material, are included in selling, general and administrative
expenses as incurred.
Research and Development: Research and
development costs are expensed in selling, general and
administrative expenses as incurred and approximated
$0.3 million, $0.3 million and $0.4 million in
2008, 2007 and 2006 respectively.
Stock Compensation Costs: On January 1,
2006, the Company adopted the provisions of
SFAS No. 123(R), Share-Based Payment,
which had been issued by the Financial Accounting Standards
Board in December 2004. SFAS No. 123(R) establishes
standards for accounting for transactions in which an entity
exchanges its equity instruments for goods or services that are
based on the fair value of the entitys equity instruments,
focusing primarily on accounting for transactions in which an
entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires public entities
to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair
value of the award and recognize the cost as a charge to
operating results over the period during which an employee is
required to provide service in exchange for the award, with the
offset being additional paid-in capital.
The Company uses the Black-Scholes pricing model to determine
the grant date fair value per option. This model incorporates
assumptions for stock volatility, a risk-free interest rate and
the expected life of the options. Stock volatility is based on
historical fluctuations in the value of the Companys
common stock and the expected life is based on historical data
of exercises. The risk-free interest rate reflects the long-term
U.S. Treasury bill rate at the time of the grant. The total
compensation expense of an option grant, which is determined
using the option fair value and the number of options granted,
51
is expensed evenly over the vesting period of the option with
the offset being
paid-in-capital.
Compensation expense and
paid-in-capital
are adjusted for the previously recorded expense associated with
any unvested stock options which are cancelled.
The Company also records stock compensation expense associated
with restricted and performance restricted shares of stock which
are granted under the Equity Incentive Plan. The total
compensation cost of a grant, which is determined using the
stock price on the date of grant and the number of shares
granted, is expensed evenly over the vesting period, with the
offset being common stock and
paid-in-capital.
Stock compensation expense, common stock and
paid-in-capital
are adjusted for the previously recorded expense associated with
any unvested restricted and performance restricted shares which
are cancelled due to the termination of employment. Restricted
and performance restricted stock are treated as issued and
outstanding on the date of grant; however, they are excluded
from the calculation of basic (loss) income per share until the
shares are vested.
Income Taxes: Deferred tax assets and
liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. A deferred tax valuation
allowance is recorded to reduce the carrying amount of deferred
tax assets if it is more likely than not that such assets will
not be realized. Interest and penalties on income tax payments,
when incurred, are included in interest expense in the
Consolidated Statement of Operations.
Concentration of Credit Risk: The Company is
subject to a concentration of credit risk primarily with its
trade accounts receivable. The largest concentration is in the
Companys Domestic segment where the top five customers
comprise approximately 33% of net sales in 2008 and 43% of gross
trade accounts receivable at December 31, 2008. The loss of
one or more of these customers could have a material adverse
effect on the Companys results of operations. The Company
grants individualized credit limits to customers who meet
pre-established credit requirements, and generally requires no
collateral from its customers. Estimates of potential credit
losses are based upon historical experience, customer
information and managements expectations of the industry
and the overall economy. As of December 31, 2008, the
Company had no other significant concentrations of credit risk.
Use of Estimates: The preparation of the
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Reclassification: Certain prior period amounts
have been reclassified to conform to the current year
presentation.
|
|
Note 3
|
Southaven
Event and Related Liquidity Issues
|
On February 5, 2008, the Companys central
distribution facility in Southaven, Mississippi sustained
significant damage as a result of strong storms and tornadoes
(the Southaven Casualty Event). During the storm, a
significant portion of the Companys automotive and light
truck heat exchange inventory was also destroyed. While the
Company had insurance covering damage to the facility and its
contents, as well as any business interruption losses, up to
$80 million, this incident has had a significant impact on
the Companys short term cash flow as the Companys
lenders would not give credit to the insurance proceeds in the
Borrowing Base, as such term is defined in the Credit and
Guaranty Agreement (the Silver Point Agreement) by
and among the Company and certain domestic subsidiaries of the
Company, as guarantors, the lenders party thereto from time to
time (collectively, the Lenders), Silver Point
Finance, LLC (Silver Point), as administrative agent
for the Lenders, collateral agent and as lead arranger, and
Wachovia Capital Finance Corporation (New England)
(Wachovia), as borrowing base agent. Under the
Silver Point Agreement, the damage to the inventory and fixed
assets resulted in a significant reduction in the Borrowing Base
because the Borrowing Base definition excludes the damaged
assets without giving effect to the related
52
insurance proceeds. In order to provide access to funds to
rebuild and purchase inventory damaged by the Southaven Casualty
Event, the Company entered into a Second Amendment of the Silver
Point Agreement on March 12, 2008 (see Note 7).
Pursuant to the Second Amendment, and upon the terms and subject
to the conditions thereof, the Lenders agreed to temporarily
increase the aggregate principal amount of Revolving B
Commitments available to the Company from $25 million to
$40 million. Pursuant to the Second Amendment, the Lenders
agreed to permit the Company to borrow funds in excess of the
available amounts under the Borrowing Base definition in an
amount not to exceed $26 million. The Company was required
to reduce this Borrowing Base Overadvance Amount, as
defined in the Silver Point Agreement, to zero by May 31,
2008. The Borrowing Base Overadvance Amount of $26 million
was reduced to $24.2 million in the Third Amendment of the
Silver Point Agreement (see Note 7), which was signed on
March 26, 2008. While the Company was able to achieve the
Borrowing Base Overadvance reduction by the May 31, 2008
date through a combination of operating results, working capital
management and insurance proceeds, the Company continues to face
significant liquidity constraints.
As part of the insurance claim process, the Company received a
$10.0 million preliminary advance during the first quarter
of 2008, additional preliminary advances of $24.7 million
during the second quarter of 2008 and $17.3 million during
the third quarter of 2008, which were used to reduce obligations
under the Companys Silver Point Agreement. On
July 30, 2008, the Company reached a global settlement of
$52.0 million with its insurance company regarding all
damage claims. Of the $52.0 million insurance settlement
amount, $25.8 million represents the estimated recovery on
inventory damaged by the Southaven Casualty Event,
$3.4 million represents the estimated recovery on damaged
fixed assets and $22.8 million represents the business
interruption reimbursement of margin on lost sales, incremental
costs for travel, product procurement and reclamation,
incremental customer costs and other items resulting from the
tornadoes, incurred through December 31, 2008. The
insurance recovery did not completely offset the impacts of lost
sales and additional costs incurred by the Company during 2008.
The Company was required by its lenders to make repayments of
the term loan, maintain an availability block of between
$2.5 million and $5.0 million, and pay fees and
expenses from the insurance proceeds resulting in the loss of
approximately $20.0 million of liquidity. As the Company
was required by the Silver Point Agreement to utilize a portion
of the insurance claim proceeds to meet these requirements
instead of using them to fund the replacement of inventory
destroyed by the tornadoes, the Company has been forced to
extend vendor payables in an effort to maintain short-term cash
flow. As a result of extending vendor payables, the Company has
encountered delays in obtaining inventory which has had an
adverse impact on net sales and the results of operations during
2008. These impacts on net sales, results of operations and cash
flow are continuing in 2009 and will likely continue until the
destroyed inventory is replenished and vendor payables reduced
to normal payment terms which the Company anticipates will
happen only in conjunction with a refinancing of the existing
credit facility.
Included in selling, general and administrative expenses for the
twelve months ended December 31, 2008 is a
$15.3 million net credit resulting from the Southaven
Casualty Event reflecting a gain on the disposal of fixed assets
of $2.3 million, as the insurance recovery was in excess of
the damaged assets net book value, a $1.1 million gain
resulting from the recovery of margin on a portion of the
destroyed inventory and $14.5 million resulting from the
recovery under the business interruption portion of the
insurance coverage, which was offset in part by expenses of
$2.6 million incurred as a result of the tornadoes.
The Company is continuing to work toward raising debt
and/or
equity to reduce or possibly replace the current Silver Point
Agreement and to provide additional working capital as the
current Silver Point Agreement provides the Company with
insufficient liquidity. An investment banking firm is assisting
the Company in obtaining this new debt or equity capital. To
date we have not been able to consummate the desired
refinancing, due in part to the current conditions in the
financing marketplace, and there can be no assurance that we
will be able to do so on acceptable terms, or at all. The
violation of any covenant of the Silver Point Agreement requires
the Company to negotiate a waiver
53
to cure the default. We were able to obtain waivers for the
covenant violations at December 31, 2008 with respect to
the consolidated and U.S. senior leverage ratio
calculations, the amount of NRF operating leases and the
explanatory paragraph in the accountants opinion. However,
if the Company was unable to successfully resolve a default in
the future with the Lenders, the entire amount of any
indebtedness under the Silver Point Agreement at that time could
become due and payable, at the Lenders discretion. This
results in uncertainties concerning the Companys ability
to retire the debt. The financial statements do not include any
adjustments that might be necessary if the Company were unable
to continue as a going concern. As there can be no assurance
that the Company will be able to obtain additional funds from
the proposed debt refinancing or that further Lender
accommodations would be available, on acceptable terms or at
all, should there be covenant violations; the Company has
classified the remaining balance of the term loan as short-term
debt in the consolidated financial statements at
December 31, 2008. At December 31, 2007, the remaining
balance of the term loan had been classified as short-term debt
as a result of the uncertainties existing at that time
concerning the Companys ability to reduce the Borrowing
Base Overadvance Amount to zero by May 31, 2008.
|
|
Note 4
|
Recent
Accounting Pronouncements
|
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157),
which defines fair value, provides a framework for measuring
fair value, and expands the disclosures required for assets and
liabilities measured at fair value. SFAS 157 applies to
existing accounting pronouncements that require fair value
measurements; it does not require any new fair value
measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007 and was adopted by the
Company beginning in the first quarter of fiscal 2008 with no
impact on the financial statements. Application of SFAS 157
to non-financial assets and liabilities was deferred by the FASB
until 2009. The Company does not anticipate adoption of
SFAS 157 relating to non-financial assets and liabilities
in 2009 to have a material impact on its financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159), which provides
companies with an option to report selected financial assets and
liabilities at fair value with the changes in fair value
recognized in earnings at each subsequent reporting date.
SFAS 159 provides an opportunity to mitigate potential
volatility in earnings caused by measuring related assets and
liabilities differently, and it may reduce the need for applying
complex hedge accounting provisions. SFAS 159 is effective
for fiscal years beginning after November 15, 2007.
Adoption of SFAS 159 had no financial statement impact on
the Company.
During December 2007, the FASB issued FASB Statement
No. 141R Business Combinations, which
significantly changed the accounting for business combinations.
Under Statement 141R, the acquiring entity will recognize all
the assets acquired and liabilities assumed at the acquisition
date fair value with limited exceptions. Other changes are that
acquisition costs will generally be expensed as incurred instead
of being included in the purchase price; and restructuring costs
associated with the business combination will be expensed
subsequent to the acquisition date instead of being accrued on
the acquisition balance sheet. Statement 141R applies to any
business combination made by the Company after January 1,
2009.
In December 2007, the FASB issued Statement No. 160
Noncontrolling Interests in Consolidated Financial
Statements (SFAS 160), which clarified
the presentation and accounting for noncontrolling interests,
commonly known as minority interests, in the balance sheet and
income statement. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008, and earlier
adoption is prohibited. Adoption of SFAS 160 will not have
any impact on the Company.
In June 2008, the Emerging Issues Task Force of the FASB
published EITF Issue
07-5
Determining Whether an Instrument Is Indexed to an
Entitys Own Stock
(EITF 07-5)
to address concerns regarding the meaning of indexed to an
entitys own stock contained in FAS Statement
133 Accounting for Derivative Instruments and Hedging
Activities. This related to the determination of whether a
freestanding equity-linked instrument should be classified as
equity or debt. If an instrument
54
is classified as debt, it is valued at fair value, and this
value is remeasured on an ongoing basis, with changes recorded
in earnings in each reporting period.
EITF 07-5
is effective for years beginning after December 15, 2008
and earlier adoption is not permitted. Effective January 1,
2009 the Company has determined that the warrants issued to
Silver Point in March 2008 (see Note 8), which were
included in paid-in capital at December 31, 2008, should be
classified as liabilities due to the full ratchet
anti-dilution provision contained in the warrant agreement at
the adoption date. The impact of adopting
EITF 07-5
in 2009, will be a decrease in
paid-in-capital
by $3.0 million, which was the fair value recorded at the
time the warrants were issued, an increase of long-term
liabilities by the estimated fair value of the warrants as of
January 1, 2009 and credit to retained earnings for the
difference. The Company is determining the fair market value of
the warrants at January 1, 2009. At the end of the first
quarter of 2009, and all future quarters, the fair value of the
warrants will be re-calculated and any difference from the
previously reported fair value will adjust the carrying value of
the liability with the offset being included in the
determination of net income.
Inventories at December 31 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Raw material and component parts
|
|
$
|
25,479
|
|
|
$
|
23,055
|
|
Work in progress
|
|
|
4,043
|
|
|
|
4,044
|
|
Finished goods
|
|
|
55,064
|
|
|
|
79,657
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
84,586
|
|
|
$
|
106,756
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6
|
Property,
Plant and Equipment
|
Property, plant and equipment at December 31 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Leasehold improvements
|
|
$
|
4,918
|
|
|
$
|
3,390
|
|
Buildings and land
|
|
|
2,423
|
|
|
|
2,369
|
|
Machinery and equipment
|
|
|
40,337
|
|
|
|
44,406
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, gross
|
|
|
47,678
|
|
|
|
50,165
|
|
Accumulated depreciation and amortization
|
|
|
(25,792
|
)
|
|
|
(29,001
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
21,886
|
|
|
$
|
21,164
|
|
|
|
|
|
|
|
|
|
|
Assets acquired in the Modine Aftermarket merger in 2005 were
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 were $2.4 million and $0.4 million
at December 31, 2008 and $2.1 million and
$1.3 million at December 31, 2007, respectively.
55
Debt at December 31 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Term loan
|
|
$
|
33,377
|
|
|
$
|
49,625
|
|
Revolving credit facility
|
|
|
6,742
|
|
|
|
17,078
|
|
Short-term foreign debt
|
|
|
3,277
|
|
|
|
|
|
Capitalized lease obligations
|
|
|
1,441
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
44,837
|
|
|
|
67,453
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Term loan
|
|
|
33,377
|
|
|
|
49,625
|
|
Revolving credit facility
|
|
|
6,742
|
|
|
|
17,078
|
|
Short-term foreign debt
|
|
|
3,277
|
|
|
|
|
|
Current portion of capitalized lease obligations
|
|
|
564
|
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
|
43,960
|
|
|
|
67,242
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
877
|
|
|
$
|
211
|
|
|
|
|
|
|
|
|
|
|
Silver Point Agreement
Effective July 19, 2007, the Company entered into a Credit
and Guaranty Agreement (the Silver Point Agreement)
by and among the Company and certain domestic subsidiaries of
the Company, as guarantors, the lenders party thereto from time
to time (collectively, the Lenders), Silver Point
Finance, LLC (Silver Point), as administrative agent
for the Lenders, collateral agent and as lead arranger, and
Wachovia Capital Finance Corporation (New England)
(Wachovia), as borrowing base agent.
Pursuant to the Silver Point Agreement, and upon the terms and
subject to the conditions thereof, the Lenders agreed to extend
certain credit facilities (the Facilities) to the
Company in an aggregate principal amount not to exceed
$100 million, consisting of (a) $50 million
aggregate principal amount of Tranche A Term Loans,
(b) up to $25 million aggregate principal amount of
Revolving A Commitments (including a $7.5 million letter of
credit subfacility), and (c) up to $25 million
aggregate principal amount of Revolving B Commitments.
Availability under the Revolving Commitments is determined by
reference to a borrowing base formula. The Tranche A Term
Loans and any Revolving Loans are due and the commitments
terminate on the five-year anniversary of the closing,
July 19, 2012. Subject to customary exceptions and
limitations, the Company could elect to borrow at a per annum
Base Rate (as defined in the Silver Point Agreement) plus
375 basis points or a per annum LIBOR Rate (as defined in
the Silver Point Agreement) plus 475 basis points. The
proceeds from the borrowings under the Silver Point Agreement at
closing on July 19, 2007 were used to repay all Company
indebtedness under the Companys Amended and Restated Loan
and Security Agreement, dated February 28, 2007 (the
Wachovia Agreement), with Wachovia Capital Finance
Corporation (New England), formerly known as Congress Financial
Corporation (New England), as agent, and fees and expenses
related thereto. As with the prior Wachovia Agreement, all
borrowings under the Silver Point Agreement are secured by
substantially all of the assets of the Company (including a
pledge of 65% of the shares of the Companys NRF and
Mexican subsidiaries). The Silver Point Agreement provides call
protection to the Lenders (subject to certain exceptions) by way
of the lesser of a make-whole amount and prepayment premium
ranging from 5% to 3% to 1%, respectively, of outstanding loans
prepaid over years 2, 3, and 4. Mandatory prepayments in year 1
are subject to such make-whole amount (subject to certain
exceptions). Voluntary prepayments of Revolving Loans are first
applied to the Revolving A Loans outstanding. While voluntary
prepayments of the Tranche A Term Loan are permitted after
year 1, resulting availability must be at least $5 million.
The Agreement requires
56
mandatory prepayments of the loans with the proceeds of
issuances of debt and equity of the Company or its subsidiaries,
as well as an annual 75% excess cash flow sweep (subject to
availability minimums) (in each of the foregoing cases, the
proceeds of which are applied first, to the Tranche A Term
Loans, second, to the Revolving A Loans and third, to the
Revolving B Loans) and in respect of asset sales and following
the incurrence of debt from the Lenders at its NRF subsidiary.
Generally, mandatory prepayment with proceeds of inventory or
accounts are applied first to the Revolving A Loans, second, to
the Revolving B Loans and third, to the Tranche A Term
Loan, and mandatory prepayments with proceeds of other
collateral are applied first, to the Tranche A Term Loans
second, to the Revolving A Loans and third, to the Revolving B
Loans. Holders of Tranche A Term Loans may waive their
mandatory prepayment right, in which case such proceeds will be
applied pro rata to the remaining holders of the Tranche A
Term Loans.
At December 31, 2008, borrowings under the Silver Point
Agreement included $0.7 million of revolving credit
borrowings at a 14% per annum interest rate, $6.0 million
of revolving credit borrowings at 12% and a term loan of
$33.4 million at an interest rate of 12% per annum. The
Second Amendment of the Silver Point Agreement, signed on
March 12, 2008, increased the interest rate on outstanding
indebtedness to the greater of (i) the Adjusted Libor Rate,
as defined in the Silver Point Agreement, plus 8%, or
(ii) 12%, for LIBOR borrowings, or the greater of
(x) the Adjusted Base Rate, as defined in the Second
Amendment, plus 7%, or (y) 14%, for Base Rate borrowings.
As a result of uncertainties concerning the Companys
ability to continue to meet or obtain waivers for violations of
covenants in the future and to obtain additional funding, the
outstanding term loan in the amount of $33.4 million at
December 31, 2008 was classified as short-term debt in the
consolidated financial statements included in this
Form 10-K.
Borrowings under the Silver Point Agreement as of
December 31, 2007 included $17.1 million of revolving
credit obligations at interest rates of 9.896% and 11.0% per
annum and a term loan of $49.6 million at an interest rate
of 10.125% per annum. As a result of the uncertainties
concerning the Companys ability to reduce the Borrowing
Base Overadvance to zero by May 31, 2008 (see Note 3),
the outstanding term loan at December 31, 2007 in the
amount of $49.6 million was classified as short-term debt
in the consolidated financial statements included in this
Form 10-K.
The Silver Point Agreement contains customary representations,
warranties, affirmative covenants for financing transactions of
this nature (including, without limitation, covenants in respect
of financial and other reporting and a covenant to hedge
interest in the future in respect of up to $25 million
principal of the Tranche A Term Loan for up to two years),
negative covenants (including limitation on debt, liens,
restricted payments, investments, sale-leaseback transactions),
fundamental changes (including an annual $10 million limit
on asset sales), affiliate transactions (including prohibition
on transfers of assets to subsidiaries of the Company that are
not guarantors of the Facilities) and events of default
(including any pledge of assets of NRF or its subsidiaries or
any change of control).
The Silver Point Agreement also has quarterly and annual
covenants relating to leverage, capital expenditures, EBITDA,
and a fixed charge coverage ratio. Certain financial covenants
are tested on a consolidated basis as well as in respect of the
Companys domestic subsidiaries and a Mexican subsidiary
and in respect of its European operations on a stand alone
basis. At September 30, 2007, the Company was in violation
of the consolidated senior leverage and NRF total debt covenants
contained in the Silver Point Agreement. The Company obtained
waivers for these violations. As of November 30, 2007, the
Company was in violation of the EBITDA covenant for its domestic
subsidiaries and at December 31, 2007, the Company was in
violation of the consolidated EBITDA, senior leverage and fixed
charge covenants and the domestic EBITDA, fixed charge and
senior leverage covenants. As a result of these specific events
of default, as defined in the Silver Point Agreement, effective
November 30, 2007, the Company was charged an additional 2%
default interest until the date the events of default were cured
or waived. Results for the year ended December 31, 2007
included $0.1 million of default interest. The Second
Amendment to the Silver Point Agreement (the Second
Amendment), signed on March 12, 2008, described in
more detail below, contained a waiver of the 2007 events of
default resulting in the elimination of the default interest, as
of the
57
Second Amendment date. During the twelve months ended
December 31, 2008, $0.3 million, representing default
interest through the date of the Second Amendment, was included
in interest expense in the consolidated statement of operations.
At December 31, 2008, the Company was in compliance with
all financial covenants of the Silver Point Agreement except the
U.S. and consolidated senior leverage ratio covenants and
the NRF operating lease covenant. In addition, as a result of
the explanatory paragraph in the accountants opinion for
the year ended December 31, 2008 concerning the
Companys ability to continue as a going concern, the
Company was in default of the Silver Point Agreement. The
Twenty-Second Amendment to the Silver Point Agreement (see
Note 19), signed as of March 17, 2009 contained a
waiver of these events of default.
During the twelve months ended December 31, 2008, as
required by the Silver Point Agreement, the term loan was
reduced by $14.7 million from the receipt of insurance
proceeds associated with the Southaven Casualty Event, by
$0.5 million from the receipt of Extraordinary Receipts, as
defined in the Silver Point Agreement, and by $1.0 million
from the receipt of proceeds from the sale of an unused facility
in Emporia, Kansas. The term loan was reduced by
$0.4 million during the year ended December 31, 2007
from the receipt of Extraordinary Receipts. As a result of the
term loan reductions from the receipt of the insurance proceeds,
the Company paid prepayment premiums, as required by the Silver
Point Agreement, of $0.9 million, which were recorded in
debt extinguishment costs in the consolidated statement of
operations for the year ended December 31, 2008. In
addition, as a result of the prepayments, $0.8 million of
deferred debt costs, which were previously capitalized, have
been expensed as debt extinguishment costs for the year ended
December 31, 2008.
On November 9, 2007, the First Amendment and Waiver to the
Silver Point Agreement (the First Amendment) was
signed. The First Amendment contained a waiver of the
Consolidated Senior Leverage Ratio and NRF Total Debt Ratio
covenant violations for the applicable periods ended
September 30, 2007 and required that any funds received by
the Company under the terms of the agreement relating to the
closure of 36 branches, signed on September 28, 2007, which
are reimbursement of closure expenses, would be treated as
Extraordinary Receipts and utilized to pay down the
outstanding indebtedness under the Term Loan.
On March 12, 2008, the Second Amendment of the Silver Point
Agreement (the Second Amendment) was signed.
Pursuant to the Second Amendment, and upon the terms and subject
to the conditions thereof, the Lenders agreed to temporarily
increase the aggregate principal amount of Revolving B
Commitments available to the Company from $25 million to
$40 million. This additional liquidity allowed the Company
to restore its operations in Southaven, Mississippi that were
severely damaged by the Southaven Casualty Event. Under the
Silver Point Agreement, the damage to the inventory and fixed
assets caused by the Southaven Casualty Event, resulted in a
dramatic reduction in the Borrowing Base, as such term is
defined in the Silver Point Agreement, because the Borrowing
Base definition excludes the damaged assets without giving
effect to the related insurance proceeds. Pursuant to the Second
Amendment, the Lenders agreed to permit the Company to borrow
funds in excess of the available amounts under the Borrowing
Base definition in an amount not to exceed $26 million. The
Company was required to reduce this Borrowing Base
Overadvance Amount, as defined in the Silver Point
Agreement, to zero by May 31, 2008. The Company was able to
achieve this reduction prior to May 31, 2008 through a
combination of insurance proceeds, operating results and working
capital management. In addition, pursuant to the Second
Amendment, the Company has been working to strengthen its
capital structure by raising additional debt
and/or
equity. An investment banking firm is assisting the Company in
obtaining such funds.
As previously reported a number of Events of Default, as defined
in the Silver Point Agreement, had occurred and were continuing
relating to, among other things, the Southaven Casualty Event.
Pursuant to the Second Amendment, the Lenders waived such Events
of Default including the 2007 covenant violations, effective as
of the Second Amendment date, resulting in the cessation of the
2% default interest, which had been charged effective
November 30, 2007. The Second Amendment also increased the
interest rate on outstanding indebtedness to the Lenders,
consistent with current market conditions for similar
borrowings, to the greater of (i) the Adjusted LIBOR Rate,
as defined in the Second
58
Amendment, plus 8%, or (ii) 12%, for LIBOR borrowings, or
the greater of (x) the Adjusted Base Rate, as defined in
the Second Amendment, plus 7%, or (y) 14%, for Base Rate
borrowings. In connection with the Second Amendment, the Company
paid the Lenders a fee of $3.0 million, which has been
deferred and is being amortized over the remaining term of the
outstanding obligations.
The Company entered into the Third Amendment to the Silver Point
Agreement (the Third Amendment) on March 26,
2008. The Third Amendment reset the 2008 financial covenants
contained in the Silver Point Agreement in light of, among other
things, the Southaven Casualty Event. Among the covenants
adjusted were those relating to leverage, capital expenditures,
consolidated EBITDA, and the fixed charge coverage ratio. In
addition, the Third Amendment reduced the maximum Borrowing Base
Overadvance Amount, which had been fixed at $26.0 million
in the Second Amendment, to $24.2 million to reflect a
small portion of the inventory in Southaven which had not been
damaged by the tornadoes, and could be returned to the
Companys inventory (and, consequently, to the Borrowing
Base). The Third Amendment also provided the Company with a
waiver for the default resulting from the explanatory paragraph
in the accountants opinion for the year ended
December 31, 2007 concerning the Companys ability to
continue as a going concern.
The Fourth Amendment (the Fourth Amendment) of the
Silver Point Agreement, signed on July 18, 2008, resulted
in Wells Fargo replacing Wachovia as (i) the Borrowing Base
Agent for the Lenders and (ii) the issuing bank with
respect to issued letters of credit. In addition, the Fourth
Amendment provided for an increase in the Revolving A Commitment
from $25 million to $35 million and a reduction of the
Revolving B Commitment from $25 million to
$15 million. The total revolving credit line of
$50 million under the Silver Point Agreement remained
unchanged as a result of the Fourth Amendment. As a result of
the effectiveness of the Fourth Amendment, Wells Fargo is the
sole Revolving A Lender and Silver Point and certain of its
affiliates remain the Revolving B Lenders. In addition, the
Fourth Amendment provided for an adjustment to certain financial
covenants (and definitions related thereto) to allow for
expenditures relating to the acquisition of replacement fixed
assets at the Companys new Southaven, Mississippi
distribution facility. As a result of Wells Fargo replacing
Wachovia as Issuing Bank, the Company recorded a non-cash debt
extinguishment expense in the year ended December 31, 2008
of $1.1 million reflecting the expensing of amounts
previously capitalized in deferred debt costs.
On July 24, 2008, the Company entered into the Fifth
Amendment (the Fifth Amendment) of the Silver Point
Agreement. The Fifth Amendment clarified that the first
$5.0 million of additional proceeds of insurance in respect
of the Southaven Casualty Event would be applied to repay the
outstanding Tranche A Term Loans. The balances of such
insurance proceeds would be applied on a
50-50
basis to prepay the Revolving Loans outstanding and the
Tranche A Term Loans. In addition, the Fifth Amendment
provided that the Borrowing Base Reserve relating to the
Southaven Casualty Event would be reduced from $5.0 million
to $3.0 million effective on the date of the Fifth
Amendment, and from $3.0 million to zero on the date the
Company delivered to the administrative agent a final insurance
settlement agreement with respect to the Southaven Casualty
Event. However, the Borrowing Base Reserve would be increased to
$5.0 million on August 31, 2008, unless the Capital
Raise, as defined in the Silver Point Agreement, was completed
by that date. Thereafter, such Borrowing Base Reserve would be
permanently reduced to zero if the Capital Raise was consummated
on or before September 30, 2008 (subject to extension with
Administrative Agents consent). Finally, if the Company
did not consummate the Capital Raise by December 31, 2008,
the minimum EBITDA covenant would be increased from
$27.5 million to $28.0 million. The Company agreed to
pay to the Revolving B Lenders a $0.5 million amendment fee
(the Amendment Fee), earned on the date of the Fifth
Amendment and due and payable on the earlier of
September 30, 2008 or the date of consummation of the
Capital Raise. The Amendment Fee was 0.50% (the Fee
Rate) of the sum of the Tranche A Term Loans and the
Revolving Commitments outstanding as of the date the Amendment
Fee was due and payable. Also, the deadline for consummation of
the Capital Raise could be extended by the Administrative Agent
from September 30, 2008 to November 15, 2008 so long
as there existed no event of default and subject to an extension
fee payable to the Revolving B Lenders
59
equal to 0.50% of the Tranche A Term Loans and Revolving
Commitments outstanding on September 30, 2008.
The Sixth Amendment (the Sixth Amendment) of the
Silver Point Agreement, signed on August 25, 2008, extended
the deadline date for Interest Rate Protection, as defined in
the Silver Point Agreement, to no later than December 31,
2008. In addition, the Sixth Amendment amended the Silver Point
Agreement relating to the concentration of Certain Eligible
Accounts, as defined in the Silver Point Agreement, as a result
of the merger of CSK Auto Corporation and OReilly
Automotive, Inc.
On September 30, 2008, the Company entered into the Seventh
Amendment (the Seventh Amendment) of the Silver
Point Agreement which reduced the Southaven Insurance Proceeds
Reserve, as defined in the Silver Point Agreement, from
$5.0 million to $4.0 million as of September 30,
2008. On October 2, 2008, the Southaven Insurance Proceeds
Reserve was increased back to $5.0 million under the
Seventh Amendment.
On October 2, 2008, the Company entered into the Eighth
Amendment (the Eighth Amendment) of the Silver Point
Agreement. Pursuant to the Eighth Amendment, the Southaven
Insurance Proceeds Reserve (the Reserve)
(i) was reduced from $5.0 million to $2.5 million
effective on October 2, 2008, and (ii) would be
increased to $5.0 million on the earlier of (x) the
occurrence of an Event of Default, or (y) October 31,
2008, provided that, if prior to such time, the Company provided
satisfactory commitment letters in respect of the Mezzanine
Financing and Senior Credit Financing, then subject to certain
conditions described in the Eighth Amendment, the Reserve would
be reduced to $0 until November 30, 2008. If the reduction
was extended until November 30, 2008, the Reserve would be
increased to $5.0 million on the earliest of (w) an
Event of Default, (x) the date the Administrative Agent
determined the Mezzanine Financing and Senior Credit Financing
would not likely to be consummated, (y) the date any
commitment letter for the Mezzanine Financing and Senior Credit
Financing was terminated, and (z) November 30, 2008 if
the Mezzanine Financing and Senior Credit Financing had not been
consummated.
The Ninth Amendment (the Ninth Amendment) of the
Silver Point Agreement, signed on October 29, 2008,
replaced the references contained in the Eighth Amendment to
October 31, 2008 regarding the Southaven Insurance Proceeds
Reserve with November 7, 2008.
The Tenth Amendment (the Tenth Amendment) of the
Silver Point Agreement, signed on November 6, 2008,
replaced the references contained in the Ninth Amendment to
November 7, 2008 regarding the Southaven Insurance Proceeds
Reserve with November 14, 2008.
On November 14, 2008, the Company entered into the Eleventh
Amendment (the Eleventh Amendment) of the Silver
Point Agreement which replaced the references contained in the
Tenth Amendment to November 14, 2008 regarding the
Southaven Insurance Proceeds Reserve with November 21, 2008.
The Twelfth Amendment (the Twelfth Amendment) of the
Silver Point Agreement, signed on November 21, 2008,
replaced the references contained in the Eleventh Amendment to
November 21, 2008 regarding the Southaven Insurance
Proceeds Reserve with December 5, 2008 and the deadline of
November 30, 2008 contained in the Eighth Amendment was
extended to December 5, 2008.
On December 4, 2008, the Company entered into the
Thirteenth Amendment (the Thirteenth Amendment) of
the Silver Point Agreement which replaced the references
contained in the Twelfth Amendment to December 5, 2008
regarding the Southaven Insurance Proceeds Reserve with
December 19, 2008.
On December 19, 2008, the Company entered into the
Fourteenth Amendment (the Fourteenth Amendment) of
the Silver Point Agreement which replaced the references
contained in the Thirteenth Amendment to December 19, 2008
regarding the Southaven Insurance Proceeds Reserve
60
with January 5, 2009 and extended the requirement to have
interest rate protection by December 31, 2008 to
January 31, 2009.
See Note 19, included herein, for a description of the
Fifteenth, Sixteenth, Seventeenth, Eighteenth, Nineteenth,
Twentieth, Twenty-First and Twenty-Second Amendments of the
Silver Point Agreement signed subsequent to December 31,
2008.
As a result of the $3.0 million fee paid at the time of the
Second Amendment, the $0.5 million paid in conjunction with
the Fifth Amendment, the $3.0 million fair value of the
Warrants, and other legal and professional costs associated with
the 2008 amendments to the Silver Point Agreement, offset by the
normal amortization of accumulated costs and the write-off of
debt extinguishment costs, described above, deferred debt costs,
included in other assets in the consolidated balance sheet
increased from $4.5 million at December 31, 2007 to
$7.5 million at December 31, 2008. This amount is
being amortized over the remaining term of the outstanding
obligations under the Silver Point Agreement, however it would
be written-off as a non-cash debt extinguishment expense if the
Silver Point Agreement was paid in full using the proceeds from
any future credit agreement.
Refinancing Process
As noted above, an investment banker is assisting the Company in
the raising of debt
and/or
equity in order to strengthen its capital structure.
On October 6, 2008, the Company announced that it had
signed a letter of intent with a group of institutional lenders
that would provide $30 million of mezzanine financing to
the Company. Completion of this financing, was subject to
various closing conditions, including satisfactory completion of
due diligence, the Company establishing a new senior secured
credit facility with a new lender, a dividend from the
Companys NRF subsidiary in the Netherlands and execution
of definitive agreements. The proposed mezzanine lenders
indicated in February 2009, due in part to market conditions and
delays encountered in obtaining authorization from the Works
Council (NRF employee representatives) for a credit facility
expansion to enable a dividend from NRF, that they would require
the Company to provide additional sources of capital
and/or debt
in order for them to complete their part of the refinancing.
Therefore it is now uncertain whether the Company will be able
to reach agreement with these mezzanine lenders. While the
Company continues to consider and pursue mezzanine financing as
a part of its refinancing program, it is also evaluating all
other options to reduce or eliminate Silver Points current
loan and provide appropriate liquidity for the Company.
On November 18, 2008, the Company announced that it had
signed a proposal letter with a major bank to provide a new
$60 million senior secured credit facility to the Company,
subject to execution of definitive agreements, completion of due
diligence and other closing conditions. The Company is in
continued discussions with this proposed lender.
As part of the refinancing process, the Company has also been
negotiating to obtain an expansion of the existing
5.0 million Euro credit line which the Companys NRF
subsidiary has with a European bank. This expansion would
provide funds which would lower the Companys borrowing
costs in the U.S. After negotiating with the NRF Works
Council for many months to obtain their authorization for the
expansion of the credit line, the Company recently obtained the
necessary consent in order to proceed. Finalization of a credit
line expansion would be subject to completion of the
U.S. refinancing process.
While to date the Company has been unable to consummate the
desired refinancing, due in part to the current financial market
conditions and the delays noted above in gaining approval of the
NRF credit line expansion, the Company believes that a timely
and more flexible alternative to its current financing is
critical to the success of its business and the Company is doing
everything in its control to complete this process as quickly as
possible. There can be no assurance, however, that the Company
will be able to do so on acceptable terms, or at all. If the
Company is unable to obtain refinancing, it could be forced to
seek to restructure its liabilities, substantially curtail
operations or otherwise act to protect the Company.
61
In conjunction with the negotiation of a new credit agreement,
the Company has incurred legal and other professional fees of
$1.8 million, which have been classified as deferred
financing costs in Other Assets on the consolidated balance
sheet at December 31, 2008. These costs will be written-off
over the term of a new agreement or will be written-off in total
if it is determined that new capital will not be obtained.
Wachovia Agreement
On January 3, 2007, the Company amended its then existing
Loan and Security Agreement (the Credit Facility)
with Wachovia Capital Finance Corporation (New England) pursuant
to a Sixteenth Amendment (the Sixteenth Amendment).
The Sixteenth Amendment, which was effective as of
December 19, 2006, revised the inventory loan limits
between December 1, 2007 and February 23, 2007.
On January 19, 2007, the Company amended the Credit
Facility pursuant to a Seventeenth Amendment (the
Seventeenth Amendment). The Seventeenth Amendment
reduced the amount of Minimum Excess Availability which the
Company was required to maintain from $5.0 million to
$2.5 million from and after January 19, 2007.
On February 28, 2007, the Company entered into an Amended
and Restated Loan and Security Agreement with Wachovia Capital
Finance Corporation (New England) (the Wachovia
Agreement). The Wachovia Agreement amended and restated
the Companys then existing Credit Facility to reflect an
additional Term B loan in the amount of $8.0 million. This
additional indebtedness was secured by substantially all of the
assets of the Company, including its owned real property
locations across the United States. The maturity date of the
Term B loan was July 2009. Repayments of the Term B loan were to
be in twenty-two consecutive monthly installments of $167
thousand commencing on October 1, 2007 with the remaining
balance paid on July 21, 2009. The Wachovia Agreement reset
certain financial covenants for 2007 and 2008 and established
minimum EBITDA for the Companys NRF subsidiary, unless
there was excess availability of $15.0 million, for 2007.
The Wachovia Agreement did not affect the amount of minimum
excess availability that the Company was required to maintain.
The Company was not in compliance with the EBITDA and fixed
charge ratio covenants as of June 30, 2007; however, these
were cured when the outstanding debt under the Wachovia
Agreement was paid in full on July 19, 2007. The pay-off of
the indebtedness under the Wachovia Agreement resulted in the
Company recording $0.9 million as debt extinguishment costs
during the year ended December 31, 2007. This reflected the
write-off of a portion of the deferred debt costs associated
with the Wachovia Agreement which had been capitalized and were
being amortized over the life of the Wachovia Agreement. The
remaining portion of the Wachovia Agreement deferred debt costs
($1.0 million) were being amortized over the remaining life
of the Silver Point Agreement, until Wachovia ceased to be a
participant in 2008 as described above.
The Credit Facility, which was originally entered into on
January 4, 2001, and amended thereafter, was collateralized
by a blanket first security interest in substantially all of the
Companys assets plus a pledge of stock of the
Companys subsidiaries. Available borrowings under the
revolving credit line were determined by a borrowing base
consisting of the Companys eligible accounts receivable
and inventory, adjusted by an advance rate.
Other Debt Information
During the year ended December 31, 2008, the weighted
average interest rate on outstanding domestic revolving credit
and term loan borrowings was 11.8%. The weighted average
interest rate during 2007 on domestic revolving credit and term
loan borrowings was 8.9%.
Average outstanding total debt during 2008 was
$58.2 million compared to $67.6 million during 2007.
This reduction reflected the required pay down of borrowings
under the Silver Point Agreement offset in part by borrowings
under the NRF credit facility.
62
Capitalized lease obligations relate primarily to racking at the
Companys distribution center in Southaven, Mississippi and
computer equipment in the U.S. Total future payments under
the capital leases outstanding on December 31, 2008, of
$1.9 million include interest of $0.5 million.
The Companys NRF subsidiary has a 5.0 million Euro
credit facility under which it may borrow. Interest on
outstanding borrowings is calculated at the LIBOR borrowing rate
plus 1%. At December 31, 2008, $3.3 million
(2.6 million Euro) was borrowed at an annual interest rate
of 4.29% while at December 31, 2007, there were no
borrowings outstanding under this credit facility.
The Company utilized letters of credit of $4.7 million and
$4.9 million at December 31, 2008 and 2007,
respectively, to back certain insurance policies and certain
trade purchases.
Minimum future debt repayments, excluding the term loan,
revolving credit facility borrowings and short-term foreign
debt, will be $0.6 million in 2009, $0.3 million in
2010, $0.6 million in 2011, $4 thousand in 2012 and $1
thousand in 2013. The term loan payment of $33.4 million
due in 2012 has been reclassified from long-term debt to
short-term debt as a result of uncertainties concerning the
Companys ability to obtain covenant waivers and additional
financing in the future.
|
|
Note 8
|
Stockholders
Equity
|
Common Stock: The Company has
47.5 million shares of common stock authorized. The Company
has not declared a quarterly common stock dividend since
September 2000. Under the provisions of the Silver Point
Agreement, the Company may not pay common stock dividends or
redeem common shares.
As contemplated by the Second Amendment of the Silver Point
Agreement, on March 26, 2008 the Company issued warrants to
purchase up to the aggregate amount of 1,988,072 shares of
Company common stock (representing 9.99% of the Companys
common stock on a fully-diluted basis) to two affiliates of
Silver Point (collectively, the Warrants). Warrants
to purchase 993,040 shares were subject to cancellation if
the Company had raised $30 million of debt or equity
capital pursuant to documents in form and substance satisfactory
to Silver Point on or prior to May 31, 2008. Since such
financing did not occur prior to the May 31, 2008 deadline,
the warrants remain outstanding. To reflect the issuance of the
Warrants, the Company recorded additional
paid-in-capital
and deferred debt costs of $3.0 million. This represents
the estimated fair value of the Warrants, based upon the terms
and conditions of the Warrants and the market value of the
Companys common stock on the date of issuance. (See
Note 4 for the impact in 2009 of adopting the Emerging
Issues Task Force Issue
07-5
relating to a change in how the Warrants will be accounted for.)
The increase in deferred debt costs associated with the original
market value is being amortized over the remaining term of the
outstanding obligations under the Silver Point Agreement. The
Warrants have a term of seven years from the date of grant and
have an exercise price equal to 85% of the lowest average dollar
volume weighted average price of the Companys common stock
for any 30 consecutive trading day period prior to exercise
commencing 90 trading days prior to March 12, 2008 and
ending 180 trading days after March 12, 2008. The exercise
price calculated in accordance with the warrant terms was fixed
at $0.3178 per share. The Warrants contain a full
ratchet anti-dilution provision providing for adjustment
of the exercise price and number of shares underlying the
Warrants in the event of certain share issuances below the
exercise price of the Warrants; provided that the number of
shares issuable pursuant to the Warrants is subject to
limitations under applicable NYSE Amex (formerly known as
American Stock Exchange) rules (the 20% Issuance
Cap). If the anti-dilution provision results in the
issuance of shares above the 20% Issuance Cap, the Company would
provide a cash payment in lieu of the shares in excess of the
20% Issuance Cap. The Warrants also contain a cashless exercise
provision. In the event of a change of control or similar
transaction (i) the Company has the right to redeem the
Warrants for cash at a price based upon a formula set forth in
the Warrant and (ii) under certain circumstances, the
Warrant holders have a right to require the Company to purchase
the Warrants for cash during the 90 day period following
the change of control at a price based upon a formula set forth
in the Warrants.
63
In connection with the issuance of the Warrants, the Company
entered into a Warrantholder Rights Agreement dated
March 26, 2008 (the Warrantholder Rights
Agreement) containing customary representations and
warranties. The Warrantholder Rights Agreement also provided the
Warrant holders with a preemptive right to purchase any
preferred stock the Company issued prior to December 31,
2008 that was not convertible into common stock. There was no
preferred stock issued which would be subject to this provision.
The Company also entered into a Registration Rights Agreement
dated March 26, 2008 (the Registration Rights
Agreement), pursuant to which it agreed to register for
resale pursuant to the Securities Act of 1933, as amended, 130%
the shares of common stock initially issuable pursuant to the
Warrants. On April 21, 2008, a
Form S-3
was filed with the Securities and Exchange Commission with
respect to the resale of 2,584,494 shares of common stock
issuable upon exercise of the Warrants. The Registration
Statement was declared effective on June 24, 2008. The
Registration Rights Agreement also requires payments to be made
by the Company under specified circumstances if (i) a
registration statement was not filed on or before April 25,
2008, (ii) the registration statement was not declared
effective on or prior to June 24, 2008, (iii) after
its effective date, such registration statement ceases to remain
continuously effective and available to the holders subject to
certain grace periods, or (iv) the Company fails to satisfy
the current public information requirement under Rule 144
under the Securities Act of 1933, as amended. If any of the
foregoing provisions are breached, the Company would be
obligated to pay a penalty in cash equal to one and one-half
percent (1.5%) of the product of (x) the market price (as
such term is defined in the Warrants) of such holders
registrable securities and (y) the number of such
holders registrable securities, on the date of the
applicable breach and on every thirtieth day (pro rated for
periods totaling less than thirty (30) days) thereafter
until the breach is cured. To date, there have not been any
breaches of the Warrantholder Rights Agreement provisions.
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), with a liquidation preference of
$3.0 million. As noted in Note 11, included herein, on
June 29, 2007 an arbitrators decision concerning the
dispute associated with the Ready-Aire earn-out calculation,
resulted in a $3.2 million increase in the liquidation
preference of the remaining 12,781 outstanding shares of
Series B Preferred Stock. The Preferred Stock is
non-transferable and is entitled to cumulative dividends of 5%.
It is redeemable at the Companys 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 could not exceed 7% of
the total number of shares of common stock outstanding, after
giving effect to the conversion (the Conversion
Cap), unless the Company waived such Conversion Cap. On
June 27, 2007, the Company, by action of its Board of
Directors, waived the Conversion Cap. On October 12, 2007,
2,868 shares of Preferred Stock, with a liquidation
preference of $1.0 million, were converted into
459,071 shares of common stock. Based on the closing price
of the Companys common stock at December 31, 2008,
$0.36 per share, conversion of the $3.5 million liquidation
preference would result in the issuance of 9,591,667 shares
of common stock.
64
Accumulated Other Comprehensive (Loss)
Income: Other comprehensive (loss) income
represents revenues, expenses, gains and losses that are not
included in net income (loss), but rather are recorded directly
in Stockholders Equity. The adjustments for the years
ended December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
Minimum
|
|
|
Currency
|
|
|
|
|
|
|
Pension Liability
|
|
|
Translation
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Balance at December 31, 2006
|
|
$
|
(4,358
|
)
|
|
$
|
2,888
|
|
|
$
|
(1,470
|
)
|
Annual adjustment
|
|
|
(240
|
)
|
|
|
3,487
|
|
|
|
3,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
(4,598
|
)
|
|
|
6,375
|
|
|
|
1,777
|
|
Annual adjustment
|
|
|
(12,592
|
)
|
|
|
(7,299
|
)
|
|
|
(19,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
(17,190
|
)
|
|
$
|
(924
|
)
|
|
$
|
(18,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, the minimum pension liability adjustment represents
$(13.0) million for domestic plans and $0.4 million
for foreign plans, which is net of $0.1 million of foreign
income taxes. The domestic plan adjustment primarily reflects
the decline in the market value of pension plan assets while the
foreign plan change reflects actuarial gains. The adjustment to
the minimum pension liability in 2007 represented
($0.5) million from domestic plans offset by
$0.3 million for foreign plans, which was net of
$0.1 million of foreign income taxes. The domestic
adjustment reflected unfavorable fund performance, while the
foreign plan change represented a curtailment gain resulting
from headcount reductions primarily at the Companys Mexico
City manufacturing operation.
The foreign currency translation adjustments in both 2008 and
2007 result from fluctuations of the Euro and the Peso in
relation to the U.S. dollar and the Companys net
asset position in both Europe and Mexico.
|
|
Note 9
|
Restructuring
Charges
|
In 2008, the Company recorded $0.2 million of restructuring
costs. These costs resulted from the closure of ten branch
locations offset in part by credits received from the
cancellation of vehicle leases associated with previously closed
facilities. Headcount was reduced by 34 as a result of the
closures. In September 2006, the Company announced that it was
commencing a process to realign its branch structure which would
include the relocation, consolidation or closure of some
branches and the establishment of expanded relationships with
key distribution partners in some areas, as well as the opening
of new branches, as appropriate. Actions during 2007 and 2008
have resulted in the reduction of branch and agency locations
from 94 at December 31, 2006 to 34 at December 31,
2008 and the establishment of supply agreements with
distribution partners in certain areas. It is anticipated that
these actions will improve the Companys market position
and business performance by achieving better local branch
utilization where multiple locations are involved, and by
establishing in some cases, relationships with distribution
partners to address geographic market areas that do not justify
stand-alone branch locations. Annual savings from these actions
have exceeded the restructuring costs incurred.
During 2007, the Company reported $4.1 million of
restructuring costs associated with changes to the
Companys branch operating structure and headcount
reductions in the United States and Mexico. The branch operating
structure changes were associated with the Companys
September 2006 announcement which resulted in a reduction of 48
branch and agency locations during 2007. On July 25, 2007,
in response to soft 2007 second quarter sales and expectations
of lower-than-expected results for the full year, due to market
conditions, the Company announced that it was finalizing and
acting upon additional strategic actions to right size its North
American operational and administrative structure going forward.
The headcount reductions, during 2007, in the United States
resulted from the elimination of approximately 200 salaried
positions, while reductions at the Companys Mexican
manufacturing facilities resulted from the elimination of
approximately 100 positions, as a result of
65
production cutbacks reflecting the conversion of radiator
production from copper/brass to aluminum construction and the
Companys efforts to right-size its manufacturing
facilities.
Restructuring costs in 2006 of $3.1 million were associated
with the elimination of 78 positions, facility closure costs and
the write-down of fixed assets, no longer required, to net
realizable value as a result of the relocation of copper/brass
radiator production from Nuevo Laredo to the Companys
Mexico City facility, the relocation of air conditioning parts
manufacturing from Arlington, Texas to Nuevo, Laredo, Mexico,
and the elimination of 126 salaried and hourly positions in
Mexico City, Mexico due to the conversion of radiator production
from cooper/brass construction to aluminum in order to lower
product costs. In addition, during the fourth quarter of 2006,
the Company reduced the number of branch and agency locations by
26 as part of its change in go-to-market strategy and closed its
Racine office and consolidated the functions performed there
into its New Haven headquarters.
The remaining restructuring reserve balance at December 31,
2006, 2007 and 2008 was classified in other accrued liabilities.
A summary of restructuring charges and payments during the three
years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
|
Facility
|
|
|
Asset
|
|
|
|
|
|
|
Related
|
|
|
Consolidation
|
|
|
Write-down
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Balance at December 31, 2005
|
|
$
|
283
|
|
|
$
|
1,671
|
|
|
$
|
|
|
|
$
|
1,954
|
|
Charge to operations
|
|
|
1,744
|
|
|
|
1,196
|
|
|
|
189
|
|
|
|
3,129
|
|
Cash payments
|
|
|
(1,353
|
)
|
|
|
(1,478
|
)
|
|
|
|
|
|
|
(2,831
|
)
|
Non-cash write-off
|
|
|
|
|
|
|
|
|
|
|
(189
|
)
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
674
|
|
|
|
1,389
|
|
|
|
|
|
|
|
2,063
|
|
Charge to operations
|
|
|
3,644
|
|
|
|
651
|
|
|
|
(178
|
)
|
|
|
4,117
|
|
Reversal of accrual no longer required
|
|
|
|
|
|
|
(428
|
)
|
|
|
|
|
|
|
(428
|
)
|
Non-cash write-off
|
|
|
|
|
|
|
|
|
|
|
178
|
|
|
|
178
|
|
Cash payments
|
|
|
(3,339
|
)
|
|
|
(910
|
)
|
|
|
|
|
|
|
(4,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
979
|
|
|
|
702
|
|
|
|
|
|
|
|
1,681
|
|
Charge to operations
|
|
|
164
|
|
|
|
8
|
|
|
|
|
|
|
|
172
|
|
Cash payments
|
|
|
(923
|
)
|
|
|
(406
|
)
|
|
|
|
|
|
|
(1,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
220
|
|
|
$
|
304
|
|
|
$
|
|
|
|
$
|
524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $0.2 million non-cash credit in 2007 reflects an
actuarially computed pension liability curtailment gain as a
result of headcount reductions, which occurred principally at
the Companys Mexico City manufacturing facility. The
reversal in 2007 of a $0.4 million accrual recorded at the
time of the Modine merger, which was no longer required,
resulted in a reduction of selling, general and administrative
expenses.
The remaining accrual for facility consolidations at
December 31, 2008 consists primarily of lease obligations
and facility exit costs, which are expected to be paid by the
end of 2011. Workforce related expenses will be paid by the end
of 2009.
|
|
Note 10
|
Retirement
and Post-retirement Plans
|
Domestic Retirement Plans: A majority of the
Companys 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
unfunded 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 uses
December 31 as the measurement date for its domestic retirement
plans.
66
Domestic Postretirement Plans: The Company
provides healthcare and life insurance benefits for certain
retired employees who reach retirement age while working for the
Company. No new retirees may participate in these programs and
the future reimbursements are fixed at the time of retirement.
The Company accrues for the cost of its postretirement
healthcare and life insurance benefits based on actuarially
determined costs and funds these costs on a pay as you go basis.
The Company uses December 31 as the measurement date for its
domestic postretirement plans.
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
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Service cost
|
|
$
|
666
|
|
|
$
|
831
|
|
|
$
|
946
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
2,008
|
|
|
|
1,959
|
|
|
|
1,845
|
|
|
|
13
|
|
|
|
15
|
|
|
|
21
|
|
Expected return on plan assets
|
|
|
(2,481
|
)
|
|
|
(2,312
|
)
|
|
|
(2,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss (gain)
|
|
|
513
|
|
|
|
614
|
|
|
|
620
|
|
|
|
(10
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
706
|
|
|
$
|
1,092
|
|
|
$
|
1,335
|
|
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decline in net periodic benefit cost of the retirement plans
in 2008 and 2007 is largely attributable to the headcount
reductions which occurred in conjunction with the Companys
cost reduction actions.
67
The following tables set forth the domestic plans combined
funded status and amounts recognized in the Companys
consolidated balance sheets at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans
|
|
|
Postretirement Plans
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1
|
|
$
|
33,012
|
|
|
$
|
33,267
|
|
|
$
|
223
|
|
|
$
|
312
|
|
Service cost
|
|
|
666
|
|
|
|
831
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
2,008
|
|
|
|
1,959
|
|
|
|
13
|
|
|
|
15
|
|
Actuarial loss (gain)
|
|
|
1,752
|
|
|
|
203
|
|
|
|
8
|
|
|
|
(90
|
)
|
Actual gross benefits paid
|
|
|
(2,762
|
)
|
|
|
(3,248
|
)
|
|
|
(13
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31
|
|
|
34,676
|
|
|
|
33,012
|
|
|
|
231
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1
|
|
|
31,168
|
|
|
|
30,454
|
|
|
|
|
|
|
|
|
|
Actual (loss) income on plan assets
|
|
|
(9,216
|
)
|
|
|
1,306
|
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
535
|
|
|
|
2,656
|
|
|
|
13
|
|
|
|
14
|
|
Actual gross benefits paid
|
|
|
(2,762
|
)
|
|
|
(3,248
|
)
|
|
|
(13
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31
|
|
|
19,725
|
|
|
|
31,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation (in excess of) plan assets at December 31
|
|
|
(14,951
|
)
|
|
|
(1,844
|
)
|
|
|
(231
|
)
|
|
|
(223
|
)
|
Unrecognized prior service cost
|
|
|
139
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
Unrecognized net loss (gain)
|
|
|
17,488
|
|
|
|
4,534
|
|
|
|
(136
|
)
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
2,676
|
|
|
$
|
2,848
|
|
|
$
|
(367
|
)
|
|
$
|
(377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term pension asset
|
|
$
|
|
|
|
$
|
107
|
|
|
$
|
|
|
|
$
|
|
|
Accrued benefit liability
|
|
|
(14,951
|
)
|
|
|
(1,951
|
)
|
|
|
(231
|
)
|
|
|
(223
|
)
|
Accumulated other comprehensive loss (income)
|
|
|
17,627
|
|
|
|
4,692
|
|
|
|
(136
|
)
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
2,676
|
|
|
$
|
2,848
|
|
|
$
|
(367
|
)
|
|
$
|
(377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss
(income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
|
$
|
17,488
|
|
|
$
|
4,534
|
|
|
$
|
(136
|
)
|
|
$
|
(154
|
)
|
Prior service cost
|
|
|
139
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,627
|
|
|
$
|
4,692
|
|
|
$
|
(136
|
)
|
|
$
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ending December 31, 2009, the Company
expects to recognize in its net periodic pension cost
$0.8 million of amortized actuarial loss and $20 thousand
of amortized prior service cost.
The assumptions used in the determination of the domestic
retirement and postretirement benefit obligation at December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans
|
|
|
Postretirement Plans
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
|
5.90
|
%
|
|
|
6.20
|
%
|
|
|
5.97
|
%
|
|
|
5.90
|
%
|
|
|
6.20
|
%
|
|
|
5.97
|
%
|
Salary progression
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial trend rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.00
|
%
|
|
|
11.00
|
%
|
Ultimate trend rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
Years to ultimate rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
68
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
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
|
6.20
|
%
|
|
|
5.97
|
%
|
|
|
5.88
|
%
|
|
|
6.20
|
%
|
|
|
5.97
|
%
|
|
|
5.88
|
%
|
Return on assets
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary progression
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial trend rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.00
|
%
|
|
|
11.00
|
%
|
|
|
12.00
|
%
|
Ultimate trend rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
Years to ultimate trend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
At December 31, 2008, the Companys expected long-term
return on assets assumption, which will impact the periodic
pension cost in 2009, was 8.20%. 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 Companys long-term annual rate of return
pension assumption is based upon the current portfolio
allocation, long-term rates of return for similar investment
vehicles and economic and other indicators of future performance.
Assumed healthcare cost trend rates can have an effect on the
amounts reported as expense for the post-retirement healthcare
plan. There were no ultimate trend rates used in the assumptions
as of December 31, 2008, as the post retirement plans are
closed as to any new retirees and the benefit reimbursements are
fixed at the time of retirement. As a result, a one-percentage
point change in the assumed healthcare cost trend rates would
not have any effect on total service and interest cost
components or 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
$34.7 million, $34.6 million and $19.7 million as
of December 31, 2008 and $30.4 million,
$30.3 million, and $28.9 million as of
December 31, 2007, respectively.
Benefits expected to be paid to participants under the
Companys defined benefit pension plans are
$2.2 million in 2009, $2.3 million in 2010,
$2.5 million in 2011, $2.5 million in 2012,
$2.5 million in 2013 and $14.1 million between 2014
and 2018.
Under the Companys postretirement plans, expected benefit
payments are $21 thousand in 2009, $21 thousand in 2010,
$20 thousand in 2011, $19 thousand in 2012, $19 thousand in 2013
and $84 thousand between 2014 and 2018.
Target and actual allocations of the Companys domestic
pension plan assets by category of investment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Allocation
|
|
|
|
|
|
|
at December 31,
|
|
Asset Category
|
|
Target Allocation
|
|
|
2008
|
|
|
2007
|
|
|
Equity securities
|
|
|
56
|
%
|
|
|
50
|
%
|
|
|
56
|
%
|
Hedge funds
|
|
|
10
|
%
|
|
|
13
|
%
|
|
|
10
|
%
|
Debt securities
|
|
|
34
|
%
|
|
|
37
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity and debt securities are invested in a combination of
U.S. and international investments, which are valued using
quoted market prices. The hedge funds invest in a number of
different hedge products with the ultimate goal of providing
solid performance without increasing overall market risk. The
market value of the hedge fund investments is based on the
reported net asset value of the underlying
69
funds at the end of the period. The pension plan assets do not
include any shares of the Companys common stock. An
outside investment advisor is utilized to manage and act as
trustee for the Companys pension plan assets. The
Companys 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 Companys policy to make contributions to its
qualified retirement plans sufficient to meet the minimum
funding requirements of applicable laws and regulations. During
2009, the Company estimates that pension contributions will be
$2.7 million. The increased level of contributions over
2008 reflects the decline in the market value of pension plan
assets and the elimination of a credit for surplus contributions
made in past years. The Company has determined that it does not
qualify for a reduction in pension plan funding requirements in
2008 or 2009 under the pension funding relief section of HR
7327, as it does not meet the funded liability percentage
requirements contained in the legislation during the period 2004
through 2007.
During the first quarter of 2009, the Companys Board of
Directors voted to cease all benefit accruals effective as of
March 31, 2009 for all non-collective bargaining
participants in the Companys domestic pension plan as an
additional cost savings measure. As a result, no new
participants will be added to the plan and vested benefits of
active participants will be frozen. This is not a termination of
the plan and the cessation of benefits can be reversed at any
time by vote of the Board of Directors. In addition, effective
March 31, 2009 all future benefit accruals will cease under
the Companys supplemental executive retirement plan. The
Companys Chief Executive Officer is the sole current
employee participating in the plan. These actions are expected
to lower the 2009 net periodic benefit cost by
approximately $0.5 million and the estimated pension
contribution in 2009 by approximately $0.5 million.
401(k) Investment Plan: Under the
Companys 401(k) Plan, substantially all of the
Companys domestic non-union employees and certain union
employees are eligible to contribute a portion of their salaries
into various investment options, which include the
Companys common stock. The Company matches a percentage of
the amounts contributed by the employees. The Companys
matching contributions were $0.4 million in 2008 and
$0.5 million in both 2007 and 2006.
Foreign Plans: The Company has defined-benefit
plans and/or
termination indemnity plans covering substantially all of its
eligible foreign employees. 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 plan in Europe.
Components of net foreign plan periodic benefit cost for the
three years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Service cost
|
|
$
|
238
|
|
|
$
|
259
|
|
|
$
|
245
|
|
Interest cost
|
|
|
287
|
|
|
|
322
|
|
|
|
317
|
|
Curtailment (gain)
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
Expected return on plan assets
|
|
|
(179
|
)
|
|
|
(166
|
)
|
|
|
(174
|
)
|
Amortization of net loss (gain)
|
|
|
3
|
|
|
|
4
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
349
|
|
|
$
|
238
|
|
|
$
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The curtailment gain in 2007 resulted from headcount reductions
primarily at our Mexico City, Mexico facility.
70
The Company also participates in foreign multi-employer pension
plans. Pension expense for these plans was $1.3 million,
$1.1 million and $1.0 million for the three years
ended December 31, 2008, 2007 and 2006, respectively.
The following tables set forth the combined funded status of the
foreign plans and amounts recognized in the consolidated balance
sheet at December 31:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1
|
|
$
|
3,793
|
|
|
$
|
4,097
|
|
Service cost
|
|
|
238
|
|
|
|
259
|
|
Interest cost
|
|
|
287
|
|
|
|
322
|
|
Curtailment (gain)
|
|
|
|
|
|
|
(307
|
)
|
Actuarial (gain)
|
|
|
(657
|
)
|
|
|
(240
|
)
|
Plan change
|
|
|
|
|
|
|
(122
|
)
|
Foreign exchange impact
|
|
|
(310
|
)
|
|
|
46
|
|
Actual gross benefits paid
|
|
|
(2,220
|
)
|
|
|
(262
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31
|
|
|
1,131
|
|
|
|
3,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1
|
|
|
2,331
|
|
|
|
1,905
|
|
Actual income on plan assets
|
|
|
112
|
|
|
|
117
|
|
Company contributions
|
|
|
463
|
|
|
|
534
|
|
Foreign exchange impact
|
|
|
(151
|
)
|
|
|
37
|
|
Actual gross benefits paid
|
|
|
(2,220
|
)
|
|
|
(262
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31
|
|
|
535
|
|
|
|
2,331
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation (in excess of) plan assets at December 31
|
|
|
(596
|
)
|
|
|
(1,462
|
)
|
Unrecognized net (gain) loss
|
|
|
(418
|
)
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(1,014
|
)
|
|
$
|
(1,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in consolidated balance sheet:
|
|
|
|
|
|
|
|
|
Long-term pension asset
|
|
$
|
|
|
|
$
|
|
|
Accrued benefit liability
|
|
|
(596
|
)
|
|
|
(1,462
|
)
|
Accumulated other comprehensive (gain) loss
|
|
|
(418
|
)
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(1,014
|
)
|
|
$
|
(1,382
|
)
|
|
|
|
|
|
|
|
|
|
The accumulated other comprehensive (gain) loss of $(418)
thousand and $80 thousand at December 31, 2008 and 2007,
respectively, reflects net actuarial (gains) losses.
Assumptions used in the determination of the foreign retirement
benefit obligation at December 31, 2008 were a discount
rate of 6.25%, long-term rate of return of 4.0% and salary
progression of 3.0% in Europe and a discount rate of 8.94%,
long-term rate of return of 8.94% and salary progression of 5.3%
in Mexico. The assumptions used in the determination of the
foreign retirement benefit obligation at December 31, 2007
were a discount rate of 5.25%, long-term rate of return of 4.0%
and salary progression of 3.0% in Europe and a discount rate of
8.5%, long-term rate of return of 9.0% and salary progression of
4.75% in Mexico. The assumptions used in the determination of
the foreign retirement benefit obligation at December 31,
2006 were a discount rate of 4.25%, long-term rate of return of
4.0% and salary progression of 2.5% in Europe and a discount
rate of 9.0%, long-term rate of return of 10.0% and salary
progression of 5.0% in Mexico.
71
The assumptions used in the determination of the net periodic
benefit cost for the foreign retirement plans for the year ended
December 31, 2008 were a discount rate of 5.25%, an
expected rate of return of 4.0% and salary progression of 3.0%
in Europe and a discount rate of 8.5%, an expected rate of
return of 9.0% and salary progression of 4.75% in Mexico.
Assumptions used in the determination of the net periodic
benefit cost for the foreign retirement plans for the year ended
December 31, 2007 were a discount rate of 4.25%, an
expected rate of return of 4.0% and salary progression of 2.5%
in Europe and a discount rate of 9.0%, an expected rate of
return of 10.0% and salary progression of 5.0% 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, 2006 were a discount rate of 4.25%, an
expected rate of return of 4.0% and salary progression of 2.5%
in Europe and a discount rate of 9.0%, an expected rate of
return of 10.0% and salary progression of 5.0% in Mexico.
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
$1.1 million, $0.8 million, and $0.5 million at
December 31, 2008 and $3.8 million, $3.2 million
and $2.3 million at December 31, 2007, respectively.
Company contributions to foreign plans in 2009 are estimated to
be $0.2 million.
The increase in pension benefits paid in 2008 reflects lump sum
distributions to several executives in Mexico upon their
retirement. Benefits expected to be paid to participants under
the Companys foreign defined benefit pension plans are $62
thousand in 2009, $42 thousand in 2010, $16 thousand in 2011,
$14 thousand in 2012, $37 thousand in 2013 and $333 thousand
between 2014 and 2018.
Assets of the Companys foreign pension plans and target
allocations by category of investment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Allocation at
|
|
|
|
|
|
|
December 31,
|
|
Asset Category
|
|
Target Allocation
|
|
|
2008
|
|
|
2007
|
|
|
Equity securities
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Debt securities
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets in the European pension plan are invested in
insurance contracts while assets in the Mexican plans are
invested in a mutual fund of government-backed securities. These
investments are considered low risk.
Note 11
Arbitration Earn-Out Decision
Background. Pursuant to an Agreement
and Plan of Merger, dated July 23, 1998 (the EVAP
Agreement) among Proliance International, Inc., EI
Acquisition Corp., EVAP, Inc., and Paul S. Wilhide, Proliance
(through an acquisition subsidiary) acquired from
Mr. Wilhide all of the common stock of EVAP. The
consideration for this transaction was the payment of
$3.0 million in cash, the issuance of 30,000 shares of
Series B Convertible Redeemable Preferred Stock of
Proliance (the Series B Preferred Stock) with
an aggregate liquidation preference of $3.0 million, and
the potential for an earn-out to Mr. Wilhide
based on a calculation relating to EVAPs financial
performance during the years 1999 and 2000 that would, in whole
or in part, take the form of an increase in the liquidation
preference of the Series B Preferred Stock. There was a
dispute between Proliance and Mr. Wilhide relating to the
calculation of the earn-out. Mr. Wilhide claimed that the
value of his earn-out was $3.75 million, while Proliance
claimed that Mr. Wilhide was not entitled to any earn-out.
An arbitration concerning the appropriate earn-out was held in
early 2007 before a representative of Ernst &
Youngs Dallas, Texas office.
Arbitrator Decision. On June 29,
2007, the arbitrator determined that Mr. Wilhide was
entitled to an earn-out of $3.2 million. In accordance with
the EVAP Agreement, this earn-out was paid by
72
increasing the liquidation preference of the 12,781 then
outstanding shares of Series B Preferred Stock held by
Mr. Wilhide, after prior conversions, from $100.00 per
share (representing an aggregate liquidation preference of
$1.3 million) to $348.3727 per share (or an aggregate
liquidation preference of $4.5 million).
Waiver of Conversion Cap. Under
Section 3(b) of Proliances Certificate of
Designations of Series B Preferred Stock (i) the
Series B Preferred Stock is convertible into Proliance
common stock based upon the liquidation preference of the shares
being converted divided by the market value of Proliance common
stock at the time of conversion, and (ii) the aggregate
number of shares of Proliance common stock to be issued upon
conversion of Series B Preferred Stock may not exceed 7% of
the total number of shares of common stock outstanding, after
giving effect to the conversion (the Conversion
Cap), unless Proliance waives such Conversion Cap. On
June 27, 2007, Proliance, by action of its Board of
Directors, waived the Conversion Cap.
Financial Impact. As a result of the
waiver of the Conversion Cap described above, the full amount of
the earn-out determined to be payable by the arbitrator was paid
in additional liquidation preference on the Series B
Preferred Stock (or ultimately in shares of Proliance common
stock upon Mr. Wilhides conversion of his shares of
Series B Preferred Stock), and no portion of that amount
was paid by Proliance in cash. In addition, Mr. Wilhide was
entitled to payment in cash of dividends he would have received
on his Series B Preferred Stock as if the earn-out took
place in April 2000. These additional dividends, plus interest
and an increased cash bonus payment due to Mr. Wilhide,
required Proliance to pay Mr. Wilhide in cash the sum of
$1.3 million in July 2007. The earn-out of
$3.1 million, the interest on unpaid dividends of
$0.2 million and the bonus payment of $28 thousand were
charged to operating results during the year ended
December 31, 2007. The additional dividends of
$1.1 million were deducted from Shareholders Equity
at December 31, 2007. As part of its decision, the
arbitrator required Mr. Wilhide to reimburse Proliance for
arbitration expenses in the amount of $0.2 million, which
amount was recorded as a reduction of operating expense during
the year ended December 31, 2007.
|
|
Note 12
|
Stock
Compensation Plans
|
Stock Options: At December 31, 2008, the
Company had three stock option plans (Equity Incentive Plan,
1995 Stock Plan and Non-Employee Directors Stock Option Plan)
under which key employees and directors have been granted
options to purchase Proliance common stock. At the
Companys annual stockholders meeting held on
July 22, 2005, stockholders approved the Companys
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 Companys common stock.
Under the Incentive Plan equity-based awards up to
1.4 million shares of the Companys common stock may
be granted. Awards under the Incentive Plan can be made to
directors, officers or other key employees. Under the Incentive
Plan, up to 200,000 shares may be utilized for grants to
non-employee directors. As of December 31, 2008 and 2007,
respectively, 644,423 and 177,500 common shares were reserved
for stock options granted under the Equity Incentive Plan.
No new awards may be granted under either the 1995 Stock Plan or
the Directors Plan, which both expired in September 2005. Under
the 1995 Stock Plan (the Stock Plan), options were
granted to key employees at fair market value on the date of
grant and were exercisable 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 as of July 22, 2005 became fully
vested. Options granted under the Stock Plan expire ten years
from the date of the grant. At December 31, 2008 and 2007
respectively, 309,777 and 339,777 common shares were reserved
for stock options granted under the 1995 Stock Plan.
73
The Directors Plan provided for the issuance of options to
directors at the fair market value of the common stock on the
date of grant. Each option granted under the Directors Plan was
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. At both
December 31, 2008 and 2007, 30,800 common shares were
reserved for stock options granted under the Directors Plan.
Information regarding the Stock Plan, the Directors Plan and
Incentive Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Price Range
|
|
|
|
Number of
|
|
|
|
|
|
Weighted
|
|
|
|
|
Stock Plan
|
|
Options
|
|
|
Low
|
|
|
Average
|
|
|
High
|
|
|
Outstanding at December 31, 2005
|
|
|
534,359
|
|
|
$
|
2.56
|
|
|
$
|
4.02
|
|
|
$
|
5.88
|
|
Cancelled
|
|
|
(74,333
|
)
|
|
|
2.56
|
|
|
|
3.82
|
|
|
|
4.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
460,026
|
|
|
|
2.56
|
|
|
|
4.05
|
|
|
|
5.88
|
|
Exercised
|
|
|
(10,000
|
)
|
|
|
2.56
|
|
|
|
2.56
|
|
|
|
2.56
|
|
Cancelled
|
|
|
(110,249
|
)
|
|
|
3.20
|
|
|
|
4.35
|
|
|
|
5.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
339,777
|
|
|
|
2.56
|
|
|
|
3.99
|
|
|
|
5.25
|
|
Cancelled
|
|
|
(30,000
|
)
|
|
|
4.65
|
|
|
|
4.69
|
|
|
|
4.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
309,777
|
|
|
$
|
2.56
|
|
|
$
|
3.93
|
|
|
$
|
5.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
309,777
|
|
|
$
|
2.56
|
|
|
$
|
3.93
|
|
|
$
|
5.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Price Range
|
|
|
|
Number of
|
|
|
|
|
|
Weighted
|
|
|
|
|
Directors Plan
|
|
Options
|
|
|
Low
|
|
|
Average
|
|
|
High
|
|
|
Outstanding at December 31, 2005
|
|
|
36,800
|
|
|
$
|
2.70
|
|
|
$
|
4.61
|
|
|
$
|
5.50
|
|
Cancelled
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
36,800
|
|
|
|
2.70
|
|
|
|
4.61
|
|
|
|
5.50
|
|
Cancelled
|
|
|
(6,000
|
)
|
|
|
2.70
|
|
|
|
4.61
|
|
|
|
5.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
30,800
|
|
|
|
2.70
|
|
|
|
4.61
|
|
|
|
5.50
|
|
Cancelled
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
30,800
|
|
|
$
|
2.70
|
|
|
$
|
4.61
|
|
|
$
|
5.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
30,800
|
|
|
$
|
2.70
|
|
|
$
|
4.61
|
|
|
$
|
5.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Price Range
|
|
|
|
Number of
|
|
|
|
|
|
Weighted
|
|
|
|
|
Equity Incentive Plan
|
|
Options
|
|
|
Low
|
|
|
Average
|
|
|
High
|
|
|
Outstanding at December 31, 2005
|
|
|
56,400
|
|
|
$
|
7.75
|
|
|
$
|
9.70
|
|
|
$
|
11.75
|
|
Granted
|
|
|
140,337
|
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
5.27
|
|
Cancelled
|
|
|
(16,779
|
)
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
179,958
|
|
|
|
5.27
|
|
|
|
6.66
|
|
|
|
11.75
|
|
Granted
|
|
|
25,000
|
|
|
|
2.90
|
|
|
|
2.90
|
|
|
|
2.90
|
|
Cancelled
|
|
|
(27,458
|
)
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
177,500
|
|
|
|
2.90
|
|
|
|
6.34
|
|
|
|
11.75
|
|
Granted
|
|
|
572,000
|
|
|
|
1.20
|
|
|
|
1.80
|
|
|
|
2.80
|
|
Cancelled
|
|
|
(105,077
|
)
|
|
|
2.80
|
|
|
|
6.75
|
|
|
|
11.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
644,423
|
|
|
$
|
1.20
|
|
|
$
|
2.25
|
|
|
$
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
48,958
|
|
|
$
|
2.90
|
|
|
$
|
4.97
|
|
|
$
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of the options exercised during the
year ended December 31, 2007 under the Stock Plan was $24
thousand. There were no other option exercises under the three
Company plans during the three years ended December 31,
2008.
The weighted average remaining term of all options outstanding
at December 31, 2008, 2007 and 2006 was 7.0 years,
4.7 years and 5.6 years, respectively. The intrinsic
value of options outstanding at December 31, 2008, 2007 and
2006 was $0, $0 and $0.3 million, respectively.
Total stock options exercisable at December 31, 2008, 2007
and 2006 under the three Company plans were 389,535, 450,995 and
553,226, respectively. The weighted average remaining term of
options exercisable at December 31, 2008, 2007 and 2006 was
3.6 years, 3.9 years and 4.8 years, respectively.
The intrinsic value of options exercisable at December 31,
2008, 2007 and 2006 was $0, $0 and $0.3 million,
respectively. The total weighted average grant date fair value
of options granted in the years ended December 31, 2008,
2007 and 2006 was $1.0 million, $0.1 million and
$0.7 million, respectively. The fair value of options
vesting during the years ended December 31, 2008, 2007 and
2006 was $0.1 million, $0.1 million and
$0.0 million, respectively.
Stock-based compensation expense associated with outstanding
stock options, which was included in selling, general and
administrative expenses, was $0.1 million,
$0.1 million and $0.1 million for the years ended
December 31, 2008, 2007 and 2006, respectively
At December 31, 2008 there was $0.5 million of
unrecognized stock-based compensation expense for 2008, 2007,
and 2006 stock option grants which will be written off over the
remaining portion of the grants vesting periods, which are
between 14 months and 43 months.
Stock-based compensation expense was calculated using the
following assumptions for the years ended December 31:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Expected volatility
|
|
50.3%-52.9%
|
|
51.21%
|
|
52.94%
|
Risk-free interest rate
|
|
4.39%-4.45%
|
|
5.09%
|
|
4.50%
|
Expected life
|
|
6 years
|
|
6 years
|
|
6 years
|
Dividend
|
|
-0-
|
|
-0-
|
|
-0-
|
75
Restricted Stock: Restricted stock activity
during the three years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date Fair Value
|
|
|
|
Number of
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Shares
|
|
|
Low
|
|
|
Average
|
|
|
High
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Granted
|
|
|
56,138
|
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
5.27
|
|
Cancelled
|
|
|
(6,712
|
)
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
49,426
|
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
5.27
|
|
Granted
|
|
|
40,491
|
|
|
|
2.35
|
|
|
|
3.54
|
|
|
|
4.24
|
|
Vested
|
|
|
(12,350
|
)
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
5.27
|
|
Cancelled
|
|
|
(8,237
|
)
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
69,330
|
|
|
|
2.35
|
|
|
|
4.26
|
|
|
|
5.27
|
|
Granted
|
|
|
5,000
|
|
|
|
1.20
|
|
|
|
1.20
|
|
|
|
1.20
|
|
Vested
|
|
|
(28,166
|
)
|
|
|
2.35
|
|
|
|
3.71
|
|
|
|
5.27
|
|
Cancelled
|
|
|
(3,049
|
)
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
43,115
|
|
|
$
|
1.20
|
|
|
$
|
4.19
|
|
|
$
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense for outstanding restricted
stock grants, which is included in selling, general and
administrative expenses, was $0.1 million for each of the
three years ended December 31, 2008, 2007 and 2006,
respectively.
At December 31, 2008, there was $0.1 million of
unrecognized stock-based compensation expense for 2008, 2007 and
2006 restricted stock grants which will be written off over the
remaining vesting periods of the grants which are between
3 months and 31 months.
Performance Restricted Stock: There were no
outstanding performance restricted stock awards at
December 31, 2008, 2007 and 2006.
On May 3, 2007, the Company granted 232,600 shares of
performance restricted stock under the Incentive Plan. These
shares would vest over a three-year period; however they would
be forfeited if pre-determined targets for both net income and
cash flow from operations during 2007 were not achieved. Results
for the three months ended September 30, 2007 included a
$44 thousand reduction of compensation expense to reflect the
reversal of expense recorded in the first and second quarters of
2007, as management determined that it was likely that the net
income and cash flow targets for 2007 would not be achieved. All
outstanding performance restricted shares under the grant were
cancelled as of December 31, 2007.
On June 4, 2007, the Company granted 15,000 shares of
performance restricted stock under the Incentive Plan. These
shares would vest over a three-year period; however they would
be forfeited if the pre-determined targets for both net income
and cash flow from operations during 2007, established for the
May 3, 2007 performance stock grant, were not achieved.
Results for the three months ended September 30, 2007
included a $1 thousand reduction of compensation expense to
reflect the reversal of expense recorded in the second quarter
of 2007, as management determined that it was likely that the
net income and cash flow targets for 2007 would not be achieved.
All outstanding performance restricted the shares under this
grant were cancelled as of December 31, 2007.
On March 2, 2006, the Board of Directors granted
168,414 shares of performance restricted stock under the
Incentive Plan. These shares would vest in four equal annual
installments on the anniversary date of the grant; however,
these shares would be forfeited if certain pre-established net
income and cash flow targets for 2006 were not achieved. In the
third quarter of 2006, management determined that it would not
achieve the net income target for 2006, resulting in an
adjustment of $41 thousand to compensation expense recorded in
the first and second quarters of 2006. During the fourth quarter
of 2006, management determined that it would not achieve the
cash flow from operations target for 2006,
76
resulting in an adjustment of $47 thousand to compensation
expense recorded during the nine months ended September 30,
2006. All outstanding shares of performance restricted stock
under these grants were cancelled as of December 31, 2006.
The provision for (benefit from) income taxes for the three
years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Foreign
|
|
|
1,679
|
|
|
|
2,016
|
|
|
|
1,203
|
|
State and local
|
|
|
106
|
|
|
|
(75
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
1,785
|
|
|
|
1,941
|
|
|
|
1,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(6,557
|
)
|
|
|
(4,583
|
)
|
|
|
(3,570
|
)
|
Foreign
|
|
|
297
|
|
|
|
(210
|
)
|
|
|
510
|
|
State and local
|
|
|
(1,520
|
)
|
|
|
356
|
|
|
|
(153
|
)
|
Valuation allowance
|
|
|
8,077
|
|
|
|
4,228
|
|
|
|
3,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
297
|
|
|
|
(209
|
)
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
2,082
|
|
|
$
|
1,732
|
|
|
$
|
1,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the provision for (benefit from) income
taxes at the Federal statutory rate of 34% to the reported
provision for (benefit from) income taxes in 2008, 2007 and 2006
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
(Benefit) computed at the Federal statutory rate
|
|
$
|
(673
|
)
|
|
$
|
(5,125
|
)
|
|
$
|
(5,554
|
)
|
State and local income taxes, net of Federal income tax benefit
|
|
|
(933
|
)
|
|
|
185
|
|
|
|
(148
|
)
|
Foreign tax rate differential
|
|
|
(379
|
)
|
|
|
630
|
|
|
|
110
|
|
Permanent difference-arbitration earn-out decision
|
|
|
|
|
|
|
1,079
|
|
|
|
|
|
Permanent differences other
|
|
|
39
|
|
|
|
53
|
|
|
|
132
|
|
Valuation allowance included in provision
|
|
|
4,129
|
|
|
|
4,228
|
|
|
|
7,180
|
|
Other
|
|
|
(101
|
)
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
2,082
|
|
|
$
|
1,732
|
|
|
$
|
1,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
Significant components of deferred income tax assets and
liabilities as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Pensions
|
|
$
|
5,899
|
|
|
$
|
1,258
|
|
Postretirement benefits
|
|
|
88
|
|
|
|
85
|
|
Inventories
|
|
|
|
|
|
|
66
|
|
Allowance for bad debts
|
|
|
368
|
|
|
|
1,218
|
|
Self-insurance reserves
|
|
|
487
|
|
|
|
514
|
|
Warranty reserves
|
|
|
917
|
|
|
|
1,238
|
|
Accrued vacation
|
|
|
1,099
|
|
|
|
1,139
|
|
Federal and state net operating loss
|
|
|
30,469
|
|
|
|
25,429
|
|
Deferred charges
|
|
|
588
|
|
|
|
146
|
|
Depreciation
|
|
|
1,575
|
|
|
|
2,878
|
|
Foreign tax credit
|
|
|
1,574
|
|
|
|
1,574
|
|
Other
|
|
|
43
|
|
|
|
897
|
|
Valuation reserve
|
|
|
(39,743
|
)
|
|
|
(31,666
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
3,364
|
|
|
|
4,776
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(1,296
|
)
|
|
|
(1,419
|
)
|
Other
|
|
|
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,296
|
)
|
|
|
(1,471
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
2,068
|
|
|
$
|
3,305
|
|
|
|
|
|
|
|
|
|
|
The net deferred tax assets at December 31, 2008 and 2007
relate to the foreign operations and management believes that it
is more likely than not that the deferred tax assets will be
realized. Included in other assets on the consolidated balance
sheet at December 31, 2008 and 2007 was $3.2 million
and $4.7 million, respectively, of deferred tax assets
associated with foreign operations.
The Companys federal net operating loss carry-forwards at
December 31, 2008 of approximately $80.1 million
expire beginning in 2024 through 2028. The net deferred losses
prior to the merger of $10.2 million are subject to
limitation under Internal Revenue Code Section 382 of
$1.9 million per year.
At this time, the statute of limitation is still open for a
potential audit of the Companys 2005 through 2008 Federal
U.S. income tax returns. Similarly, depending on the state,
the open years for a U.S. state income tax audit are 2005
through 2008. In Mexico, tax years 2003 through 2008 are subject
to review by local authorities. For the Companys European
operations, the years subject to audit range from 1999 through
2008, depending on the country. In conjunction with the 2005
Modine Aftermarket merger, the Company entered into a Tax
Sharing Agreement with Modine, through which Modine retained the
liability for adjustments to the acquired business,
U.S. and foreign, for any periods prior to the merger.
The valuation reserve related to the deferred tax asset
generated by the minimum pension liability at December 31,
2008, 2007 and 2006 was $6.7 million, $1.7 million and
$1.5 million, respectively. The benefit from the reversal
of the valuation allowance related to the minimum pension
liability will be recorded in other comprehensive income as it
is realized.
The earnings of foreign subsidiaries are considered permanently
reinvested in the foreign operations, unless they can be
repatriated with little or no income tax consequences. As a
result, no provision has been made for U.S. taxes related
to these subsidiaries.
78
(Loss) income before income taxes from United States and foreign
sources for the three years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
United States
|
|
$
|
(8,907
|
)
|
|
$
|
(19,153
|
)
|
|
$
|
(21,051
|
)
|
Foreign
|
|
|
6,927
|
|
|
|
4,081
|
|
|
|
4,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(1,980
|
)
|
|
$
|
(15,072
|
)
|
|
$
|
(16,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The computation of basic and diluted loss per common share for
the three years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands, except per share amounts)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,062
|
)
|
|
$
|
(16,804
|
)
|
|
$
|
(18,055
|
)
|
Less: preferred stock dividends
|
|
|
(173
|
)
|
|
|
(1,268
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|