-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VsIRJ/VMIO3gxsyQ/cktB5yCExt17fLkRAzBkxrzGf3TjhfU7Dvd0w9pNN0HzPcO YMrN6hkszLNztsm4ODNavA== 0000914039-99-000142.txt : 19990331 0000914039-99-000142.hdr.sgml : 19990331 ACCESSION NUMBER: 0000914039-99-000142 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSPRO INC CENTRAL INDEX KEY: 0000948844 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 341807383 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13894 FILM NUMBER: 99578008 BUSINESS ADDRESS: STREET 1: 100 GANDO DR CITY: NEW HAVEN STATE: CT ZIP: 06513 BUSINESS PHONE: 2034016450 MAIL ADDRESS: STREET 1: 100 GANDO DR CITY: NEW HAVEN STATE: CT ZIP: 06513 10-K405 1 TRANSPRO, INC. 1 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-13894 TRANSPRO, INC. (Exact name of Registrant as specified in its charter) DELAWARE 34-1807383 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 100 Gando Drive, New Haven, Connecticut 06513 (Address of principal executive offices, including zip code) (203) 401-6450 (Registrant's 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 New York Stock Exchange (together with associated Preferred Stock purchase rights)
Securities registered pursuant to Section 12 (g) of the Act: NONE Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate 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 Registrant's 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] The aggregate market value of voting and non-voting common stock held by non-affiliates of the Registrant at March 13, 1999 was $32,986,674. On that date, there were 6,597,334 outstanding shares of the Registrant's common stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to stockholders for the fiscal year ended December 31, 1998 are incorporated by reference into Part I and Part II hereof. Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders are incorporated by reference into Part III of this report. Exhibit Index is on page 16 of this report. 2 TRANSPRO, INC. INDEX TO ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1998
PAGE ---- PART I Item 1. Business 3 Item 2. Properties 10 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results 14 of Operations Item 7A. Quantitative and Qualitative Disclosures about Market Risk 14 Item 8. Financial Statements and Supplementary Data 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 15 PART III Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 15 Item 12. Security Ownership of Certain Beneficial Owners and Management 15 Item 13. Certain Relationships and Related Transactions 15 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 17 Signatures 20
2 3 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS On September 29, 1995, TransPro, Inc. (the "Company") completed a series of transactions pursuant to which the Company's sole stockholder, Allen Telecom Inc. (formerly The Allen Group Inc.) ("Allen"), contributed (the "Contribution") to the Company substantially all of the assets and liabilities of Allen's original equipment radiator and fabricated metal products business (the "Automotive and Truck Products Business"), as well as Allen's 50% ownership interest in GO/DAN Industries ("GDI"), a 50/50 joint venture partnership between affiliates of Allen and Handy & Harman. Immediately thereafter, Allen caused GDI to redeem the outstanding ownership interest in GDI not already owned by Allen (the "GDI Redemption"), thereby making GDI an indirect wholly owned partnership of the Company. GDI produces replacement radiators and other heat transfer products for the automotive and truck aftermarkets. In addition, Allen effected the distribution (the "Distribution") of 100% of the outstanding shares of the Company's common stock to the holders of record of Allen's common stock as of the close of business on September 29, 1995 (the "Record Date"). The Distribution was made on the basis of one share of the Company's common stock for every four shares of Allen's common stock outstanding on the Record Date, which resulted in the distribution of an aggregate of 6,621,349 shares of TransPro common stock. As a result of the Contribution, the Distribution, and the GDI Redemption, TransPro now owns the Automotive and Truck Products Business and 100% of GDI, and is an independent publicly-traded company. The Company is comprised of four operating divisions that supply products and services to the automotive and truck aftermarkets, original equipment manufacturers ("OEMs") of trucks, vans, telecommunications equipment and other industrial products. The Company's GO/DAN INDUSTRIES division ("GDI") is a producer of replacement radiators and other heat transfer products for the automotive, truck and off-highway aftermarkets. The Company's EVAP, Inc. division ("EVAP") is a manufacturer and distributor of replacement automotive air conditioning parts for the automotive aftermarket. The Company's G&O Manufacturing Company division ("G&O") produces and supplies radiators, charge air coolers, oil coolers, condensers and engine cooling system components for OEMs of heavy duty trucks and industrial and off-highway equipment. The Company's Crown divisions ("Crown") install specialized interiors in utility trucks and vans for major commercial fleets and design, manufacture and assemble fabricated metal parts for light truck, telecommunications and other industrial customers. The Company operates in three market segments, Aftermarket Heating and Cooling Systems, Original Equipment Manufacturing ("OEM") Heat Transfer Systems and Specialty Metal Fabrication. The Company's origins date back to 1915 when G&O commenced operations in New Haven, Connecticut as a manufacturer of radiators for custom built automobiles, fire engines and original equipment radiators for Ford. Allen acquired G&O in 1970 as part of its strategy to become a broad-based automotive supplier. Crown commenced operations in 1947 and was acquired by Allen in 1967 as part of the same business strategy. GDI was formed in 1990 when Allen contributed a portion of its G&O division and other assets, which together represented all of Allen's aftermarket radiator business, and Handy & Harman contributed substantially all of the assets of its then wholly owned subsidiaries, Daniel Radiator Corporation, Jackson Industries, Inc., Lexington Tube Co., Inc. and US Auto Radiator Manufacturing Corporation, to form a 50/50 joint venture partnership. EVAP commenced operations in 1981 for the purpose of re-manufacturing GM and Ford evaporators for distribution to national packagers and master distributors. The Company acquired the outstanding stock of EVAP in a purchase transaction effective August 1, 1998. 3 4 DESCRIPTION OF BUSINESS MARKETS The automotive and heavy truck parts industries target two distinct markets, the OEM market and the aftermarket. The manufacture of individual component parts for use in the original equipment manufacturing process of automobiles, vans and light trucks forms the automotive OEM market and the manufacture of individual components for use in the original equipment manufacturing process of heavy trucks forms the heavy truck OEM market. The products and services used to maintain and repair automobiles, vans and light trucks and heavy trucks, as well as accessories not supplied with such vehicles when manufactured, form the respective automotive and heavy truck aftermarkets. The Company believes that in recent years demand for replacement parts and supplies in both the automotive and heavy truck aftermarkets has increased as both individuals and commercial fleet operators are driving more and keeping their vehicles longer. The Company sells its products and services principally to the heavy truck OEM market as well as both the automotive and heavy truck aftermarkets. The Company also sells its automotive products to OEM's of off-highway equipment and other industrial customers and manufactures fabricated enclosures and cabinetry for the telecommunications industry PRINCIPAL PRODUCTS AND SERVICES The Company designs, manufactures and markets radiators and other specialty heat exchangers for OEMs of heavy trucks and industrial and off-highway equipment as well as replacement radiators, air conditioning condensers and other heat transfer products for the automotive and heavy truck aftermarkets. In addition, the Company manufactures and distributes automotive air conditioning replacement parts for the automotive aftermarket. The Company also manufactures and installs specialized interiors in utility trucks and other vehicles for major commercial fleets and designs, manufactures and assembles fabricated metal products for telecommunications and other industrial customers. A description of the particular products manufactured and the services performed by the Company in each of its market segments is set forth below. Aftermarket Heating and Cooling Systems GDI Through GDI, the Company provides one of the most extensive product ranges of high-quality radiators, radiator cores, heater cores and air conditioning condensers to the automotive and heavy truck aftermarkets. The Company's primary radiator and heater manufacturing facility in Nuevo Laredo, Mexico is ISO-9002 certified, which is an internationally recognized verification system for quality management. In addition to its standard models, the Company can produce and deliver special orders of such products typically within 24 hours. 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 contains the radiator core, which consists of coolant-carrying tubes and a large cooling area; 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 over the tops of 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. The Company's lines of complete radiators are produced for automotive, light and heavy truck applications and consist of more than 700 models, which are able to service approximately 90% of the automobiles in the United States. The Company has established itself as an industry leader with its well recognized line of Ready-Rad(R) radiators. The Ready-Rad(R) Plus line has become extremely 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. 4 5 The Company introduced its Ready Rad(R) Heatbuster line of complete radiators in 1994. This line of replacement radiators is specially designed to provide approximately 20% more cooling capability than a standard radiator. The Heatbuster line is the ideal replacement radiator for vehicles which are used for towing, hauling, plowing, or off-highway purposes, and as a result, it has been particularly popular in the growing light truck segment of the automotive fleet. Radiator Cores. Radiator cores are the largest and most expensive component of a complete radiator. The Company's Ready-Core(R) line consists of 2,500 models of radiator cores for automobiles and light trucks. Given the wide range of cores required by today's automobile and truck fleet, there are many times when a specific core is not readily available. In these cases, the Company can produce a new core, on demand, within several hours. The Company is able to provide same day service to virtually the entire United States using its 13 strategically positioned, regional manufacturing plants. Industrial cores are heavy duty units which are constructed of extremely durable materials in order to meet the demands of the commercial marketplace. The Company produces approximately 13,000 models of industrial cores, and these products serve many different needs in a variety of markets. In general, an industrial core is much larger than an automotive core and typically sells for three to four times the cost of an automotive core. Heater Cores. The Company produces more than 350 different heater core models for domestic and foreign cars and trucks, which cover the requirements for more than 95% of today's automotive fleet. A heater core is part of a vehicle's heater system through which heated coolant from the engine cooling system flows; the warm air generated as the liquid flows through the heater core is propelled into the vehicle by a fan. The Company's Ready-Aire(R) line of heater cores is recognized as an industry leader and its models utilize both cellular and tubular technology. Traditional heater cores utilize cells to transport coolant through the unit, while the more modern models transport coolant through tubes. The Company introduced its tubular CT Ready-Aire(R) line of heater cores in 1988, and its CT heater cores now account for approximately 20% of the Company's total heater core sales. Radiator Parts and Supplies. The Company sells radiator shop supplies and consumable products used by its customers in the process of radiator repairs. The Company's extensive line includes radiator parts, small hand tools and equipment, and solders and fluxes. The Company is one of the largest domestic suppliers of stamped metal radiator parts, supplying these parts to regional core manufacturers throughout the United States. Air Conditioning Condensers. Automotive air conditioning condensers were added to the GDI product line in 1996 through the acquisition of Rahn Industries, Inc., an aftermarket supplier of automotive air conditioning condensers. Air conditioning condensers are a component of a vehicle's air conditioning system designed to convert the air conditioner refrigerant from a high pressure gas to a high pressure liquid by passing air through the condenser. GDI distributes this product under both the GDI and Rahn Industries brands and has fully integrated this product into the GDI distribution network. GDI catalogs more than 900 condenser part numbers. EVAP Through EVAP, the Company provides one of the most extensive catalogs of replacement automotive air conditioning parts to the automotive and truck aftermarkets. Compressors. The Company sells air conditioning compressors for replacement in both domestic and import automotive and truck aftermarkets. The compressor is designed to compress low pressure refrigerant, which it draws from the evaporator, in a low pressure vapor state, into a high pressure gas. This gas is then pumped to the condenser. 5 6 Accumulators. Accumulators act as a reservoir to accumulate liquid refrigerant. The accumulator uses a drying agent to remove moisture from the system and a filter screen to trap any solid contaminants to prevent moisture and contaminants from reaching the compressor. Evaporators. Automotive air conditioning evaporators are designed to remove heat from the passenger compartment. The core is generally located under the dashboard or adjacent to the fire wall and functions as a heat exchanger by passing low pressure liquid refrigerant through its passageways and forcing warm air from the passenger compartment over the core. The low pressure liquid refrigerant then becomes a low pressure vapor which is returned to the compressor and re-circulated. Air Conditioning Parts and Supplies. The Company sells an extensive line of air conditioning parts and supplies through EVAP. These other component parts include driers, hose and tube assemblies, blowers and fan clutches. Specialty Metal Fabrication The Company's specialty metal fabrication business, through its Crown Divisions, is comprised of three interrelated businesses. The principal products manufactured and services performed by each of these businesses is set forth below. Vehicle Conversions. The Company is one of the leaders in the installation of specialized interiors in utility trucks and other vehicles for major commercial fleets such as Sears, Airborne Express, General Electric and the regional telephone companies. The Company's vehicle conversion installation facilities are strategically located near each of the major production facilities for utility trucks and vans of Ford, Chrysler and General Motors. The Company offers its customers a full range of customizing options ranging from the installation of ladder racks, specialized bins and shelves and other components for convenient and safe storage to decaling the outside of the vehicle. Each interior is installed according to the customer's specifications, based upon various design and equipment options offered by the Company. Much of the specialized equipment installed by the Company in its conversion business is also manufactured by the Company. During 1997 the Company, under a short-term contract with the Ford Motor Company, up-fit approximately 10,000 Aerostar and Windstar mini vans for the US Postal Service. The modifications were completed at the Company's Lorain, Ohio and St. Charles, Missouri facilities. The Company's Lorain, Ohio facility is QS-9000 certified. In December 1997, the Company acquired substantially all of the assets and assumed certain specific liabilities of a small Canadian van converter to provide greater access to the Canadian market. The Company enjoys a reputation in the industry for offering new and innovative products. For example, the Company introduced in the early 1990's its exclusive Slide-Down(TM) ladder rack, which enables service technicians to easily load and unload heavy ladders from the top of a vehicle with the reduced risk of back injury and strain. In 1997, the Company introduced a new, easily removable storage system for mini-vans called Slide-Lock(TM) was introduced which offers users the ability to switch back and forth between a passenger van and a service van within minutes. The Company is continually seeking to capitalize on its reputation by marketing these innovations to the automotive companies as value-added factory programs and options. Fabricated Metal Products. Certain of the fabricated metal products manufactured by the Company are used in its own vehicle conversion business. In addition to vehicle conversion products, the Company also produces fabricated metal components for telephone switching equipment, wireless communications equipment, stationary rotary air compressors and heavy duty battery boxes. The Company designs, manufactures and assembles over 400 different fabricated metal parts such as high tolerance cabinets for telecommunications and other industrial customers such as Lucent Technologies, Alcatel, and East Penn. During 1998, the Company opened a state-of-the-art metal fabrication facility in Plano, Texas to service the rapidly growing telecommunications industry in that area. The Plano, Texas facility is ISO-9002 certified. The Company's metal fabrication business is principally conducted out of its Wooster, Ohio, Thomaston, Georgia and Plano, Texas manufacturing facilities. The Company focuses on the production of 6 7 large, complex parts that typically require greater engineering and more sophisticated production techniques than traditional high volume, undifferentiated products. The Company's Wooster, Ohio facility is currently ISO-9001 and QS-9000 certified. Truck Cab Conversions. Prior to December 1997, the Company produced a four-door pickup truck cab for Ford's F-Series Truck ("Crew Cab") and modified rear wheel fender assemblies to accommodate a dual rear wheel axle ("DRWs"). The Crew Cab was produced by the Company utilizing an assembly line production process in which various stamped components were assembled using certain welding techniques. In much the same fashion, the Company produced DRWs in order to provide adequate space for the additional tire on each side of the rear wheel axle assembly. Prior to December 1997, the Company was the exclusive supplier of Crew Cabs and DRWs to Ford, and had provided such products to Ford for 30 years and 20 years, respectively, excluding a brief period from 1980 to 1982 when Ford did not offer either option with its F-Series Pickup Trucks. Ford moved the manufacture of Crew Cabs and DRWs in-house in late 1997. As a result, the Company's Crew Cab/DRW production facility in Louisville, Kentucky was closed in December 1997. OEM Heat Transfer Systems Through its G&O division, the Company designs, manufactures and markets radiators and charge air coolers to OEMs of heavy duty trucks, buses and industrial and off-highway equipment such as generator sets, construction vehicles, railroad locomotives and military equipment. The Company manufactures its products in Jackson, Mississippi. The Company's Jackson, Mississippi facility is ISO 9002 certified. Radiators. The Company custom designs, manufactures and sells approximately 400 different models of radiators, which are specifically designed and engineered to meet OEM customer specifications. The Company's radiators are sold under the widely-recognized Ultra-Fused(R) brand name utilizing welded tube-to-header core construction and are specifically engineered to meet customer specifications and to withstand a variety of demanding customer applications. Charge Air Coolers. The Company offers its OEM customers approximately 200 different models of aluminum charge air coolers. A charge air cooler is a device that is used to decrease the temperature of the air that is used by the engine in its combustion process, which in turn improves the operating efficiency of the engine and lowers its emission levels. The Company believes that the demand for charge air coolers will continue to increase as the Company's customers face increasing pressure to produce vehicles and equipment that are more fuel efficient and less polluting. G&O's traditional class 8 truck market has become increasingly competitive and the Company's share of this segment of the market has been reduced. The Company believes there are opportunities to expand into the specialty vehicle marketplace which is not as well served as our traditional class 8 truck market. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS, FOREIGN OPERATIONS AND EXPORT SALES The Company operates in three market segments, Aftermarket Heating and Cooling Systems, OEM Heat Transfer Systems and Specialty Metal Fabrication. Applicable segment information appears in Note 3 of the Notes to Consolidated Financial Statements contained in the Registrant's 1998 Annual Report to Stockholders, certain portions of which are filed as Exhibit 13 to this Report. All such information is incorporated herein by reference. Export sales from North America were below 10% in each of the years reported. The Company has a manufacturing facility in Mexico which has no sales in Mexico and acquired a vehicle conversion facility in Canada in December 1997. Sales in Canada aggregated $1.4 million during 1998. 7 8 CUSTOMERS The Company sells its products and services to a wide variety and large number of industrial and other commercial customers. The Company supplies radiators, charge air coolers and cooling modules to OEMs of heavy duty trucks, such as PACCAR and Mack, and OEMs of industrial and off-highway equipment, such as Cummins Power Generation, AM General and Oshkosh Truck Corporation. Principal customers of the Company's vehicle conversion products and services include operators of large commercial fleets such as Sears, General Electric and Airborne Express. The Company sells its replacement radiators, air conditioning replacement parts and supplies, and other heat transfer products to national retailers of aftermarket automotive products, such as AutoZone and Pep Boys, and warehouse distributors, radiator shops, parts jobbers and, to a lesser extent, OEMs. The Company's largest customer during 1998 was AutoZone, which accounted for approximately 11% of net sales. In 1998 the Company had no other customers who individually accounted for greater than 10% of the Company's net sales. SALES AND MARKETING The Company maintains a separate sales and marketing department at each of its principal operating units. By focusing its sales effort at the operating unit level, the Company enables its sales staff to develop a thorough understanding of each unit's technical and production capabilities and of the overall market in which each unit operates. The Company employs approximately 235 individuals involved in sales and marketing efforts. GDI's sales and marketing efforts are under the direction of GDI's Executive Vice President of Sales and Marketing, who oversees a Vice President of Marketing, a Vice President of National Accounts, and a National Sales Manager. The National Sales Manager oversees 14 Territory Sales Managers and monitors sales of products to the fleet and industrial markets. The Vice President of National Accounts is responsible for sales to retailers and auto parts warehouses. GDI also employs several marketing specialists and product managers who report to a Vice President of Marketing and develop, implement and monitor GDI's various marketing and advertising programs. As part of its current marketing efforts, GDI is focusing on increasing its sales to the fastest growing segments of the automotive aftermarket. EVAP has an internal sales and marketing staff consisting of a Vice President of Sales and Marketing with a sales staff serving both its existing customer base as well as seeking new customers. EVAP also utilizes independent sales representatives to aid in its outside sales efforts. At G&O, the Company has an in-house sales management staff who are responsible for growing the business, servicing existing customers and identifying new marketing opportunities. These individuals and in-house engineering specialists, work in close consultation with its customers' engineering staff in order to provide the technical expertise and advice needed in the development stage of new customer products. In addition, G&O's engineers work closely with truck engine OEMs, such as Cummins Engine and Detroit Diesel, during the early stages of new product development and design. G&O has historically focused on sales of its products to domestic OEMs of heavy duty trucks and industrial equipment. In recent years, G&O has expanded its focus to include all highway and specialty vehicle applications. The Company's Crown Divisions employ direct salespersons dedicated to servicing the national fleet and leasing companies and truck and other vehicle OEMs such as Ford, GM and Chrysler and independent sales representatives to manage the over 200 dealer/distributors nationwide. In 1997, the Company expanded direct fleet coverage to develop its west coast opportunities and support distribution warehousing in Los Angeles, California and Dallas, Texas. In addition, the Company utilizes several direct salespersons and an independent sales representative force to service the telecommunications industry and other industrial buyers of fabricated metal products and value added assemblies. 8 9 COMPETITION The Company faces significant competition within each of the markets in which it operates. In both its OEM and aftermarket heat transfer product lines, the Company believes that it is among the major manufacturers and that competition is widely distributed. The Company's principal methods of competition include product design, performance, price, service, warranty, product availability and timely delivery. The Company competes with the national producers of heat transfer products, such as Modine Manufacturing Company and Valeo Engine Cooling Systems, the internal operations of OEMs and, to a lesser extent, local and regional manufacturers. The Company's primary competition in the air conditioning replacement parts businss includes the 4 Seasons division of Standard Motor Products and numerous regional operators. With respect to its OEM radiator business, the Company principally competes for new business both at the beginning of the development phase of a new model or offering and upon the redesign of existing models used by its major customers. New model development generally begins two to three years prior to the marketing of the vehicle to the public. Once a producer has been designated to supply components to a new program, an OEM will generally continue to purchase those components from the designated producer for the life of the program. Leadership in the vehicle conversion business largely relies on close proximity to factory assembly plants, maintenance of quality standards to retain authorized factory ship-through capability, and an ability to "flex" capacity to meet seasonal demands and satisfy customer delivery requirements. INTELLECTUAL PROPERTY The Company owns a number of foreign and US patents and trademarks. The patents expire on various dates from 2009 to 2013. In general, the Company's patents cover certain of its radiator, charge air cooler and air conditioning accumulator manufacturing processes. The Company has entered into licensing and other agreements with respect to certain patents, trademarks and manufacturing processes it uses in the operation of its business. The Company believes that it owns or has rights to all patents and other technology necessary for the operation of its business. The Company does not consider any single patent or trademark or group of patents or trademarks to be material to its business as a whole. RAW MATERIALS AND SUPPLIERS The principal raw materials used by the Company in its OEM and Aftermarket radiator product lines are copper and brass. The principal raw material used in the Company's specialty metal fabrication business is steel. Although copper, brass and steel and other materials are available from a number of vendors, the Company has chosen to concentrate its sources with a limited number of long-term suppliers. The Company believes this strategy results in purchasing and operating economies. Outokumpu, a Swedish corporation, supplied the Company with approximately 90% of its copper and brass requirements in 1998, 1997, and 1996. The Company believes its sources for raw steel materials are very reliable and adequate for its needs. The Company has not experienced any significant supply problems in its operations and does not anticipate any significant supply problems in the foreseeable future. The Company typically executes purchase orders for its anticipated copper and brass requirements approximately three to six months prior to the actual delivery date. The purchase price for such copper and brass is established at the time orders are placed by the Company and not at the time of delivery. In mid-1996, copper prices declined significantly; however, by year-end 1996, prices were trending higher. Prices continued to climb until mid-year 1997 at which time a steady decline began which continued through the end of 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" - Item 7. 9 10 BACKLOG The Company's backlog was approximately $13.1 million at December 31, 1998 as compared to approximately $8.1 million at December 31, 1997 primarily as a result of interim orders from its new telecommunications and vehicle facility. Backlog consists of product orders for which a customer purchase order has been received and is scheduled for shipment within 12 months. Since orders may be rescheduled or canceled, backlog does not necessarily reflect future sales levels. SEASONALITY Historically, OEM Heat Transfer Systems and Specialty Metal Fabrication businesses have experienced a slight decrease in revenues and operating income during the third and fourth calendar quarters as compared to the first and second quarters. Third quarter results are affected by scheduled plant shut-downs for vacations and model year changeovers while fourth quarter results are affected by scheduled plant shut-downs for the holiday season. The Company expects the second and third quarters to be positively impacted and the first and fourth quarters to be negatively impacted by the operating results of Aftermarket Heating and Cooling Systems, which typically experiences higher sales during the summer months as the demand for replacement radiators and air conditioning parts and supplies tend to increase and lower sales during the winter months. The seasonal impact of the Aftermarket Heating and Cooling Systems segment became more pronounced on TransPro as a whole during 1998 with the elimination of the far less seasonal Crew Cab/DRW program. RESEARCH AND DEVELOPMENT Research and development expenses were approximately $0.2 million, $0.2 million and $0.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. EMPLOYEES At December 31, 1998, the Company had approximately 2,370 employees. Of these employees, approximately 1,270 were covered by collective bargaining agreements. The Company's collective bargaining agreements are independently negotiated at each manufacturing facility and expire on a staggered basis. Locals affiliated with the International Union of Electronic, Electrical, Technical, Salaried and Machine Workers (AFL-CIO) and the United Paperworkers International Union represent approximately 25% and 20% respectively, of the Company's unionized employees. In addition, a local Mexican labor union represents approximately 47% of the Company's unionized employees. The Company believes that its relations with its unions and employees are good. The Company has successfully re-negotiated seven collective bargaining agreements over the last several years, although there can be no assurance that the Company will not experience work stoppages in the future. ITEM 2. PROPERTIES The Company maintains its corporate headquarters in New Haven, Connecticut and conducts its operations through 16 principal manufacturing and assembly facilities. The Company believes its property and equipment are in good condition and suitable for its needs. The Company estimates that its plants operate at between 40% and 95% of capacity on a six-day basis. The Company has sufficient capacity to increase production with respect to its original equipment and replacement radiator product lines, its air conditioning replacement parts business, and its vehicle conversion and fabricated metal products operations. The Company's principal manufacturing and assembly facilities are as follows:
APPROXIMATE OWNED/ LOCATION SQUARE FOOTAGE LEASED PRODUCT LINE -------- -------------- ------ ------------ New Haven, Connecticut 158,800 Owned (1) Corporate headquarters, GDI headquarters,
10 11
tubes for original equipment radiators (2). Jackson, Mississippi 135,885 Owned Original equipment radiators. Wooster, Ohio 216,000 Owned (1) Fabricated metal products, vehicle conversion. Lorain, Ohio 79,846 Owned Vehicle conversion. Thomaston, Georgia 30,000 Owned Fabricated metal products. Baltimore, Maryland 10,000 Leased Vehicle conversion. Bridgeton (St. Louis), Missouri 16,900 Leased Vehicle conversion. Plano, Texas 70,000 Leased Fabricated metal products. Dallas, Texas 50,050 Leased Replacement radiators (radiator cores). Nuevo Laredo, Mexico 109,055 Leased Replacement radiators (radiator cores). Maquoketa, Iowa 38,000 Leased Parts and tooling for replacement radiators. Los Angeles, California 32,900 Leased Air conditioning condensers. Atlanta, Georgia 14,000 Leased Air conditioning condensers. Mississauga, Ontario Canada 14,616 Leased Vehicle conversion. Philadelphia, Pennsylvania 15,300 Leased Air conditioning condensers. Arlington, Texas 82,000 Leased Air conditioning parts &supplies.
- ------------------------- (1) Subject to IRB financing arrangements. (2) In December 1996, most of the manufacturing operation was moved to Jackson, Mississippi. A small tube mill operation remains. The Company is considering various alternatives for the unoccupied manufacturing/ware- housing portion of the facility. As part of its replacement radiator business, the Company maintains a nationwide network of manufacturing and distribution facilities which enables the Company to provide its customers generally with same day delivery service. In addition to the three manufacturing facilities for replacement radiators described above, the Company also operates 13 fully equipped, regional manufacturing facilities. These thirteen facilities are all leased, average approximately 11,000 square feet in size and are strategically located to generally provide same-day service to virtually the entire United States. The Company also has approximately 45 local branch offices and approximately 20 independent agencies and 2 distribution centers that comprise its nationwide local distribution network. All of the Company-operated local branch offices are leased and, on average, approximate 6,000 square feet in size. ENVIRONMENTAL MATTERS As is the case with manufacturers of similar products, the Company uses certain hazardous substances in its operations, including certain solvents, lubricants, acids, paints and lead, and is subject to a variety of environmental laws and regulations governing discharges to 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). The Company 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. During 1998, the Company 11 12 was fined approximately $0.1 million in connection with certain pre-treatment water containment violations at its Jackson, Mississippi facility. The issues were satisfactorily resolved. The Company believes it is reasonably possible that environmental related liabilities may exist with respect to one industrial site formerly occupied by the Company. Based upon environmental site assessments, 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 operation or liquidity of the Company. The Company has an environmental policy that confirms its commitment to compliance with existing environmental regulations and planning to reduce the level of pollutants in the manufacturing process. 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 Company's business and there is no assurance that material environmental liabilities and compliance charges will not arise. The Company has assumed all environmental liabilities, if any, associated with the former Allen Automotive and Truck Products Business and GDI. ITEM 3. LEGAL PROCEEDINGS Various legal actions are pending against or involve the Company with respect to such matters as product liability, casualty and employment-related claims including one potential claim under the Americans with Disabilities Act. In the opinion of management, after review and consultation with counsel, the aggregate liability, if any, that ultimately may be incurred in excess of amounts already provided should not have a material adverse effect on the consolidated financial position, results of operations, or liquidity of the Company. During 1998, the Company paid approximately $0.6 million to settle a prior-filed claim of sexual harassment of a group of non-exempt union employees by another non-exempt union employee at one of the Company's manufacturing facilities. 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, 1998. 12 13 EXECUTIVE OFFICERS OF THE REGISTRANT*
SERVED AS OFFICER POSITION OR OFFICE WITH THE COMPANY & BUSINESS EXPERIENCE DURING PAST NAME AGE SINCE FIVE (5) YEAR PERIOD ---- --- ----- -------------------- Henry P. McHale 60 July 1995 President, Chief Executive Officer and Director, since 1995; President and Chief Executive Officer of GDI, 1992 through 1995. Prior thereto, various executive positions with Ladish Corporation and Rockwell Automotive. Jeffrey L. Jackson 51 August 1995 Vice President of Human Resources, since 1995; Vice President of Human Resources of GDI, 1992 through 1995. Prior thereto, Managing Director of Resources of IMCOR since 1990. Timothy E. Coyne 44 October 1996 Vice President, Chief Financial Officer, Treasurer, and Secretary since 1998, Corporate Controller, since 1996; Vice President of Finance and Administration and Treasurer of Keene Corporation 1990 through 1996. Michael T. Hooper 53 February 1996 President of The Crown Divisions since 1996; Senior Vice President of Findlex Corporation from 1993-1996, various executive positions with Rockwell International and CMW, Inc. prior thereto. John F. Della Ventura 50 February 1998 President of G&O, since 1998; Group Controller-Engine Systems of Echlin, Inc., 1990 through 1998.
* All officers are elected by the Board of Directors. The information contained in the Company's 1999 Proxy Statement under the heading "Proposal No. 1 -- ELECTION OF DIRECTORS" and under the heading "EXECUTIVE COMPENSATION - Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. 13 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchange. The number of stockholders of record of the Company's Common Stock as of the close of business on March 13, 1999, was 1,256. Information regarding market prices and dividends declared for the Company's Common Stock is shown below for 1998 and 1997. Market prices are closing prices quoted on the New York Stock Exchange, the principal exchange market for the Company's Common Stock. The Company currently expects that comparable dividends will continue to be paid in the future, although there can be no assurance of this.
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------- 1ST QTR 2ND QTR 3RD QTR 4TH QTR ------- ------- ------- ------- Market price of common stock ---High $ 8 15/16 $ 8 3/4 $ 7 7/16 $ 6 1/4 ---Low $ 7 $ 7 7/16 $ 5 5/16 $ 4 3/8 Dividends per share $ .05 $ .05 $ .05 $ .05
YEAR ENDED DECEMBER 31, 1997 -------------------------------------------------- 1ST QTR 2ND QTR 3RD QTR 4TH QTR ------- ------- ------- ------- Market price of common stock ---High $ 10 $ 8 7/8 $11 15/16 $11 1/2 ---Low $ 8 5/8 $ 7 1/8 $ 8 3/8 $ 7 5/8 Dividends per share $ .05 $ .05 $ .05 $ .05
ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated herein by reference to "Financial Highlights" contained in the Registrant's 1998 Annual Report to Stockholders, portions of which are filed as Exhibit 13 to this report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated herein by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Registrant's 1998 Annual Report to Stockholders, portions of which are filed as Exhibit 13 to this Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company has certain exposures to market risk related to changes in interest rates, foreign currency exchange rates and commodities. The Company's interest rate risk is most sensitive to changes in the US interest rates. The Company has an outstanding revolving credit agreement, under which approximately $29.5 million was outstanding at December 31, 1998. The revolving credit agreement bears interest at variable rates based on current indexes. The weighted average interest rate on this agreement during 1998 was 7.8%. Interest on the revolving credit agreement is based on, at the Company's option, changes in the Eurodollar loan rate or the Federal Funds effective rate, plus an applicable margin based on certain Company ratios. The Company also has Industrial Revenue Bonds ("IRB's"), which aggregated $13 million at December 31, 1998, and mature in 2008 and 2010. The IRB's had a weighted average interest rate of 3.7% during 1998. Interest on the IRB's are based on the short-term tax exempt bonds index. 14 15 The Company has sales and manufacturing facilities in Mexico and Canada. As a result, changes in the foreign currency exchange rates and changes in the economic conditions in these foreign markets could affect financial results. The Company has accounted for transactions associated with these foreign operations in accordance with the guidance established under Financial Accounting Standards No. 52, "Foreign Currency Translation." Assets and liabilities are translated into US dollars at the current rate of exchange, while revenues and expenses are translated at the average rate for the year. Operating income or loss for the Mexico operation is included in the periodic results of operations of the Company. The foreign currency exchange amounts associated with Canada are included in other comprehensive income through the statement of changes in stockholders equity. The Company believes it has mitigated the risk associated with its foreign operation through its management of inventory and other significant operating assets. Certain risks may arise in the various commodity markets in which the Company participates. Commodity prices in copper, brass and steel markets may be subject to changes based on availability. The Company conducts its purchasing of such commodities generally through three to six month purchase order committments. See "Raw Materials and Suppliers" in Part I, page 9 for additional information on commodity pricing. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated herein by reference to the Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Balance Sheets, Consolidated Statements of Cash Flows and Consolidated Statements of changes in Stockholders' Equity, to the Notes to Consolidated Financial Statements and to "Report of Independent Accountants" contained in the Registrant's 1998 Annual Report to Stockholders, portions of which are filed as Exhibit 13 to this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements between Registrant and its independent accountants on accounting and financial disclosure during the year ended December 31, 1998. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Portions of the information required by this item are included in Part I hereof, on page 13 of this Report. Other information required by this item is contained in the Company's 1999 Proxy Statement under the heading, "Proposal No. 1 - Election of Directors" and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained in the Company's 1999 Proxy Statement under the heading "EXECUTIVE COMPENSATION" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the Company's 1999 Proxy Statement under the headings "STOCK OWNERSHIP-Principal Stockholders and Directors and Officers" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the Company's 1999 Proxy Statement, under the heading "CERTAIN TRANSACTIONS" is incorporated herein by reference. 15 16 PART IV Index to Financial Statements, Financial Statement Schedule and Exhibits
Annual Report to Shareholders Form 10-K Report of Independent Accountants 37 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997, and 1996 19 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998, 1997, and 1996 19 Consolidated Balance Sheets at December 31, 1998 and 1997 20 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996 22 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997, and 1996 23 Notes to Consolidated Financial Statements 24 Financial Statement Schedule 23 Exhibits 17
16 17 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements of the Registrant The Consolidated Financial Statements of the Registrant listed below, together with the Report of Independent Accountants, dated February 12, 1999, are incorporated herein by reference to the Registrant's 1998 Annual Report to Stockholders, portions of which are filed as Exhibit 13 to this Report. Consolidated Statements of Income for the Years Ended December 31, 1998, 1997, and 1996 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Balance Sheets at December 31, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997, and 1996 Notes to Consolidated Financial Statements Report of Independent Accountants 17 18 (a) (2) Financial Statement Schedules The following additional information should be read in conjunction with the Consolidated Financial Statements of the Registrant described in Item 14 (a) (1) above: Schedule II - Valuation and Qualifying Accounts, on page 22 of this Report Schedules other than the schedule listed above are omitted because they are not applicable, or because the information is furnished elsewhere in the Consolidated Financial Statements or the Notes thereto. (a) (3) Exhibits The information required by this Item relating to Exhibits to this Report is included in the Exhibit Index in (c) below. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the 1998 fiscal year. (c) Exhibits - The following exhibits are filed as part of this report:
2.1 Agreement, dated June 15, 1995, between Allen Heat Transfer Products, Inc., AHTP II, Inc., GO/DAN Industries and Handy & Harman Radiator Corporation. (1) 3.1 (i) Restated Certificate of Incorporation of TransPro, Inc. (2) 3.1 (ii) By-laws of TransPro, Inc. (1) 4.1 Form of Rights Agreement between the Company and the First National Bank of Boston, as Rights Agent (including form of Certificate of Designations of Series A Junior Participating Preferred Stock and form of Rights Certificate). (1) 4.2 Form of Revolving Credit Agreement between the Company and Certain lending Institutions or Banks, BankBoston N.A. as Agent (2). The Company is a party to certain other long-term debt agreements each of which does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to file such agreements upon request from the Securities and Exchange Commission. 10.1 TransPro, Inc. 1995 Stock Plan. (1) 10.2 Form of Stock Option Agreement under the 1995 Stock Option Plan (1) 10.3 Form of Restricted Stock Agreements between the Company and Messrs. Scanlon and Martin (two agreements). (1) 10.4 Form of TransPro, Inc. 1995 Non-employee Directors Stock Option Plan. (1) 10.5 Form of Stock Option Agreement under the 1995 Non-employee Directors Stock Option Plan. (1)
17 19 10.6 Form of Contribution Agreement between Allen and the Company. (1) 10.7 Form of Instrument of Assumption of the Company. (1) 10.8 Form of Interim Services Agreement between Allen and the Company. (1) 10.9 Form of Consulting Agreement between Allen and the Company. (1) 10.10 Form of Indemnification Agreement. (1) 10.11 Form of Employment Agreement between the Company and Henry P. McHale. (1) 10.12 Amendment No. 1 to Employment Agreement between the Company and Henry P. McHale. (1) 10.13 Form of Employment Agreement between the Company and John C. Martin, III. (1) 10.14 Form of Employment Agreement between the Company and Raymond M. Scanlon. (1) 10.15 Form of Key Employee Severance Policy. (1) 10.16 Letter Agreement, dated July 21, 1993 between Andrew J. Mazzarella and GO/DAN Industries. (1) 10.17 Letter Agreement, dated December 15, 1992 between Jeffrey J. Jackson and GO/DAN Industries. (1) 10.18 Letter Agreement dated September 24, 1996 between Timothy E. Coyne and TransPro, Inc. (3) 13 Portions of the 1998 Annual Report to Stockholders incorporated by reference herein 21.1 Subsidiaries of the Company 23 Consent of PricewaterhouseCoopers LLP 24 Powers of Attorney (included on signature page) 27 (i-viii) Financial Data Schedule
- ---------------------- (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 33-96770). (2) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1998. (3) Incorporated by reference to the Company's 1996 Form 10-K. 18 20 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. TransPro, Inc. By /s/ Henry P. McHale ------------------------------------------------------- Henry P. McHale President, Chief Executive Officer, and Director Date: March 26, 1999 POWER OF ATTORNEY Each of the undersigned hereby appoints Barry R. Banducci and Henry P. McHale, and each of them severally, his or her true and lawful attorneys to execute on behalf of the undersigned any and all amendments to this annual report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. Each such attorney will have the power to act hereunder with or without the others. Each of the undersigned hereby ratifies and confirms all such attorneys, or any of them may lawfully do or cause to be done by virtue thereof. --------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. BOARD OF DIRECTORS
/s/ HENRY P. McHALE March 26, 1999 - ---------------------------------------------------- Henry P. McHale, Director /s/ WILLIAM J. ABRAHAM, JR. March 26, 1999 - ---------------------------------------------------- William J. Abraham, Jr., Director /s/ BARRY R. BANDUCCI March 26, 1999 - ---------------------------------------------------- Barry R. Banducci, Director /s/ PHILIP WM. COLBURN March 26, 1999 - ---------------------------------------------------- Philip Wm. Colburn, Director /s/ PAUL R. LEDERER March 26, 1999 - ---------------------------------------------------- Paul R. Lederer, Director /s/ SHARON M. OSTER March 26, 1999 - ---------------------------------------------------- Sharon M. Oster, Director /s/ F. ALAN SMITH March 26, 1999 - ---------------------------------------------------- F. Alan Smith, Director
19 21
/s/ TIMOTHY E. COYNE March 26, 1999 - ---------------------------------------------------- Timothy E. Coyne Vice President, Treasurer, Secretary, Controller and Chief Financial Officer
20 22 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of TransPro, Inc. Our audits of the consolidated financial statements referred to in our report dated February 12, 1999, appearing on page 37 of the 1998 Annual Report to Stockholders of TransPro, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in the index on page 16 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Hartford, Connecticut February 12, 1999 23 SCHEDULE II TRANSPRO, INC. VALUATION AND QUALIFYING ACCOUNTS
PERIOD BALANCE AT CHARGED TO ACCOUNTS BALANCE AT BEGINNING COSTS AND WRITTEN OFF END OF (DOLLARS IN THOUSANDS) OF PERIOD EXPENSES AND OTHER PERIOD Year Ended December 31, 1998 Allowance for doubtful accounts $ 3,441 $ 1,394 $ (2,445) $ 2,390 Allowance for obsolete inventory 5,003 1,629 (1,027) 5,605 Year Ended December 31, 1997 Allowance for doubtful accounts 3,378 1,790 (1,727) 3,441 Allowance for obsolete inventory 4,942 1,299 (1,238) 5,003 Year Ended December 31, 1996 Allowance for doubtful accounts 3,059 1,090 (771) 3,378 Allowance for obsolete inventory 5,731 1,114 (1,903) 4,942
22 24 EXHIBIT INDEX -------------
Exhibit No. Description - ---------- ----------- 2.1 Agreement, dated June 15, 1995, between Allen Heat Transfer Products, Inc., AHTP II, Inc., GO/DAN Industries and Handy & Harman Radiator Corporation. (1) 3.1 (i) Restated Certificate of Incorporation of TransPro, Inc. (2) 3.1 (ii) By-laws of TransPro, Inc. (1) 4.1 Form of Rights Agreement between the Company and the First National Bank of Boston, as Rights Agent (including form of Certificate of Designations of Series A Junior Participating Preferred Stock and form of Rights Certificate). (1) 4.2 Form of Revolving Credit Agreement between the Company and Certain lending Institutions or Banks, BankBoston N.A. as Agent (2). The Company is a party to certain other long-term debt agreements each of which does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to file such agreements upon request from the Securities and Exchange Commission. 10.1 TransPro, Inc. 1995 Stock Plan. (1) 10.2 Form of Stock Option Agreement under the 1995 Stock Option Plan (1) 10.3 Form of Restricted Stock Agreements between the Company and Messrs. Scanlon and Martin (two agreements). (1) 10.4 Form of TransPro, Inc. 1995 Non-employee Directors Stock Option Plan. (1) 10.5 Form of Stock Option Agreement under the 1995 Non-employee Directors Stock Option Plan. (1) 10.6 Form of Contribution Agreement between Allen and the Company. (1) 10.7 Form of Instrument of Assumption of the Company. (1) 10.8 Form of Interim Services Agreement between Allen and the Company. (1) 10.9 Form of Consulting Agreement between Allen and the Company. (1) 10.10 Form of Indemnification Agreement. (1) 10.11 Form of Employment Agreement between the Company and Henry P. McHale. (1) 10.12 Amendment No. 1 to Employment Agreement between the Company and Henry P. McHale. (1) 10.13 Form of Employment Agreement between the Company and John C. Martin, III. (1) 10.14 Form of Employment Agreement between the Company and Raymond M. Scanlon. (1) 10.15 Form of Key Employee Severance Policy. (1) 10.16 Letter Agreement, dated July 21, 1993 between Andrew J. Mazzarella and GO/DAN Industries. (1) 10.17 Letter Agreement, dated December 15, 1992 between Jeffrey J. Jackson and GO/DAN Industries. (1) 10.18 Letter Agreement dated September 24, 1996 between Timothy E. Coyne and TransPro, Inc. (3) 13 Portions of the 1998 Annual Report to Stockholders incorporated by reference herein 21.1 Subsidiaries of the Company 23 Consent of PricewaterhouseCoopers LLP 24 Powers of Attorney (included on signature page) 27 (i-viii) Financial Data Schedule
- ---------------------- (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 33-96770). (2) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1998. (3) Incorporated by reference to the Company's 1996 Form 10-K. EX-13 2 PORTIONS OF THE 1998 ANNUAL REPORT TO STOCKHOLDERS 1 [PHOTO OMITTED] TransPro, Inc. PRECISION TRANSPORTATION PRODUCTS 2 At TransPro, Inc. our core management values are quality, low cost manufacturing and commitment to our customers. 1 Financial Highlights 2 Letter to Shareholders 4 Aftermarket Heating and Cooling Systems 6 Speciality Metal Fabrication 8 OEM Heat Transfer Systems 10 In Summary 11 Distribution Network 12 Financial Information 3 TransPro, Inc. FINANCIAL HIGHLIGHTS
- -------------------------------------------------------- ------------------------------------------------------- Amounts in Thousands, Except Per Share, Current Ratio, and Employee Data 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Operating results Sales $240,065 $288,866 $264,095 $151,660 $118,506 Gross margin 54,518 66,684 61,827 31,174 20,983 Plant and business consolidation and closure costs -- 3,958 4,389 -- -- Income from operations 6,231 16,448 17,006 13,907 16,114 Income from joint venture -- -- -- 2,495 1,368 Net income 1,647 7,875 8,420 9,074 9,966 Basic earnings per common share* $ 0.25 $ 1.20 $ 1.28 $ 1.39 $ 1.51 Diluted earnings per common share* $ 0.24 $ 1.20 $ 1.28 $ 1.39 $ 1.51 Cash dividends per share $ 0.20 $ 0.20 $ 0.20 $ 0.05 -- Financial condition Current ratio 3.34 2.65 2.46 2.27 2.18 Working capital $ 70,176 $ 63,465 $ 56,161 $ 53,255 $ 17,837 Capital expenditures 8,582 7,214 5,565 4,066 2,512 Depreciation expense 6,557 6,627 5,911 3,701 3,220 Net property, plant and equipment 39,487 36,752 37,939 36,951 23,618 Total assets 148,527 144,540 140,266 139,718 87,907 Debt 42,197 37,838 38,917 40,846 13,950 Total equity 67,867 65,015 58,696 51,103 54,647 Number of employees 2,367 2,322 2,139 2,001 828 - -------------------------------------------------------- -------------------------------------------------------
*The basic and diluted earnings per share for years prior to 1995 are for comparative purposes only as common shares were not issued until October 1995 and assumes average shares outstanding of 6,621,000. On September 29, 1995, TransPro, Inc. ("TransPro" or the "Company") completed a series of transactions pursuant to which the Company's sole stockholder, Allen Telecom Inc. ("Allen"), contributed (the "Contribution") to the Company substantially all of the assets and liabilities of Allen's original equipment radiator and fabricated metal products business (the "Automotive and Truck Products Business"), as well as Allen's 50% ownership interest in GO/DAN Industries ("GDI"), a 50/50 joint venture partnership between affiliates of Allen and Handy & Harman. Immediately thereafter, Allen caused GDI to redeem the outstanding ownership interest in GDI not already owned by Allen (the "GDI Redemption"), thereby making GDI an indirect wholly owned partnership of the Company. GDI produces replacement radiators and other heat transfer products for the automotive and truck aftermarkets. In addition, Allen effected the distribution (the "Distribution") of 100% of the outstanding shares of the Company's common stock to the holders of record of Allen's common stock as of the close of business on September 29, 1995 (the "Record Date"). The Distribution was made on the basis of one share of the Company's common stock for every four shares of Allen's common stock outstanding on the Record Date, which resulted in the distribution of an aggregate of 6,621,349 shares of TransPro common stock. As a result of the Contribution, the Distribution, and the GDI Redemption, TransPro owns the Automotive and Truck Products Business and 100% of GDI, and is an independent publicly-traded company. The above table sets forth certain selected historical (1994 and 1995) financial data for the Crown and G&O divisions of the Company (formerly the Automotive and Truck Products Business). Prior to October 1, 1995, the date on which the financial results of GDI were reported on a fully consolidated basis, TransPro's 50% ownership in GDI was reported under the equity method of accounting. Therefore the 1994 sales, gross margin and income from operations amounts in the table above do not include GDI and the 1995 sales, gross margin and income from operations amounts in the table above include only three months of GDI activity. The number of employees for 1995 includes GDI employees. 4 TransPro, Inc. ANNUAL REPORT 1998 TransPro, Inc. continues to focus on growth and expansion of all our divisions. [PHOTO OMITTED] /s/ Barry Banducci /s/ Hank McHale Barry Banducci Hank McHale Chairman of the Board of Directors President and Chief Executive Officer 5 TransPro, Inc. ANNUAL REPORT 1998 Letter To Shareholders For TransPro, 1998 was a year of transformation. It marked the first full year of operations at TransPro that did not include results from the Ford Crew Cab program. In addition, 1998 did not include the results from the Ford order to convert vans for the U.S. Postal Service, which was completed in 1997. As a result, the Aftermarket represents a larger proportion of our overall business. This change has increased the seasonality of our operating results, as the normal seasonality of the Aftermarket business becomes more apparent. Throughout the year, we continued the process of positioning the Company for improving profits and future growth. That process began with the restructuring initiatives enacted in our Aftermarket Heating and Cooling Systems and OEM Heat Transfer Systems operations over a year ago. Through a combination of acquisitions and other strategic actions as well as extensive cost reduction activities, we have extended the breadth and depth of the markets we service and have achieved significant operating improvements across all of our divisions. However, much effort remains in order to attain an acceptable level of profitability. During 1998, we expanded our product offerings to the automotive Aftermarket into air conditioning parts with the acquisition of Evap, Inc. in August 1998. To further support our expansion into air conditioning parts, in February 1999 we acquired A/C Plus, Inc., an automotive air conditioning compressor remanufacturer. By adding the product lines of these two acquisitions to our existing Rahn air conditioning condenser line, we now offer the Aftermarket a full line of air conditioning parts in addition to our traditional heat transfer product line. While we are pleased with the significant progress we have made in improving and growing our remaining core businesses, we also believe that this progress has been masked somewhat by year over year comparisons which attempt to equate where TransPro is today without the Ford Crew Cab program and the Ford order to convert U.S. Postal Service vans, as compared to where TransPro was in the past. For 1998, net sales totaled $240.1 million versus $288.9 million in 1997. Net income for the year was $1.6 million, or $0.24 per diluted common share, versus net income of $10.2 million before plant and business consolidation and closure costs, or $1.55 per diluted common share last year. After these costs, 1997 net income was $7.9 million, or $1.20 per diluted common share. In order to truly understand the improvements we have made, it is important to examine the results of each of TransPro's operating divisions. The TransPro Business Matrix
- ---------------------------------------------------------------------------------------------------------------------------------- Divisions Products Applications Significant Customers % of Sales - ---------------------------------------------------------------------------------------------------------------------------------- Aftermarket Complete Radiators Passenger Cars National Retailers 65% Heating and Light to Moderate Duty Cores Light Trucks o Autozone o Pep Boys Cooling Heavy Duty Cores Heavy Trucks Radiator Shops Systems Heaters Off-Highway Vehicles Warehouse Distributors GDI Air Conditioning Condensers o Car Quest EVAP Air Conditioning Parts o Auto Value Cooling System Specialists - ---------------------------------------------------------------------------------------------------------------------------------- OEM Heat Radiators Heavy Trucks and Buses Paccar 16% Transfer Charge Air Coolers Off-Highway Vehicles Mack Truck Systems Oil Coolers Industrial OshKosh Truck G&O Condensers Locomotive Cummins Power Generator Engine Cooling System Components - ---------------------------------------------------------------------------------------------------------------------------------- Specialty Industrial Fabricated Electronic and Lucent Technologies 19% Metal Components Telecommunications Alcatel Fabrication Vehicle Conversions Delivery and Service Automotive OEMs CROWN Aftermarket Vehicle Vehicles Fleet Operators Conversion Parts - ----------------------------------------------------------------------------------------------------------------------------------
3 6 In the Aftermarket we provide high quality cost effective products to our customers when they are needed, virtually anywhere in the U.S. [PHOTO OMITTED] 4 7 TransPro, Inc. ANNUAL REPORT 1998 Moving Forward Aftermarket Heating and Cooling Systems At GDI, we achieved significant unit volume growth in our cornerstone radiator product line as well as in our heater and air conditioning product lines. [PHOTO OMITTED] We also completed the acquisition of Evap, Inc. to add air conditioning parts to our Aftermarket offerings. Although we were not able to conclude that acquisition in time to enjoy the benefit of the peak air conditioning parts selling season, we have enhanced our national distribution network for Aftermarket heating and cooling systems products. We expect to see strong contributions in 1999 from the air conditioning parts product line as we expand our product offerings to existing customers and develop new customers. In February 1999, we acquired A/C Plus, Inc., an air conditioning compressor remanufacturing company. This acquisition supports our entry into air conditioning parts and ensures a supply of high quality compressors, a critical component of any full line air conditioning product line. The Aftermarket continued to be extremely competitive in 1998 with downward pressure on pricing throughout the marketplace. To relieve some of this pressure, we remained focused on cost reduction activities, including low cost sourcing of product, more efficient production methods and a full year of savings associated with the move of heater production to our Mexico facility. These cost reduction actions and the strategic actions described above, coupled with the highest fill rates in the industry and excellent customer service, have helped to relieve some of the downward pricing pressure by making us a more valuable business partner to our customers. 5 8 Our customers in the Specialty Metal Fabrication segment include the leading telecommunications companies and large fleet vehicle operators. [PHOTO OMITTED] 6 9 Transpro. Inc. ANNUAL REPORT 1998 Aggressive Expansion Specialty Metal Fabrication At Crown, we continued to focus on efficient, lean production while at the same time leveraging our core competencies of superior quality and on-time delivery. We accomplished this through the aggressive expansion of both our vehicle conversion and telecommunications operations. [PHOTO OMITTED] As a result of increased demand and our December 1997 acquisition of Vehicle Management Systems, revenues from vehicle conversions, excluding the Postal Service order, increased 131% in 1998, virtually offsetting all of the revenue lost from the completion of the Postal Service contract. We also grew our metal fabrication business primarily through the start-up in April 1998 of our state-of-the art facility in the Dallas "telecom corridor." This has allowed us to participate in the rapidly growing telecommunications industry. Our customers include some of the leading telecommunications companies and our order rates accelerated throughout the year as we ramped-up production at this facility. We have achieved this increase in volume while improving operating efficiencies, resulting in better margins for the division. 7 10 Our OEM Heat Transfer Systems engineering capabilities are ranked `Best in Class.' [PHOTO OMITTED] 8 11 TransPro, Inc. ANNUAL REPORT 1998 Significant Strides OEM Heat Transfer Systems At our G&O division, 1998 was a year for building on strengths as a foundation for future growth and development. [PHOTO OMITTED] We made significant strides in improving the efficiency of the division's Jackson, Mississippi facility. G&O's new management team, led by John DellaVentura, was effective in devising creative new solutions to address many of the facility's operating issues. These programs are focused on controlling costs while enhancing operational efficiency, and should help us to realize the cost savings anticipated in the original restructuring initiatives. In conjunction with our steps to improve G&O's bottom line, we also took measures to enhance its growth potential. Through a combination of renewed marketing and sales efforts and strong build rates at our customers, G&O realized higher than expected revenue growth in 1998. Our ongoing commitment to high standards of manufacturing and product quality will help to ensure that we retain our existing customers while we grow our business. Our capabilities once again earned us ISO 9002 certification and G&O's proprietary solution to heavy-duty truck charge air cooler durability and reliability. The Ultrao Seal(TM) grommeted charge air cooler is just one example of how we have grown the business through the introduction of innovative products. The introduction of this exciting new product has been extremely well received, and we expect to generate considerable new sales opportunities in the future. 9 12 TransPro, Inc. ANNUAL REPORT 1998 As we look ahead into 1999, all of us at TransPro are encouraged by the opportunities to grow and expand all of our businesses. In the Aftermarket, our focus will be on maintaining our sales and market share in heat transfer products while significantly growing the newly acquired air conditioning product line. We plan to concentrate our cost reduction efforts on implementing a new lower cost condenser design, expanding our in house radiator tube production capacity and further developing aluminum core manufacturing capability for radiators, heaters and charge air coolers. At G&O, we will continue to improve our cost effectiveness, and fully expect the significant progress we have made in this area to continue. At Crown, the strong orders we continue to receive tell us there is significant opportunity for sales growth at our Dallas facility. As we ramp-up production at this operation, we see significant opportunities for revenue and margin growth. Similarly, we expect vehicle conversion revenues to grow from our strategic positioning in the Canadian market and, as we continue to explore new opportunities, to broaden our vehicle conversion product offerings and customer base. Over the longer term, we remain committed to our goal of becoming a premier supplier of heating and cooling systems products to the Aftermarket and see significant opportunity to increase our presence in this area by leveraging the benefits of our extensive distribution network. Our acquisitions of Evap, Inc. and A/C Plus, Inc. are prime examples of this strategy, and we will continue to focus our acquisition efforts on heating and cooling system parts companies as we quickly grow this aspect of our business. We remain committed to continued internal sales and profit growth through the introduction of innovative products and a constant focus on cost control. We believe concentrating on our core management values of quality, low cost manufacturing and commitment to our customers will provide the framework for our continuing efforts to gain profitable market share and maintain leadership in our chosen markets. We look forward to the opportunity in 1999 to clearly show the progress we have made. Our Aftermarket Sales Distribution Network GO/DAN INDUSTRIES AGENCIES Amarillo, TX 806. 342-9440 Anchorage, AK 907. 279-5557 Bakersfield, CA 805. 837-8947 Billings, MT 406. 248-4594 Corpus Christi, TX 512. 884-7418 Eugene, OR 503. 683-2883 Jacksonville, FL 904. 730-3177 Knoxville, TN 615. 522-8845 Las Vegas, NV 702. 657-9666 Louisville, KY 502. 451-7749 McAllen, TX 210. 630-2991 Modesto, CA 209. 572-3151 Norfolk, VA 804. 461-0843 Odessa, TX 915. 337-0961 Oklahoma City, OK 405. 272-0453 Pensacola, FL 904. 477-6244 Redding, CA 916. 221-0118 Spokane, WA 509. 536-9429 Waller, TX 409. 372-2200 Wilkes-Barre, PA 717. 829-1723 BRANCHES Albany, NY 518. 463-1331 Albuquerque, NM 505. 247-9180 Austin, TX 512. 835-8264 Birmingham, AL 205. 592-6707 Canton, OH 216. 455-4440 Cedar Rapids, IA 319. 377-7264 Charlotte, NC 704. 522-0711 Chatsworth, CA 818. 894-5878 Columbia, SC 803. 779-5897 Columbia, MD 410. 309-0701 Framingham, MA 508. 877-9880 Fresno, CA 209. 233-6525 Grand Rapids, MI 616. 261-4162 Hilliard, OH 614. 276-1646 Indianapolis, IN 317. 634-5754 Lansing, MI 517. 322-3031 Los Angeles, CA 310. 583-5711 Memphis, TN 901. 345-9069 Milwaukee, OR 503. 653-8531 Nashville, TN 615. 255-0501 Oakland, CA 415. 562-2732 Pembroke Park, FL 954. 964-5878 Pennsauken, NJ 609. 663-8101 Pittsburgh, PA 412. 771-2100 Richmond, VA 804. 321-0384 Riviera Beach, FL 407. 863-7998 Sacramento, CA 916. 649-8020 Salt Lake City, UT 801. 486-5877 San Antonio, TX 512. 224-0857 San Diego, CA 619. 283-2177 San Jose, CA 408. 244-0237 Santa Fe Springs, CA 310. 941-6113 Shreveport, LA 318. 635-8514 Springfield, MO 417. 869-5111 St. Louis, MO 314. 343-9515 Syracuse, NY 315. 475-3794 Tampa, FL 813. 251-8041 Tucson, AZ 602. 791-9211 Tulsa, OK 918. 622-5860 Wichita, KS 316. 263-8287 PLANTS/BRANCHES Atlanta, GA 404. 627-5731 Burr Ridge, IL 708. 655-2686 Cincinatti, OH 513. 984-3912 Cleveland, OH 216. 267-0922 Dallas, TX 214. 637-6740 Denver, CO 303. 295-0944 Houston, TX 713. 675-6401 Los Angeles, CA 213. 588-1291 Los Angeles, CA 213. 588-1294 Kansas City, MO 816. 471-5404 Orlando, FL 407. 843-9130 Philadelphia, PA 215. 425-9582 Phoenix, AZ 602. 252-1801 San Bernardino, CA 714. 796-0754 Seattle, WA 206. 764-7028 Tucker, GA 770. 491-6351 Windsor, CT 203. 688-7644 Evap, Inc. Arlington, TX 817. 633-6622 EVAP, INC. Arlington, TX 817. 633-6622 A/C PLUS, INC. Arlington, TX 817. 861-8989 10 13 TransPro, Inc. ANNUAL REPORT 1998 Headquarters Aftermarket Headquarters, located in New Haven, Connecticut, provides marketing, financial and engineering support for the plants, branches and agencies. Agencies Privately operated sales outlets provide cost effective local service in smaller markets, using our inventory and computer systems networked to Aftermarket Corporate offices. Branches Branches are situated in major markets to service all customers with a full complement of products and services. Locations are computer networked to the distribution centers and other branches to locate inventory and process orders for daily delivery. Our national distribution network for Aftermarket heating and cooling systems products. [PHOTO OMITTED] Plants/Branches Regional Plants build to order truck and industrial radiator cores for same day and next day delivery to local radiator shops. These facilities design and manufacture special applications from race cars to oil rigs and ship within 24 hours. Major Plants produce high volume parts at world class quality levels and offer the flexibility to help manage total finished goods inventory. Distribution Centers Distribution Centers maintain an inventory of thousands of different parts, ensuring the availability of a complete line of parts and the highest fill rates in the industry. 11 14 TransPro, Inc. ANNUAL REPORT 1998 [PHOTO OMITTED] 12 15 Financial Information Management's responsibility for financial statements. The consolidated financial statements of TransPro, Inc. and its subsidiaries, and all other information presented herein are the responsibility of the management of the Company. The financial statements have been prepared in accordance with generally accepted accounting principles. Management is responsible for the integrity and objectivity of the financial statements, including estimates and judgments reflected in them. It fulfills this responsibility primarily by establishing and maintaining accounting systems and practices adequately supported by internal accounting controls. These controls include the selection and training of management and supervisory personnel; maintenance of an organizational structure providing for delegation of authority and establishment of responsibilities; communication of requirements for compliance with approved accounting, control and business practices throughout the organization and business planning and review. However, an effective internal control system, no matter how well designed, has inherent limitations - including the possibility of the circumvention or overriding of controls - and, therefore, can provide only reasonable assurance with respect to financial statement preparation and such safeguarding of assets. Further, because of changes in conditions, internal control system effectiveness may vary over time. Management believes the internal accounting controls in use provide reasonable assurance that the Company's assets are safeguarded, that transactions are executed in accordance with management's authorizations, and that the financial records are reliable for the purpose of preparing financial statements. The Audit Committee will recommend the selection of the independent public accountants who are then appointed by the Board of Directors. The independent public accountants are engaged to perform an audit of the consolidated financial statements in accordance with generally accepted auditing standards. Their report appears herein. The Audit Committee of the Board of Directors is comprised entirely of individuals who are not employees of the Company. This Committee meets periodically with management and the independent public accountants to review controls, financial results and audit results. /s/ Hank McHale /s/ Timothy E. Coyne Hank McHale Timothy E. Coyne President and Chief Executive Officer Vice President, Treasurer, Secretary, Controller and Chief Financial Officer 13 16 - -------------------------------------------------------------------------------- Management's Discussion and Analysis - ------------------------------------ of Financial Condition and Results of Operations TransPro, Inc. (the "Company") is a manufacturer and supplier of heat transfer components and systems, replacement automotive air conditioning parts and specialty fabricated metal products for a variety of Aftermarket and OEM automotive, truck and industrial equipment applications, and performs vehicle conversions. Year Ended December 31, 1998 versus Year Ended December 31, 1997 Net sales for 1998 declined 17% to $240.1 million compared with $288.9 million for 1997. This decline reflects the completion in the fourth quarter of 1997 of the Ford Crew Cab/Dual Rear Wheel program and the Ford order to convert vehicles for the U.S. Postal Service (the "Ford Orders"). Excluding the Ford Orders from the 1997 results, sales increased $28.3 million or 13% in 1998. Aftermarket Heating and Cooling Systems sales increased $13.1 million or 9% over 1997 due to unit volume gains in the radiator, heater and condenser product lines, as well as air conditioning parts sales related to the August 1998 acquisition of Evap, Inc. ("Evap"), an aftermarket air conditioning parts supplier. Excluding the Ford Orders, sales in the Specialty Metal Fabrication business increased $14.8 million or 50% over 1997 levels, substantially offsetting the loss of revenue from the Ford order to convert vehicles for the U.S. Postal Service and reflecting the full year effect of the December 1997 acquisition of VMS, a Canadian vehicle converter. OEM Heat Transfer Systems sales increased 1% over 1997. Gross margins of 22.7% in 1998 were lower than the 23.1% achieved in the prior year, reflecting the completion of the Ford Orders. Aftermarket Heating and Cooling Systems margins increased due to cost savings achieved by the move of heater manufacturing to Mexico during 1997, efficiencies resulting from increased volume and lower copper costs, offset by a higher proportion of sales to lower margin customers. Excluding the Ford Orders, margins in the Specialty Metal Fabrication business have increased during the year due to higher vehicle conversion revenues and improved manufacturing efficiencies. These achievements have substantially offset the negative margin impact of the completion of the Ford U.S. Postal Service program in December 1997. Although gross margins for the OEM Heat Transfer Systems business remained negative during 1998, there have been substantial improvements compared with 1997. In 1998, selling, general and administrative expenses ("SG&A") increased 4% to $48.3 million from $46.3 million in 1997. SG&A in the Aftermarket Heating and Cooling Systems business increased by $1.8 million due to higher costs associated with increased volume, and the acquisition of Evap, which added approximately $1.1 million of incremental SG&A cost, partially offset by a reduction in bad debt expense of $0.8 million related to the 1997 bankruptcy filing of a large customer and cost savings related to the consolidation of distribution centers during 1998. SG&A in the Specialty Metal Fabrication business declined $1.2 million due to the closing of the Kentucky facility as a result of the completion of the Ford Crew Cab/Dual Rear Wheel program in December 1997, a one time dividend from the Ohio State Workers Compensation Fund of $0.6 million and the reduction of $1.1 million in certain freight accruals no longer required at the vehicle conversion operation, partially offset by a $0.7 million increase in personnel costs associated with increased volume and the opening of the new facility in Plano, Texas, the settlement of an employment related lawsuit approximating $0.6 million and residual medical costs of $0.2 million related to the 1997 Kentucky facility closing. SG&A in the OEM Heat Transfer Systems business increased $0.4 million due to the full year impact of administrative costs associated with the business move to Jackson Mississippi. Corporate office costs increased $1.0 million due to the recognition of a $0.5 million reserve against a note receivable accepted in a 1994 asset sale transaction, a $0.4 million increase in incentive accruals and the write off of deferred debt costs of $0.1 million due to the renegotiation of the Company's bank credit facility. Net interest expense increased to $3.3 million in 1998 from $3.1 million in 1997 as a result of higher borrowings under the bank credit facility. The Company's effective tax rate of 43.3% is comprised of the U.S. Federal income tax rate plus the estimated aggregate effective rate for state and local income taxes. The rate increased from the 1997 rate of 40.8% principally as a result of higher non-deductible expenses in relation to taxable income in 1998. Net income for 1998 was $1.6 million, or $0.25 per basic common share and $0.24 per diluted common share, compared with $7.9 million, or $1.20 per basic and diluted common share in 1997. Before the net impact of plant closure costs, net income for 1997 was $10.2 million, or $1.55 per basic and diluted common share. Year Ended December 31, 1997 versus Year Ended December 31, 1996 Net sales for 1997 increased 9% to $288.9 million compared with $264.1 million for 1996. Sales of Aftermarket heat transfer products increased $7.4 million or 6%, reflecting a full year's inclusion of replacement automotive air conditioning condenser sales from the August 1996 acquisition of Rahn Industries ("Rahn"), coupled with higher sales of other Aftermarket heat transfer products. Sales of OEM contract fabricated metal products increased $14.6 million or 16%, reflecting the impact of a large van conversion order from Ford Motor Company ("Ford") for the United States Postal Service delivery fleet, slightly higher sales of Crew Cabs and Dual Rear Wheel ("DRW") components to Ford due to higher daily shipment rates in 1997 compared with 1996 and an increase in sales of other OEM contract fabricated metal products, primarily to telecommunications customers. Sales of OEM heat transfer products increased $2.8 million or 8% from the levels of a year ago as a result of higher volume to off highway and specialty vehicle customers. Gross margins of 23.1% in 1997 were lower than the 23.4% achieved in 1996. The OEM heat transfer products business experienced significant negative gross margins in 1997 as a result of continued operating inefficiencies related to the relocation and consolidation of heavy-duty 14 17 - -------------------------------------------------------------------------------- radiator manufacturing operations into the Jackson, Mississippi facility. These operating inefficiencies have exceeded the Company's original estimates and have persisted for a longer period of time than anticipated. As a result, the cost savings goals related to the plant consolidations in the OEM Heat Transfer Systems business were not realized in 1997. In the Aftermarket Heating and Cooling Systems business, margins declined reflecting the impact of price competition which was offset by lower copper costs as well as higher expenses associated with the move of heater production to Mexico and higher repairs and maintenance expenses. Gross margins in the OEM contract fabricated metal products business improved due to the successful fulfillment of the Ford Postal Service order and better manufacturing efficiencies resulting from cost reduction programs coupled with higher overhead absorption related to higher sales of fabricated metal components to telecommunications customers and the additional component production volume for the Ford Postal Service order. SG&A in 1997 increased $5.8 million or 14% over 1996 as a result of increases in Aftermarket Heating and Cooling Systems business, SG&A related to the inclusion of the Rahn business for a full year in 1997 which added approximately $1.1 million of incremental cost, additional warehousing and freight costs of approximately $0.9 million related to higher inventory levels, the cost of additional sales personnel in the industrial core products and national accounts areas which amounted to approximately $0.2 million and incremental expenses of approximately $0.3 million associated with the conversion of several agents to Company branches in certain markets. In addition, the allowance for doubtful accounts in the Aftermarket Heating and Cooling Systems business was increased by approximately $0.8 million as the result of the bankruptcy filing of a large customer. Corporate Office expenses increased as a result of absorbing the carrying costs of approximately $0.3 million for unoccupied manufacturing space in New Haven resulting from the consolidation of heavy duty radiator production into Jackson, Mississippi as well as reflecting an adjustment of approximately $1.1 million to reduce the accrued workers' compensation liability in 1996. The Company recorded $4.0 million in plant and business consolidation and closure costs in 1997, of which $3.2 million was associated with the closing of the Company's Louisville, Kentucky plant as a result of the previously announced loss of the Ford Crew Cab and DRW pickup truck components business. See "End of Crew Cab and Dual Rear Wheel Contract" for a discussion of this matter. In addition, in 1997, the Company recorded $1.3 million of costs related to previously announced consolidation actions of its OEM and Aftermarket businesses which were partially offset by the reversal of employee termination benefits recorded in 1996 of $0.5 million also associated with these consolidation actions. In 1996, the Company recorded costs of $4.4 million associated with the OEM and Aftermarket heat transfer business consolidation actions. Net interest expense increased to $3.1 million in 1997 from $2.9 million in 1996 as a result of higher borrowings under the 1995 Credit Agreement to finance higher inventory levels. The Company's effective tax rate of 40.8% for 1997 is comprised of the U.S. Federal income tax rate plus the estimated aggregate effective rate for state and local income taxes and increased from the 1996 rate of 40.4% principally as a result of higher non-tax deductible expenses in 1997. Net income was $7.9 million or $1.20 per basic and diluted share in 1997 compared with $8.4 million or $1.28 per basic and diluted share in 1996. Before the net impact of plant and business consolidation and closure costs, corresponding net income was $10.2 million or $1.55 per basic and diluted share in 1997 compared with $11.0 million or $1.67 per basic and diluted share in 1996. Financial Condition, Liquidity and Capital Resources In July 1998, the Company entered into a Revolving Credit Agreement with five banking institutions to replace its 1995 Revolving Credit and Term Loan Agreement (the "1995 Credit Agreement") in order to increase the amount of and extend the commitment period for bank financing. The Revolving Credit Agreement provides for secured borrowings or the issuance of letters of credit in an aggregate amount not to exceed $75 million. The Revolving Credit Agreement is secured by a blanket first perfected security interest in substantially all of the Company's assets plus a pledge of the stock of the Company's subsidiaries. The Revolving Credit Agreement expires on July 1, 2003. The security interest in the Company's assets and the pledge of the Company's subsidiaries' stock are eligible for release commencing March 31, 1999 if the Company achieves certain senior debt ratings or if certain financial ratios are met and maintained. Available borrowings under the Revolving Credit Agreement are determined by a borrowing base consisting of the Company's eligible (i) accounts receivable, (ii) inventory and (iii) fixed assets, as adjusted by an advance rate. The aggregate amount of borrowings under the Revolving Credit Agreement is automatically reduced by $0.5 million at the end of each calendar quarter through June 30, 1999; by $1.25 million at the end of each calendar quarter through June 30, 2000; and by $1.5 million at the end of each calendar quarter through June 30, 2003. The Revolving Credit Agreement bears interest at variable rates based, at the Company's option on either (a) a Eurodollar loan rate plus an applicable margin based upon the ratio of the Company's total funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"), or (b) (i) the higher of the BankBoston, N.A. base lending rate and (ii) one-half of one percent above the Federal Funds Effective Rate, as defined, plus an applicable margin based upon the ratio of the Company's total funded debt to EBITDA. A commitment fee of .25% or .375% based upon the ratio of the Company's total funded debt to EBITDA on the average daily unused portion of the Revolving Credit Agreement is payable quarterly, in arrears. The Revolving Credit Agreement contains financial covenants which, among other things, require maintenance of a minimum tangible net worth and debt service coverage and a maximum level of debt to EBITDA and debt to net worth, as well as covenants which place limits on dividend 15 18 Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- payments in excess of $2.0 million per year and capital expenditures in excess of 140% of such year's depreciation expense. Total debt outstanding at December 31, 1998 under the Revolving Credit Agreement was $29.5 million. In addition, the Company has Industrial Revenue Bonds totaling $13 million at December 31, 1998, which are fully secured by letters of credit. In 1998, net borrowings under the Revolving Credit Agreement increased by $4.4 million. During 1997, net borrowings under the 1995 Credit Agreement decreased by $1.2 million. During 1996, net borrowings under the 1995 Credit Agreement declined by $1.8 million and other borrowings declined $0.2 million. During 1998, the Company generated $9.3 million of cash from operations. Net income plus total adjustments to reconcile net income to net cash provided by operating activities, which includes, among other things, depreciation and amortization, resulted in $10.5 million of operating cash flow. Accounts receivable collections and a decline in inventories generated cash of $4.4 million and $1.1 million, respectively. Cash was used to reduce accounts payable and accrued expenses by $4.6. During 1997, the Company generated $10.0 million of cash from operations. Net income plus total adjustments to reconcile net income to net cash provided by operating activities resulted in $18.4 million of operating cash flow. The Company's investment in accounts receivable and inventory required cash of $3.2 million and $5.5 million, respectively. During 1996, the Company generated $14.7 million of cash from operations. Net income plus total adjustments to reconcile net income to net cash provided by operating activities, resulted in $16.1 million of operating cash flow. In addition, cash was generated from the collection of trade accounts receivable of $0.9 million, the repayment of miscellaneous notes receivable of $0.8 million and the return of $0.4 million of federal tax deposits. Cash was used to reduce accounts payable and accrued expenses by $3.3 million. Capital spending totaled $8.6 million, $7.2 million and $5.6 million in 1998, 1997 and 1996, respectively. In 1998, the Company purchased all of the outstanding stock of Evap for approximately $6.0 million, which included an initial cash payment of $3.0 million and the issuance of $3.0 million of TransPro, Inc. Series B Convertible Redeemable Preferred Stock (the "Series B Preferred Stock"). In 1997, the Company acquired substantially all of the assets and assumed certain specified liabilities of Vehicle Management Systems Inc. ("VMS") for approximately $1.0 million, and in 1996, the Company paid $5.5 million for certain assets and liabilities of Rahn. Cash dividends of $1.3 million were paid in 1998, 1997 and 1996. The future liquidity and ordinary capital needs of the Company in the near term are expected to be met from operations. The Company's working capital requirements peak during the second and third quarters, reflecting the normal seasonality of the heat transfer Aftermarket. The Company believes that the Revolving Credit Agreement, along with cash flow from operations, will be adequate to meet near term anticipated ordinary capital expenditure and working capital requirements. However, the capital for major growth initiatives, which may include future acquisitions and related working capital requirements, may exceed the aggregate amount of borrowings available under the Revolving Credit Agreement. If this were to occur, the Company would have to negotiate a new credit facility or seek additional sources of capital. No assurance can be given that the Company would be successful in negotiating a new credit facility or in securing additional sources of capital. Acquisitions Effective August 1, 1998, the Company acquired 100% of the outstanding stock of Evap. Evap is an Arlington, Texas manufacturer and distributor of replacement automotive air conditioning parts. Evap's fiscal 1997 sales were $6.6 million. The transaction was structured with an initial purchase price of $6.0 million, consisting of $3.0 million cash at closing and 30,000 shares of Series B Preferred Stock, with an opportunity for a maximum additional payout of $3.75 million based upon the future earnings performance of the Evap business. Concurrent with the purchase, the Company repaid $1.7 million of working capital debt on behalf of Evap. The Company financed the cash portion of the initial purchase price and the working capital debt repayment with borrowings under the Revolving Credit Agreement. The acquisition was accounted for as a purchase and goodwill of $3.5 million, which is being amortized over 20 years, was recorded as part of the transaction. Evap's results have been included in the consolidated financial statements from the date of acquisition. The Series B Preferred Stock has an initial liquidation preference of $3.0 million. The potential additional payout based on future earnings will take the form of an increase in the liquidation preference of the Series B Preferred Stock. The Series B Preferred Stock is non-transferable; is entitled to cumulative dividends of 2% per annum during the first year after acquisition, 3.5% per annum during the second year and 5.0% per annum thereafter. The Series B Preferred Stock is convertible into TransPro common stock at the rate of 50% on the third anniversary of the acquisition, an additional 25% on the fourth anniversary and the remaining 25% on the fifth anniversary; and is redeemable after the fifth anniversary at the liquidation preference at the time of redemption. The Series B Preferred Stock is convertible into TransPro common stock based upon the liquidation preference and an average market value of TransPro common stock at the time of conversion, as further defined in the purchase agreement. The aggregate number of shares of TransPro common stock to be issued upon conversion of all the Series B Preferred Stock may not exceed 7% of the total number of shares of TransPro common stock outstanding, after giving effect to the conversion. The market value of the TransPro common stock in excess of the 7% limitation, if any, will be paid in cash. In December 1997, the Company acquired substantially all of the assets and assumed certain specified liabilities of VMS for a cash payment of approximately $1.0 million. VMS is located in Ontario, Canada and specializes in utility van conversions. VMS reported fiscal 1997 sales of $1.6 million. The acquisition was accounted for as a purchase and VMS's results have been included in the consolidated financial statements from 16 19 - -------------------------------------------------------------------------------- the date of acquisition. The Company financed the purchase of the VMS assets by borrowings under the 1995 Credit Agreement and recorded $0.4 million of goodwill related to the transaction, which is being amortized over 20 years. In August 1996, the Company acquired substantially all of the assets and assumed certain specified liabilities of Rahn. Rahn is a manufacturer of replacement automotive air conditioner condensers and evaporators for the Aftermarket as well as tube and fin heat exchangers for industrial applications. Rahn reported fiscal 1995 sales of $12.3 million. The acquisition was accounted for as a purchase and Rahn's results have been included in the consolidated financial statements from the date of acquisition. The transaction was structured with an initial purchase price of $5.3 million paid in cash at closing, with an opportunity for a maximum additional payout of $2.5 million based upon the future earnings performance of the Rahn business. The period to measure the future earnings performance of the Rahn business has expired and no additional payout will be made. The initial purchase price was financed by borrowings under the 1995 Credit Agreement. In connection with this transaction, the Company recorded $2.4 million of goodwill, which is being amortized over 20 years. Effective February 1, 1999, the Company purchased 100% of the outstanding stock of A/C Plus, Inc., ("A/C Plus") an air conditioning compressor remanufacturer located in Arlington, Texas. A/C Plus had fiscal 1998 sales of approximately $2.9 million. The transaction was structured with a purchase price of $2.25 million paid in cash at closing and the issuance of a promissory note of $0.25 million payable on the second anniversary of the closing. Concurrent with the purchase, the Company repaid $0.5 million in working capital debt on behalf of A/C Plus. The purchase price and working capital debt repayment were financed through the Revolving Credit Arrangement. The acquisition was accounted for as a purchase. Goodwill of $2.1 million was recorded in connection with the transaction and will be amortized over 20 years. End of Crew Cab and Dual Rear Wheel Contract Until December 1997, the Company's largest customer was Ford. The Company was the exclusive supplier of the cab portion of Ford's Crew Cab pickup truck and the rear fender panel for Ford's DRW pickup truck under a five-year contract that expired on December 31, 1995. The Company's manufacturing facility in Louisville, Kentucky was dedicated solely to the production of Crew Cab and DRW components. During 1997, 1996 and 1995, Ford accounted for approximately 27%, 24% and 38%, respectively, of the Company's net sales and a significantly greater portion of the Company's total 1997, 1996 and 1995 profits as a result of the higher margins and significantly lower selling, distribution and administrative costs associated with the Ford contract compared with the average of the Company's other businesses. In early 1996, Ford notified the Company that it planned to move the production of Crew Cab and DRW components in-house in late 1997. Attempts to develop new business for the Louisville plant were unsuccessful and, accordingly, the Company closed the Louisville plant in December 1997. Impact of the Year 2000 Issue The Year 2000 issue results from computer system software using only two digits rather than four digits to define the applicable year for a transaction. Such software may not recognize a date identified as "00" or may assume the year to be 1900 instead of 2000. On a worst case basis, this may result in system failure or miscalculation causing disruption of operations, including but not limited to, a temporary inability to process transactions, send invoices, generate disbursement checks or engage in similar normal business activities. The Company's Year 2000 initiative consists of (i) performing an inventory of all computer, facility and manufacturing equipment, finished goods and external business partners which may be Year 2000 sensitive; (ii) assessing that inventory for Year 2000 compliance; (iii) developing a plan to remediate or replace non Year 2000 compliant inventory items; and (iv) the implementation of that plan, including remediation, replacement, testing and contingency arrangements, as necessary. The Company has identified an information systems platform which is Year 2000 compliant and to which the majority of current systems employed by the Company will be converted. The conversion project began in 1996 and is expected to be complete by mid-year 1999. Hardware, software and other capitalizable costs will be capitalized and expensed over the useful life of the system. All other project costs will be expensed as incurred. The total cost of the Year 2000 project is currently estimated to be $2.5 million, of which $1.6 million is for capitalizable hardware and software costs. To date, the Company has spent approximately $1.3 million on this project, of which $1.0 million was for capitalizable hardware and software costs. During 1998, the Company initiated formal communications with its information technology hardware and software providers, and all of its significant vendors, service providers, lenders and large customers to determine the extent to which it is vulnerable to the Year 2000 issue externally. The Company believes that with the completion of its Year 2000 initiatives, as scheduled, the possibility of significant interruptions of normal operations should be significantly reduced. However, no assurance can be given that the systems of other companies on which the Company relies will be Year 2000 compliant on a timely basis, that the Year 2000 systems of other companies will be compatible with the Company's system or that external Year 2000 issues would not have a material impact on the Company's operations. On a worst case basis, non-compliance of a significant supplier may result in source of supply issues or inability to order product. The costs of the Year 2000 project and the date on which all of the Company's primary information systems will be converted are based upon management's best estimates given current available information and resource requirements. There can be no assurance, however, that these estimates will be achieved and actual results may differ materially from these expectations. Uncertainties that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to affect the timely conversion of all relevant systems, and other similar factors. 17 20 Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Inflation The overall impact of the low rate of inflation in recent years has resulted in no significant impact on labor costs and general services utilized by the Company. The principal raw materials used in the Company's original equipment and replacement radiator product lines are copper and brass. The principal raw material used in the Company's specialty metal fabrication business product lines is steel. Copper, brass, steel and other primary metals used in the Company's business are generally subject to commodity pricing and variations in the market prices for such materials. Although these materials are available from a number of vendors, the Company has chosen to concentrate its sources with a limited number of long-term suppliers. The Company typically executes purchase orders for its copper and brass requirements approximately three to six months prior to the actual delivery date. The purchase price for such copper, brass and steel is established at the time such orders are placed by the Company and not at the time of delivery. The Company manages its metals commodity pricing by attempting to pass through any cost increases to its customers. Although the Company has been successful in passing through price increases to its customers to offset a portion of past cost increases of copper, brass and steel, there is no assurance that the Company will continue to be successful in raising prices in the future. The Company does not use hedging transactions with respect to its metals consumption. Environmental Matters The Company is subject to Federal, state and local laws designed to protect the environment and believes that, as a general matter, its policies, practices, and procedures are properly designed to reasonably prevent risk of environmental damage and financial liability to the Company. During 1998, the Company was fined approximately $0.1 million in connection with certain pre-treatment water containment violations at its Jackson Mississippi facility. The issues were sufficiently resolved and the fine has been paid. The Company believes it is reasonably possible that environmental related liabilities might exist with respect to an industrial site formerly occupied by the Company. Based upon environmental site assessments, 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. Impact of Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging contracts. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company does not expect the adoption of SFAS No. 133 to have a material impact of its results of operations or financial position. In October 1998 the FASB issued Statement of Financial Accounting Standards No. 134 ("SFAS No. 134"), "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". SFAS No. 134 establishes accounting and reporting standards for certain mortgage banking enterprises and is effective for fiscal quarters beginning after December 15, 1998. The adoption of SFAS No. 134 does not apply to the Company and accordingly will not have an impact on its results of operations or financial position. In February 1999, the FASB issued Statement of Financial Accounting Standards No. 135 ("SFAS No. 135"), "Recission of FASB Statement No. 75 and Technical Corrections". SFAS No. 135 rescinds FASB Statement No. 75 "Deferral of the effective Date of Certain Accounting Requirements for Pension Plans of State and Local Governmental Units" and amends certain related authoritative literature. SFAS No. 135 is effective for fiscal years ending after February 15, 1999. The adoption of SFAS No. 135 does not apply to the Company and accordingly will not have an impact on its results of operations or financial position. Forward-Looking Statements -- Cautionary Factors Statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations, which are not historical in nature, are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements regarding the Company's future business prospects, revenues, orders, sales and liquidity are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from those projected or suggested in the forward-looking statements, including but not limited to: business conditions and growth in the general economy and automotive and truck business, the impact of competitive products and pricing, the financial impact of the loss of the Ford Orders, changes in customer and product mix, failure to obtain new customers, retain existing customers or changes in the financial stability of customers, changes in the cost of raw materials, components or finished products, the effect of the Company's restructuring actions, the potential impact of the year 2000 issue and changes in interest rates. Improvements in manufacturing efficiencies and reduction of costs are subject to a number of factors, including but not limited to, the ability of management to implement improvements in workforce efficiencies and the timing of such improvements. 18 21 - -------------------------------------------------------------------------------- Consolidated Statements - ----------------------- of Income
- ---------------------------------------------------- ---------------------------------- Amounts in Thousands, Except Per Share Amounts Year Ended December 31: 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Sales $ 240,065 $ 288,866 $ 264,095 Cost of sales 185,547 222,182 202,268 - ----------------------------------------------------------------------------------------------- Gross margin 54,518 66,684 61,827 Selling, general, and administrative expenses 48,287 46,278 40,432 Plant & business consolidation & closure costs (Note 4) -- 3,958 4,389 - ----------------------------------------------------------------------------------------------- Income from operations 6,231 16,448 17,006 Interest expense, net (3,326) (3,140) (2,886) - ----------------------------------------------------------------------------------------------- Income before taxes 2,905 13,308 14,120 Provision for income taxes (Note 5) 1,258 5,433 5,700 - ----------------------------------------------------------------------------------------------- Net income $ 1,647 $ 7,875 $ 8,420 - ----------------------------------------------------------------------------------------------- Basic earnings per common share $ 0.25 $ 1.20 $ 1.28 - ----------------------------------------------------------------------------------------------- Diluted earnings per common share $ 0.24 $ 1.20 $ 1.28 - ----------------------------------------------------------------------------------------------- Weighted average common shares -- basic 6,593 6,553 6,554 - ----------------------------------------------------------------------------------------------- Weighted average common shares and equivalents -- diluted 6,804 6,586 6,571 - ----------------------------------------------------------------------------------------------- - ---------------------------------------------------- ----------------------------------
- -------------------------------------------------------------------------------- Consolidated Statements - ----------------------- of Comprehensive Income
- ---------------------------------------------------- ---------------------------------- Amounts in Thousands Year Ended December 31: 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Net income $ 1,647 $ 7,875 $ 8,420 Other comprehensive (loss) income, net of tax: Foreign currency translation 9 (26) (71) Minimum pension liability adjustment (559) (326) 487 - ----------------------------------------------------------------------------------------------- Other comprehensive (loss) income (550) (352) 416 - ----------------------------------------------------------------------------------------------- Comprehensive income $ 1,097 $ 7,523 $ 8,836 - ----------------------------------------------------------------------------------------------- - ---------------------------------------------------- ----------------------------------
The accompanying notes are an integral part of these financial statements. 19 22 - -------------------------------------------------------------------------------- Consolidated Balance Sheets: - ---------------------------- Assets
- ---------------------------------------------------------------------------------------------------- ----------------- Amounts in Thousands December 31: 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Current assets: Cash and cash cash equivalents $ 345 $ 593 Accounts receivable (less allowances of $2,390 and $3,441) 34,173 37,506 Inventories: Raw materials 14,765 15,151 Work in process 7,124 7,632 Finished goods 37,886 35,752 ----------------------------------------------------------------------------------------- Total inventories 59,775 58,535 ----------------------------------------------------------------------------------------- Deferred income taxes (Note 5) 2,641 3,318 Other current assets 3,200 1,984 ----------------------------------------------------------------------------------------- Total current assets 100,134 101,936 - ----------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment: Land and land improvements 808 784 Buildings 17,662 17,087 Machinery and equipment 74,319 65,949 Leasehold improvements 2,124 3,206 ----------------------------------------------------------------------------------------- 94,913 87,026 Less: accumulated depreciation and amortization 55,426 50,274 ----------------------------------------------------------------------------------------- Net property, plant and equipment 39,487 36,752 - ----------------------------------------------------------------------------------------------------------------------------- Goodwill (net of amortization of $348 and $170) 6,093 2,733 Other assets 2,813 3,119 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $148,527 $144,540 - ----------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- -----------------
The accompanying notes are an integral part of these financial statements. TransPro, Inc. ANNUAL REPORT 1998 20 23 - -------------------------------------------------------------------------------- Consolidated Balance Sheets: - ---------------------------- Liabilities & Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------ ---------------- Amounts in Thousands, Except Share and Per Share Amounts December 31: 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Current liabilities: Accounts payable $ 14,797 $ 13,604 Notes payable and current maturities of long-term debt (Note 8) -- 5,000 Accrued insurance 4,404 5,817 Accrued salaries and wages 4,823 4,310 Accrued taxes 541 2,450 Accrued expenses 5,393 7,290 -------------------------------------------------------------------------------------------------- Total current liabilities 29,958 38,471 - ------------------------------------------------------------------------------------------------------------------------------------ Long-term liabilities: Long-term debt (Note 8) 42,197 32,838 Retirement and post retirement obligations 7,482 7,050 Deferred income taxes (Note 5) 973 793 Other liabilities 50 373 -------------------------------------------------------------------------------------------------- Total liabilities 80,660 79,525 - ------------------------------------------------------------------------------------------------------------------------------------ Commitments and contingent liabilities (Note 9) -- -- 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, 1998 (none at December 31, 1997) Series B convertible preferred stock, $.01 par value: -- -- Authorized 30,000 shares; issued and outstanding 30,000 at December 31, 1998 (none at December 31, 1997) Common stock, $.01 par value: 66 66 Authorized 17,500,000 shares at December 31, 1998 and 1997 6,669,445 shares issued (6,683,571 in 1997) 6,597,334 shares outstanding (6,611,460 in 1997) Treasury stock, at cost: (26) (26) 72,111 shares at December 31, 1998 and 1997 Paid-in capital 55,074 52,227 Unearned compensation (113) (369) Retained earnings 14,883 14,584 Accumulated other comprehensive income (2,017) (1,467) -------------------------------------------------------------------------------------------------- Total stockholders' equity 67,867 65,015 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $148,527 $144,540 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ ----------------
The accompanying notes are an integral part of these financial statements. 21 24 - -------------------------------------------------------------------------------- Consolidated Statements - ----------------------- of Cash Flows
- -------------------------------------------------------------------------------------------- -------------------------------- Amounts in Thousands Year Ended December 31: 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 1,647 $ 7,875 $ 8,420 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,782 8,193 7,020 Deferred income taxes 677 (797) (428) Provision for losses-- accounts receivable 1,394 1,790 1,090 Write-off of fixed assets related to plant closure -- 1,379 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total adjustments to reconcile net income to net cash provided by operating activities 8,853 10,565 7,682 Change in operating assets and liabilities, net of acquisitions: Accounts receivable 4,413 (3,217) 919 Inventories 1,068 (5,454) (137) Accounts payable 437 1,397 (1,455) Accrued expenses (5,004) (1,504) (1,813) Other (2,146) 347 1,133 - ------------------------------------------------------------------------------------------------------------------------------------ Total change in operating assets and liabilities, net of acquisitions (1,232) (8,431) (1,353) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 9,268 10,009 14,749 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Capital expenditures (8,582) (7,214) (5,565) Sales and retirements of fixed assets, net 73 318 581 Acquisitions, net of cash acquired (2,764) (967) (5,532) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (11,273) (7,863) (10,516) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Exercise of stock options -- 24 6 Purchase of treasury stock -- (26) -- Dividends paid (1,348) (1,321) (1,319) Borrowings of long-term debt 12,161 3,850 4,450 Repayments of long-term debt and current maturities of long-term debt (9,056) (5,000) (6,450) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 1,757 (2,473) (3,313) - ------------------------------------------------------------------------------------------------------------------------------------ (Decrease) increase in cash and cash equivalents (248) (327) 920 Cash and cash equivalents: Beginning of year 593 920 -- - ------------------------------------------------------------------------------------------------------------------------------------ End of year $ 345 $ 593 $ 920 - ------------------------------------------------------------------------------------------------------------------------------------ Supplemental disclosures of cash flow information: Cash Paid during the year for: Interest $ 3,064 $ 3,209 $ 3,150 Taxes (net of refunds) $ 1,041 $ 5,722 $ 5,270 - ------------------------------------------------------------------------------------------------------------------------------------ Supplemental schedule of non-cash investing and financing activities: The Company acquired Evap, VMS and Rahn in 1998, 1997 and 1996, respectively; the details of which are further described in Note 14. In connection with these transactions, liabilities were assumed and preferred stock issued, as follows: Fair value of assets acquired $ 5,679 $ 1,000 $ 6,692 Cash paid (3,000) (1,000) (5,300) - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities assumed $ 2,675 $ 0 $ 1,392 Preferred stock issued $ 3,000 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ - -------------------------------------------------------------------------------------------- --------------------------------
The accompanying notes are an integral part of these financial statements. 22 25 TransPro, Inc. ANNUAL REPORT 1998 - -------------------------------------------------------------------------------- Consolidated Statements - ----------------------- of Changes In Stockholders' Equity Amounts in Thousands, Except Share and Per Share Amounts Years Ended December 31, 1998, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------------------ Other Total Treasury Compre- Stock- Common Stock Preferred Stock Stock Paid-in Retained Unearned hensive holders' Shares Value Shares Value Value Capital Earnings Comp. Income Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance Dec. 31, 1995 6,617,439 $ 67 -- $-- $ -- $52,445 $ 928 $ (806) $ (1,531) $51,103 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 8,420 8,420 Cash dividends declared ($.20 per share) (1,318) (1,318) Restricted stock issued 9,463 -- 72 (72) -- Restricted stock canceled (36,411) -- (416) 416 -- Stock options exercised 1,344 -- 6 6 Amortization of unearned compensation 65 65 Net change in translation adjustment (71) (71) Net change in adjustment for minimum pension liability 487 487 Other adjustments (1) (46) 51 4 - ------------------------------------------------------------------------------------------------------------------------------------ Balance Dec. 31, 1996 6,591,835 $ 66 -- $-- $ -- $52,061 $ 8,030 $ (346) $(1,115) $58,696 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 7,875 7,875 Cash dividends declared ($0.20 per share) (1,321) (1,321) Treasury stock purchased (2,807) -- (26) (26) Restricted stock issued 18,400 -- 142 (142) -- Stock options exercised 4,032 -- 24 24 Amortization of unearned compensation 99 99 Net change in translation adjustment (26) (26) Net change in adjustment for minimum pension liability (326) (326) Other adjustments 20 20 - ------------------------------------------------------------------------------------------------------------------------------------ Balance Dec. 31, 1997 6,611,460 $ 66 $ -- $-- $ (26) $52,227 $14,584 $ (369) $(1,467) $65,015 - ------------------------------------------------------------------------------------------------------------------------------------ Net Income 1,647 1,647 Issuance of preferred stock related to an acquisition 30,000 3,000 3,000 Cash dividends declared ($.20 per share) (1,348) (1,348) Restricted stock issued 4,800 37 (37) -- Restricted stock canceled (18,926) (190) 190 -- Amortization of unearned compensation 103 103 Net change in translation adjustment 9 9 Net change in minimum adjustment for pension liability (559) (559) - ------------------------------------------------------------------------------------------------------------------------------------ Balance Dec. 31,1998 6,597,334 $ 66 30,000 $-- $ (26) $55,074 $14,883 $ (113) $(2,017) $67,867 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 23 26 TransPro, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 The Company TransPro, Inc. (the "Company") is a manufacturer and supplier of heat transfer components and systems, replacement automotive air conditioning parts and specialty fabricated metal products for a variety of Aftermarket and OEM automotive, truck and industrial equipment applications, and performs vehicle conversions. Note 2 Summary of Significant Accounting Policies Basis of Consolidation: The Company's consolidated financial statements include the accounts of all subsidiaries. Intercompany balances and transactions have been eliminated. 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. Inventories: Inventories are valued at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment: Property, plant and equipment is recorded at cost. Ordinary maintenance and repairs are expensed; replacements and betterments are capitalized. Land improvements, buildings and machinery are depreciated over their estimated useful lives under the straight-line method. Estimated useful lives for buildings are 40 years and for machinery and equipment are between 3 and 7 years. The provision for amortization of leasehold improvements is based on the lease term or the estimated useful lives of the improvements, 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 income. Goodwill: Goodwill represents the excess of cost over the fair value of assets acquired and is being amortized using the straight-line method over 20 years. The Company periodically estimates the future undiscounted cash flows of the businesses to which goodwill relates to ensure that the carrying value of such goodwill has not been impaired. The Company's existing goodwill relates to the acquisition of Evap in 1998, VMS in 1997 and Rahn in 1996 (see note 14). Impairment of Long-Lived Assets: The Company, in the event circumstances arise that indicate that its fixed assets may be impaired, would perform an evaluation of recoverability of the assets in accordance with Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The assets' carrying value would be compared to the estimated future undiscounted cash flows of the assets to determine if a writedown is required. There were no impaired long-lived assets at December 31, 1998. Foreign Currency Translation: Assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at the current rate of exchange, while revenues and expenses are translated at the average exchange rate during the year. The functional currency of the Company's manufacturing operations in Mexico is the U.S. dollar and therefore any adjustments related to currency translations are included in results from operations. The Securities and Exchange Commission has deemed that Mexico ceased to be a highly inflationary economy, effective for quarters beginning after January 1, 1999. As the Company currently uses the U.S. dollar as its functional currency, there will be no material impact on the financial position of the company. Adjustments from translating other foreign subsidiaries' financial statements are excluded from the results of operations and are reported as a separate component of stockholders' equity. Revenue Recognition: The Company recognizes revenues from product sales upon shipment to its customers. Research and Development: Research and development costs are charged to income as incurred. Financial Instruments: The Company was a party to an interest rate swap agreement which expired on December 29, 1997 involving the exchange of fixed and floating rate interest payments. The difference to be paid or received was accrued as interest rates changed and was recognized over the life of the agreement as an adjustment to interest expense. Income Taxes: The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS No.109"), "Accounting for Income Taxes," under which deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end. Earnings Per Share: Earnings per share are computed in accordance with the provisions of Statement of Financial Accounting Standards No.128 ("SFAS No.128"), "Earnings Per Share", whereby net earnings are divided by the weighted average number of shares of common stock outstanding less shares of non-vested restricted stock to arrive at basic earnings per share. The dilutive impact of stock options and restricted stock grants are included in the weighted average number of shares of common stock and equivalents outstanding to arrive at diluted earnings per common share. Other Comprehensive Income: The Company has reported other comprehensive income in accordance with the provisions of Statement of Financial Accounting Standards No.130 ("SFAS No.130"), "Reporting Comprehensive Income." Other comprehensive income represents the change in the equity of the business from non-owner sources and is presented in a separate financial statement. Segment Information: The Company has reported segment information in accordance with Statement of Financial Accounting Standards No.131 ("SFAS No.131"), "Disclosures about Segments of an Enterprise and Related Information," which supersedes Statement of Financial Accounting Standards No.14, "Financial Reporting Segments of a Business Enterprise." SFAS No.131 requires disclosure of financial data based on the "management approach" to business decision making. The management approach is based on internal information used for making operating decisions and assessing the performance of the Company's reportable segments. SFAS No.131 also requires disclosures regarding products and services. The adoption of SFAS No.131 did not affect results of operations or TransPro, Inc. ANNUAL REPORT 1998 24 27 financial position of the Company, but did affect the disclosure of segment information. Use of Estimates: The preparation of the consolidated financial statements in conformity with generally accepted accounting principles 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 items in prior years have been reclassified due to current year disclosures. Note 3 Segment and Business Information In 1998, the Company adopted SFAS No.131. Prior year segment information has been restated to present the Company's three reportable segments -- Aftermarket Heating and Cooling Systems, Original Equipment Manufacturing ("OEM") Heat Transfer Systems and Specialty Metal Fabrication. Aftermarket Heating and Cooling Systems product lines include complete radiators and radiator cores, heaters, air conditioning condensers and other air conditioning parts. The OEM Heat Transfer Systems business provides manufactures specialized heavy-duty equipment radiators, charge air coolers and oil coolers. Specialty Metal Fabrication products and services include fabrication of metal racking, enclosures and cabinetry and the fabrication and installation of customized van interiors vehicle conversion components. The accounting policies of the segments are the same as those described in Note 2, with the exception of the following: Intercompany sales: Segment data includes inter-segment sales, at cost plus a standard intercompany markup. Intercompany sales from Aftermarket Heating and Cooling Systems and OEM Heat Transfer Systems for 1996 were not readily available. Allocations: Certain other expenses are allocated between segments based on their respective use of shared facilities and resources, such as information technology, human resources and finance and accounting functions. The Company evaluates the performance of its segments and allocates resources accordingly based on earnings before interest and taxes. The tables below set forth information about reported segments for the years ended December 31:
- ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Revenues Earnings Before Interest and Taxes from External Customers Amounts in Thousands 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Business Segment Aftermarket Heating and Cooling Systems $ 156,335 $ 143,273 $ 135,841 $ 9,944 $ 6,299 $ 5,670 OEM Heat Transfer Systems 39,257 38,864 36,110 (1,955) (4,629) (5,876) Specialty Metal Fabrication 44,473 106,729 92,144 3,693 19,206 14,326 Inter-segment Revenues: Aftermarket Heating and Cooling Systems 3,678 3,443 -- -- -- -- OEM Heat Transfer Systems 112 543 3,719 -- -- -- Elimination of inter-segment sales (3,790) (3,986) (3,719) -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Segment totals 240,065 288,866 264,095 11,682 20,876 19,680 Corporate expenses -- -- -- (5,451) (4,428) (2,680) - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Totals $ 240,065 $ 288,866 $ 264,095 $ 6,231 $ 16,448 $ 17,006 - ----------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------- --------------------------------------- ------------------------------
- ------------------------------------------------------------------------------------------------------------------------------- Total Assets by Segment Capital Expenditures Depreciation Expense Amounts in Thousands 1998 1997 1996 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Aftermarket Heating and Cooling Systems $ 97,336 $ 89,023 $ 82,175 $ 4,412 $ 3,216 $ 2,098 $ 3,801 $ 3,302 $ 2,936 OEM Heat Transfer Systems 18,144 18,831 18,506 1,756 1,900 1,716 1,260 1,265 1,228 Specialty Metal Fabrication 24,882 27,190 29,944 2,365 2,098 1,632 1,315 1,883 1,731 - ------------------------------------------------------------------------------------------------------------------------------- Segment Totals 140,362 135,044 130,625 8,533 7,401 5,446 6,376 6,450 5,895 Corporate 8,165 9,498 9,641 49 -- 119 181 177 16 - ------------------------------------------------------------------------------------------------------------------------------- Consolidated Totals $148,527 $144,540 $140,266 $ 8,582 $ 7,214 $ 5,565 $ 6,557 $ 6,627 $ 5,911 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------- ---------------------------- ---------------------- ----------------------
25 28
- ------------------------------------------------------ --------------------- Business consolidation and closure costs included in earnings before interest and taxes for the years ended December 31, are as follows: Amounts in Thousands 1998 1997 1996 - -------------------------------------------------------------------------------- Business Segment Aftermarket Heating and Cooling Systems $-- $ 336 $ 511 OEM Heat Transfer Systems -- 422 3,878 Specialty Metal Fabrication -- 3,200 -- - -------------------------------------------------------------------------------- Totals $-- $3,958 $4,389 - -------------------------------------------------------------------------------- - ------------------------------------------------------ ---------------------
In 1998 Autozone accounted for 11% of net sales and comprised 29% of total accounts receivable at December 31, 1998. These sales were all in the Aftermarket Heating and Cooling Systems segment. During 1997 and 1996, Ford accounted for approximately 27% and 24%, respectively, of the Company's net sales. In 1998, 1997 and 1996, the Company had no other customers who individually accounted for greater than 10% of the Company's net sales. Export sales from North America were below 10% in each of the years reported. During 1998, the Company's facility in Mexico, which has had no sales in Mexico and its vehicle conversion facility in Canada with had sales of $1.4 million in Canada. All other sales were based in the U.S. Substantially all assets of the Company are located in the U.S. Note 4 Plant and Business Consolidation and Closure Costs In 1997 the Company recorded approximately $4.0 million of plant and business consolidation and closure costs. Of this amount, approximately $3.2 million related to expenses in connection with the closing of the Company's Louisville, Kentucky plant as a result of Ford's decision to move the production of Crew Cab and DRW components in-house in late 1997. These costs included approximately $1.5 million of severance and other employee termination costs for the nearly 200 employees at the Louisville plant and approximately $1.7 million for facility lease cancellation penalties and the abandonment of the fixed assets utilized at the plant. In addition, the Company recorded $1.3 million in plant and business consolidation and closure costs related to the consolidation of the OEM and Aftermarket heat transfer organizations; the closing of the New Haven, Connecticut OEM heat transfer product manufacturing plant and move such manufacturing to Jackson, Mississippi; and the closing of the Peru, Illinois Aftermarket manufacturing operations and movement of such manufacturing operations to Mexico. These charges were offset by the reversal of previously recorded employee termination benefits of $0.5 million related to the transfer of manufacturing operations to Jackson, Mississippi and Mexico. At December 31, 1997, approximately $0.4 million remained on the balance sheet related to employee termination costs and facility lease cancellation penalties for the closing of the Company's Louisville, Kentucky plant, all of which were paid in 1998. The Company recorded approximately $4.4 million in plant and business consolidation and closure costs in 1996 resulting from the actions to consolidate the OEM and Aftermarket heat transfer organizations, close the New Haven, Connecticut and Peru, Illinois manufacturing plants and to relocate these manufacturing operations to Jackson, Mississippi and Mexico, respectively. Note 5 Income Taxes
- ------------------------------------------ ----------------------------- Information with respect to income taxes is as follows: Amounts in Thousands Year Ended December 31: 1998 1997 1996 - -------------------------------------------------------------------------------- Current: Federal $ 83 $ 4,929 $ 4,950 Foreign 123 -- -- State and local (7) 1,301 1,178 ------------------------------------- 199 6,230 6,128 - -------------------------------------------------------------------------------- Deferred: Federal 804 (630) (346) State and local 255 (167) (82) ------------------------------------- 1,059 (797) (428) ------------------------------------- Provision for income taxes $ 1,258 $ 5,433 $ 5,700 - -------------------------------------------------------------------------------- - ------------------------------------------ -----------------------------
- ----------------------------------------------------------------------------------------------------- A reconciliation of the provision for income taxes at the Federal statutory rate of 35% in 1998 and 34% in 1997 and 1996, to the reported tax provisions is as follows: Amounts in Thousands 1998 1997 1996 - ----------------------------------------------------------------------------------------------------- Provision computed at the Federal statutory rate $1,017 $4,657 $4,942 State and local income taxes, net of Federal income tax benefit 161 738 713 Other 80 38 45 ---------------------------------- $1,258 $5,433 $5,700 - ----------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------- --------------------------
TransPro, Inc. ANNUAL REPORT 1998 26 29
- ---------------------------------------------------------------------------------------------- Significant components of deferred income tax assets and liabilities as of December 31, are as follows: Amounts in Thousands 1998 1997 - ---------------------------------------------------------------------------------------------- Deferred tax assets: Inventories $ 469 $ 354 Pensions and deferred compensation 2,691 2,310 Post retirement benefits 524 588 Allowance for bad debts 432 200 Self insurance reserves 823 1,395 Warranty reserves 338 648 Accrued vacation 355 361 Other 477 459 - ---------------------------------------------------------------------------------------------- Total deferred tax assets 6,109 6,315 - ---------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation (2,470) (2,312) Investment in joint venture (1,425) (902) Deferred charges (457) (477) Other (89) (97) - ---------------------------------------------------------------------------------------------- Total deferred tax liabilities (4,441) (3,788) - ---------------------------------------------------------------------------------------------- Net deferred tax assets $ 1,668 $ 2,527 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------- ----------------
The earnings of certain foreign subsidiaries are considered permanently reinvested in the foreign operations and therefore no provision has been made for U.S. taxes related to these subsidiaries. Note 6 Earnings Per Share
- -------------------------------------------------------------------------------------------------------------------------- The following table sets forth the computation of basic and diluted earnings per common share: Amounts in Thousands, Except Per Share Amounts 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- Numerator: Net income $ 1,647 $ 7,875 $ 8,420 Preferred dividends added: 25 -- -- - -------------------------------------------------------------------------------------------------------------------------- Denominator: $ 1,672 $ 7,875 $ 8,420 Weighted average common shares 6,615 6,604 6,596 Non-vested restricted stock (22) (51) (42) ------------------------------------------------------------------------------------------------- Denominator for basic earnings per common share - weighted average common shares 6,593 6,553 6,554 Dilutive effect of stock options and restricted stock 4 33 17 ------------------------------------------------------------------------------------------------- Diluted effect of series B preferred stock 207 -- -- ------------------------------------------------------------------------------------------------- Denominator for diluted earnings per common share - weighted average common shares and equivalents 6,804 6,586 6,571 Basic earnings per common share $ .25 $ 1.20 $ 1.28 - -------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $ .24 $ 1.20 $ 1.28 - -------------------------------------------------------------------------------------------------------------------------- There were outstanding options to purchase common stock excluded from the diluted calculation because their price exceeded the average market price of TransPro common stock during the respective earnings periods. The shares excluded and average market value were as follows: - -------------------------------------------------------------------------------------------------------------------------- Options 362 15 80 Average market value $ 7.39 $ 9.16 $ 8.44 - -------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------ -------------------------------
27 30 Note 7 Fair Values of Financial Instruments Financial Accounting Standards Board ("FASB") Statements of Financial Accounting Standards No.107, "Disclosure about Fair Value of Financial Instruments" and No.119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," are part of a continuing process by the FASB to improve information regarding financial instruments. The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instruments: Cash and Cash Equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Current Maturities of Long-Term Debt: The carrying amounts are a reasonable approximation of fair value due to the short-term maturity of these instruments. Long-Term Debt: The carrying amounts of the Company's long-term debt either approximate fair value or are estimated using discounted cash flow analysis based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Letters of Credit: The Company utilizes letters of credit to back its industrial revenue bonds, certain insurance policies and certain trade purchases, which totaled $13.4 million, $4.1 million and $1.3 million, respectively at December 31, 1998. The letters of credit reflect fair value as a condition of their underlying purpose. Concentration of Credit Risk: The Company is subject to a concentration of credit risk primarily with its trade and notes receivable. The Company grants credit to certain customers who meet pre-established credit requirements, and generally requires no collateral from its customers. Estimates of potential credit losses are provided for in the Company's consolidated financial statements and are within management's expectations and industry averages. As of December 31, 1998 the Company had no other significant concentrations of credit risk.
- ----------------------------------------------------------------------------------------- The carrying amounts and fair values of the Company's financial instruments at December 31, 1998 and 1997, are as follows: Amounts in Thousands Carrying Amount Fair Value - ----------------------------------------------------------------------------------------- 1998 Long-term debt $42,197 $42,197 Off balance sheet financial instruments: letters of credit 18,849 18,849 1997 Current maturities of long-term debt $ 5,000 $ 5,000 Long-term debt 32,838 32,838 Off balance sheet financial instruments: letters of credit 18,861 18,861 - -----------------------------------------------------------------------------------------
Note 8 Debt In July 1998, the Company entered into a Revolving Credit Agreement with five banking institutions to replace its 1995 Revolving Credit and Term Loan Agreement in order to increase the amount of and extend the commitment period for bank financing. The Revolving Credit Agreement provides for secured borrowings or the issuance of letters of credit in an aggregate amount not to exceed $75 million. The Revolving Credit Agreement is secured by a blanket first perfected security interest in substantially all of the Company's assets plus a pledge of the stock of the Company's subsidiaries. The Revolving Credit Agreement expires on July 1, 2003. The security interest in the Company's assets and the pledge of the Company's subsidiaries' stock are eligible for release commencing March 31, 1999 if the Company achieves certain senior debt ratings or if certain financial ratios are met and maintained. Available borrowings under the Revolving Credit Agreement are determined by a borrowing base consisting of the Company's eligible (i) accounts receivable, (ii) inventories and (iii) fixed assets, as adjusted by an advance rate. The aggregate amount of borrowings under the Revolving Credit Agreement is automatically reduced by $0.5 million at the end of each calendar quarter through June 30, 1999; by $1.25 million at the end of each calendar quarter through June 30, 2000; and by $1.5 million at the end of each calendar quarter through June 30, 2003. The Revolving Credit Agreement bears interest at variable rates based, at the Company's option on either (a) a Eurodollar loan rate plus an applicable margin based upon the ratio of the Company's total funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"), or (b) (i) the higher of the BankBoston, N.A. base lending rate and (ii) one-half of one percent above the Federal Funds Effective Rate, as defined, plus an applicable margin based upon the ratio of the Company's total funded debt to EBITDA. A commitment fee of .25% or .375% based upon the ratio of the Company's total funded debt to EBITDA on the average daily unused portion of the Revolving Credit Agreement is payable quarterly, in arrears. The Revolving Credit Agreement contains financial covenants which, among other things, require maintenance of a minimum tangible net worth and debt service coverage and a maximum level of debt to EBITDA and debt to net worth, as well as covenants which place limits on dividend payments in excess of $2.0 million per year and capital expenditures in excess of 140% of such year's depreciation expense. TransPro, Inc. ANNUAL REPORT 1998 28 31
- ---------------------------------------------------------- ------------- Long-term debt consisted of the following at December 31: Amounts in Thousands 1998 1997 - -------------------------------------------------------------------------------- Revolver $ 29,499 $ 11,500 Term loan -- 13,750 Industrial revenue bonds: floating rate bond due 2010 8,000 8,000 Floating rate bond due 2013 5,000 5,000 Unamortized debt expense (302) (412) 42,197 37,838 Less current maturities -- 5,000 - -------------------------------------------------------------------------------- Total long-term debt $ 42,197 $ 32,838 - -------------------------------------------------------------------------------- - ---------------------------------------------------------- -------------
Total debt outstanding at December 31, 1998 under the Revolving Credit Agreement was $29.5 million. In addition, the Company has Industrial Revenue Bonds totaling $13 million at December 31, 1998, which are fully secured by letters of credit. The floating rate industrial revenue bonds are fully secured by letter of credit and bear interest at a rate based on a short-term tax-exempt bonds index, as defined in the bonds, and which approximated 3.60% at December 31, 1998 and 3.86% at December 31, 1997. The average interest rate for all industrial revenue borrowings approximated 3.66% during 1998 and 3.82% during 1997. Long-term debt (excluding the unamortized debt expense) at December 31, 1998 matures after 2002. Note 9 Commitments and Contingencies Leases: The Company's leases consist primarily of manufacturing and distribution facilities and equipment and expire principally between 1999 and 2002. A number of leases require that the Company pay certain executory costs (taxes, insurance, and maintenance) and contain renewal and purchase options. Annual rental expense for operating leases approximated $4,731,000 in 1998, $3,749,000 in 1997 and $3,907,000 in 1996. Future minimum payments under noncancelable operating leases as of December 31, 1998 were as follows:
- -------------------------------------------------------------------------------- Amounts in Thousands - -------------------------------------------------------------------------------- 1999 $ 4,870 2000 3,964 2001 1,802 2002 1,011 2003 277 - -------------------------------------------------------------------------------- Total $11,924 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Insurance: The Company is self-insured for health care, workers compensation, general liability and product liability up to predetermined amounts above which third party insurance applies. The Company is contingently liable to insurance carriers under its workers compensation and liability policies and has reserved approximately $3.1 million to pay such claims. Legal Proceedings: Various legal actions are pending against or involve the Company with respect to such matters as product liability, casualty and employment related claims including one potential claim under the Americans with Disabilities Act. In the opinion of management, after review and consultation with counsel, the aggregate liability, if any, that ultimately may be incurred in excess of amounts already provided should not have a material adverse effect on the consolidated financial position, results of operations, or liquidity of the Company. Severance Agreements: The Company has a Key Employee Severance Policy and has entered into severance agreements with senior key employees in order to provide financial assistance if employment with the Company is terminated under the circumstances 29 32 set forth in the policy and the agreements. The policy and agreements provide for formalized severance benefits in the event of non-voluntary termination. Environmental Matters: The Company is subject to Federal, state and local laws designed to protect the environment and believes that, as a general matter, its policies, practices and procedures are properly designed to reasonably prevent risk of environmental damage and financial liability to the Company. The Company believes it is reasonably possible that environmental related liabilities may exist with respect to one industrial site formerly occupied by the Company. Based upon environmental site assessments, 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. Collective Bargaining Agreements: The Company had 2,367 employees at December 31, 1998. Of these employees, 1,268 were covered by collective bargaining agreements, which expire at different times. The Company has successfully renegotiated 7 collective bargaining agreements over the last several years and feels labor relations are good, but there can be no assurance that work stoppages will not occur in the future. Note 10 Stock Compensation Plans Stock Options At December 31, 1998, the Company had two stock option plans under which key employees and directors have options to purchase TransPro Common Stock. Under the 1995 Stock Plan (the "Stock Plan") options are granted at fair market value on the date of grant and are exercisable cumulatively at the rate of 50% two years from the date of grant, 75% three years from the date of grant, and 100% four years from the date of grant. Options granted under the Stock Plan expire 10 years from the date of the grant. Awards of restricted stock may also be granted to key employees under the Stock Plan and may be issued in addition to, or in lieu of stock options. The total number of shares of Common Stock with respect to which stock options may be granted and restricted shares may be awarded under the Stock Plan shall not exceed 600,000. At December 31, 1998 and 1997, 495,052 and 461,429 common shares, respectively, were reserved for stock options and restricted shares granted under the Stock Plan. The weighted average remaining contractual life on outstanding stock options was 7.3 years and 6.3 years at December 31, 1998 and 1997 respectively. The Directors Stock Option Plan (the "Directors Plan") provides for the purchase price per share of Common Stock for which each option is exercisable to be equal to 100% of the fair market value of the Common Stock covered thereby on the date of grant. Subject to certain acceleration provisions, each option granted under the Directors Plan will be exercisable 50% after two years from the date of grant, 75% after three years from the date of grant and 100% after four years from the date of grant. Options granted under the Directors Plan expire 10 years from the date of grant. The total number of shares of Common Stock with respect to which options may be granted under the Directors Plan may not exceed 100,000 shares. At December 31, 1998 and 1997, 43,600 Common Shares were reserved for future grants of stock options under the Directors Plan. The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized in the financial statements. Had compensation cost for the Company's plans been determined based on the fair value at the grant dates for awards under the plans consistent with Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
- ------------------------------------------ ------------------------------- Amounts in Thousands, Except Per Share Amounts 1998 1997 1996 - -------------------------------------------------------------------------------- Net Income As reported $ 1,647 $ 7,875 $ 8,420 Pro forma 1,484 7,590 8,136 Basic earnings As reported $ 0.25 $ 1.20 $ 1.28 Per common share Pro forma $ 0.22 $ 1.16 $ 1.24 Diluted earnings As reported $ 0.24 $ 1.20 $ 1.28 - -------------------------------------------------------------------------------- - ------------------------------------------ -------------------------------
- -------------------------------------------------------------------------------- The fair value of each option grant is estimated for the above disclosure on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1998 1997 1996 - -------------------------------------------------------------------------------- Dividend yield 2.20% 2.20% 2.20% Expected volatility 48.77% 30.20% 31.10% Risk-free interest rate 4.80% 6.69% 5.88% Expected life 6 Years 6 Years 6 Years - -------------------------------------------------------------------------------- - ------------------------------------------- ------------------------------
TransPro, Inc. ANNUAL REPORT 1998 30 33 Information regarding the Stock Plan and the Directors Plan is as follows:
- ---------------------------------------------------------------------------------------- Option Price Range ------------------------------------- Number of Weighted Stock Plan Options Low Average High - ---------------------------------------------------------------------------------------- Outstanding at December 31, 1996 315,592 $ 3.720 $ 8.137 $ 11.750 Granted 95,400 $ 7.750 $ 7.750 $ 7.750 Exercised (4032) $ 5.880 $ 5.880 $ 5.880 Canceled (14,193) $ 6.240 $ 7.900 $ 8.600 - ---------------------------------------------------------------------------------------- Outstanding at December 31, 1997 392,767 $ 3.720 $ 7.970 $ 11.750 Granted 112,100 $ 5.875 $ 6.2948 $ 7.750 Exercised -- -- -- -- Forfeited -- -- -- -- Canceled (64,352) $ 6.24 $ 7.909 $ 11.750 - ---------------------------------------------------------------------------------------- Outstanding at December 31, 1998 440,515 $ 3.72 $ 7.644 $ 11.750 - ---------------------------------------------------------------------------------------- Exercisable at December 31, 1998 173,169 $ 3.72 $ 8.246 $ 11.750 - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Option Price Range ------------------------------------- Number of Weighted Directors Plan Options Low Average High - ---------------------------------------------------------------------------------------- Outstanding at December 31, 1996 45,700 $ 8.375 $10.156 $11.750 Granted 10,700 $ 7.750 $ 7.750 $ 7.750 - ---------------------------------------------------------------------------------------- Outstanding at December 31, 1997 56,400 $ 7.750 $ 9.700 $11.750 Granted -- -- -- -- - ---------------------------------------------------------------------------------------- Outstanding at December 31, 1998 56,400 $ 7.750 $ 9.700 $11.750 - ---------------------------------------------------------------------------------------- Exercisable at December 31, 1998 31,600 $ 8.375 $ 9.699 $11.750 - ---------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------
Restricted Stock Restricted stock awarded in 1998 and 1997 vests four years from the date of the award. Unearned compensation, representing the fair value of the restricted shares at the date of the award, is charged to income over a four year period beginning when the stock is issued, or over the period of actual vesting of such shares, whichever period is shorter. Compensation expense with respect to all restricted shares amounted to $83,000 in 1998, $99,000 in 1997, and $73,000 in 1996.
- -------------------------------------------------------------------------------- Restricted Stock Awards - -------------------------------------------------------------------------------- Outstanding at December 31, 1996 42,235 Awarded 18,400 Vested (10,049) - -------------------------------------------------------------------------------- Outstanding at December 31, 1997 50,586 Awarded 4,800 Vested (12,435) Canceled (18,926) - -------------------------------------------------------------------------------- Outstanding at December 31, 1998 24,025 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
31 34 Note 11 Stockholder Rights Plan On September 14, 1995, the Board of Directors adopted a stockholder rights plan (the "Rights Plan"), under which one Right was issued and distributed for each share of Common Stock. The Rights Plan is intended to protect shareholders against unsolicited attempts to acquire control of the Company that do not offer what the Company believes to be an adequate price to all shareholders. Each Right will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Preferred Stock at a price of $60.00 per one one-hundredth of a share of Series A Preferred Stock subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement between the Company and The First National Bank of Boston, as Rights Agent. The Rights will become exercisable only if a person or group acquires or obtains the right to acquire beneficial ownership of 20% or more of the outstanding shares of Common Stock (an "Acquiring Person") or 10 days (or such later date as the Company's Board of Directors may determine) following the commencement by a person or group of a tender or exchange offer which would result in such person or group becoming an Acquiring Person. The earlier of such dates is called the "Rights Distribution Date." Until the Rights Distribution Date, the Rights will be evidenced by the certificates for shares of Common Stock. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights that are or were owned beneficially by the Acquiring Person (which, from and after the later of the Rights Distribution Date and the date of the earliest of any such events, will be void), will thereafter have the right to receive, upon exercise thereof at the then current exercise price of the Right, that number of shares of Common Stock having a market value of two times the exercise price of the Right. Note 12 Retirement & Post Retirement Plans Retirement Plans: The Company has noncontributory defined benefit pension plans covering the majority of its full-time U.S. employees. Non-Union employees at the Company's GDI operations are covered by a cash balance defined benefit plan. The Company maintains a nonqualified retirement plan to supplement benefits for designated employees whose pension plan benefits are limited by the provisions of the Internal Revenue Code. It is the Company's policy to make contributions to qualified retirement plans sufficient to meet the minimum funding requirements of applicable laws and regulations. The assets of the plans consist principally of equity securities, fixed income instruments and investment contracts with insurance companies. The Company has recorded an additional minimum liability at the end of each year representing the excess of the accumulated benefit obligations over the fair value of plan assets and accrued pension liabilities. To the extent possible, intangible assets representing unrecognized prior service costs have offset the liabilities. The balance of the liability at the end of the period is reported as a separate reduction of stockholders' equity, net of tax benefits. During 1998, the Company purchased participating annuity contracts for certain plan participants for the payment of future benefits. The Company remains subject to any of the significant risks and rewards associated with the benefit obligations on these contracts. In 1998, 1997, and 1996, GDI contributed $13,000, $22,000 and $141,000 respectively, to multi-employer pension plans covering certain union employees based on a stated amount per hour. These contributions are deposited directly to the trustee and are not included in the net periodic pension cost amounts presented in the tables that follow. The Louisville, Kentucky manufacturing facility, which was dedicated solely to the production of Crew Cab and DRW components for Ford, was closed in late 1997. There were no pension curtailment losses associated with this closing nor were any costs incurred related to the termination of benefits. The settlement resulting from the partial plan termination totaled $0.1 million and were paid out in 1998, and had no material impact on the Company's results. In 1996, the Company closed its G&O New Haven, Connecticut manufacturing operation and moved the work to G&O's manufacturing operation in Jackson, Mississippi. As a result of this action, $0.3 million of pension curtailment losses and costs for the termination of benefits were recorded in 1996. This amount was recorded as part of the 1996 plant and business consolidation costs and is not included in the 1996 amounts in the tables that follow. Post Retirement Plans: The Company accounts for the cost of its post-retirement health care and life insurance benefits in accordance with Statement of Financial Accounting Standards No.106 ("SFAS No.106"), "Employers' Accounting for Post-retirement Benefits Other Than Pensions," which requires that the Company accrue for such post-retirement benefits based on actuarially determined costs recognized over the period from the date of hire to the full eligibility date of employees who are expected to qualify for these benefits. The Company provides health care and life insurance benefits for certain retired employees who reach retirement age while working for the Company. The following tables' sets forth the Company's plans' combined funded status and amounts recognized in the Company's consolidated balance sheet: TransPro, Inc. ANNUAL REPORT 1998 32 35
- -------------------------------------------------------------------------------------------------------------------- Amounts in Thousands Retirement Plans Post Retirement Plans Year Ended December 31: 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation at January 1 $ 29,021 $ 26,277 $ 1,171 $ 1,221 Plan amendment -- 57 -- -- Service cost 1,067 1,025 16 27 Interest cost 1,981 1,916 65 85 Plan participants' contribution -- -- 15 15 Actuarial loss (gain) 2,844 1,599 (195) 35 Liability for participating annuity contracts (1,960) -- -- -- Actual gross benefits paid (2,530) (1,853) (121) (212) - -------------------------------------------------------------------------------------------------------------------- Benefit obligation at December 31 $ 30,423 $ 29,021 $ 951 $ 1,171 - -------------------------------------------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets at January 1 $ 25,685 $ 22,901 $-- $-- Actual return of plan assets 3,381 3,701 -- -- Company contribution 1,019 936 106 197 Plan participant contribution -- -- 15 15 Purchase of participating annuity contracts (1,261) -- Actual gross benefits paid (2,530) (1,853) (121) (212) - -------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at December 31 $ 26,294 $ 25,685 $-- $-- - -------------------------------------------------------------------------------------------------------------------- Reconciliation of funded status Funded status at December 1 $ (4,129) $ (3,336) (951) (1,171) Unrecognized transition (asset) (149) (201) -- -- Unrecognized prior service cost 847 1,029 -- -- Unrecognized net loss (gain) 69 (693) (344) (220) - -------------------------------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ (3,362) $ (3,201) $ (1,295) $ (1,391) - -------------------------------------------------------------------------------------------------------------------- Amounts recognized in statement of financial position Accrued benefit liability $ (7,271) $ (6,395) $ (1,295) $ (1,391) Intangible asset 630 1,078 -- -- Accumulated other comprehensive amount 3,279 2,116 -- -- - -------------------------------------------------------------------------------------------------------------------- Net amount recognized at December 31 $ (3,362) $ (3,201) $ (1,295) $ (1,391) - -------------------------------------------------------------------------------------------------------------------- Weighted-average assumptions as of December 31 Discount rate 6.50% 7.00% 6.50% 7.00% Initial trend rate 9.00% 9.00% 9.20% 9.20% Salary progression 4.00% 4.00% N/A N/A Expected benefit payments $ 1,811 $ 1,449 N/A N/A Ultimate health care trend rate N/A N/A 5.00% 5.00% Expected contributions $ 938 $ 958 N/A N/A Years to ultimate trend N/A N/A 11 12 Average future working lifetime 16.64 16.27 N/A N/A - ----------------------------------------------------------- ----------------------- ----------------
33 36
- ---------------------------------------------------------------------------------------------------------------------------- Retirement Plans Post-Retirement Plans Year Ended December 31: 1998 1997 1996 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost Service cost $ 1,067 $ 1,026 $ 941 $ 16 $ 27 $ 50 Interest cost 1,981 1,916 1,693 65 85 168 Expected return on plan assets (3,381) (1,956) (2,283) -- -- -- Plan settlement 98 -- -- -- -- -- Amortization and deferral of net (gain)/loss 1,404 88 707 (35) (32) (32) - ---------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 1,259 $ 1,074 $ 1,058 $ 46 $ 80 $ 186 - ---------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------- ---------------------------------- ------------------------
- --------------------------------------------------------------------------------------------------- Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects: 1% Point Increase 1% Point Decrease Effect on total of service and interest cost components $ 3 $ (3) Effect of post retirement benefit obligation $ 29 $(28) - ---------------------------------------------------------------------------------------------------
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 $13.2 million, $13.2 million and $9.0 million, respectively as of December 31, 1998 and $13.3 million, $13.2 million and $9.6 million, respectively as of December 31, 1997. 401(k) Investment Plans Under the Company's 401(k) Plans, substantially all of the Company's non-union employees and certain union employees are eligible to save, by payroll deductions, a portion of their salaries. Effective January 1, 1996, the amount saved may be invested in the Company's Common Stock. Depending upon the Plan, the Company matches certain percentages of the amounts saved by the employees. The Company's matching contribution to the 401(k) Plans was approximately $416,000 in 1998, $458,000 in 1997, and $376,000 in 1996. Note 13 Quarterly Financial Data (Unaudited)
- ------------------------------------------------------------------------------------------------------- Amounts in Thousands, Except Per Share Amounts Year Ended December 31, 1998 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr - ------------------------------------------------------------------------------------------------------- Sales $ 50,587 $ 65,603 $ 68,535 $ 55,340 Gross margin 11,574 15,590 16,400 10,954 Net (loss) income (139) 1,446 1,091 (751) Basic (loss) earnings per common share (.02) .22 .17 (.11) Diluted (loss) earnings per common share (.02) .22 .16 (.11) Market price of common stock: High $8-15/16 $ 8-3/4 $ 7-7/16 $ 6-1/4 Low $ 7 $7-7/16 $ 5-5/16 $ 4-3/8 - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- Amounts in Thousands, Except Per Share Amounts Year Ended December 31, 1997 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr - ------------------------------------------------------------------------------------------------------- Sales $ 62,096 $ 79,303 $ 80,181 $ 67,286 Gross margin 13,914 21,281 19,156 12,333 Net income 1,000 4,639 2,018 218 Basic and diluted earnings per share 0.15 0.71 0.31 0.03 Market price of common stock: High $ 10 $ 8-7/8 $11-15/16 $ 11-1/2 Low $ 8-5/8 $ 7-1/8 $ 8-3/8 $ 7-5/8 - -------------------------------------------------------------------------------------------------------
The above tables summarize quarterly financial information for 1998 and 1997. In management's opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the information for such quarters have been reflected above. Certain amounts may not agree to consolidated annual amounts due to quarterly rounding. TransPro, Inc. ANNUAL REPORT 1998 34 37 Note 14 Acquisitions Effective August 1, 1998, the Company acquired 100% of the outstanding stock of Evap. Evap is an Arlington, Texas manufacturer and distributor of replacement automotive air conditioning parts. Evap's fiscal 1997 sales were $6.6 million. The transaction was structured with an initial purchase price of $6.0 million, consisting of $3.0 million cash at closing and 30,000 shares of TransPro, Inc. Series B Preferred Stock (the "Series B Preferred Stock"), with an opportunity for a maximum additional payout of $3.75 million based upon the future earnings performance of the Evap business. Concurrent with the purchase, the Company repaid $1.7 million of working capital debt on behalf of Evap. The Company financed the cash portion of the initial purchase price and the working capital debt repayment with borrowings under the Revolving Credit Agreement. The acquisition was accounted for as a purchase and goodwill of $3.5 million, which is being amortized over 20 years, was recorded as part of the transaction. Evap's results are included in the consolidated financial statements from the date of acquisition. The Series B Preferred Stock has an initial liquidation preference of $3.0 million. The potential additional payout based on future earnings will take the form of an increase in the liquidation preference of the Series B Preferred Stock. The Series B Preferred Stock is non-transferable; is entitled to cumulative dividends of 2% per annum during the first year after acquisition, 3.5% per annum during the second year and 5.0% per annum thereafter. The Series B Preferred Stock is convertible into TransPro common stock at the rate of 50% on the third anniversary of the acquisition, an additional 25% on the fourth anniversary and the remaining 25% on the fifth anniversary; and is redeemable after the fifth anniversary at the liquidation preference at the time of redemption. The Series B Preferred Stock is convertible into TransPro common stock based upon the Liquidation Preference and the market value of TransPro common stock at the time of conversion, as further described in the purchase agreement. The aggregate number of shares of TransPro common stock to be issued upon conversion of all the Series B Preferred Stock may not exceed 7% of the total number of shares of TransPro common stock outstanding, after giving effect to the conversion, as further described in the purchase agreement. The average market value of the TransPro common stock in excess of the 7% limitation, if any, will be paid in cash. In December 1997, the Company acquired substantially all of the assets and assumed certain specified liabilities of VMS for approximately $1.0 million. VMS is located in Ontario, Canada and specializes in utility van conversions. VMS reported sales of $1.6 million for the fiscal year end February 1997. The acquisition was accounted for as a purchase and VMS's results have been included in the consolidated financial statements from the date of acquisition. The Company financed the purchase of VMS by borrowings under the 1995 Credit Agreement and recorded $0.4 million of goodwill related to the transaction, which is being amortized over 20 years. In August 1996, the Company acquired substantially all of the assets and assumed certain specified liabilities of Rahn. Rahn is a manufacturer of replacement automotive air conditioner condensers and evaporators for the Aftermarket as well as tube and fin heat exchangers for industrial applications. Rahn reported sales of $12.3 million for the fiscal year ended December 31, 1995. The acquisition was accounted for as a purchase and Rahn's results of operations have been included in the consolidated financial statements from the date of acquisition. The transaction was structured with an initial purchase price of $5.3 million paid in cash at closing, with an opportunity for a maximum additional payout of $2.5 million based upon the future earnings performance of the business. The period to measure the future earnings performance of the Rahn business has expired and no additional payout will be made. In addition, approximately $0.2 million was capitalized for transaction costs incurred to complete the acquisition. The initial purchase price was financed by borrowings under the 1995 Credit Agreement. In connection with this transaction, the Company recorded $2.4 million of goodwill, which is being amortized over 20 years.
- -------------------------------------------------------------------------------- Consolidation results as of December 31, 1998 on a pro forma basis, assuming the acquisition of Evap as of the beginning of 1998, are as follows: Amounts in Thousands 1998 - -------------------------------------------------------------------------------- Net sales $247,356 Goss margin 57,323 Income from operations 7,222 - -------------------------------------------------------------------------------- Net income $ 2,122 - -------------------------------------------------------------------------------- Basic earnings per common share $ 0.33 - -------------------------------------------------------------------------------- Diluted earnings per common share $ 0.32 - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------
35 38 Note 15 Comprehensive Income
- -------------------------------------------------------------------------------- The following table sets forth the income tax expense or (benefit) related to each item of other comprehensive income: Pre-tax Tax Expense Net-of-Tax Amounts in Thousands Amount (Benefit) Amount - -------------------------------------------------------------------------------- Year ended December 31, 1998 Foreign currency translation adjustment $ 15 $ 6 $ 9 Minimum pension liability adjustment (944) (385) (559) - -------------------------------------------------------------------------------- Other comprehensive income $(929) $(379) $(550) - -------------------------------------------------------------------------------- Year ended December 31, 1997 Foreign currency translation adjustment $ (44) $ (18) $ (26) Minimum pension liability adjustment (548) (222) (326) - -------------------------------------------------------------------------------- Other comprehensive income $(592) $(240) $(352) - -------------------------------------------------------------------------------- Year ended December 31, 1996 Foreign currency translation adjustment $(119) $ (48) $ (71) Minimum pension liability adjustment 817 330 487 - -------------------------------------------------------------------------------- Other comprehensive income $ 698 $ 282 $ 416 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------- The following is a rollforward of the accumulated other comprehensive income balances: Foreign Currency Minimum Pension Accumulated Other Amounts in Thousands Translation Liability Adjustment Comprehensive Income - --------------------------------------------------------------------------------------------- Balance December 31, 1995 $ (111) $(1,420) $(1,531) - --------------------------------------------------------------------------------------------- Current period change (71) 487 416 - --------------------------------------------------------------------------------------------- Balance December 31, 1996 (182) (933) (1,115) - --------------------------------------------------------------------------------------------- Current period change (26) (326) (352) - --------------------------------------------------------------------------------------------- Balance December 31, 1997 (208) (1,259) (1,467) - --------------------------------------------------------------------------------------------- Current period change 9 (559) (550) - --------------------------------------------------------------------------------------------- Balance December 31, 1998 $ (199) $(1,818) $(2,017) - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
Note 16 Subsequent Event Effective February 1, 1999, the Company purchased 100% of the outstanding stock of A/C Plus, Inc., ("A/C Plus") an air conditioning compressor remanufacturer located in Arlington, Texas. A/C Plus had sales of approximately $2.9 million in fiscal 1998. The transaction was structured with a purchase price of $2.25 million cash at closing and a promissory note of $0.25 million payable on the second anniversary of the closing. Concurrent with the purchase, the Company agreed to repay $0.5 million in working capital debt on behalf of A/C Plus. The purchase price and working capital repayment were financed through the Revolving Credit Agreement. The acquisition was accounted for as a purchase. Goodwill of $2.1 million was recorded in connection with the transaction and will be amortized over 20 years. TransPro, Inc. ANNUAL REPORT 1998 36 39 TransPro, Inc. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of TransPro, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of TransPro, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Hartford, CT February 12, 1999 TransPro, Inc. CORPORATE INFORMATION Stock Exchange Listing Common stock: New York Stock Exchange Ticker Symbol: TPR Registrar & Transfer Agent BankBoston, N.A. c/o Boston EquiServe PO Box 8040, Boston, Massachusetts 02266-8040 1-800-733-5001 Counsel Wiggin & Dana, New Haven, Connecticut Independent Accountants PricewaterhouseCoopers LLP, Hartford, Connecticut Annual Report Design Donaldson Makoski Inc, Avon, Connecticut Investor Relations Morgen-Walke Associates, Inc., New York, New York Annual Stockholders' Meeting The Annual Meeting of Stockholders will be held at 11:00 AM on April 28, 1999 at the St. Regis Hotel Two East 55th. Street, New York, New York Form 10-K or Additional Information If you are requesting the 1998 Annual Report, Form 10-K or other written information, please Phone 203-401-6450. Stockholders As of March 13, 1999, TransPro, Inc. had 6,597,334 shares of common stock outstanding owned by 1,256 holders of record. Corporate Office TransPro, Inc., 100 Gando Drive, New Haven, Connecticut 06513 203-401-6450 Board of Directors William J. Abraham, Jr., Partner, Foley & Lardner Barry R. Banducci, Chairman of the Board, TransPro, Inc. Philip Wm. Colburn, Chairman of the Board, Allen Telecom, Inc. Paul R. Lederer, Former, Executive Vice President, Worldwide Aftermarket, Federal-Mogul Corporation Hank McHale, President and Chief Executive Officer, TransPro, Inc. Sharon M. Oster, Frederic D. Wolfe Professor of Management and Entrepreneurship, Yale University School of Management F. Alan Smith, Former Executive Vice President, General Motors Corporation Corporate Officers Hank McHale, President and Chief Executive Officer Jeffrey L. Jackson, Vice President, Human Resources and Assistant Secretary Timothy E. Coyne, Vice President, Treasurer, Secretary, Controller and Chief Financial Officer Division Presidents Hank McHale, President, Aftermarket Heating and Cooling Systems John Della Ventura, President, OEM Heat Transfer Systems Michael Hooper, President, Specialty Metal Fabrication 40 [GRAPHIC OMITTED] TransPro, Inc. 100 Gando Drive, New Haven, Connecticut 06513 203. 401-6450 www.transpro.com EX-21.1 3 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 SUBSIDIARIES OF TRANSPRO, INC. The following sets forth a list of all the subsidiaries of TransPro, Inc., a Delaware corporation (the "Company"), and the State or other jurisdiction of incorporation or organization of each
NAME JURISDICTION OF INCORPORATION OR ORGANIZATION ------------ Allen Heat Transfer Products, Inc. Delaware AHTP II, Inc. Delaware CROWN CREW CAB, INC. Delaware GO/DAN Industries (1) New York GO/DAN de Mexico, SA de C.V. (2) Mexico Radiadores GDI, SA de C.V. (2) Mexico TransPro Indus Ltd. Mauritius Crown-VMS Canada, Ltd. Ontario, Canada EVAP, Incorporated Texas A/C Plus, Incorporated Texas
(1) GO/DAN Industries, a New York general partnership, is jointly owned by Allen Heat Transfer Products Inc. and AHTP II, Inc. (2) A wholly-owned subsidiary of GO/DAN Industries. EX-23 4 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statement of TransPro, Inc. on Form S-8 (File No. 33-80871) of our reports dated February 12, 1999, on our audits of the consolidated financial statements and financial statement schedule of TransPro, Inc., as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which reports are incorporated by reference from the 1998 Annual Report to Stockholders, and included, respectively, in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP - ------------------------------- PricewaterhouseCoopers Hartford, Connecticut March 26, 1999 EX-27 5 EX-27
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 345 0 36,563 2,390 59,775 100,134 94,913 55,426 148,527 29,958 0 0 0 66 67,801 148,527 240,065 240,065 185,547 233,834 0 0 3,326 2,905 1,258 1,647 0 0 0 1,647 0.25 0.24
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