Dana Inc. Form 8-K Summary
Business Context and Reporting Period
This Current Report (Form 8-K) was filed by Dana Corporation on December 6, 2005, covering events occurring on December 1, 2005. The filing addresses material changes to executive compensation plans and a default notice regarding the delayed filing of the company's Third Quarter Report.
Key Financial Metrics and Material Changes
Compensation Expense Impact:
- Action: The Compensation Committee accelerated the vesting of unvested stock options and stock appreciation rights (SARs) with exercise/grant prices of $15.00 or more.
- Volume: 3,584,646 stock options (weighted average exercise price $18.23) and 11,837 SARs (weighted average grant price $21.97) became immediately exercisable.
- Valuation: As of December 1, 2005, the stock price was $6.95, rendering all accelerated instruments "out-of-the-money."
- Expense Avoidance: This action avoids approximately $22 million in future share-based compensation expense ($11 million in 2006, $8 million in 2007, and $3 million in 2008) that would have been required under SFAS No. 123(R).
- Remaining Expense: Dana expects to recognize approximately $4 million in share-based compensation from 2006 through 2008 for remaining unvested instruments.
Debt and Default Status:
- Default Notice: Holders of at least 25% of outstanding notes under the 1997 Indenture and the trustee under the 2004 Indenture declared a default due to the failure to timely file the Form 10-Q for the period ended September 30, 2005.
- Cure Period: The company has a 60-day cure period to remedy the default by filing the report.
- Bank Facility: Lenders under the five-year bank facility have waived the default arising from the delayed filing. This waiver expires 56 days after receipt of the default notices unless the report is delivered.
Management Commentary and Risks
Accounting Rationale: Management accelerated vesting to reduce future compensation expenses associated with the adoption of SFAS No. 123(R) in January 2006. The Committee determined the retention incentive of the original vesting schedules was not commensurate with the $22 million in additional expense.
Tax Implications: The company does not expect to realize any significant tax benefit from the accelerated vesting due to its outlook on generating future taxable income and utilizing net operating loss carryforwards.
Plan Amendments: The Additional Compensation Plan (ACP) was amended to eliminate deferral features and "Severe Financial Emergency" provisions, effective retroactively to January 1, 2005, to preserve pre-IRC 409A deferral rules for prior earnings.
Investor Verification Checklist
- Verify the timely filing of the Form 10-Q for the quarter ended September 30, 2005, to confirm the default under the 1997 and 2004 Indentures is cured.
- Confirm the expiration date of the bank facility waiver (56 days from receipt of default notices) to assess immediate liquidity risk.
- Review the pro forma financial statements for the fourth quarter of 2005 to see the $22 million expense reflected as required.
- Monitor the company's ability to generate taxable income to validate the assertion regarding the lack of tax benefits from the accelerated vesting.