UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 March 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: 001-13657
STANDARD AUTOMOTIVE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-2018607
- --------------------------------------------- -----------------------------
(State or other Jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
321 Valley Rd.,Hillsborough Township, NJ 08876-4056
- --------------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(908) 369-5544
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since
last report)
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 |_|
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant as of June 26, 1998, was $18,486,000 based upon
a last sale price of $9.875.
As of June 26, 1998 the registrant had a total of 3,095,000 shares of
Common Stock outstanding and 1,150,000 shares of Preferred Stock outstanding.
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STANDARD AUTOMOTIVE CORPORATION
For the Year Ended March 31, 1998
Form 10-K Annual Report
Index
Page
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Part I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 18
Part III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 24
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25
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PART 1
Item 1. Business
Standard Automotive Corporation ("Standard" or the "Company") is a
specialized manufacturer of trailer chassis which are sold to leasing companies,
large steamship lines, railroads and trucking companies to transport overland
20', 40', 45', 48' and 53' shipping containers. The Company also remanufactures
used trailer chassis. The Company recently began to manufacture a new line of
20, 30 and 40 yard sanitary containers known as roll-off dumpsters and a new
line of intermodal refuse containers that can be shipped on trailer chassis,
barge or railroad. However, because of the volume of demand for its primary
products the Company has suspended full time manufacture of the dumpsters and
refuse containers. The Company's unaudited historical combined net revenues and
net income were $33,070,000 and $2,086,000 for the fiscal year ended March 31,
1998, as compared to $22,356,000 and $1,728,000 for the fiscal year ended March
31, 1997, respectively. Financial information included in this Annual Report on
Form 10-K for the fiscal year ended March 31, 1998 include the unaudited
combined operating results of Standard and Ajax Manufacturing Company.
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Stock Purchase Agreement
On January 27, 1998, the Company completed an initial public offering (the
"IPO") of its securities consisting of 1,150,000 shares of convertible Preferred
Stock and 1,495,000 shares of common Stock, including the exercise of the
Underwriters' over-allotment option, from which it derived net proceeds of
approximately $23,988,000. The Company used $19,618,000 of such proceeds to
consummate the acquisition (the "Acquisition") from Mr. Carl Massaro, the
founder and sole stockholder of Ajax Manufacturing Company ("Ajax"), of all of
the outstanding capital stock of Ajax. In addition to the cash paid to Mr.
Massaro, the Company issued to Mr. Massaro a three-year promissory note in the
principal amount of $4,000,000 (the "Redemption Note"). Commencing on the
Closing Date, Ajax has been operated as a wholly owned subsidiary of the
Company. References herein to "Standard", "Ajax" or the "Company" means Ajax and
Standard, as of dates and period prior to the closing date and to Standard and
its subsidiaries, collectively, thereafter.
Forward Looking Statements
Certain statements made in this Annual Report on Form 10-K are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future performance operations. Such statements involve known and unknown
risks, uncertainties and other factors that may cause actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. The forward-looking statements included herein are
based on current expectations that involve numerous risks and uncertainties. The
Company's plans and objectives are based, in part, on assumptions involving the
continued expansion of business. Assumptions relating to the foregoing involve
judgements with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements included in this Report will prove to be accurate, in
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any person that the objectives
and plans of the Company will be achieved.
General
A shipping container is a reusable metal container designed for the
efficient carriage of cargo with a minimum of exposure to loss through damage or
theft. According to industry sources, the world container fleet has grown to an
estimated 9,100,000 TEU as of mid-1995. The Company believes that demand for new
and remanufactured container chassis is closely related to container use. The
total size of the United States chassis fleet was estimated at 534,000 units in
1997 as compared to 515,000 in 1996.
The Company's business strategy is to grow through the acquisition of
companies that manufacture complementary products, by diversifying its product
lines and establishing manufacturing facilities to service potential customers
on the West Coast, who are currently constrained by freight cost considerations
from purchasing from the Company's East Coast facility. At this time the Company
has not established a timetable for the establishment of a new manufacturing
facility. The Company and its agents have begun to identify and evaluate
potential acquisition candidates, and in that connection the Company's agents
had entered into two purchase agreements with potential acquisition candidates.
The Company may determine, depending upon the opportunities available to it, to
seek additional debt or equity financing to fund the cost of continuing
expansion. To the extent that the Company finances an acquisition with a
combination of cash and equity securities, any such issuance of equity
securities would result in dilution to the interests of the Company's
shareholders. Additionally, to the extent that the Company incurs indebtedness
or issues debt securities in connection with any acquisition, the Company will
be subject to risks associated with incurring additional indebtedness and there
can be no assurance that cash flow will be sufficient to repay any such
indebtedness.
Industry Overview
The Shipping Container and Chassis Market
The Company manufactures and remanufactures chassis used in the transport
of shipping containers.
Steamship companies use chassis by attaching them to a truck cab, driving
it to a customer's warehouse, having a container loaded upon it, transporting
the container to an ocean going vessel, removing the container from the chassis
and loading the container on a ship. At the destination, the container is
unloaded from the ship onto another chassis, which is attached to a truck cab
for transportation to the container's next or final destination. Rail freight
users stack the chassis either separately or together with the containers on
rail cars.
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A shipping container is a reusable metal container designed for the
efficient overland carriage of cargo with a minimum of exposure to loss through
damage or theft. Containers are manufactured to conform to worldwide standards
of container dimensions and container ship fittings adopted by the International
Standards Organization ("ISO") in 1968. The standard container is either 20'
long x 8' wide x 8'6" high (i.e., one "20 foot Equivalent Unit" or "TEU") or 40'
long x 8' wide x 8'6" high (two TEU). Standardization of the construction,
maintenance and handling of containers allows containers to be picked up,
dropped off, stored and repaired efficiently. This standardization is the
foundation on which the container industry has developed.
The Container Market
The Company believes that one of the primary benefits of containerization
has been the ability of the shipping industry to effectively lower freight rates
due to the efficiencies created by standardized intermodal containers.
Containers can be handled much more efficiently than loose cargo and are
typically shipped via several modes of transportation, including truck, railway
and ship. Containers require loading and unloading only once and remain sealed
until arrival at the final destination, significantly reducing transport time,
labor and handling costs, and losses due to damage and theft. Efficient movement
of containerized cargo between ship and shore reduces the amount of time that a
ship must spend in port and the transit time of freight moves. The Company
believes that greater use of containers on cargo ships has led railroad and
trucking companies to increase their capacity to transport containers
domestically by chassis and railcar, and shipping companies have begun
soliciting domestic freight in order to mitigate the cost of moving empty
containers back to the port areas for use again in international trade. The
Company believes that the introduction in the mid-1980's of the double stack
railroad car, specially designed to carry containers stacked one on top of
another, accelerated the growth of domestic intermodal transportation by
reducing shipping costs still further. Due to these trends, the Company believes
that an increasing portion of domestic cargo is now being shipped by container
instead of by a conventional highway trailer. The Container Chassis Market
The total size of the United States chassis fleet was estimated at 534,000
units in 1997 as compared to 515,000 united in 1996. Most chassis are owned by
leasing companies or by maritime shipping companies. Two of the largest U.S.
owners of container chassis are Flexi Van Leasing, Inc. and Trac Lease, Inc.,
customers of the Company. The Company believes that the demand for container
chassis is closely related to container use. The Company believes that the
primary factors affecting demand for new or remanufactured container chassis
are: domestic and international business conditions, technical changes
(resulting from a desire for greater payloads), regulatory developments (such as
a requirement for a new braking system) and foreign use of containerization,
railroad containerization and over-the-road containerization. Increased ocean
and rail freight usage has a direct relationship with chassis demand, and such
increase is affected by general business conditions, domestically and
internationally. Chassis Design, Technology and Useful Life
There has been little change in container chassis design over the last
five years. Over a more extended time, customers have sought longer chassis
capable of carrying larger payloads. As a result, chassis length has increased
from 40' to 45' to 53'. In addition, moving the running gear further to the rear
to increase load-bearing capacity and increasing container height by six inches
has affected the design of the chassis "gooseneck." The Company believes that
such redesigns have increased the demand for remanufactured chassis. The Company
believes that, if properly used and maintained, a chassis generally will last
between 15 and 20 years. Legal obsolescence (which is in part a function of
technological advances) plays a large role in the useful life of a chassis.
Recent changes in laws concerning the vehicles' braking systems have added $500
to $1,800 to the price of a chassis. This has increased demand for
remanufacturing and has a favorable effect on the Company's business. Changes in
industry practice also affect the life of a chassis. Shippers generally demand
the ability to carry the largest possible payload, thereby forcing carriers to
upgrade their chassis to accommodate such demands.
Products
New Container Chassis. The Company manufactures its new chassis from raw
materials and purchased parts to customer order, in accordance with
International Standards Organization ("ISO") specifications or such other
specifications as the customer may require.
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Remanufactured Container Chassis. The Company remanufactures chassis
originally built by the Company and by other manufacturers to customer order and
to ISO specifications. The Company remanufactures a used chassis by removing all
of its components except the axles, which are refurbished, and replacing the
discarded components with new components. In periods of high demand, customers
tend to purchase new chassis because their existing chassis are in use ("on
hire") and cannot be returned for remanufacture. When demand eases, leasing
companies are able to remove chassis from service for remanufacturing at the end
of their lease terms in order to prepare for renewed demand.
Chassis Kits/Chassis Parts. Include front assemblies ("goosenecks"),
slider assemblies and rear bolster sets. Sales of chassis parts and
sub-assemblies have historically been small. However, the Company's sales of
such have increased as the number of chassis in service grows.
Sanitary Containers. Due to the strong demand for chassis the Company
recently suspended full time manufacture and marketing of a new line of 20, 30
and 40 yard sanitary containers known as roll-off dumpsters that, are available
in standard and watertight containers. The Company anticipates that the
potential market for its sanitary containers includes waste haulers, scrap metal
dealers, construction and demolition companies and leasing companies in the
Northeast. Although the Company is unable to estimate the total demand for its
sanitary containers, the Company contemplates that it may manufacture such
containers for sale from inventory rather than upon receipt of a customer
purchase order. The Company is in discussions with several waste haulers
regarding their requirements for these products. In addition, the Company has
begun to offer for sale a line of enclosed intermodal refuse containers that can
be shipped on trailer chassis, barge or railroad.
New Products. The Company's new product lines will include converter
dollies, as well as platform trailers and "drop frame" trailers. Converter
dollies are used to link tandem trailers and are manufactured in a similar (but
simpler) manner as a chassis. The Company expects that these dollies would be
marketed directly to fleet over-the-road haulers. Revenue by Product
The table set forth below shows the Company's approximate sales as a
percentage of total sales by product group for the last five years:
Fiscal Year Ended New Remanufactured Chassis-Kits/
March 31, Chassis Chassis Parts
--------- ------- ---------- -----
1998 54% 37% 9%
1997 49% 45% 6%
1996 90% 7% 3%
1995 77% 19% 4%
1994 67% 33% --
Backlog
The Company's backlog of firm unfilled orders totaled approximately
$27,212,000 as of March 31, 1998, as compared to approximately $9,877,000 as of
March 31, 1997. The Company estimates that approximately all of its current
backlog will be filled by March 31, 1999.
Business Strategy
The Company's business strategy is to grow through the acquisition of
companies that manufacture complementary products, by diversifying its product
lines and, establishing manufacturing facilities to service potential customers
on the West Coast of the United States. At this time the Company has not
established a timetable for the establishment of a new manufacturing facility.
The Company and its agents have identified and evaluated potential acquisition
candidates, and in that connection the Company's agents have entered into two
purchase agreements with the potential acquisition candidates. The Company has
determined to seek debt financing to fund a substantial portion of the cost of
its currently contemplated acquisitions. To the extent that the Company incurs
indebtedness or issues debt securities in connection with any acquisition, the
Company will be subject to risks associated with incurring additional
indebtedness and there can be no assurance that cash flow will be sufficient to
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repay any such indebtedness.
Marketing and Distribution
The Company sells directly to its customers, and does not use outside
dealers or distributors. The Company anticipates that new products, such as
sanitary containers and truck trailers, will be sold both directly and through
dealers and distributors. The Company currently does not employ any person in
sales. Senior management maintains customer contacts. The Company intends to
establish a sales force as required when new products are ready for sale. The
Company participates in industry trade shows and is listed in industry
registers. The Company does not currently rely on printed advertisement of its
products. Magazine and trade publication promotion of its products is limited.
Manufacturing
The Company manufactures all of its products to order. All products are
pre-inspected by the buyer before title passes. Products are then shipped FOB
manufacturer. Customer orders generally run from as little as 100 units to as
many as 5,000 units. Production scheduling, except for customer emergencies, is
generally planned three months in advance. Each of the Company's production
lines is capable of producing between 13 and 15 chassis per single daily shift
on a continuous basis. The Company currently operates two production lines for
two shifts per day. The Company has the capacity to operate three production
lines for three shifts per day.
The Company manufactures most of the components that are used in the
chassis from commercially available, standard supplies and materials. Where
possible, the Company purchases pre-sized material. Lead times are generally
between four to eight weeks. In the case of steel I beams, lead-time is tied to
the steel mills' production scheduling. The Company maintains an inventory
position, which it believes, is sufficient to prevent delays due to increased
demand.
Raw Materials
Materials, such as steel, tires and wheels, represent approximately 81% of
the cost of sales of manufactured chassis and 64% of the cost of sales of
remanufactured chassis, the remainder consisting of labor and factory overhead.
Labor represents about 10% and 19% of product cost for new and remanufactured
chassis, respectively, and is the other significant cost factor. Any change in
the price of materials or labor would have a direct effect on the price of the
product. Other factors affecting product cost include design changes, changes in
available materials and changes in government regulations. The Company has
generally been able to pass any such cost increases through to its customers.
The Company does business with suppliers with which it has generally had
long relationships. All of its primary suppliers are well known in the industry
are substantial and have a reputation for reliability. The Company purchases its
materials on an as-needed basis, and does not have any long-term agreements with
any of its suppliers. The Company does not rely upon a single supplier for
steel, tires or wheels, but rather maintains relationships with a number of
suppliers for each of these components.
Machinery and Equipment
The Company's manufacturing equipment consists primarily of steel bending,
cutting, hole punching and welding equipment. There have been little basic
changes in this type of equipment over time. The Company manufactures some and
maintains most of its tools and dies. If the Company implements its plans to
manufacture new products, it would acquire additional tooling and equipment as
necessary. The Company also uses paint spraying and material handling equipment.
The Company has its own internal maintenance department and performs regular
preventive maintenance on its equipment.
Major Customers
The Company generally sells to leasing companies that, in turn, lease
chassis to steamship and rail companies. The Company also negotiates purchase
orders directly with steamship companies. Although the Company typically has
long-standing relationships with such steamship companies, it does not have any
long-term contracts with them, as all sales are made pursuant to purchase
orders. The Company does not offer any special discounts or credit terms.
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Set forth below are the Company's sales by percentage of net sales to major
customers for the fiscal years ended March 31, 1996, 1997 and 1998.
Fiscal Year Ended March 31,
-------------------------------
Customer 1996 1997 1998
-------- ---- ---- ----
Trac Leasing 33% 53% 49%
Ned Lloyd 26% 31% --
Hapag Lloyd 18% 5% 13%
Flexi Van Leasing 10% 4% 26%
Maersk Lines 9% -- 1%
Garden State -- -- 8%
Trac Leasing and Flexi Van Leasing each purchase new chassis from the
Company for the accounts of approximately 50 steamship lines and other lessees
and end users and purchase remanufactured chassis for their own accounts.
Historically, the Company has relied on a limited number of customers for a
substantial portion of its total net revenues. The Company expects that a
significant portion of its future revenues from chassis sales will continue to
be generated by a limited number of customers.
Competition for the Manufacture of New Chassis
The Company believes that it has only three significant domestic
competitors in manufacturing new chassis. The Company believes that it has no
significant competitors in remanufacturing chassis on a production line basis
and is aware of only a limited number of companies that remanufacture on a
piece-by-piece basis. Because container chassis are purchased FOB manufacturer,
shipping costs affect customer purchase decisions. The market is thus segmented
geographically. The Company currently competes mainly on the Eastern seaboard,
with some Gulf Coast sales. The Company's primary competitors are Strick
Corporation (located in Pennsylvania) which also primarily services the
Northeast market, Hyundai Mexico (located on the California border), and HPA
Monon (located in Chicago, Illinois), all of which manufacture other products in
addition to trailer chassis. The Company believes that none of the competitors
in the industry has a material price advantage.
In making purchase decisions, customers generally considers engineering,
quality, availability, price and transportation cost. The Company believes that
it competes well with regard to each of these factors, as a result of the
Company's design and manufacturing integrity, its flexibility in making design
changes to meet customer requirements, its ability to meet delivery schedules
and its competitive pricing.
Manufacturing labor, both direct and indirect, represents approximately
11% of the value of a new chassis, while materials represent in excess of 82% of
value and the balance is overhead expense. This ratio, plus the cost of
shipment, tends to protect the domestic container chassis market from low labor
cost of foreign competition. Additionally, chassis used elsewhere in the world
are manufactured to local standards in addition to ISO specifications. The
Company believes that, with the exception of chassis being manufactured by
Hyundai in Mexico and shipped to California, there are no chassis imported into
the United States.
Due to freight cost considerations, the industry competes on a regional
basis. The Company thus believes that there is currently no significant export
market. The Company has evaluated the feasibility of establishing a facility in
the Western United States to serve potential customers on the West Coast. The
Company has not identified any such facility and there can be no assurance that
any such facility, if identified, will be established.
Product Warranties
The Company provides limited warranties against construction defects in
its products. These warranties generally provide for the replacement or repair
of defective parts or workmanship for a specified period following the date of
sale. Customers and end-users also receive warranties from suppliers of
components incorporated into
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the Company's chassis.
Violation of Federal and State Air Quality Regulation
The New Jersey Department of Environmental Protection ("NJDEP"), which
administers Title V of the Federal Clean Air Act in New Jersey, requires the
Company to obtain an air emission permit which limits the emission levels from
certain equipment at the Company's facility of various pollutants, including
volatile organic compounds ("VOC") generated by the drying of solvent-based
primers and paints. The equipment that requires Title V permitting includes
three paint spray booths, three natural gas fired heaters and two shot blaster
systems. In March 1997 the NJDEP issued two Notices of Violations to the
Company, which asserted that the Company had failed to obtain permits for the
shot blasters prior to February 1997 and the heaters for the paint spray booths.
The Company submitted permit applications for the heaters in March 1997, which
are pending. In May 1997 the NJDEP issued an Administrative Order of Civil
Administrative Penalty Assessment ("Order and Notice") assessing the Company a
$9,000 penalty for emitting VOCs from the paint spray booths in excess of
permissible limits in 1995. In response to the Order and Notice, the Company
submitted to the NJDEP an adjudicatory hearing request, which contests the
$9,000 assessment.
In March 1998 the NJDEP issued a Notice of Violation ("NOV") to the
Company for emitting VOCs from the paint spray booths in excess of permissible
limits in 1996. The NOV directed the Company to achieve compliance by April 1998
and to submit a written report documenting the corrective measures taken to
achieve compliance. The Company timely responded to the request for a written
report, proposing to achieve compliance by use of low VOC, water-base coatings,
by re-engineering the facility in order to facilitate use of the water-based
coatings, and by installing a fourth spray booth and other equipment, and
submitting to NJDEP a request for a new, expanded air emission permit for the
facility. The Company has been in active negotiations with NJDEP. As requested
by NJDEP, the Company submitted in May 1998 a new air permit application that
would allow the Company to install a fourth paint spray booth and expand
permitted emissions from the facility. The application is pending and the
Company continues to negotiate with NJDEP to resolve all air emission issues.
The Company is presently preparing an amendment to its Title V Permit
application proposing that the Company and NJDEP enter into an Administrative
Consent Order or other form of agreement (a "Compliance Schedule") as to VOC
emissions from the three paint spray booths at the facility. The Company plans
to propose a timetable by which it will change its primer and topcoat paint
formulations from current, solvent based products that generate high amounts of
VOC upon drying to water-based and lower-solvent based primers and topcoats,
which would generate lower amounts of VOC upon drying. The Company believes that
such change is technically feasible and that by making such change, the Company
will reduce VOC emissions to levels allowable under the Company's present
permits while allowing the Company to produce numbers of completed chassis
comparable to those produced in recent years. Water-based primers are currently
available. The Company has been advised by paint manufacturers that topcoat
paints with progressively lower VOC content are currently being tested and will
become available during the next twelve months. The Company believes that these
primers and paints are suitable for the purposes of the Company's customers. Use
of the new primer and paint products is expected to require certain
modifications of the Company's production lines, primarily because water-based
primer requires an additionally heated drying environment than solvent-based
primer. The Company's plan for installing such modifications, had been presented
to NJDEP as part of the on going negotiations. The estimated cost of such
modifications and of the equipment required therefor is estimated to be less
than $100,000. There is no assurance that NJDEP will grant a Compliance Schedule
to the Company, or if granted the Compliance Schedule will not include NJDEP
demands for fines, penalties, or other sanctions. If NJDEP does not grant a
Compliance Schedule, the Company might need to reduce its output of chassis
until lower VOC formulations are utilized.
The outcome of NJDEP regulatory actions cannot be predicted with
certainty. The NJDEP could fine the Company for operating the shot blaster
booths without a completed permit until February 1997, for operating the heaters
for the paint spray booths without a permit, and/or for emitting more VOCs from
the paint spray booths than allowed by its permits. If changing to water-based
primers and low-VOC topcoat paints is not acceptable to NJDEP, NJDEP could
require the Company to take other steps to comply with NJDEP requirements and
the Clean Air Act, including capital improvements to ensure compliance with air
quality regulations. Such improvements could include a VOC incinerator and/or
other control apparatus, which could cost up to $2,000,000 or more and which
could result in increased operating expenses. Failure to comply with NJDEP
regulations and directives could result in fines and/or NJDEP orders to curtail
or shutdown operations, any or all of which could have a material adverse effect
on the Company's business and financial condition. The Company does not have
liabilities accrued
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for fines that may be assessed which respect to its air quality violations or
for potential purchases of any capital equipment that may be mandated by the
NJDEP or otherwise may be necessary to avoid future violations.
Other Environmental and Regulatory Compliance
The Company is subject to Federal, state and local laws and regulations
relating to its operations, including building and occupancy codes, occupational
safety and environmental laws, and laws governing the use, discharge and
disposal of hazardous materials. Except as otherwise described above with regard
to air quality regulations, the Company is not aware of any material
non-compliance with any such laws and regulations. The Company is a manufacturer
of truck trailer chassis and is covered by Standard Industrial Code (SIC)
#3715. Companies covered by SIC Code #3715 are among those companies subject to
the New Jersey Industrial Site Recovery Act ("ISRA"). Pursuant to ISRA, the
Company has begun an investigation for any environmental "Areas of Concern"
("AOCs") that may be present at the facility. The Company has entered into a
Remediation Agreement with NJDEP by which the Company will fulfill its
obligations under ISRA. AOCs, if discovered, could require remediation, which
could have a material adverse effect on the Company.
In March 1998, as part of the ISRA Remediation Agreement with NJDEP, NJDEP
required the Company to perform soil and sediment sampling at various locations
at the facility. The sampling results were within NJDEP compliance limits with
the exception of results for certain metals detected in soil around roof
downspouts at the facility. The Company has engaged a contractor to perform
additional sampling at these locations, the results of which will be forwarded
to NJDEP. If the additional sampling indicates additional areas of contamination
above NJDEP compliance levels, additional investigations may be necessary.
There can be no assurance that such additional investigations will not
reveal additional environmental regulatory compliance liabilities, nor can there
by any assurance that health-related or environmental issues will not arise in
the future and, if so, that they will not have a material adverse impact on the
Company's financial position or results of operations.
Insurance
The Company maintains auto liability and general liability coverage on
contents/physical loss coverage and statutory workmen's compensation coverage.
The Company has obtained directors' and officers' liability coverage and
environmental liability coverage with policy limits of $5,000,000 each. Such
environmental insurance will cover presently unknown potential environmental
liabilities, and will not cover the potential environmental liabilities
disclosed elsewhere in this filing. The Company has not experienced any
significant claim under any of its insurance policies.
Employees
As of June 1998, the Company had 218 full-time employees of whom four were
managers, twelve were administrative personnel and the rest were in production.
The Company's employees do not belong to a collective bargaining unit and the
Company considers its relations with employees to be satisfactory.
Item 2. Properties
The Company leases on a "triple net" basis, the 182,000 square foot
factory complex it currently occupies. The facility is located on 22 acres in
Hillsborough Township, New Jersey, approximately 45 miles southwest of New York
City. The area is rural to suburban and is convenient to major expressways and
points of delivery. The facility was built in 1964. Currently approximately
2,500 square feet is devoted to administrative offices and the balance is used
for manufacturing and warehousing. The site is primarily used for storing
customer chassis, inventory and employee parking. The Company believes that it
has sufficient storage and warehousing space for its current and future needs.
The lease provides for a five-year initial term and is renewable at the
Company's option for four successive, five year renewal terms, at an annual base
rent of $600,000 for the initial term, subject to increase during each renewal
term by the percentage increase in the Consumer Price Index over the immediately
preceding five year term. The lease contains customary provisions indemnifying
Mr. Massaro for the acts of the Company and its employees, agents, contractors
and the like, and against certain specified environmental liabilities other than
those arising out of Mr. Massaro's use of the leased facility and land prior to
the closing of the Acquisition and acts which at Mr. Massaro's discretion are
required to be performed by the Company. Additionally, so long as the lease
remains in effect and the Company is not in default thereunder or under the
Redemption Note, the Company will have
10
<PAGE>
the option, exercisable during the initial term of the lease, to purchase the
leased facility and land for a cash purchase price of $6,500,000.
Item 3. Legal Proceedings
Litigation
In July 1997, the Internal Revenue Service notified Ajax of a proposed
$1,434,931 increase in federal excise tax liability relating to Ajax's valuation
of tires included in the sale of new chassis for the period from March 1995
through December 1996 and a $286,986 penalty thereon. In November 1997 Ajax and
its outside counsel, based on an assessment of preliminary discussions with the
IRS, decided to pursue a settlement agreement. In November 1997 Ajax paid
approximately $830,000 to settle this matter. The Company recognized the effects
of this settlement as a charge in the fiscal year ended March 31, 1998. There
can be no assurance that additional liabilities will not be assessed for
subsequent periods. Pursuant to certain amendments to the Internal Revenue Code,
commencing January 1998, the value of tires will no longer be excluded from the
federal excise tax imposed on chassis sales. Instead, the amount of federal
excise tax imposed upon the tire manufacturer will be deductible from the excise
tax payable by Ajax on the sale of new chassis.
The Company is involved in litigation arising in the normal course of its
business, none of which is believed, individually or in the aggregate, to be
material to the Company's financial position and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
11
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market information:
The Company's common stock (symbol "AJX") and convertible redeemable
preferred stock (symbol "AJX.PR") are listed and principally traded on the
American Stock Exchange ("Amex"). The following table sets forth on a per share
basis the high and low sale prices for the Company's securities from January 22,
1998, the date of the Company's IPO, through June 25, 1998.
Convertible Redeemable
Common Stock Preferred Stock
--------------- ---------------
High Low High Low
---- --- ---- ---
Quarter Ended March 31, 1998 12 3/4 8 1/2 14 1/8 10 1/2
Quarter through June 25, 1998 12 5/8 8 3/4 13 9 7/8
The approximate number of holders of record of the Company's common stock
as of June 24, 1998 was 39. The approximate number of holders of record of the
Company's convertible redeemable preferred stock as of June 24, 1998 was five.
Dividends:
The holders of the convertible redeemable preferred stock are entitled to
receive cumulative dividends at the rate of $1.02 per share per annum, paid
quarterly on the last business day of March, June, September and December of
each year, commencing on March 31, 1998.
12
<PAGE>
Item 6. Selected Financial Data
The following table sets forth for the periods indicated and at the dates
indicated summary historical financial information of Standard Automotive
Corporation ("Standard") and the Predecessor Company, Ajax Manufacturing
("Ajax"). Standard had no operating results prior to the year ended March 31,
1997. The historical information contained in the table for the fiscal years
ended March 31, 1995, 1996, 1997 and the 1998 Periods has been derived from
audited financial statements, and is qualified in its entirety by, and should
be read in connection with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", the audited financial statements (and
notes thereto) and other financial and statistical information of the Company
and Ajax appearing elsewhere in this report. The historical information as of
and for the year ended March 31, 1994 have been derived from unaudited financial
statements. However in the opinion of management all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of the
financial statements for the periods have been made.
<TABLE>
<CAPTION>
(Amounts in thousands, except share and earnings per share data)
Ajax Standard
--------------------------------------------------------- | -----------
Period from | Period from
April 1, 1997 | January 27,
Year Ended March 31, through | through Combined
------------------------------------------- January 26, | March 31, March 31,
Selected Income Data: 1994 1995 1996 1997 1998 | 1998 1998
--------- -------- --------- -------- --------- | -------- ---------
(1) | (2) (3)
| (Unaudited)
<S> <C> <C> <C> <C> <C> | <C> <C>
Net sales $ 17,551 $ 33,407 $ 42,538 $ 22,356 $ 25,134 | $ 7,936 $ 33,070
Selling, general and administrative 861 1,419 3,082 2,510 1,431 | 407 1,838
Operating income 545 1,277 5,482 2,818 3,805 | 1,305 5,110
Interest expense 342 339 118 -- -- | 450 450
Income before income taxes 172 1,012 5,449 2,896 3,015 | 801 3,816
Net income $ 103 $ 514 $ 3,344 $ 1,728 $ 1,743 | $ 343 $ 2,086
======== ======== ======== ======== ======== | ======== ========
Preferred stock dividend $ -- $ -- $ -- $ -- $ -- | $ 184 184
Basic and diluted earnings per share(4) $ 0.06 $ 0.32 $ 2.09 $ 1.08 $ 1.09 | $ 0.09 $ 1.03
======== ======== ======== ======== ======== | ======== ========
Basic and diluted weighted
average number of common
shares outstanding(4) 1,600 1,600 1,600 1,600 1,600 1,846 1,846
<CAPTION>
Ajax | Standard
--------------------------------------------- | ----------
As of March 31, |
---------------------------------------------- | ----------
Selected Balance Sheet Data: 1994 1995 1996 1997 | 1998
-------- -------- -------- -------- | --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 15 $ 512 $ 1,482 $ 1,558 | $ 3,357
Accounts receivable, net 1,218 503 751 2,536 | 4,838
Inventory 3,172 5,165 3,341 3,515 | 5,399
Property and equipment, net 1,045 949 946 994 | 1,225
Intangible assets -- -- -- -- | 15,127
Current liabilities (excluding debt) 2,056 3,288 1,464 2,093 | 2,851
Total debt 3,113 2,373 -- -- | 4,000
Stockholders' equity 1,367 2,151 5,495 7,222 | 24,709
Working capital (117) 1,680 4,562 5,941 | 11,547
</TABLE>
(1) Represents the historical results of Ajax for the period from April 1,
1997 through January 26, 1998.
(2) Represents the historical results of Standard for the period from January
27, 1998 through March 31, 1998
(3) Represents the unaudited combined operating results of Standard and Ajax
for the year ended March 31, 1998.
(4) "Basic and Diluted Earnings per Share" and "Weighted Average number of
common shares outstanding" data assume Ajax had 1,600,000 of common stock
outstanding for periods prior to the Acquisition. Such number of shares
reflects the Company prior to the Acquisition.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read together with the
consolidated financial statements and notes thereto included elsewhere herein.
Management's Discussion and Analysis for the fiscal year March 31, 1998 include
the unaudited operating results of Standard and Ajax, as if these entities were
combined for that period. Standard had no operating results prior to fiscal
1998. Prior to the Acquisition of Ajax, the Company had no business operations
and engaged in no activities other than those related to its organization, the
negotiation of the Acquisition and obtaining the funds necessary to complete the
Acquisition. Accordingly, all the historical discussion prior to March 31, 1997
contained herein relates solely to the operating results and financial position
of Ajax.
Overview
Ajax manufactures and remanufactures trailer chassis. Ajax manufactures
all of its chassis to order and revenues are recognized when the finished
product is inspected and accepted by the customer or its agent. The market for
chassis is cyclical and is affected by overall economic conditions, in
particular the needs of the transportation industry. Remanufacturing existing
chassis tends to be counter-cyclical to manufacturing new chassis. To reduce the
effect of industry cyclicality on its business, in September 1996 Ajax began to
manufacture roll-off refuse containers. Sales of such containers comprised less
than 1% of Ajax's sales for the year ended March 31, 1998 and the company has
suspended the manufacture of such containers due to the volume of demand for its
primary products.
The container chassis and marine container manufacturing industries and
related industries are dependent on the demand for their products from the
trucking and shipping industries. Sales of new container chassis have
historically been subject to the substantial cyclical variation. Future economic
downturns, increases in the utilization rates of existing chassis or cyclical
decreases in demand for marine cargo containers would likely have a material
adverse effect on the Company.
Part of the Company's strategy is to grow through expansion of product
lines and acquisitions. The Company's proposed expansion is expected to place a
strain on the Company's management, operational, financial and other resources.
The Company's expansion plans will be dependent upon its ability to identify
appropriate targets for acquisition and raise the necessary financing for
acquisitions. Further, the success of the Company's efforts will be dependent
upon its ability to market new products, absorb new management and other
personnel, and reduce duplicative overhead. The Company has limited experience
in effectuating a plan of rapid expansion and in managing a geographically
dispersed operation. There can be no assurance that the Company can successfully
expand its operations or manage its growth.
The Company anticipates that the number of chassis it remanufactures will
increase as compared to the number of new chassis it manufactures as a result of
(i) a contemplated increase in the Company's marketing of its remanufacturing
capabilities, (ii) the potentially large number of purchasers of remanufactured
chassis among the lessors and steamship lines that use the Company's chassis,
(iii) the fact that the container chassis fleet is growing and aging and (iv)
potential regulatory changes affecting the container chassis fleet. The chassis
that the Company remanufactures for a particular customer are provided by that
customer.
Results of Operations
The following table sets forth, for the period indicated, certain
components of the Company's Statements of Income expressed in dollar amounts (in
thousands) and as a percentage of net sales (rounded):
14
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------
1996 1997 1998 (Unaudited)
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues, net $ 42,538 100.0% $ 22,356 100.0% $ 33,070 100.0%
Cost of revenues 33,973 79.9 17,027 76.2 25,992 78.6
Selling, general and administrative 3,082 7.2 2,510 11.2 1,968 6.0
-------- ----- -------- ----- -------- -----
Operating income 5,483 12.9 2,819 12.6 5,110 15.5
Other income (expense) 57 0.1 77 0.3 (1,294) (3.9)
-------- ----- -------- ----- -------- -----
Income before provision for taxes 5,539 13.0 2,896 12.9 3,816 11.5
Provision for income taxes 2,195 5.2 1,168 5.2 1,730 5.2
-------- ----- -------- ----- -------- -----
Net income $ 3,344 7.9% $ 1,728 7.7% $ 2,086 6.3%
======== ===== ======== ===== ======== =====
</TABLE>
The following discussion provides information regarding the Company's
results of operations for the fiscal years ended March 31, 1996 ("Fiscal 1996"),
March 31, 1997 ("Fiscal 1997") and March 31, 1998 ("Fiscal 1998").
Comparison of fiscal Year Ended March 31, 1998 to fiscal Year Ended March 31,
1997
Net Revenues in Fiscal 1998 were $33,070,000, an increase of 48% from net
revenues of $22,356,000 for Fiscal 1997. The increase in net revenues reflects a
shift of the Company's business to the manufacture of new chassis from the
remanufacture of used chassis, and a general improvement in the trailer
industry. During Fiscal 1998, sales of new chassis represented 54% of total
sales as compared to 49% in Fiscal 1997; the increase in sales of new chassis
resulted principally from an increase in the volume of new chassis sold in
Fiscal 1998 as compared to Fiscal 1997. In contrast, sales of remanufactured
chassis represented 37% of total sales in Fiscal 1998 as compared to 45% in
Fiscal 1997; the reduction in the sales of remanufactured chassis resulted from
a decline in the growth of remanufactured chassis sold in Fiscal 1998 as
compared to the aforementioned growth of the sale of new chassis. As the result
of certain customers requirements for new chassis, the Company's margins
declined moderately in Fiscal 1998. Sales of refuse containers were not material
during Fiscal 1998.
Cost of Revenues increased to $25,992,000 or 79% of net sales in Fiscal
1998 from $17,027,000 or 76% of net sales in Fiscal 1997. Cost of revenues as a
percentage of net revenues increased moderately during Fiscal 1998 as the mix of
the Company's business reflected an increase in the sale of new chassis.
Selling, General & Administrative Expense were $1,969,000 during Fiscal
1998, a decrease of 27% from the $2,510,000 incurred during Fiscal 1997. SG&A
expenses decreased to 6% of net sales, down from 11% of net sales during Fiscal
1997. The decrease in SG&A as a percentage of net sales in Fiscal 1998
principally reflects a reduction in executive incentive compensation of $936,000
in Fiscal 1998.
Interest Expense increased to $450,000 in Fiscal 1998 from $0 during
Fiscal 1997, reflecting interest on the nonrecurring bridge loan incurred by
Standard prior to completion of the Acquisition and the note payable to Carl
Massaro pursuant to the Acquisition.
Comparison of Fiscal Year Ended March 31, 1997 to Fiscal Year Ended March 31,
1996
Net Revenues in Fiscal 1997 were $22,356,000, a decrease of 47% from net
revenues of $42,538,000 for Fiscal 1996. The decrease in net revenues reflects a
shift of the Company's business from the manufacture of new chassis to the
remanufacture of used chassis, and a general slowdown in the trailer industry.
During Fiscal 1997, sales of new chassis represented 49% of total sales as
compared to 90% in Fiscal 1996; the reduction in sales of new chassis resulted
principally from a decrease in the volume of new chassis sold in Fiscal 1997 as
compared to Fiscal 1996. In contrast, sales of remanufactured chassis
represented 45% of total sales in Fiscal 1997 as compared to 7% in Fiscal 1996;
the increase in sales of remanufactured chassis resulted from an increase in the
number of remanufactured chassis sold in Fiscal 1997 as compared to Fiscal 1996.
Despite the reduction in revenue resulting from the shift to the remanufacture
of
15
<PAGE>
used chassis, the Company maintained its margins in Fiscal 1997 due to the fact
that gross profit on a remanufactured chassis is approximately 85% of gross
profit on a new chassis while the Company's cost to remanufacture a chassis is
approximately 62% of the cost to manufacture a new chassis, reflecting, in part,
the lower cost of materials used to remanufacture a chassis. Sales of refuse
containers were not material during Fiscal 1997; the first year the Company
manufactured refuse containers.
Cost of Revenues decreased to $17,027,000 or 76% of net sales in Fiscal
1997 from $33,973,000 or 80% of net sales in Fiscal 1996. The decrease in the
cost of sales as a percentage of net sales reflects the fact that during Fiscal
1997 the mix of the Company's business reflected an increase in the sale of
remanufactured chassis.
Selling, General & Administrative Expense were $2,510,000 during Fiscal
1997, a decrease of 19% from the $3,082,000 of SG&A incurred during Fiscal 1996.
Although SG&A expenses decreased from Fiscal 1996 to Fiscal 1997, SG&A
represented 11% of net sales during Fiscal 1997 as compared to 7% of net sales
during Fiscal 1996. The increase in SG&A as a percentage of net sales in Fiscal
1997 reflects the relatively constant nature of the SG&A expenses despite the
decrease in the Company's revenues. The decrease in Fiscal 1997 SG&A principally
reflects a reduction in executive incentive compensation paid of $349,000 due to
decreased profitability of the Company in fiscal 1997.
Interest Expense decreased to $0 in Fiscal 1997 from $118,000 during
Fiscal 1996, reflecting full repayment of all interest bearing debt.
Liquidity and Capital Resources
Historically, Ajax has financed its operations through debt provided by
its sole stockholder and loans from financial institutions. In addition, to
provide the Company with working capital, the stockholder varied the amount of
his compensation to reflect the performance of the Company's business. In
November 1995 the Company entered into a revolving line of credit agreement with
a bank permitting borrowing up to the lesser of $2,000,000 or the sum of certain
inventory and receivables plus $750,000. Upon completion of the Acquisition this
facility was terminated. The Company is in the process of securing a new bank
credit facility. In connection with the Acquisition, the Company issued a note
to Carl Massaro in satisfaction of a portion of the purchase price. The fact
that the note payable to Carl Massaro is currently secured by substantially all
of the Company's assets may make it more difficult for the Company to obtain a
new credit facility.
In January 1998, the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1 (Registration No. 333-33465)
effective. Pursuant to the Registration Statement, the Company registered the
following securities:
(i) 1,000,000 shares of Convertible Redeemable Preferred Stock (the
"Firm Preferred") and 1,300,000 shares of Common Stock (the "Firm
Common");
(ii) 150,000 shares of Convertible Redeemable Preferred Stock (the
"Option Preferred") and 195,000 shares of common Stock (the "Option
Common") issuable upon exercise of the Underwriters' over-allotment
option; and
(iii) 1,150,000 shares of Common Stock issuable upon conversion of the
Firm Preferred and Option Preferred.
In January 1998, the Company closed the Initial Public Offering with an
underwriting syndicate for which Westport Resources Investment Services, Inc.
served as "Representative." The Company sold the Firm Preferred and the Firm
Common at a price of $12.00 per share of the Preferred and $10.00 per share of
the Common, for an aggregate offering price of $25,000,000. In February 1998,
the Underwriters exercised the over-allotment option with respect to all of the
Option Preferred and Option Common and on the next day the Company closed the
sale of the Option Preferred and Option Common at per share prices of $12.00 and
$10.00, respectively, for gross proceeds of $3,750,000.
The Company paid the Underwriters an underwriting commission of $2,300,000
and paid the Representative non-accountable expense allowance and incurred other
directly related expenses totaling $940,000. Other expenses incurred in
connection with the offering, including SEC registration fees, AMEX listing
fees, blue sky fees and expenses, printing, legal and accounting fees were
approximately $1,512,000 in the aggregate, yielding net proceeds of
approximately $23,998,000.
Of the net proceeds, the Company used $19,618,000 to satisfy a portion of
the purchase price due Carl Massaro (see "Stock Purchase Agreement") and
$347,000 to retire the Company's Bridge Notes including accrued interest. The
balance was utilized for general working capital purposes and acquisition costs.
The Company generated $261,000 of cash in operating activities during
Fiscal 1998 as compared to $547,000 provided by operating activities during
Fiscal 1997. The cash provided by operating activities during fiscal year 1998
reflects primarily an increase in the Company's net income and non cash charges
offset by an increase of approximately $2,470,000 in accounts receivable. These
were partially offset by decreases in accounts payable and accrued expense,
income taxes payable and other taxes. The Net cash used in investing activities
was $20,368,000 during the Fiscal 1998 as compared to $471,000 used in investing
activities during Fiscal 1997. The cash used in investing activities during
Fiscal 1998 was primarily for the acquisition of Ajax. The balance of the net
proceeds were used during Fiscal 1998 for the acquisition of property, plant and
equipment and acquisition costs. Cash flows were provided by financing
activities of $23,464,000 in Fiscal 1998 primarily from the proceeds of the
Company's IPO. This was reduced by the payment of registration costs and for the
payment of Preferred Dividend.
In February 1998, the Company repaid $325,000 in aggregate principal
amount to the holders of the Bridge Notes, together with interest thereon at the
annual rate of 12% per annum, and issued to the holders of the Bridge Notes
32,500 shares of Common Stock. The Company incurred a charge to operations in
the period the shares were issued of $325,000.
The terms on which the Company manufactures and remanufactures chassis
provide for payment within 30 days of acceptance and the Company's accounts
receivable were collected in an average of less than 30 days during Fiscal 1996,
Fiscal 1997 and Fiscal 1998.
16
<PAGE>
Capital expenditures, primarily for the acquisition of equipment at the
Company's facility were $408,000, $171,000 and $139,000 in Fiscal 1998, Fiscal
1997 and Fiscal 1996, respectively. The Company anticipates that capital
expenditures during Fiscal 1999 will slightly exceed those of the proceeding
years as the Company expands its operations. Nevertheless, the Company could
require substantial additional capital if it were to seek to expand its product
lines by substantially modifying, improving, or modernizing its facility,
opening additional facilities or acquiring a new business within the chassis
industry or related industries.
The annual dividend requirement on the Convertible Preferred Stock is
$1,173,000. The future earnings of the Company, if any, may not be adequate to
pay the dividends on the Convertible Preferred Stock, and, although the Company
intends to pay quarterly dividends out of available capital surplus, there can
be no assurance that the Company will maintain sufficient capital surplus or
that future earnings, if any, will be adequate to pay the dividends on the
Convertible Preferred Stock. In addition, the Company had $4,000,000 in debt
outstanding, consisting of the note payable to Carl Massaro, which bears
interest at an assumed rate of 10%, payable quarterly, at an aggregate annual
interest expense of up to $400,000.
The Company intends to seek opportunities for growth through acquisitions,
and, in connection therewith, may seek to raise additional cash in the form of
equity, bank debt or other debt financing, or may seek to issue stock as
consideration for assets. At this time the Company is a party to two purchase
agreements for acquisitions.
At March 31, 1998, the Company had working capital of $11,547,000, which
is sufficient to meet its current operating requirements, and, if necessary,
such needs could be met out of the remaining cash on hand from the IPO.
Subsequent Events
In February 1998, Barclay Investments, Inc., ("Barclay"), entered into a
Stock Purchase Agreement to purchase 100% of the stock of CPS Trailer Company,
Inc., ("CPS"), and a Stock Purchase Agreement to purchase 100% of the stock of R
& S Truck Body Company, Inc., ("R & S"). Subsequent thereto, Standard entered
into a Stock Purchase Agreement (the "Stock Purchase Agreement") to purchase
100% of the stock of Barclay Investments, Inc. from its owners (some principals
of which are current shareholders of the Company). The Stock Purchase Agreement
calls for the purchase of 100% of the stock of Barclay Investments, Inc. in
exchange for 185,000 shares of Company common stock. In addition, in connection
with the acquisition, the Company is obligated to pay Redstone Advisors
Corporation, a company of which two-thirds of the outstanding common stock is
owned by an officer of the Company and of which a Company shareholder is
president, a fee of $600,000 for arranging the transactions. The Company is not
obligated to close the purchase of Barclay Investments, Inc. under the Stock
Purchase Agreement unless it simultaneously closes the purchase of CPS and
R & S.
The Stock Purchase Agreement among Barclay Investments, Inc., and CPS
provides for the payment of $7,000,000, plus a defined level of net income for
the period from January 1, 1998, through the closing date; plus shares of
Company common stock with a value of $1,250,000. In addition, the CPS
stockholder may be entitled to an additional $1 million of cash if certain
operating results are achieved.
The Stock Purchase Agreement among Barclay Investments, Inc. and R & S, as
amended, provides for the payment by the purchaser of $11,900,000, plus an
amount equal to the earnings of R & S for the period from January 1, 1998
through closing, plus shares of Company common stock with a value of $1,000,000
plus an amount equal to $10,000 times the number of days elapsed from June 22
through the closing date.
The closing of the three Stock Purchase Agreements is contingent upon
certain matters, including the successful completion of a due diligence review
and the consummation of a financing satisfactory to Standard to enable it to pay
the amounts due. Standard has received from PNC Bank, NA a commitment to provide
the Company with $40,000,000 to complete the acquisitions of R & S and CPS, to
repay the Redemption Note, with the balance to be used for working capital
purposes. The $40,000,000 will be provided through a $25,000,000 six-year term
loan and a $15,000,000 three-year revolving credit facility with a $7,000,000
sub-limit for standby letters of credit. The loans will be secured by liens on
all of the Company's assets.
17
<PAGE>
Year 2000
The Company is aware of the uncertainty surrounding the ability of
computer systems to function properly with the coming of the year 2000 and
related issues. The Company anticipates that it will replace substantial
portions of its existing computer software during 1999 as it integrates the
operations of its New Jersey facility with those of the businesses to be
acquired. Nevertheless, management intends during 1998 to assess the
functionality of all of the Company's computer systems, as well as those of the
businesses it acquires to determine which of the Company's systems are
susceptible to the year 2000 problem and what corrective measures need to be
taken. Subsequent to assessing its own computer inventory the Company will seek
to assess the functionality of the systems of its customers and suppliers in an
attempt to identify and ward off potential problems.
Item 8. Financial Statements and Supplementary Data
The financial statements of the Company required by this item are set
forth at the pages indicated in Item 14 (a) and (c).
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
18
<PAGE>
Part III
Item 10. Executive Officers and Directors of the Registrant
The executive officers and directors of the Company are as follows:
Name Age Position with the Company
---- --- -------------------------
Steven Merker(2) 41 Chairman of the Board and Chief
Executive Officer
Karl Massaro 44 President and Director
Roy Ceccato 39 Chief Financial Officer and Director
William Merker 37 Vice President, Secretary and Director
Joseph Spinella(1)(2) 40 Director
William Needham(1)(2) 57 Director
----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Steven Merker has been the Chief Executive Officer and a Director of the
Company since August 1997. Mr. Merker was the Managing Director of Barclay
Partners LLC, an investment banking firm specializing in corporate buy-outs,
which he formed in 1995 with his brother, William Merker. From 1993 to 1995 he
was Senior Vice President of Branin Investments. From 1988 to 1993, he was a
partner with the Redstone Group, an investment banking firm. Prior to joining
Redstone, Mr. Merker was the Chief Financial Officer of The R.O.I. Group, Inc.,
an investment banking firm. Mr. Merker graduated with a B.S. degree in
accounting from Fairleigh Dickinson University in 1979.
Karl Massaro has been President and a Director of the Company since August
1997. Mr. Massaro has been Vice President and General Manager of Ajax since
1991. From 1984 to 1990, he was purchasing manager and chief product
designer/engineer of Ajax, and, prior to that, he worked for Ajax in various
other capacities from 1963 to 1984.
Roy Ceccato has been a Director of the Company since August 1997 and was
appointed Chief Financial Officer in February 1998. From 1995 to August 1997,
Mr. Ceccato had been Director of Finance of Complete Management, Inc., a
NYSE-listed physician practice management company. From 1990 to 1995, he was
President of Broad Partners, Inc., a management consulting firm. From 1986 to
1989, he was Vice President of The R.O.I. Group, Inc., an investment banking
firm specializing in retailing and machine tool parts manufacturing companies
for the aerospace industry. Mr. Ceccato graduated from Pace University in 1980
with a BBA in management accounting.
William Merker has been a Vice President, Secretary and a Director of the
Company since August 1997. William Merker had been associated with the law firm
of Loeb, Block & Partners LLP since 1990, specializing in the field of corporate
law. In 1995, Mr. Merker and his brother, Steven Merker, founded Barclay
Partners LLC. Mr. Merker received a B.S. degree in accounting from The American
University in 1982 and graduated from Georgetown University Law School in 1985.
Joseph Spinella has been a Director of the Company since August 1997.
Since October 1997, Mr. Spinella has been controller of Morcroft Capital
Corporation (an equipment leasing company). From November 1996 until October
1997, Mr. Spinella was manager of financial reporting for Gruntal Financial
L.L.C. (an investment banking and brokerage company). From 1989 through 1995,
Mr. Spinella was Vice President-Director of Financial Services and Controller of
Copelco Capital, a subsidiary of Itochu International. From 1987 to 1989, he was
an Assistant Vice President with First Fidelity Bank. Mr. Spinella graduated
from Fairleigh Dickinson University with a B.S. in Accounting in 1979 and with
an MBA in Finance in December 1988.
William Needham has been a Director of the Company since November 1997.
Since March 1995, Mr. Needham has been a private merchant banker and investor.
From March 1994 to March 1995 he was a registered representative and corporate
finance specialist at First Hanover Securities, Inc., an investment banking and
brokerage firm. From December 1989 to March 1994, Mr. Needham was a registered
representative and corporate finance specialist at Emanuel & Company, an
investment banking and brokerage firm. Mr. Needham is a
19
<PAGE>
director of Modal Systems, Inc., a housing construction company, and a director
of Cutting Edge Industries, Inc., a manufacturer of toys and novelties. Mr.
Needham graduated from Wesleyan University in 1963 with a B.A. in liberal arts.
Consultant
Redstone Capital Corporation, of which Andrew A. Levy is President has
acted as a consultant and advisor to the Company since August 1996. Since June
1983, Mr. Levy has been the chief executive officer of Redstone Capital
Corporation, an investment banking firm specializing in oil and gas and energy
cogeneration project financings, and in leveraged buy-outs. From March 1993 to
August 1994, Mr. Levy was vice-president and a director of NR Marine, Inc., a
company engaged in the business of owning and operating offshore oil and gas
drilling rigs. In August 1994, NR Marine filed for bankruptcy protection under
chapter 11 of the U.S. Bankruptcy Code. Mr. Levy graduated from Yale University
in 1968 with a B.S. in engineering, and graduated from Harvard Law School in
1972.
Item 11. Executive Compensation
The following table sets forth the compensation paid by the Company for
services rendered in all capacities during the fiscal years ended March 31,
1998, 1997 and 1996 to its chief executive officer and to the most
highly-compensated executive officers and key employees (other than the chief
executive officer) whose annual salary and bonus exceeded $100,000 and who were
serving at March 31, 1998 (collectively, the "Named Officers").
Summary Compensation Table
Total Paid Compensation
-----------------------
Name and Principal Position Year Other Annual
- --------------------------- Ended Salary Bonus Compensation
March 31 ($) ($) ($)
-------- --- --- ---
Steven Merker, Chairman and 1998 $ 22,154
Chief Executive Officer
Karl Massaro, President 1998 173,231
1997 680,546
1996 386,613
Carl Massaro, Consultant 1998 113,846
1997 581,947
1996 1,232,500
Employment Agreements
The Company has entered into employment agreements with Steven Merker,
Karl Massaro, and Roy Ceccato and into a consulting agreement with Carl Massaro.
In January 1998 the Company entered into an employment agreement with
Steven Merker which will terminate three years thereafter, subject to earlier
termination upon the occurrence of certain specified events. Pursuant to his
employment agreement, Mr. Merker will receive a base salary at the annual rate
of $144,000, and such bonus compensation as the Board of Directors may
determine. Mr. Merker will be required to devote at least 40 hours per week to
the business of the Company.
In January 1998 the Company entered into an employment agreement with Karl
Massaro which will terminate three years thereafter, subject to earlier
termination upon the occurrence of certain specified events. Pursuant to his
Employment Agreement, Mr. Massaro will receive a base salary at the annual rate
of $200,000 and such bonus compensation as the Board of Directors may determine.
The agreement will also contain restrictive covenants prohibiting Mr. Massaro
from directly or indirectly competing with the Company east of the Mississippi
River during the three-month period commencing upon the termination of his
agreement, and, during the six-month period commencing upon such termination,
from soliciting or servicing any supplier to or customer of the Company for any
competitive purpose, and from employing or retaining any employee of or
consultant to the Company or soliciting any such employee or consultant to
become affiliated with any entity other than the Company.
In February 1998 the Company entered into an employment agreement with Roy
Ceccato which will terminate
20
<PAGE>
three years thereafter, subject to earlier termination upon the occurrence of
certain specified events. Pursuant to his employment agreement, Mr. Ceccato will
receive a base salary at the annual rate of $120,000, with an annual increase of
$30,000 and such bonus compensation as the Board of Directors may determine.
Carl Massaro's consulting agreement became effective in February 1998 and
will terminate three years thereafter, subject to earlier termination on the
occurrence of certain specified events pursuant to this agreement. Mr. Massaro
will receive consulting fees at the annual rate of $160,000 and is required to
devote at least 40 hours per month to the business of the Company. Mr. Massaro
has the right to attend Board meetings as an observer. The agreement also
contains restrictive covenants prohibiting Mr. Massaro, during the one-year
period commencing upon the termination of the agreement, from directly or
indirectly competing with the Company east of the Mississippi River, soliciting
or servicing any supplier to or customer of the Company for any competitive
purpose, and employing or retaining any employee of or consultant to the Company
or soliciting any such employee or consultant to become affiliated with any
entity other than the Company.
Board of Directors
The Certificate of Incorporation divides the Board of Directors into three
classes, with, initially, one class having a term of one year, one class having
a term of two years and one class having a term of three years. Commencing with
the annual meeting of stockholders to be held in 1999, directors will be elected
to succeed those directors whose terms have expired, and each newly elected
director will serve for a three-year term. All officers are appointed annually
by the Board of Directors and, subject to existing employment agreements, serve
at the discretion of the Board. Directors who are employees of the Company
receive no compensation for serving on the Board of Directors. It is expected
that Directors who are not employees of the Company will receive compensation
for their services in an amount to be determined. All Directors are reimbursed
by the Company for any expenses incurred in attending Director's meetings and,
upon completion of this Offering, non-employee directors will receive
compensation of $500 per meeting attended and options to purchase 2,000 shares
of the Company's Common Stock in respect of the first year of such service as a
director, and 500 shares of the Company's Common Stock for each year of such
service thereafter. The Company has obtained Officers and Directors liability
insurance.
Audit Committee of the Board of Directors
The Board of Directors has designated an Audit Committee of the Board of
Directors consisting of Messrs. Spinella and Needham. The duties of the Audit
Committee are to (i) recommend to the full Board the auditing firm to be
selected each year as the Company's independent auditors and the terms and
conditions upon which such firm is to be engaged, (ii) consult with the persons
so chosen to be the independent auditors with regard to the plan of audit, (iii)
review, in consultation with the independent auditors, their report of audit, or
proposed report of audit, and the accompanying management letter, if any, (iv)
consult with the independent auditors (periodically, as appropriate, out of the
presence of management) with regard to the adequacy of the Company's internal
accounting and control procedures, (v) review the Company's financial condition
and results of operations with management and the independent auditors and (vi)
review any non-audit services and special engagements to be performed by the
independent auditors and consider the effect of such performance on the
auditors' independence.
Compensation Committee of the Board of Directors
The Board of Directors has designated a Compensation Committee of the
Board of Directors, consisting initially of Steven Merker, Joseph Spinella and
William Needham. The primary duties of the Compensation Committee are to (i)
determine the annual salary, bonus and other benefits, direct and indirect, of
any and all executive officers (as defined under Regulation S-K promulgated by
the Commission), (ii) prepare an Annual Report of the Compensation Committee for
inclusion in the Company's Proxy Statement, (iii) review and recommend to the
full Board any and all matters related to benefit plans covering the foregoing
officers and any other employees in the event such matters are appropriate for
stockholder approval, and (iv) administer any stock option plan or other bonus
or incentive plan or pool adopted by the Company (including the 1997 Incentive
Stock Option Plan).
1997 Stock Option Plan
The Company has adopted its 1997 Stock Option Plan ("Plan"). The Board
believes that the Plan is desirable to attract and retain executives and other
key employees of outstanding ability. Under the Plan, options to purchase an
aggregate of not more than 340,000 shares of Common Stock may be granted from
time to time to all employees of the Company or any parent corporation or
subsidiary corporation of the Company. To date no options have been
21
<PAGE>
granted pursuant to the Plan.
The Board of Directors currently administers the Plan, which has empowered
the Compensation Committee to administer the Plan. The Compensation Committee is
generally empowered to interpret the Plan, prescribe rules and regulations
relating thereto, determine the terms of the option agreements, amend them with
the consent of the optionee, determine the individuals to whom options are to be
granted, and determine the number of shares subject to each option and the
exercise price thereof. The per share exercise price for options granted under
the Plan are determined by the Compensation Committee; provided that the
exercise price of incentive stock options ("ISOs") will not be less than 100% of
the fair market value of a share of the Common Stock on the date the option is
granted (110% of fair market value on the date of grant of an ISO if the
optionee owns more than 10% of the Common Stock of the Company); and further
provided that, for a period of 18 months after the IPO, the exercise price will
be the greater of 110% of fair market value on the date of grant and the IPO
price of the Common Stock. Upon exercise of an option, the optionee may pay the
purchase price with previously acquired shares of Common Stock of the Company,
or at the discretion of the Board, the Company may loan some or the entire
purchase price to the optionee.
Options will be exercisable for a term determined by the Compensation
Committee which will not be greater than ten years from the date of grant (or
five years in the case of ISO's granted to holders of more than 10% of the
Common Stock). The Compensation Committee shall determine the effect on an
option of the termination of the optionee's relationship with the Company. In
the event of certain basic changes in the Company, including a reorganization,
merger or consolidation of the Company, or the purchase of shares pursuant to a
tender offer for shares of Common Stock of the Company, in the discretion of the
Committee, each option may become fully and immediately exercisable. ISOs are
not transferable other than by will or the laws of descent and distribution.
Non-qualified stock options may be transferred to the optionee's spouse or
lineal descendants, subject to certain restrictions. Only the holder, his or her
guardian or legal representative, may exercise options during the holder's
lifetime.
Options granted pursuant to the Plan may be designated as ISOs, with the
attendant tax benefits provided under Section 421 and 422 of the Internal
Revenue Code of 1986. Accordingly, the Plan provides that the aggregate fair
market value (determined at the time an ISO is granted) of the Common Stock
subject to ISOs exercisable for the first time by an employee during any
calendar year (under all plans of the Company and its subsidiaries) may not
exceed $100,000. The Board may modify, suspend or terminate the Plan; provided,
that certain material modifications affecting the Plan must be approved by the
stockholders, and any change in the Plan that may adversely affect an optionee's
rights under an option previously granted under the Plan requires the consent of
the optionee.
22
<PAGE>
Comparative Performance by the Company
The following graph shows a comparison of cumulative total returns for the
Company, the American Stock Exchange Market index ("Amex") and a peer group
index during the period covered.
[LINE GRAPH OMITTED]
23
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock at the date of this
report by (i) each person known by the Company to own beneficially more than 5%
of the Company's Common Stock, (ii) each of the Company's directors and
executive officers, and (iii) all officers and directors of the Company as a
group. Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed below based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws, where applicable.
Name and Address of Number of Percent of Common
Beneficial Owner Shares Stock Owned
---------------- ------ -----------
Roy Ceccato (1) 70,000 2.3%
Andrew Levy (2) 178,430 5.8%
Karl Massaro (1) 145,000 4.7%
Steven Merker (3) 525,160 17.0%
William Merker (3) 304,410 9.8%
Joseph Spinella (1) -- --
William Needham(4) -- --
All Directors and Officers
as a group (6 persons) 1,223,000 39.5%
- ----------
(1) The address of such person is c/o the Company, 321 Valley Road,
Hillsborough Township, NJ 08876-4056.
(2) The address of such person is c/o Redstone Capital Corp., 280 Park Avenue,
New York, NY 10017-1216. Includes 30,000 shares owned by a family trust
and 50,000 shares owned by Mr. Levy's wife. Mr. Levy disclaims beneficial
ownership as to all such shares.
(3) The address of such person is c/o the Company, 280 Park Avenue, 21st Floor
West, New York, NY 10017-1216. Steven and William Merker each disclaims
beneficial ownership of shares owned by the other.
(4) The address of such person is 400 E. 58th Street, New York, NY 10022-2318
Item 13. Certain Relationships and Related Transactions
Steven Merker and William Merker are brothers. Carl Massaro, the founder
of Ajax and its sole stockholder prior to the Acquisition, is the father of Karl
Massaro, the President and a Director of the Company. There are no other family
relationships among the Company's officers, directors and 5% shareholders.
Redstone Advisors, of which William Merker and Redstone Capital
Corporation, of which Andrew A. Levy is President, are the principals, will upon
completion of the acquisition of R&S Truck Body and CPS Trailer Company be paid
a fee for services rendered in connection with arranging such transactions.
The Company subleases portions of its offices at 280 Park Avenue, New
York, New York, to the Redstone Capital Corporation and Barclay Partners LLC in
each case, on a month-to-month basis for a monthly rental of $2,000.
In January 1998, the Company granted Carl Massaro options to purchase up
to 50,000 shares of Common Stock. The options are initially exercisable at a
price of $11.50 per share.
In January 1998, the Company and Carl Massaro entered into a three-year
consulting agreement providing for annual base compensation of $160,000 and a
"triple net" lease of the factory and office facility owned by Mr. Massaro and
presently occupied by Ajax. The lease will provide for annual rent of $600,000,
payable monthly, and the estimated amount of triple net expenses for the first
year are approximately $63,000. During the initial five-year term of the lease,
so long as the Company is not in default thereunder or under the Redemption
Note, the Company will have the option to purchase the leased facility and land
for a cash purchase price of $6.5 million. Ajax also terminated an existing
credit facility with Summit Bank, and Mr. Massaro has terminated his guaranty of
the Company's obligations thereunder. The terms of the lease, including the
purchase option, were determined through arms' length negotiation between the
Company and Carl Massaro.
24
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 10-K
Financial statements and schedules
The reports of independent certified public accountants, consolidated
financial statements and notes to consolidated financial statements
required by this item are submitted as part of this Annual Report
beginning on page 28.
Financial Statements of Standard Automotive Corporation
Page
----
Report of Independent Certified Public Accountants 28
Consolidated Balance Sheets as of March 31, 1998 and 1997 29
Consolidated Statement of Income for the year ended March 31, 1998 30
Consolidated Statement of Stockholders' Equity for the year ended
March 31, 1998 31
Consolidated Statement of Cash Flows for the year ended March 31, 1998 32
Notes to Consolidated Financial Statements 33
Financial Statements of Ajax Manufacturing Company
(A wholly owned subsidiary of Standard Automotive Corporation)
Report of Independent Certified Public Accountants 44
Statements of Income and Retained Earnings for the period from
April 1, 1997 through January 26, 1998 and for the
years ended March 31, 1997 and 1996 45
Statements of Cash Flows for the period from April 1, 1997 through
January 26, 1998 and for the years ended March 31, 1997 and 1996 46
Notes to the Financial Statements 47
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
applicable or not required under the related instructions or because the
required information is presented in the financial statements or notes thereto
and therefore, have been omitted.
25
<PAGE>
Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Amended and Restated Certificate of Incorporation of the Company (*)
3.2 Form of Certificate of Designation, Preferences and Rights of 8 1/2%
Senior Convertible Redeemable Preferred Stock (*)
3.3 By-Laws of the Company (*)
10.1 Stock Purchase and Redemption Agreement between Standard Automotive
Corporation and Carl Massaro dated August 11, 1997 (*)
10.2 Form of Employment Agreement between the Company and Karl Massaro
(*)
10.3 Form of Consulting Agreement between the Company and Carl Massaro
(*) 10.4 Form of Employment Agreement between the Company and Steven
Merker (*)
10.5 Form of Lease between the Company and Carl Massaro (*) 10.7 1997
Incentive Stock Option Plan (*)
10.8 Advisory Agreement between the Company and Barclay partners LLC (*)
10.9 Advisory Agreement between the company and Redstone Capital Corp.
(*)
10.10 Form of Redemption Note to be executed by the Company in favor of
Carl Massaro (*)
10.11 Form of Security Agreement between the Company and Carl Massaro (*)
10.12 Form of Guaranty made by the Company in favor of Carl Massaro (*)
10.14 Amendment to Stock Purchase and Redemption Agreement between
Standard Automotive Corporation and Carl Massaro dated August 11,
1997 (*)
10.15 Remediation Agreement between Ajax Manufacturing Company and the
NJDEP (*)
10.16 Second Amendment to Stock Purchase and Redemption Agreement between
Standard Automotive Corporation and Carl Massaro dated August 11,
1997 (*)
10.17 Stock Purchase Agreement between Barclay Investments, Inc., CPS
Trailer Company, Inc. and the shareholder of CPS Trailer Company,
Inc. (**)
10.18 Stock Purchase Agreement between Barclay Investments, Inc., R&S
Truck Body, Inc. and the shareholders of R&S Truck Body, Inc. (**)
10.19 Stock Purchase Agreement between Standard Automotive Corporation,
Barclay Investments, Inc. and the shareholders of Barclay
Investments, Inc. (**)
10.20 First amendment to Stock Purchase Agreement between Barclay
Investments, Inc., CPS Trailer Company, Inc. and the shareholder of
CPS Trailer Company, Inc.
10.21 First amendment to Stock Purchase Agreement between Barclay
Investments, Inc., R&S Truck Body, Inc. and the shareholders of R&S
Truck Body, Inc.
10.22 Second amendment to Stock Purchase Agreement between Barclay
Investments, Inc., R&S Truck Body, Inc. and the shareholders of R&S
Truck Body, Inc.
27.0 Financial Data Schedule
(*) Incorporated by reference to the Company's Registration Statement on Form
S-1, File No. 333-33465.
(**) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for December 31, 1997.
26
<PAGE>
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.
STANDARD AUTOMOTIVE CORPORATION
By: /s/ Steven Merker Date: June 29, 1998
---------------------------------------
Steven Merker
Chairman and Chief Executive Officer
Pursuant to 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.
Signature Date
/s/ Steven Merker June 29, 1998
- ---------------------------------------
Steven Merker
Chairman and Chief Executive Officer
/s/ Karl Massaro June 29, 1998
- ---------------------------------------
Karl Massaro
President
/s/ William Merker June 29, 1998
- ---------------------------------------
William Merker
Vice President, Secretary and Director
/s/ Roy Ceccato June 29, 1998
- ---------------------------------------
Roy Ceccato
Chief Financial Officer and Director
/s/ Joseph Spinella June 29, 1998
- ---------------------------------------
Joseph Spinella
Director
/s/ William Needham June 29, 1998
- ---------------------------------------
William Needham
Director
27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Standard Automotive Corporation
We have audited the accompanying balance sheets of Standard
Automotive Corporation as of March 31, 1997 and 1998, and the related statements
of income, stockholders' equity and cash flows for the year ended March 31,
1998. 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 in accordance with generally accepted
auditing standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Standard Automotive
Corporation as of March 31, 1997 and 1998, and the results of its operations and
its cash flows for the year ended March 31, 1998 in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
June 25, 1998
28
<PAGE>
Standard Automotive Corporation
Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31,
--------------------------
1997 1998
-------- --------
<S> <C> <C>
Assets
Cash and cash equivalents $ -- $ 3,357
Accounts receivable, net of allowance for doubtful accounts
of $55 -- 4,838
Inventory -- 5,399
Prepaid expenses -- 515
Deferred taxes -- 289
-------- --------
Total current assets -- 14,398
Property and equipment, net of accumulated depreciation and
amortization of $35 -- 1,225
Intangible assets, net of accumulated amortization of $130 -- 15,127
Capitalized acquisition and financing costs 375 810
-------- --------
Total assets $ 375 $ 31,560
======== ========
Liabilities and Stockholders' Equity
Accounts payable $ -- $ 1,146
Accrued expenses 375 216
Accrued wages -- 169
Accrued excise taxes -- 243
Acquisition expenses -- 350
Income taxes payable -- 727
-------- --------
Total current liabilities 375 2,851
Note payable -- 4,000
Commitments and contingencies (Notes 8, 10 and 11)
Stockholders' equity:
Preferred stock, $ .001 par value 3,000,000 shares authorized,
none and 1,150,000 issued and outstanding, respectively -- 1
Common stock, $ .001 par value 10,000,000 shares authorized,
1,567,500 and 3,095,000 issued and outstanding, respectively 2 3
Common stock subscription receivable (2) (2)
Additional paid-in capital -- 24,548
Retained earnings -- 159
-------- --------
Total stockholders' equity -- 24,709
-------- --------
Total liabilities and stockholders' equity $ 375 $ 31,560
======== ========
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
STANDARD AUTOMOTIVE CORPORATION
Statement of Income
For the Year Ended March 31, 1998
(in thousands, except share and per share data)
<TABLE>
<S> <C>
Revenues $ 7,936
Operating costs and expenses:
Cost of revenues (includes $ 275 of costs related to the Acquisition) 6,094
Selling, general and administrative expenses 407
Amortization of intangible assets 130
-------
Total operating costs and expenses 6,631
-------
Operating income 1,305
Other expense:
Bridge note interest (375)
Interest expense (75)
Other expense (54)
-------
Income before income taxes 801
Provision for income taxes 458
-------
Net income 343
Preferred dividend (184)
-------
Net income available to common stockholders $ 159
=======
Basic net income per share $ 0.09
=======
Diluted net income per share $ 0.09
=======
Basic and Diluted weighted average number of shares outstanding 1,846
</TABLE>
See accompanying notes to financial statements.
30
<PAGE>
Standard Automotive Corporation
For the Year Ended March 31, 1998
Statement of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Preferred Common Common Stock Additional Total
Shares Preferred Shares Common Subscription Paid In Retained Stockholders'
Outstanding Stock Outstanding Stock Receivable Capital Earnings Equity
----------- --------- ----------- -------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1997 -- $ -- 1,567 $ 2 $ (2) $ -- $ -- $ --
Proceeds from sale of
common and preferred
shares 1,150 1 1,495 1 -- 28,748 -- 28,750
Issuance of shares to
Bridge Note Investors -- -- 33 -- -- 325 -- 325
Cost of Initial Public
Offering -- -- -- -- -- (4,751) -- (4,751)
Warrants and Options
Issued -- -- -- -- -- 226 -- 226
Preferred Stock
Dividend -- -- -- -- -- -- (184) (184)
Net Income 343 343
------- -------- -------- -------- -------- -------- -------- --------
Balance - March 31, 1998 1,150 $ 1 3,095 $ 3 $ (2) $ 24,548 $ 159 $ 24,709
======= ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
31
<PAGE>
STANDARD AUTOMOTIVE CORPORATION
Statement of Cash Flows
For the Year Ended March 31, 1998
(in thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 343
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 165
Non cash interest expense 325
Stock option compensation 32
Deferred taxes (38)
Change in assets and liabilites:
Accounts receivable 677
Inventory 145
Prepaid expenses (320)
Accounts payable and accrued expenses (464)
Income and other taxes payable (604)
--------
Net cash provided by operating activities 261
--------
Cash flows from investing activities:
Capitalized acquisition costs (810)
Acquisition of Ajax Manufacturing Company, net of cash acquired (19,361)
Acquisition of property and equipment (197)
--------
Net cash used in investing activities (20,368)
--------
Cash flows provided by financing activities:
Preferred dividend payment (184)
Proceeds from the issuance of common and preferred shares,
net of underwriters' commission and expenses 25,510
Payment of registration costs of common and preferred shares (1,512)
Proceeds from Bridge Note borrowings 325
Repayment of Bridge Note borrowings (325)
Payments on short term borrowings (350)
--------
Net cash provided by financing activities 23,464
--------
Net increase in cash and cash equivalents 3,357
Cash and cash equivalents, beginning of period --
--------
Cash and cash equivalents, end of period $ 3,357
========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 114
Income taxes 1,100
</TABLE>
See accompanying notes to financial statements.
32
<PAGE>
STANDARD AUTOMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Organizational and Business Combination
Standard Automotive Corporation (the "Company") was formed and incorporated in
January 1997. The Company had conducted no operations for the year ended March
31,1997. The Company's principal activity is the manufacture and refurbishing of
trailer chassis for domestic customers, through its wholly owned subsidiary,
Ajax Manufacturing Company ("Ajax").
On January 27, 1998 the Company executed an agreement to purchase all
outstanding shares of Ajax for a total purchase price of approximately
$23,819,000 ("Acquisition"), comprised of a cash payment of approximately
$19,618,000 and incurrence of a debt obligation of approximately $4,000,000 to
the Ajax shareholder (see Note 5) and other consideration valued at
approximately $201,000. The Acquisition was accounted for as a purchase and,
accordingly, the Company's 1998 financial statements include the results and
activity of Ajax for only the period of January 27, 1998 through March 31, 1998.
The excess of the purchase price over the fair market value of Ajax's net assets
at the date of Acquisition totaled approximately $15,257,000. This amount is
being amortized on a straight-line basis over a twenty-year period. The final
allocation of the Ajax purchase price is subject to negotiation among the
parties and certain adjustments may be made to the related debt obligation and
goodwill resulting from the Acquisition. Management does not expect such
adjustments to be material to the Company's financial position.
The following summarized, unaudited pro forma information for the year ended
March 31, 1998 assumes that the acquisition of Ajax had occurred on April 1,
1997 and should be read in conjunction with the predecessor company's financial
statements as presented elsewhere in this report (in thousands except per share
data):
Historical
Combined Adjustments Proforma
---------- ----------- -----------
(Unaudited) (Unaudited)
Revenues $ 33,070 $ -- $ 33,070
Operating income 5,110 (397) 4,713
========== =========== ===========
Net income $ 2,086 $ (252) $ 1,834
========== =========== ===========
Preferred dividend $ 184 $ 989(1) $ 1,173
Basic and diluted net income per
share $ 0.21
===========
Basic and Diluted weighted average
number of shares outstanding 3,095
The pro forma operating results reflect estimated adjustments for: elimination
of purchase accounting adjustments on the fair value of purchased inventory; a
year of amortization expense on intangibles arising from the Acquisition;
elimination of the Bridge Note interest; a year of interest expense on the
Acquisition debt; the tax effect on these adjustments and a year of Preferred
Stock dividend requirements.
Pro forma results of operations information is not necessarily indicative of the
results of operations that would have occurred had the Acquisition been
consummated as of April 1, 1997 or of future results of the combined companies.
Concurrent with the Acquisition, the Company issued 1,300,000 shares of common
stock and 1,000,000 shares of preferred stock for gross proceeds of $25,000,000
in an initial public offering. Subsequent to the offering, an additional 195,000
and 150,000 shares of common and preferred stock, respectively, were issued in
the underwriters' exercise of an over-allotment option.
2. Summary of Significant Accounting Policies
Principles of Consolidation
33
<PAGE>
The consolidated financial statements include the accounts of the Company
and Ajax. All intercompany accounts and transactions are eliminated in
consolidation.
Revenue Recognition
The Company recognizes revenue when the product is inspected and accepted
by its customers or the customers' authorized agent and title has transferred.
Cash Equivalents
The Company considers all highly liquid investments with maturities of
less than three months when purchased to be cash equivalents.
Income Taxes
The Company follows Statement of Financial Accounting Standard ("SFAS")
No. 109, "Accounting for Income Taxes," which requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined on the difference
between the financial statement and tax basis of assets and liabilities using
expected tax rates in effect for the year in which the differences are expected
to reverse.
Inventory
Inventory is stated at the lower of cost, determined on a first-in,
first-out basis, or market. Acquired inventory at January 26, 1998 was adjusted
to its then fair market value. Costs of revenues include a charge of $275,000
representing the effects of this adjustment as the inventory was sold.
Property and Equipment
Property and equipment are stated at their fair values at the Acquisition
date. Depreciation is computed using the straight-line method for financial
reporting purposes. The estimated lives used in depreciating the assets are:
Years
-----
Transportation equipment 3 - 5
Leasehold improvements Lease term
Furniture, fixtures and office equipment 5 - 7
Machinery and equipment 5 - 7
Depreciation on leasehold improvements is recorded over the lesser of the
useful lives of the assets or lease term. Expenditures for major renewals and
improvements that extend the useful lives of property and equipment are
capitalized. Expenditures for routine maintenance and repairs are charged to
expense as incurred.
Long - Lived Assets
The Company performs a periodic review of the carrying values of
long-lived assets. Impairments would be recognized if the expected future
operating non-discounted cash flows derived from the underlying asset would be
less that its carrying values.
Capitalized Acquisition and Financing Costs
At March 31, 1998 and 1997 costs of approximately $810,000 and $375,000,
respectively, were capitalized in connection with contemplated acquisitions (see
Notes 1 and 11). If the current acquisitions are not ultimately consummated,
such costs would be expensed in the period in which the acquisitions are
abandoned.
Computation of Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Standard No. 128
("SFAS No. 128"), Earnings per Share. SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share exclude the
dilutive effects of options. Diluted earnings per share are very similar to the
fully diluted earnings per share. Earnings per share have been computed using
the weighted average number of shares of common stock outstanding. Diluted
earnings per share is the same as the basic amount and thus has not been
presented since the effects of unissued shares, underlying warrants and options,
and the conversion of preferred stock are anti-dilutive. The assumed exercise of
stock options and warrants and conversion of preferred shares could potentially
dilute basic earnings per share amounts in the future. Potential common shares
totaling 1,732,000 were not included in the calculation of diluted earnings per
share for 1998 since the effects of common stock equivalents were not
encompassed in such calculation or are anti-dilutive.
Effects of Recently Issued Accounting Standards
34
<PAGE>
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards.
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which supersedes SFAS No. 14, Financial Reporting for Segments of A
Business Enterprise, establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of a company
about which separate financial information is available that is evaluated
regularly by management in deciding how to allocate resources and in assessing
performance.
SFAS Nos. 130 and 131 are effective for the Company's 1999 financial
statements and require comparative information for earlier years to be restated.
Because of the relatively recent issuance of these standards, management has
been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of these standards.
Non - Cash Investing and Financing Activities
The Company issued 32,500 shares of common stock for no consideration in
connection with the settlement of the Bridge Notes (see Note 5).
As discussed in Note 1, the Company acquired all the common stock of Ajax
for $19,618,000 on January 27, 1998. In connection with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired $ 13,846,000
Cash paid for stock (19,618,000)
------------
Liabilities assumed $ (5,772,000)
============
Stock options with an aggregate value of $201,000 were issued in
connection with the Acquisition.
Use of Estimates
The preparation of 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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The costs the Company will ultimately incur and the value of
assets ultimately realized could differ in the near term from the related
amounts reflected in the accompanying financial statements.
Significant accounting estimates include valuation of inventory, useful
lives of property, equipment and goodwill, the allocation of the Ajax purchase
price and in the measurement of contingencies.
Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing fair value to
the extent practicable for financial instruments which are recognized or
unrecognized in the balance sheet. The fair value of the financial instruments
disclosed herein is not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider the tax
consequences of realization or settlement. For cash equivalents, accounts
receivable, accounts payable, and debt instruments, it is estimated that the
carrying amounts at March 31, 1998 and 1997 approximated fair values for these
instruments because of their short-term maturities, interest rates or payment
terms.
35
<PAGE>
3. Inventory.
Inventory is comprised of the following:
March 31,
1998
----------
Raw materials $4,881,000
Work in progress 380,000
Finished goods 138,000
----------
$5,399,000
==========
4. Property and Equipment.
Property and equipment are summarized by major classifications as follows:
March 31,
1998
----------
Transportation equipment $ 56,000
Leasehold improvements 724,000
Furniture, fixtures and office equipment 69,000
Machinery and equipment 411,000
----------
1,260,000
Less: Accumulated depreciation and amortization 35,000
----------
$1,225,000
==========
5. Long Term Debt and Credit Agreements (see Note 11)
In August 1997, the Company sold $ 325,000 of 12 % Bridge Notes to private
investors. The Bridge Notes and accrued interest thereon were repaid in February
1998 and, pursuant to the Bridge Note agreements, the private investors were
issued 32,500 shares of common stock for no consideration. The value ascribed to
the issuance of such shares was based on the initial public offering price of
the common stock and totaled $325,000. In addition, financing fees related to
the debt totaled $29,000. Such amounts were expensed over the period that the
Bridge Notes were outstanding. The annualized effective rate of interest on the
Bridge Notes was 121%.
In connection with the Acquisition, the Company incurred an obligation of
approximately $4,000,000 to the Ajax shareholder. The note is secured by the
assets of the Company and bears interest at a rate of 10% per annum. The
outstanding principal is payable, in full, on January 27, 2001. Interest on the
debt is paid on a current basis and interest expense for the period from January
27, 1998 through March 31, 1998 totaled approximately $71,000.
6. Stockholders' Equity
Common Stock Reserved for Issuance (see Note 11)
At March 31, 1998 the Company had reserved 2,072,000 shares for the
exercise of stock options, warrants and the conversion of preferred stock.
In 1997, common stock was issued to the Company's founders and principals
at nominal values, which approximated management's assessment of the fair values
of such securities at the date of issuance. At that time, the Company had
conducted no business and the probability of consummating the acquisition of
Ajax could not be predicted with any degree of certainty.
36
<PAGE>
In November 1997, the Company effected a .758162-for-one reverse stock
split, which reduced the number of shares of the Company outstanding from
2,067,500 to 1,567,500. All share and per share data have been changed to
reflect the split.
Convertible Redeemable Preferred Stock ("Preferred Stock")
Dividends on the Company's Preferred Stock are payable at a rate of $1.02
per year on a quarterly basis, when declared by the Company's Board of
Directors. The Preferred Stock is convertible into common stock on a one to one
basis after July 21, 1998; the conversion rate is subject to adjustment under
certain circumstances, including the failure of the Company to pay a dividend in
a timely manner.
The Preferred Stock is redeemable by the Company, with advance notice, on
or after July 22, 2000 at a price of $12 per share (plus unpaid dividends) if
certain market prices for the Preferred Stock are achieved. The Preferred Stock
holders have the authority, voting as a class, to approve or disapprove the
issuance of any Company securities that are senior or comparable to the rights
of the Preferred Stock, and also have a preference on the distribution of
assets. In the event that dividends are in arrears for four fiscal quarters, the
Preferred Stock holders will be entitled to elect two directors to the Company's
Board of Directors.
The Company's Board of Directors may not declare dividends to common stock
holders unless all accrued cash dividends have been paid to Preferred Stock
holders.
Stock Options and Warrants
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages entities
to adopt that method in place of the provisions of Accounting Principles Board
Opinion Number 25, Accounting for Stock Issued to Employees ("APB No. 25"), for
all arrangements under which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company continues to account for
such transactions in accordance with APB No. 25 and, as required by SFAS No.
123, has provided pro forma information regarding net income as if compensation
cost for the Company's stock option plan had been determined in accordance with
the fair value method prescribed by SFAS No. 123.
Under the 1997 Stock Option Plan the Company may grant non-qualified and
incentive stock options to certain officers, employees and directors. The
options expire one to seven years from the grant date or five years for grants
to shareholders who own more than 10% of the Company stock. The options may be
exercised subject to continued service and certain other conditions. Accelerated
vesting occurs following a change in control of the Company and under certain
other conditions. The Company may grant an aggregate of 340,000 shares under the
plan.
The per share exercise price for options granted under the Plan are
determined by the Board of Directors, provided that the exercise price of
incentive stock options ("ISOs") will not be less than 100% of the fair market
value of a share of the common stock on the date the option is granted (110% of
fair market value on the date of grant of an ISO if the optionee owns more than
10% of the common stock of the Company); and further provided that through July
27, 1999, the exercise price will be the greater of 110% of the fair market
value on the date of grant and the initial public offering price of the common
stock. Upon exercise of an option, the optionee may pay the purchase price with
previously acquired shares of common stock of the Company or, at the discretion
of the Board of Directors, the Company may loan some or the entire purchase
price to the optionee.
Prior to the establishment of the 1997 Stock Options Plan, the Company
granted 227,000 and 75,000 warrants to employees and a director, respectively.
The Company estimates the fair value of each stock option and warrant at
the grant date by using the Black-Scholes option-pricing model with the
following weighted average assumptions used for 1998 grants; no dividend yield,
expected volatility of 46.5%, risk free interest rates of approximately 5.43%
and expected lives of one to seven years. If compensation cost for the Company's
stock option and warrant grants had been determined in accordance with SFAS No.
123, net income available to common stockholders would have been reduced in 1998
by approximately $65,000 and earnings per share would have been reduced by
$0.04.
37
<PAGE>
The following table summarizes information about stock options and
warrants outstanding at March 31, 1998:
Options/Warrants Outstanding Options/Warrants Exercisable
--------------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
----------------------------------------------------------------------
$ 10.50 75,000 0.8 $ 10.50 0 $ 10.50
$ 10.89 227,000 6.8 $ 10.89 0 $ 10.89
$ 11.50 50,000 4.8 $ 11.50 0 $ 11.50
--------- ---------------------
352,000 5.24 $ 10.89 0 $ 10.89
========= =====================
Weighted
Average
Exercise
Shares Price
---------------------
Shares under Option/Warrant at April 1, 1997 -- --
Granted 352,000 $10.89
Canceled -- --
------- ------
Shares under Option/Warrant at March 31, 1998 352,000 $10.89
======= ======
There were no options or warrants exercisable at March 31, 1998. Options
available for grant total 340,000. The weighted average fair value of options
and warrants granted during the year ended March 31, 1998 is $4.85.
In connection with the Acquisition, the Company has granted 50,000 options
to the Ajax shareholder exercisable at $11.50 per share. Such options vest on
July 27, 1999 and may be exercised over a five-year period, if certain criterion
are met. The amortization expense related to the value ascribed to the options
(accounted for as a cost of the Acquisition) is $7,000 for the period from
January 27, 1998 through March 31, 1998.
The Company has also granted 75,000 warrants to a director for services to
be rendered. Such options vest over a one-year period. The compensation expense
related to the grant approximates $25,000 for the year ended March 31, 1998.
Underwriters' Warrants
In connection with the Initial Public Offering, the Underwriters received
130,000 common stock warrants and 100,000 of preferred stock warrants with
exercise prices of $16.50 and $19.80, respectively. Such warrants expire on
January 22, 2003.
7. Income Taxes
The provision (benefit) for income taxes for the year ended March 31, 1998
consists of the following components:
March 31,
1998
---------
Current:
Federal $ 384,000
State 112,000
---------
496,000
---------
Deferred:
Federal (30,000)
State (8,000)
---------
(38,000)
---------
Total provision $ 458,000
=========
Deferred tax assets (liabilities) consist of the following items:
38
<PAGE>
March 31,
1998
---------
Deferred tax asset:
Accounts receivable $ 12,000
Inventory 279,000
Accrued liabilities 10,000
---------
$ 301,000
Deferred tax liabilities:
Principally property, plant and equipment basis difference (12,000)
---------
Deferred tax asset, net $ 289,000
=========
A reconciliation between the Company's effective tax-rate and the U.S. statutory
rate is as follows:
1998
----------
U.S. statutory rate applied to pretax income 34.0%
State tax provision, net of federal tax benefit 6.0
Non deductible Acquisition costs 11.5
Amortization of goodwill 5.5
---------
Total effective tax rate 57.0%
=========
8. Related Party Transactions
The Company leases its manufacturing facility from the Ajax shareholder.
The lease provides for annual rent of $600,000 per year plus reimbursable
expenses, payable monthly, for a five year period with four renewal options
totaling twenty years. During the initial term of the lease, the Company also
has an option to purchase the leased Ajax facility for $6.5 million. To exercise
this option, the Company must not be in default of the note payable to the Ajax
shareholder.
Fees paid to Directors and officers for services rendered in connection with the
Acquisition totaled approximately $160,000.
At March 31, 1998, the Company had advanced $810,000 to an entity controlled by
a stockholder of the Company for costs incurred on potential acquisitions.
The Company and certain officers and consultants have executed employment
agreements which provide for, in certain circumstances, minimum annual salaries
to be paid over specified terms. Future commitments for such payments are as
follows:
Year Ending March 31, Amount
--------------------- ----------
1999 $ 624,000
2000 654,000
2001 570,000
----------
$1,848,000
==========
39
<PAGE>
9. Major Customers and Concentrations
Major Customers
Two customers individually accounted for 59% and 24% of net sales for the
year ended March 31, 1998.
Historically, the Company has relied on a limited number of customers for
a substantial portion of its total revenues. The Company expects that a
significant portion of its future revenues will continue to be generated by a
limited number of customers. The loss of any of these customers or any
substantial reduction in orders by any of these customers could have a material
adverse effect on operating results.
Concentrations
The Company's manufacturing and refurbishing processes are concentrated in
one facility.
The Company maintains cash balances at several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. At March 31, 1998 approximately $1,800,000 and
$999,000 were invested in two domestic money market funds.
Credit Risk
Accounts receivable are primarily composed of unsecured balances. The
Company does not require collateral as a condition of sale.
The Company has four customers with individual balances in excess of ten
percent of consolidated accounts receivable. In the aggregate, these four
customers comprise approximately 98% of the net accounts receivable balance at
March 31, 1998.
10. Commitments and Contingencies
Environmental Matters
The Company is subject to various Federal, state and local laws and
regulations governing the use, discharge and disposal of hazardous materials.
Except as noted below, management believes that the Company is in substantial
compliance with current laws and regulations. Accordingly, no reserve has been
established for such exposures. Compliance with current laws and regulations has
not had, and is not expected to have, a material adverse effect on the Company's
financial condition. However, it is possible that additional health related or
environmental issues may arise in the future, which the Company cannot predict
at present.
The Company is subject to federal, state and local regulation of
environmental matters relating to its operations. The Company and its
Stockholder are currently involved in site investigations to ascertain whether
any environmental remediation efforts are required and, if necessary, the
magnitude and extent of such costs.
The New Jersey Department of Environmental Protection ("NJDEP"), which
administers Title V of the Federal Clean Air Act in New Jersey, requires the
Company to obtain an air emission permit which limits the emission levels from
certain equipment at the Company's facility of various pollutants, including
volatile organic compounds ("VOC") generated by the drying of solvent-based
primers and paints. The equipment that requires Title V permitting includes
three paint spray booths, three natural gas fired heaters and two shot blaster
systems. In March 1997 the NJDEP issued two Notices of Violations to the
Company, which asserted that the Company had failed to obtain permits for the
shot blasters prior to February 1997 and the heaters for the paint spray booths.
The Company submitted permit applications for the heaters in March 1997, which
are pending. In May 1997 the NJDEP issued an Administrative Order of Civil
Administrative Penalty Assessment ("Order and Notice") assessing the Company a
$9,000 penalty for emitting VOCs from the paint spray booths in excess of
permissible limits in 1995. In response to the Order and Notice, the Company
submitted to the NJDEP an adjudicatory hearing request, which contests the
$9,000 assessment.
In March 1998 the NJDEP issued a Notice of Violation ("NOV") to the
Company for emitting VOCs from the paint spray booths in excess of permissible
limits in 1996. The NOV directed the Company to achieve compliance by April 1998
and to submit a written report documenting the corrective measures taken to
achieve compliance. The Company timely responded to the request for a written
report, proposing to achieve compliance by use of low VOC, water-base coatings,
by re-engineering the facility in order to facilitate use of the water-base
coatings, and by installing a fourth spray booth and other equipment, and
submitting to NJDEP a new, expanded air emission permit for the facility. The
Company has been in active negotiations with NJDEP. As requested by NJDEP, the
Company submitted in May 1998 a new air permit application that would allow the
Company to install a fourth spray booth and expand permitted emissions from the
facility. The application is pending and the Company continues to negotiate with
NJDEP to resolve all air
40
<PAGE>
emission issues.
In March 1998, as part of the ISRA Remediation Agreement with NJDEP, NJDEP
required the company to perform soil and sediment sampling at various locations
at the facility. The sampling results were within NJDEP compliance limits with
the exception of results for certain metals detected in soil around roof
downspouts at the facility. The company has engaged a contractor to perform
additional sampling at these locations, the results of which will be forwarded
to NJDEP. If the additional sampling indicates additional areas of contamination
above NJDEP compliance levels, additional investigations may be necessary.
The Company is presently preparing an amendment to its Title V Permit
application proposing that the Company and NJDEP enter into an Administrative
Consent Order or other form of agreement (a "Compliance Schedule") as to VOC
emissions from the three paint spray booths at the facility. The Company plans
to propose a timetable by which it will change its primer and topcoat paint
formulations from current, solvent based products that generate high amounts of
VOC upon drying to water-based and lower-solvent based primers and topcoats,
which would generate lower amounts of VOC upon drying. The Company believes that
such change is technically feasible and that by making such change, the Company
will reduce VOC emissions to levels allowable under the Company's present
permits while allowing the Company to produce numbers of completed chassis
comparable to those produced in recent years. Water-based primers are currently
available. The Company has been advised by paint manufacturers that topcoat
paints with progressively lower VOC content are currently being tested and will
become available during the next twelve months. The Company believes that these
primers and paints are suitable for the purposes of the Company's customers. Use
of the new primer and paint products is expected to require certain
modifications of the Company's production lines, primarily because water-based
primer requires an additionally heated drying environment than solvent-based
primer. The Company is preparing its plan for installing such modifications,
which will be presented to NJDEP as part of the planned Compliance Schedule
proposal. The estimated cost of such modifications and of the equipment required
therefor is estimated to be less than $100,000. There is no assurance that NJDEP
will grant a Compliance Schedule to the Company, or if granted the Compliance
Schedule will not include NJDEP demands for fines, penalties, or other
sanctions. If NJDEP does not grant a Compliance Schedule, the Company might need
to reduce its output of chassis until lower VOC formulations are utilized.
The outcome of NJDEP regulatory actions cannot be predicted with
certainty. The NJDEP could fine the Company for operating the shot blaster
booths without a completed permit until February 1997, for operating the heaters
for the paint spray booths without a permit, and/or for emitting more VOCs from
the paint spray booths than allowed by its permits. If changing to water-based
primers and low-VOC topcoat paints is not acceptable to NJDEP, NJDEP could
require the Company to take other steps to comply with NJDEP requirements and
the Clean Air Act, including capital improvements to ensure compliance with air
quality regulations. Such improvements could include a VOC incinerator and/or
other control apparatus, which could cost up to $2,000,000 or more and which
could result in increased operating expenses. Failure to comply with NJDEP
regulations and directives could result in fines and/or NJDEP orders to curtail
or shutdown operations, any or all of which could have a material adverse effect
on the Company's business and financial condition. The Company does not have
liabilities accrued for fines that may be assessed which respect to its air
quality violations or for potential purchases of any capital equipment that may
be mandated by the NJDEP or otherwise may be necessary to avoid future
violations.
While it is not feasible to predict the outcome of all these matters,
management, based upon all available information, is of the opinion that the
ultimate disposition of these environmental matters will not have a material
adverse effect on the Company's financial position or results of operations.
Disposal Costs
The Company also engages independent contractors to arrange, at no cost to
the Company or the lessor, for the disposal of parts of refurbished chassis and
used equipment that are stored at its present location. The Company has not
established reserves related to the associated disposal costs of such items (in
the event the current leasing arrangement ceases and the Company relocates),
since such costs will be the responsibility of its lessor.
Legal
The Company is either a plaintiff or a defendant in several pending legal
matters arising in the normal course of operations. In the opinion of
management, the final resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
Operating Leases
41
<PAGE>
The Company leases facilities and equipment under operating leases
expiring through 2004. Some of the leases have renewal options and most contain
provision for passing though certain incremental cost. Future net minimum annual
rental payments under non-cancelable leases are as follows:
1999 $ 856,000
2000 835,000
2001 807,000
2002 796,000
2003 685,000
Thereafter 97,000
----------
$4,076,000
==========
Rent expense for the year ended March 31, 1998 totaled $140,000.
11. Subsequent Events (Unaudited)
In February 1998, Barclay Investments, Inc., ("Barclay"), entered into a
Stock Purchase Agreement to purchase 100% of the stock of CPS Trailer Company,
Inc., ("CPS"), and a Stock Purchase Agreement to purchase 100% of the stock of R
& S Truck Body Company, Inc., ("R & S"). Subsequent thereto, Standard entered
into a Stock Purchase Agreement (the "Stock Purchase Agreement") to purchase
100% of the stock of Barclay from its owners (some individuals of whom are
current shareholders of the Company). At March 31, 1998 the Company had advanced
$810,000 to Barclay with the aforementioned Stock Purchase Agreement. The stock
purchase agreement calls for the purchase of 100% of the stock of Barclay
Investments, Inc. in exchange for 185,000 shares of Company common stock. In
addition, in connection with the acquisition, the Company is obligated to pay
Redstone Advisors Corporation, a company of which two-thirds of the outstanding
common stock is owned by an officer of the Company and of which a Company
shareholder is president, a fee of $600,000 for arranging the transactions. The
Company is not obligated to close the purchase of Barclay Investments, Inc.
under the Stock Purchase Agreement unless it simultaneously closes the purchase
of CPS and R & S.
The Stock Purchase Agreement among Barclay Investments, Inc., and CPS
provides for the payment of $7,000,000, plus a defined level of net income for
the period from January 1, 1998, through the closing date; plus shares of
Company common stock with a value of $1,250,000. In addition, the CPS
stockholder may be entitled to an additional $1 million of cash if certain
operating results are achieved.
The Stock Purchase Agreement among Barclay Investments, Inc. and R & S, as
amended, provides for the payment by the purchaser of $11,900,000, plus an
amount equal to the earnings of R & S for the period from January 1, 1998
through closing, plus shares of Company common stock with a value of $1,000,000.
The closing of the three Stock Purchase Agreements is contingent upon
certain matters, including the successful completion of a due diligence review
and the consummation of a financing satisfactory to Standard to enable it to pay
the amounts due. Standard has received from PNC Bank, NA a commitment to provide
the Company with $40,000,000 to complete the acquisitions of R & S and CPS, to
repay the Redemption Note, with the balance to be used for working purposes. The
$40,000,000 will be provided through a $25,000,000 six-year term loan and a
$15,000,000 three-year revolving credit facility with a $7,000,000 sub-limit for
standby letters of credit. The loans will be secured by liens on all of the
Company's assets.
42
<PAGE>
The following summarized, unaudited pro forma information for the year
ended March 31, 1998 assumes that the acquisition of Ajax, R & S and CPS had
occurred on April 1, 1997 (in thousands except per share data):
<TABLE>
<CAPTION>
Standard Adjust- As Adjusted
Proforma R & S CPS ments Proforma
------------ ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 33,070 $ 20,624 $ 13,509 $ -- $ 67,203
Operating income 4,713 2,937 1,992 2,085 11,727
Net income $ 1,834 $ 2,209 $ 1,381 $ 183 $ 5,567
======== ======== ======== ======= ========
Preferred dividend 1,173 1,173
Basic net income per share $ 0.21 $ 1.27
======== ========
Diluted net income per share $ 0.21 $ 1.27
======== ========
Basic and Diluted weighted average
number of shares outstanding 3,095 80 100 185 3,460
</TABLE>
The values ascribed to the additional shares issued in connection with the
acquisition of R & S and CPS assume a $12.50 share price at the time of the
closing of the transactions.
43
<PAGE>
Report of Independent Certified Public Accounts
Standard Automotive Corporation
Hillsborough Township, New Jersey
We have audited the accompanying statements of income and retained
earnings and cash flows of Ajax Manufacturing Company (the "Company") for the
period of April 1, 1997 through January 26, 1998 and the years ended March 31,
1997 and 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Company's operations and its cash
flows for the period of April 1, 1997 through January 26, 1998 and the years
ended March 31, 1997 and 1996 in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
June 25, 1998
44
<PAGE>
Ajax Manufacturing Company
Statements of Income and Retained Earnings
(in thousands)
<TABLE>
<CAPTION>
Period from
For the Years Ended April 1, 1997
March 31, through January 26,
1996 1997 1998
-------- -------- -------------------
<S> <C> <C> <C>
Revenues $ 42,538 $ 22,356 $ 25,134
Operating costs and expenses:
Cost of revenues 33,973 17,027 19,898
Selling, general and administrative
expenses 3,082 2,510 1,431
-------- -------- --------
Total operating costs and expenses 37,055 19,537 21,329
-------- -------- --------
Operating income 5,483 2,819 3,805
Interest expense (118) - -
Other income (expense):
Excise tax settlement - - (830)
Investment income 49 77 40
Other income 35 - -
-------- -------- --------
Income before income taxes 5,449 2,896 3,015
Provision for income taxes 2,195 1,168 1,272
-------- -------- --------
Income before extraordinary gain on
extinguishment of restructured debt 3,254 1,728 1,743
Extraordinary gain on extinguishment of
restructured debt (net of taxes of $63) 90 - -
-------- -------- --------
Net income 3,344 1,728 1,743
Retained earnings, beginning of period 1,880 5,224 6,952
-------- -------- --------
Retained earnings, end of period $ 5,224 $ 6,952 $ 8,695
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
45
<PAGE>
Ajax Manufacturing Company
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Period from
Years Ended March 31, April 1, 1997
--------------------- through January 26,
1996 1997 1998
--------- --------- -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,344 $ 1,728 $ 1,743
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on restuctured debt (148) -- --
Bad debt provision 23 7 25
Depreciation and amortization 142 124 133
Deferred taxes (1) (7) (58)
Change in assets and liabilites:
Accounts receivable (271) (1,793) (3,004)
Inventory 1,524 (174) (2,429)
Other receivables (53) 94 --
Prepaid expenses 14 (61) 25
Accounts payable and accrued expenses (1,858) 1,043 1,075
Income taxes payable 154 (414) 1,087
------- ------- -------
Net cash provided by (used in) operating activities 2,870 547 (1,403)
------- ------- -------
Cash flows from investing activities:
(Issuance) repayment of note receivable - related
parties 464 (300) (35)
Acquisition of property and equipment (139) (171) (211)
------- ------- -------
Net cash provided by (used in) investing activities 325 (471) (246)
------- ------- -------
Cash flows provided by (used in) financing activities:
Repayment of restructured debt (525) -- --
Repayment of loans to related parties (294) -- --
Borrowings from (payment of) short term debt (1,406) -- 350
------- ------- -------
Net cash provided by (used in) financing activities (2,225) -- 350
------- ------- -------
Net decrease in cash and cash equivalents 970 76 (1,299)
Cash and cash equivalents, beginning of period 512 1,482 1,558
------- ------- -------
Cash and cash equivalents, end of period $ 1,482 $ 1,558 $ 259
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 140 $ -- $ --
Income taxes 2,003 1,721 298
</TABLE>
See accompanying notes to financial statements.
46
<PAGE>
Ajax Manufacturing Company
Notes to Financial Statements
1. Business Description and Sale of Company
Ajax Manufacturing Company (the "Company") principally manufactures
trailer chassis at its Hillsborough, New Jersey facility. The Company also
manufactures industrial waste and refuse containers. Certain transactions of the
Company were initially executed under the name of an inactive, affiliated
corporation controlled by the Ajax Stockholder; related costs were funded by the
Company and reflected in the accompanying financial statements.
On January 27, 1998 the Company's Stockholder executed an agreement to
sell the company to an independent third party, Standard Automotive Corporation
("SAC"), for consideration approximating $23,618,000 million. The exact purchase
price is subject to adjustment by the parties and will be based on the financial
position of Ajax as of the closing date. The financial statements presented do
not include purchase accounting adjustments associated with this acquisition.
In connection with the sale, SAC has executed a lease with the Ajax
Stockholder for an initial term of five years with four renewal options totaling
twenty years. The annual base rent over the initial term will be $600,000.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue when the product is inspected and accepted
by its customers or the customers' authorized agent and title has transferred.
Cash Equivalents
The Company considers all highly liquid investments with maturities of
less than three months when purchased to be cash equivalents.
Income Taxes
The Company follows Statement of Financial Accounting Standard ("SFAS")
No. 109, "Accounting for Income Taxes," which requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined on the difference
between the financial statement and tax basis of assets and liabilities using
expected tax rates in effect for the year in which the differences are expected
to reverse.
Inventory
Inventory is stated at the lower of cost, determined on a first-in,
first-out basis, or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method for financial reporting purposes. The estimated lives
used in depreciating the assets are:
Years
-----
Transportation equipment 3 - 5
Leasehold improvements 10 - 25
Furniture, fixtures and office equipment 5 - 7
Machinery and equipment 5 - 7
Depreciation on leasehold improvements is recorded over the lesser of the
useful lives of the assets or lease term. Expenditures for major renewals and
improvements that extend the useful lives of property and equipment are
capitalized. Expenditures for routine maintenance and repairs are charged to
expense as incurred.
47
<PAGE>
Use of Estimates
The preparation of 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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The costs the Company will ultimately incur and the value of
assets ultimately realized could differ in the near term from the related
amounts reflected in the accompanying financial statements.
Significant accounting estimates include valuation of inventory, useful
lives of property and equipment and in the measurement of contingencies.
Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing fair value to
the extent practicable for financial instruments which are recognized or
unrecognized in the balance sheet. The fair value of the financial instruments
disclosed herein is not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider the tax
consequences of realization or settlement. For cash equivalents, accounts
receivable and accounts payable, it is estimated that the carrying amounts
approximated fair values for these instruments because of their short-term
maturities or payment terms. Amounts due from related parties were repaid at the
closing.
3. Short-Term Borrowings
In November 1995, the Company entered into a revolving line of credit
agreement with a bank (the "Agreement") which permits borrowings up to the
lesser of (1) $2,000,000 or (2) the sum of defined account receivables and
inventory levels, plus $750,000. Interest on the revolving line of credit was
payable monthly at the bank's rate, plus 2%. As of January 26, 1998 there was a
balance outstanding of $350,000. Interest expense for the years ended March 31,
1996 and 1997 and the period ending January 26, 1998 totaled $0, $0 and $1,000,
respectively.
The Agreement contained certain restrictions, including prohibitions on
additional borrowings or guarantees, the sale of assets and the payment of
dividends. The Company was also required to maintain certain financial ratios.
As of March 31, 1997 and January 26, 1998, the Company was in compliance with
all financial and operating covenants as specified in the Agreement.
Substantially all of the assets of the Company were pledged as collateral
against outstanding borrowings. This Agreement will be terminated upon
completion of the sale of the Company, discussed in Note 1.
In 1992, the Company and a Creditor commenced negotiations on
restructuring the payment terms of a note and on April 19, 1995, a settlement
was reached. In return for a full release of the obligation and interests in
related collateral, the Company paid $525,000 to the creditor. The balance
outstanding at the settlement date was $678,000, including $192,000 of accrued
interest. The excess of the carrying value of this contractual obligation over
the settlement amount ($90,000 net of a current tax benefit of $16,000 and a
deferred tax provision of $79,000) has been recognized as an extraodinary gain
for the year ended March 31, 1996. Interest expense for this note totaled $5,000
for the year ended March 31, 1996.
4. Income Taxes
The provision (benefit) for income taxes in the statements of income and
retained earnings consists of the following components:
Period from
Year ended March 31, April 1, 1997
--------------------------- through January 26,
1996 1997 1998
----------- ---------- -------------------
Current:
Federal $ 1,674,000 $ 910,000 $ 1,031,000
State 521,000 265,000 300,000
----------- ----------- -----------
Deferred:
Federal -- (6,000) (46,000)
State -- (1,000) (13,000)
----------- ----------- -----------
Total provision $ 2,195,000 $ 1,168,000 $ 1,272,000
=========== =========== ===========
48
<PAGE>
Reconciliation between the Company's effective tax-rate and the U.S.
statutory rate is as follows:
<TABLE>
<CAPTION>
Year ended March 31, April 1, 1997
--------------------- through January 26,
1996 1997 1998
--------- ---------- -------------------
<S> <C> <C> <C>
U.S. statutory rate applied to pretax income 34.0% 34.0% 34.0%
State tax provision, net of federal tax benefit 7.0 7.0 7.0
Other (0.7) (0.7) 1.0
---- ---- ----
Total effective tax rate 40.3% 40.3% 42.0%
==== ==== ====
</TABLE>
5. Related Party Transactions
Lease Obligations with Stockholder
The Company leases its manufacturing and office facilities from its sole
Stockholder on a monthly basis. Rent expense incurred by the Company is
$516,667, $620,000 and $508,000 for the years ended March 31, 1996, 1997 and for
the period from April 1, 1997 through January 26, 1998, respectively.
Selling, General and Administrative Expense
The Company did not have employment agreements with its President; also
the Company's Stockholder and his son, an officer of the Company ("Officer").
The Stockholder's and Officer's compensation varies with the overall performance
of the Company and is generally subject to limitations imposed by financial
institutions, which have outstanding indebtedness with the Company. Salary and
incentives expense for the Company's Stockholder were $1,232,500, $581,947 and
$113,846 for the years ended March 31, 1996, 1997 and the period from April 1,
1997 through January 26, 1998, respectively. Salaries and incentives expense for
the Officer were, $386,613, $680,546 and $173,231 for the years ended March 31,
1996, 1997 and for the period from April 1, 1997 through January 26, 1998,
respectively.
Guarantees
Through various guarantees, the Company's Stockholder is contingently
liable for repayment of certain indebtedness of the Company. There was no
outstanding principal of such borrowings at March 31, 1996 and 1997, the balance
outstanding at January 26, 1998 totaled $350,000. There are no direct costs to
the Company associated with these guarantees.
6. Major Customers and Concentrations
Major Customers
Listed below are five customers who individually accounted for 10% or more
of net sales for the years ended March 31, 1996, 1997 and the period from April
1, 1997 through January 26, 1998.
Customer 1996 1997 1998 Period
-------- ---- ---- -----------
A 33% 57% 59%
B 26 33 --
C 18 -- --
D 10 -- 24
E -- -- --
---- ---- ----
Total 87% 90% 83%
Historically, the Company has relied on a limited number of customers for
a substantial portion of its total revenues. The Company expects that a
significant portion of its future revenues will continue to be generated by a
limited number of customers. The loss of any of these customers or any
substantial reduction in orders by any of these customers could have a material
adverse effect on operating results.
49
<PAGE>
Concentrations
As discussed in Note 1, the Company's manufacturing and refurbishing
processes are concentrated in one facility.
The Company maintains cash balances at several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000.
7. Commitments and Contingencies
Environmental Matters
The Company is subject to various Federal, state and local laws and
regulations governing the use, discharge and disposal of hazardous materials.
Except as noted below, management believes that the Company is in substantial
compliance with current laws and regulations. Accordingly, no reserve has been
established for such exposures. Compliance with current laws and regulations has
not had, and is not expected to have, a material adverse effect on the Company's
financial condition. However, it is possible that additional health related or
environmental issues may arise in the future, which the Company cannot predict
at present.
The Company is subject to extensive federal, state and local regulation of
environmental matters relating to its operations. The Company and its
Stockholder are currently involved in site investigations to ascertain whether
any environmental remediation efforts are required and, if necessary, the
magnitude and extent of such costs.
The New Jersey Department of Environmental Protection ("NJDEP"), which
administers Title V of the Federal Clean Air Act in New Jersey, requires the
Company to obtain an air emission permit which limits the emission levels from
certain equipment at the Company's facility of various pollutants, including
volatile organic compounds ("VOC") generated by the drying of solvent-based
primers and paints. The equipment that requires Title V permitting includes
three paint spray booths, three natural gas fired heaters and two shot blaster
systems. In March 1997 the NJDEP issued two Notices of Violations to the
Company, which asserted that the Company had failed to obtain permits for the
shot blasters prior to February 1997 and the heaters for the paint spray booths.
The Company submitted permit applications for the heaters in March 1997, which
are pending. In May 1997 the NJDEP issued an Administrative Order of Civil
Administrative Penalty Assessment ("Order and Notice") assessing the Company a
$9,000 penalty for emitting VOCs from the paint spray booths in excess of
permissible limits in 1995. In response to the Order and Notice, the Company
submitted to the NJDEP an adjudicatory hearing request, which contests the
$9,000 assessment.
In March 1998 the NJDEP issued a Notice of Violation ("NOV") to the
Company for emitting VOCs from the paint spray booths in excess of permissible
limits in 1996. The NOV directed the Company to achieve compliance by April 1998
and to submit a written report documenting the corrective measures taken to
achieve compliance. The Company timely responded, proposing to achieve
compliance by use of low VOC, water-base coatings, by re-engineering the
facility in order to facilitate use of the water-base coatings, and by
installing a fourth spray booth and other equipment, and submitting to NJDEP a
new, expanded air emission permit for the facility. The Company has been in
active negotiations with NJDEP. As requested by NJDEP, the Company submitted in
May 1998 a new air permit application that would allow the Company to install a
fourth spray booth and expand permitted emissions from the facility. The
application is pending and the Company continues to negotiate with NJDEP to
resolve all air emission issues.
In March 1998, as part of the ISRA Remediation Agreement with NJDEP, NJDEP
required the company to perform soil and sediment sampling at various locations
at the facility. The sampling results were within NJDEP compliance limits with
the exception of results for certain metals detected in soil around roof
downspouts at the facility. The company has engaged a contractor to perform
additional sampling at these locations, the results of which will be forwarded
to NJDEP. If the additional sampling indicates additional areas of contamination
above NJDEP compliance levels, additional investigations may be necessary.
The Company is presently preparing an amendment to its Title V Permit
application proposing that the Company and NJDEP enter into an Administrative
Consent Order or other form of agreement (a "Compliance Schedule") as to VOC
emissions from the three paint spray booths at the facility. The Company plans
to propose a timetable by which it will change its primer and topcoat paint
formulations from current, solvent based products that generate high amounts of
VOC upon drying to water-based and lower-solvent based primers and topcoats,
which would generate lower amounts of VOC upon drying. The Company believes that
such change is technically feasible and that by making such change, the Company
will reduce VOC emissions to levels allowable under the Company's present
permits while allowing the Company to produce numbers of completed chassis
comparable to those
50
<PAGE>
produced in recent years. Water-based primers are currently available. The
Company has been advised by paint manufacturers that topcoat paints with
progressively lower VOC content are currently being tested and will become
available during the next twelve months. The Company believes that these primers
and paints are suitable for the purposes of the Company's customers. Use of the
new primer and paint products is expected to require certain modifications of
the Company's production lines, primarily because water-based primer requires an
additionally heated drying environment than solvent-based primer. The Company is
preparing its plan for installing such modifications, which will be presented to
NJDEP as part of the planned Compliance Schedule proposal. The estimated cost of
such modifications and of the equipment required therefor is estimated to be
less than $100,000. There is no assurance that NJDEP will grant a Compliance
Schedule to the Company, or if granted the Compliance Schedule will not include
NJDEP demands for fines, penalties, or other sanctions. If NJDEP does not grant
a Compliance Schedule, the Company might need to reduce its output of chassis
until lower VOC formulations are utilized.
The outcome of NJDEP regulatory actions cannot be predicted with
certainty. The NJDEP could fine the Company for operating the shot blaster
booths without a completed permit until February 1997, for operating the heaters
for the paint spray booths without a permit, and/or for emitting more VOCs from
the paint spray booths than allowed by its permits. If changing to water-based
primers and low-VOC topcoat paints is not acceptable to NJDEP, NJDEP could
require the Company to take other steps to comply with NJDEP requirements and
the Clean Air Act, including capital improvements to ensure compliance with air
quality regulations. Such improvements could include a VOC incinerator and/or
other control apparatus, which could cost up to $2,000,000 or more and which
could result in increased operating expenses. Failure to comply with NJDEP
regulations and directives could result in fines and/or NJDEP orders to curtail
or shutdown operations, any or all of which could have a material adverse effect
on the Company's business and financial condition. The Company does not have
liabilities accrued for fines that may be assessed which respect to its air
quality violations or for potential purchases of any capital equipment that may
be mandated by the NJDEP or otherwise may be necessary to avoid future
violations.
While it is not feasible to predict the outcome of all these matters,
management, based upon all available information, is of the opinion that the
ultimate disposition of these environmental matters will not have a material
adverse effect on the Company's financial position or results of operations.
Disposal Costs
The Company also engages independent contractors to arrange, at no cost to
the Company or the lessor, for the disposal of parts of refurbished chassis and
used equipment that are stored at its present location. The Company has not
established reserves related to the associated disposal costs of such items (in
the event the current leasing arrangement ceases and the Company relocates),
since such costs will be the responsibility of its lessor, also the Company's
Stockholder.
Legal
The Company is either a plaintiff or a defendant in several pending legal
matters arising in the normal course of operations. In the opinion of
management, the final resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
Internal Revenue Service ("IRS") Review
Revenue derived from sales of the Company's manufactured chassis is
subject to Federal excise tax. The Company uses certain estimates and valuation
assumptions in calculating excise tax liabilities. In July 1997, the IRS
notified Ajax of an assessment totaling $1,722,000, (which includes $287,000 of
penalties) for the period from March 1995 through December 1996. In November of
1997 the Company and its outside counsel decided to pursue a settlement
agreement and the Company paid approximately $830,000 to settle this matter.
51
FIRST AMENDMENT TO
STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT ("First Amendment") dated as of
June 10, 1998, by and among BARCLAY INVESTMENTS, INC., a New Jersey corporation
("Purchaser"), CHARLES P. SIEBERT ("Shareholder"), and CPS Trailer Company, Inc.
and CPS Enterprises, Inc., both Missouri corporations (collectively "CPS").
PRELIMINARY STATEMENT
WHEREAS, Purchaser, Shareholder and CPS are parties to a Stock Acquisition
Agreement dated as of January 30, 1998 ("Purchase Agreement"); and
WHEREAS, Purchaser, Shareholder and CPS desire to amend the Purchase
Agreement in accordance with the terms and provisions hereof.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Definitions. Capitalized terms used herein and not otherwise defined
shall have the meanings given such terms in the Purchase Agreement.
2. Amendments to Purchase Agreement.
(a) Section 4 of the Purchase Agreement is hereby amended to change
the date of "May 31, 1998" referenced therein to "June 30, 1998."
(b) Section 13.2 of the Purchase Agreement is hereby amended to
change the date of "June 15, 1998" referenced therein to "July 15, 1998."
3. Miscellaneous.
(a) All of the terms, conditions and provisions of the Purchase
Agreement not herein modified shall remain in full force and effect.
(b) This First Amendment shall be governed by and shall be construed
and interpreted in accordance with the laws of the State of Delaware.
(c) This First Amendment shall be binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, successors
and assigns.
<PAGE>
(d) This First Amendment may be executed in several counterparts,
each of which shall constitute an original, but all which together shall
constitute one and the same agreement.
IN WITNESS WHEREOF, this First Amendment has been duly executed and
delivered by or on behalf of each of the parties as of the day and in the year
first above written.
BARCLAY INVESTMENTS, INC.,
By: /s/ William Merker
---------------------------
Name: William Merker
-------------------------
Title: Chairman
------------------------
------------------------------
Charles P. Siebert
CPS ENTERPRISES, INC.
By:
---------------------------
Charles P. Siebert,
President
CPS TRAILER COMPANY, INC.
By:
---------------------------
Charles P. Siebert
Chief Executive Officer
2
FIRST AMENDMENT TO
STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT ("First Amendment")
dated as of May __, 1998, by and among BARCLAY INVESTMENTS, INC., a New Jersey
corporation ("Purchaser"), WILLIAM L. SMITH and JANET R. SMITH ("Shareholders"),
and R&S TRUCK BODY COMPANY, INC., a Kentucky corporation ("R&S").
PRELIMINARY STATEMENT
WHEREAS, Purchaser, Shareholders and R&S are parties to the Stock
Purchase Agreement dated as of February 13, 1998 ("Purchase Agreement"); and
WHEREAS, Purchaser, Shareholders and R&S desire to amend the
Purchase Agreement in accordance with the terms and provisions hereof.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants and agreements of the parties hereinafter set forth, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. Capitalized terms used herein and not otherwise
defined shall have the meanings given such terms in the Purchase Agreement.
2. Amendments to Purchase Agreement.
(a) Section 3.1 of the Purchase Agreement is hereby amended
(i) to change the date of "May 31, 1998" referenced therein to "June
22, 1998" and (ii) to add the following sentences at the end
thereof:
"In computing the earnings of R&S from January 1, 1998 through
the Closing Date, the certified public accountants for R&S
shall monitor a physical inventory of R&S to be conducted not
earlier than three (3) days prior to the Closing Date (with
the expected inventory date to be June 20, 1998). The
Purchaser shall have the right to observe with its accountants
the physical inventory to be conducted at R&S."
<PAGE>
(b) Section 3.2 of the Purchase Agreement is hereby amended to
change the date of "May 31, 1998" referenced therein to "June 22,
1998."
(c) Article 4 of the Purchase Agreement is hereby amended to
change the date of "May 31, 1998" referenced therein to "June 22,
1998."
(d) Section 9.2 of the Purchase Agreement is hereby amended in
its entirety to read as follows:
"Section 9.2 Accrued Bonus Compensation. On or before
the Closing Date, R&S shall be permitted to make a good faith
estimate of and pay out the accrued management and employee
bonuses due under the current bonus program for the period
from January 1, 1998 through the Closing Date. Once the
earnings of R&S for the period from January 1, 1998 through
the Closing Date are determined in accordance with this
Agreement, any adjustments necessary to such bonuses shall be
made."
3. Disclosure Exhibits. In accordance with the terms of the Purchase
Agreement, Shareholders have provided various updates to the Disclosure Exhibits
dated March 2, 1998 ("Exhibits") by means of letters dated May 15, 1998 and May
21, 1998 from R&S and a letter dated May 27, 1998 from Keating, Muething &
Klekamp, P.L.L., counsel to R&S (which, together with the attachments thereto,
are collectively referred to as the "Exhibit Updates"). The parties hereto agree
that the Exhibits shall be deemed amended to include the additional information
and disclosures set forth in the Exhibit Updates.
4. Miscellaneous.
(a) All of the terms, conditions and provisions of the
Purchase Agreement not herein modified shall remain in full force and effect.
(b) This First Amendment shall be governed by and shall be
construed and interpreted in accordance with the laws of the State of Delaware.
(c) This First Amendment shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, successors and
assigns.
2
<PAGE>
(d) This First Amendment may be executed in several
counterparts, each of which shall constitute an original, but all of which
together shall constitute one and the same agreement.
Remainder of page intentionally left blank. Signature page follows.
3
<PAGE>
IN WITNESS WHEREOF, this First Amendment has been duly executed and
delivered by or on behalf of the parties as of the day and in the year first
above written.
SIGNED IN THE PRESENCE OF: BARCLAY INVESTMENTS, INC.,
Purchaser
__________________________ By:____________________________
Printed:__________________ Name:__________________________
__________________________ Title:_________________________
Printed:__________________
__________________________ _______________________________
WILLIAM L. SMITH, Shareholder
Printed:__________________
__________________________
Printed:__________________
__________________________ _______________________________
JANET R. SMITH, Shareholder
Printed:__________________
__________________________
Printed:__________________
R&S TRUCK BODY COMPANY, INC.
__________________________ By:____________________________
Printed:__________________ Name:__________________________
__________________________ Title:_________________________
Printed:__________________
4
SECOND AMENDMENT TO
STOCK PURCHASE AGREEMENT
THIS SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT ("Second
Amendment") dated as of June 22, 1998, by and among BARCLAY INVESTMENTS, INC., a
New Jersey corporation ("Purchaser"), WILLIAM L. SMITH and JANET R. SMITH
("Shareholders"), and R&S TRUCK BODY COMPANY, INC., a Kentucky corporation
("R&S").
PRELIMINARY STATEMENT
WHEREAS, Purchaser, Shareholders and R&S are parties to the Stock
Purchase Agreement dated as of February 13, 1998, as amended by a First
Amendment to Stock Purchase Agreement dated as of May 31, 1998 (as amended, the
"Purchase Agreement"); and
WHEREAS, the Closing Date under the Purchase Agreement was June 22,
1998 and the Purchaser is not prepared to close as contemplated;
WHEREAS, Purchaser, Shareholders and R&S desire to amend the
Purchase Agreement further to extend the Closing date on the conditions and in
accordance with the terms and provisions hereof;
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants and agreements of the parties hereinafter set forth, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. Capitalized terms used herein and not otherwise
defined shall have the meanings given such terms in the Purchase Agreement.
2. Amendments to Purchase Agreement.
(a) Section 3.1 of the Purchase Agreement is hereby amended in
its entirety to read as follows:
"3.1 Cash Consideration. The cash consideration to be
paid by Purchaser in consideration for its purchase of the
Common Stock shall be the sum of (i) Eleven Million Nine
Hundred Thousand and 00/100 Dollars ($11,900,000.00), (ii) one
hundred percent (100%) of the earnings of R&S from January 1,
1998 through the Closing Date, calculated
<PAGE>
on a GAAP basis consistently applied, and (iii) an amount
equal to Ten Thousand and 00/100 Dollars ($10,000.00) times
the number of days elapsed from June 22, 1998 through the
Closing Date."
(b) Section 3.2(a) of the Purchase Agreement is hereby deleted
in its entirety.
(c) The first sentence of Section 3.3(a) of the Purchase
Agreement is hereby amended to read as follows:
"Section 3.3 Payment at Closing.
(a) Purchaser shall pay to the Shareholders the cash
consideration described above in Section 3.1 at the Closing in
immediately available funds, provided, good and marketable
title to the Common Stock is delivered, free and clear of any
lien or encumbrance as set forth in Section 2.2 hereof, and
provided, all other terms and conditions of this Agreement
have been complied with."
(d) The first sentence of Article 4 of the Purchase Agreement
is hereby amended to read as follows:
"Subject to the provisions of this Agreement,
the consummation of the transactions contemplated by this Agreement (the
"Closing") shall be held at the offices of Keating, Muething & Klekamp, P.L.L.,
legal counsel to R&S ("KMK") at 10:00 A.M. (local time), on July 22, 1998, or
upon such earlier date specified by Purchaser (other than a Saturday or Sunday)
upon three (3) Business Days' notice by Purchaser to Shareholders (the date of
the Closing being referred to herein as the "Closing Date")."
3. Escrow. Purchaser hereby agrees that the escrow deposit in the
amount of Four Hundred Thousand and 00/100 Dollars ($400,000.00) (the "Deposit")
placed in escrow with KMK pursuant to the terms of the letter agreement dated
February 13, 1998, shall be released from escrow by KMK and paid to the
Shareholders. As such, in accordance with the terms of such letter agreement,
the parties hereto instruct KMK, as escrow agent, to terminate the escrow and
remit the Deposit, including any interest thereon, to Shareholders in accordance
with the terms hereof.
The Shareholders shall not be required to account for the
Deposit, segregate the Deposit from other funds or
2
<PAGE>
otherwise hold the Deposit in any trust or fiduciary capacity including seeking
return of said Deposit; provided, however, that: (i) if the Closing occurs on or
before July 22, 1998, the Shareholders agree to credit $400,000 of the amount of
the Deposit as of June 22, 1998, against the cash consideration to be paid to
the Shareholders under the terms of the Purchase Agreement and (ii) the payment
of the Deposit to the Shareholders shall in no respect prejudice, impair or
restrict the remedies available to Purchaser, including seeking return of said
Deposit, if the Closing does not occur as a result of the failure of
Shareholders or R&S to satisfy any of the conditions to Closing set forth in
Article 10 of the Purchase Agreement.
4. Miscellaneous.
(a) All of the terms, conditions and provisions of the
Purchase Agreement not herein modified shall remain in full force and effect.
The terms of this Second Amendment shall not otherwise affect, impair or
prejudice the rights of Purchaser under the Purchase Agreement for any breach by
Shareholders of any of their obligations or covenants hereunder.
(b) This Second Amendment shall be governed by and shall be
construed and interpreted in accordance with the laws of the State of Delaware.
(c) This Second Amendment shall be binding upon and shall
inure to the benefit of the parties hereto and their respective heirs,
successors and assigns.
(d) This Second Amendment may be executed in several
counterparts, each of which shall constitute an original, but all which together
shall constitute one and the same agreement.
Remainder of page intentionally left blank. Signature page follows.
3
<PAGE>
IN WITNESS WHEREOF, this Second Amendment has been duly executed and
delivered by or on behalf of the parties as of the day and in the year first
above written.
SIGNED IN THE PRESENCE OF: BARCLAY INVESTMENTS, INC.,
Purchaser
__________________________ By:____________________________
Printed:__________________ Name:__________________________
__________________________ Title:_________________________
Printed:__________________
__________________________ _______________________________
WILLIAM L. SMITH, Shareholder
Printed:__________________
__________________________
Printed:__________________
__________________________ _______________________________
JANET R. SMITH, Shareholder
Printed:__________________
__________________________
Printed:__________________
R&S TRUCK BODY COMPANY, INC.
__________________________ By:____________________________
Printed:__________________ Name:__________________________
__________________________ Title:_________________________
Printed:__________________
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Combined
Unconsolidated Balance Sheet and Statement of Income found on pages 29 & 30 of
the company's Form 10-K for the year ending March 31, 1998 and is qualified in
its entirety by reference to such combined unconsolidated financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,357
<SECURITIES> 0
<RECEIVABLES> 4,893
<ALLOWANCES> 55
<INVENTORY> 5,399
<CURRENT-ASSETS> 14,398
<PP&E> 1,260
<DEPRECIATION> 35
<TOTAL-ASSETS> 31,560
<CURRENT-LIABILITIES> 2,851
<BONDS> 4,000
0
1
<COMMON> 3
<OTHER-SE> 24,705
<TOTAL-LIABILITY-AND-EQUITY> 31,560
<SALES> 7,936
<TOTAL-REVENUES> 7,936
<CGS> 6,094
<TOTAL-COSTS> 6,094
<OTHER-EXPENSES> 537
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (450)
<INCOME-PRETAX> 801
<INCOME-TAX> 458
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 343
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
