UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|_| For the second quarter ended September 30, 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 of Incorporation) (I.R.S. Employer 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 |_|
As of November 12, 1998 the registrant had a total of 3,500,124 shares of
Common Stock outstanding and 1,150,000 shares of Preferred Stock outstanding.
<PAGE>
STANDARD AUTOMOTIVE CORPORATION
Index to Quarterly Report on Form 10-Q
September 30, 1998
Page
----
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 1998 (audited) and
September 30, 1998 3
Consolidated Statement of Income for the three and six months
ended September 30, 1997 and 1998 4
Consolidated Statement of Changes in Stockholder's Equity 5
Consolidated Statement of Cash Flows for the six months ended
September 30, 1997 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Part II Other Information
Item 5. Significant Events 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
STANDARD AUTOMOTIVE CORPORATION
Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except share data) March 31, September 30,
------------- -------------
1998 1998
------------- -------------
(Audited) (Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,357 $ 2,841
Accounts receivable, net of allowance for doubtful
accounts of $30 and $167, respectively 4,838 5,189
Inventory 5,399 12,544
Prepaid expenses 515 542
Deferred tax asset 289 357
------------- -------------
Total current assets 14,398 21,473
Property and equipment, net of accumulated depreciation
and amortization of $35 and $250, respectively 1,225 14,606
Intangible assets, net of accumulated amortization of
$130 and $575, respectively 15,127 31,864
Capitalized acquisition and financing costs 810 1,917
------------- -------------
Total assets $ 31,560 $ 69,860
============= =============
Liabilities and Stockholders' Equity
Accounts payable $ 1,146 $ 6,549
Accrued expenses 978 939
Income taxes payable 727 331
Revolving loan -- 7,824
Other current liabilities -- 818
------------- -------------
Total current liabilities 2,851 16,461
Note payable 4,000 24,375
Other non-current liabilities -- 146
------------- -------------
Total liabilities 6,851 40,982
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value 3,000,000 shares
authorized, 1,150,000 issued and outstanding 1 1
Common stock, $.001 par value 10,000,000 shares authorized,
3,095,000 and 3,500,124 issued and outstanding 3 3
Additional paid-in capital 24,546 28,281
Retained earnings 159 593
------------- -------------
Total stockholders' equity 24,709 28,878
------------- -------------
Total liabilities and stockholders' equity $ 31,560 $ 69,860
============= =============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
STANDARD AUTOMOTIVE CORPORATION
Statements of Income
For the Three and Six Months Ended September 30,
(in thousands, except earnings per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ -------------------
1997 1998 1997 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 6,294 $ 17,245 $ 11,170 $ 25,125
Operating costs and expenses:
Cost of revenues 5,092 14,003 8,880 20,156
Selling, general and administrative expenses 483 1,195 800 1,923
Amortization of intangible assets -- 255 -- 445
------- -------- -------- --------
Total operating costs and expenses 5,575 15,453 9,680 22,524
------- -------- -------- --------
Operating income 719 1,792 1,490 2,601
Interest expense (172) (363) (172) (449)
Other income/(expense) 13 (162) 32 (218)
Excise tax settlement (829) -- (829) --
------- -------- -------- --------
Income before income taxes (269) 1,267 521 1,934
Provision for income taxes (38) 586 286 913
------- -------- -------- --------
Net income (231) 681 235 1,021
Preferred dividend -- 294 -- 587
------- -------- -------- --------
Net income available to common stockholders $ (231) $ 387 $ 235 $ 434
======= ======== ======== ========
Basic and diluted net income per share $ (0.14) $ 0.12 $ 0.15 $ 0.14
======= ======== ======== ========
Basic and diluted weighted average number
of shares outstanding 1,600 3,330 1,600 3,213
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
STANDARD AUTOMOTIVE CORPORATION
For the Six Months Ended September 30, 1998
Statement of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Preferred Common Additional Total
Shares Preferred Shares Common Paid In Retained Stockholders'
Outstanding Stock Outstanding Stock Capital Earnings Equity
----------- --------- ----------- -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1998 1,150 $ 1 3,095 $ 3 $ 24,546 $ 159 $ 24,709
Issuance of shares
for acquisitions -- -- 405 -- 3,639 -- 3,639
Cost of Initial Public
Offering -- -- -- -- (79) -- (79)
Warrants and Options
Issued -- -- -- -- 175 -- 175
Preferred Stock
Dividend -- -- -- -- -- (587) (587)
Net Income 1,021 1,021
----------- --------- ----------- -------- ------------ -------- ------------
Balance -
September 30, 1998 $ 1,150 $ 1 $ 3,500 $ 3 $ 28,281 $ 593 $ 28,878
=========== ========= =========== ======== ============ ======== ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
STANDARD AUTOMOTIVE CORPORATION
Statements of Cash Flows
For the Six Months Ended September 30,
(in thousands)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities: (Unaudited)
Net income $ 235 $ 1,021
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 66 713
Non-cash compensation -- 175
Deferred taxes (511) (68)
Change in assets and liabilites:
Accounts receivable 851 2,451
Inventory (2,360) (2,189)
Prepaid expenses (17) (79)
Accounts payable and accrued expenses (593) 2,898
Income taxes payable 597 (662)
Accrued excise tax settlement 829 --
--------- ---------
Net cash provided by (used in) operating activities (903) 4,260
--------- ---------
Cash flows from investing activities:
Businesses acquired -- (30,683)
Capitalized acquisition costs -- 366
Issuance of note receivable - related party (261) --
Acquisition of property and equipment (136) (2,657)
--------- ---------
Net cash provided by (used in) investing activities (397) (32,974)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of Bridge Notes 325 --
Proceeds from PNC Bank loans -- 33,168
Repayment of PNC Bank loans -- (968)
Prepaid financing costs -- (1,631)
Repayment of Ajax shareholder note -- (4,000)
Payment of registration costs -- (78)
Cash acquired from acquisitions -- 2,294
Preferred dividend payment -- (587)
--------- ---------
Net cash provided by (used in) financing activities 325 28,198
--------- ---------
Net decrease in cash and cash equivalents (975) (516)
Cash and cash equivalents, beginning of period 1,558 3,357
--------- ---------
Cash and cash equivalents, end of period $ 583 $ 2,841
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $ 543
Income taxes 200 1,462
Noncash investing and financing activities
Capital stock and debt issued for acquisition of
businesses and assets -- 4,144
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
STANDARD AUTOMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
General
The financial statements as of and for the three and six months ended
September 30, 1998 are unaudited; 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 interim period have been
made. The notes to the financial statements have been prepared consistent with
the 10-K filed for the fiscal year ended March 31, 1998 and should be read in
connection with those financials. The comparative financial statements for the
period ended September 30, 1997 pertain to sum total of the results of
operations for Ajax Manufacturing Company ("Ajax") and Standard Automotive
Corporation ("SAC"). SAC did not actually own AJAX until January 1998, therefore
AJAX was not consolidated with SAC during this period.
1. Organizational, Business Description and Recent Acquisitions
Standard Automotive Corporation (the "Company") was formed and
incorporated in January 1997. The Company is a specialty manufacturer of trailer
chassis for the intermodal shipping industry and both chassis and dump bodies
for domestic customers in the construction and agricultural industries, through
its wholly owned subsidiaries, Ajax, R/S Truck Body Co., Inc. ("R/S") and CPS
Trailer Co., Inc. ("CPS") Hereafter collectively referred to as the Company's
subsidiaries.
In July and September 1998, the Company purchased all the outstanding
shares of R/S and CPS, respectively. The acquisitions were accounted for using
purchase accounting. The excess of the purchase price over the fair market value
of R/S and CPS's net assets at the dates of acquisition totaled approximately
$17,368,000. This amount is being amortized on a straight-line basis over a
period not to exceed forty years. The Company is in the process of having
appraisals and lifing studies performed in order to properly value and amortize
the useful lives of the assets acquired. The final allocation of the purchase
price of CPS is subject to post closing audit and certain adjustments may be
made to the related 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 six
months ended September 30, 1998 assumes that the acquisitions of R/S and CPS had
occurred on April 1, 1998. (in thousands except per share data):
<TABLE>
<CAPTION>
Adjust- As Adjusted
SAC R/S CPS ments Proforma
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $ 25,125 $ 7,337 $ 8,468 $ -- $ 40,930
Operating income 2,601 (84) 1,263 1,876 5,656
Net income $ 1,021 $ (42) $ 779 $ 703 $ 2,461
======== ======== ======== ======== ========
Preferred dividend 587 587
Basic and diluted net income per share $ 0.14 $ 0.54
======== ========
Basic and diluted weighted average
number of shares outstanding 3,213 280 125 3,500
</TABLE>
The pro forma operating results reflect estimated adjustments for:
elimination of purchase accounting adjustments on the fair value of purchased
inventory; six months of amortization expense on intangibles arising from the
acquisitions; elimination of certain owner related expenses; six months of
interest expense on the acquisition debt; the tax effect of these adjustments
and six months of Preferred Stock dividend requirements.
7
<PAGE>
Pro forma results of operations information is not necessarily indicative
of the results of operations that would have occurred had the acquisitions been
consummated as of April 1, 1998 or of future results of the combined companies.
Non - Cash Investing and Financing Activities
The Company issued 405,124 shares of common stock in connection with the
acquisition of all the common stock of R/S on July 21, 1998 and CPS on September
17, 1998. In connection with the acquisition, liabilities were assumed as
follows: (in thousands)
R/S CPS Total
--- --- -----
Fair value of assets acquired $19,453 $ 8,614 $28,067
Cash paid for stock (13,012) (7,410) (20,422)
------- ------ -------
Liabilities assumed $(6,441) $(1,204) $(7,645)
======= ======= =======
2. Long Term Debt and Credit Agreements
In July 1998 the Company and certain of its subsidiaries (acting as
Guarantors) entered into with PNC Bank, National Association ("PNC"), both
individually and as agent for other financial institutions a $40,000,000 Term
Loan and Revolving Credit Agreement (the "Credit Agreement"). The Credit
Agreement provides for a Term Loan in the amount of $25,000,000 and a Revolving
Loan in the principal amount of $15,000,000 (collectively, the "Loans").
Portions of the Term Loan were used to fund the R/S and CPS Acquisitions and to
retire certain indebtedness of R/S, CPS and the Company. Proceeds available
under the Revolving Loan may be used for general working capital. Interest on
the amounts outstanding under the Loans is payable monthly and accrues at a
variable rate based upon LIBOR or the Base Rate of PNC, plus a percentage which
adjusts from time to time based upon the ratio of the Company's indebtedness to
EBITDA, as such terms are defined in the Loan Agreement. The rate of interest
for the Loans is currently 7.72%. The principal amount of the Term Loans is
payable in full on July 21, 2004. Amounts outstanding under the Revolving Loan
are payable in full in July 2001, subject to the Company's request, with the
approval of PNC, to extend the due date for a one-year period, for a maximum
extension period of three years. All amounts outstanding under the Credit
Agreement are secured by a lien on substantially all of the Company's assets.
At September 30, 1998 the total amount outstanding under the Credit
Agreement was $32,199,000.
3. Commitments and Contingencies
Environmental Matters
In March 1998 the NJDEP issued a Notice of Violation ("NOV") to the
Company for emitting VOC's 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 remains in active negotiations with NJDEP
regarding the VOC's emitted from its paint spray booths. 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
8
<PAGE>
sampling at these locations, the results of which are being forwarded to NJDEP.
If the additional sampling proves that additional areas of contamination above
NJDEP compliance levels need to be studied, the Company will perform additional
investigation as necessary.
While it is not feasible to predict the outcome of all these matters,
management, based upon the 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.
4. Significant Events
In July 1998, pursuant to the terms of the Stock Purchase Agreement dated
February 24, 1998, as amended, the Company completed the acquisition of all of
the outstanding capital stock of Barclay Investments, Inc. ("Barclay"). In
consideration for such capital stock, the Company issued to the shareholders of
Barclay an aggregate of 185,000 shares of the common stock of the Company.
Simultaneously with the Company's acquisition of Barclay, pursuant to the
terms of the Stock Purchase Agreement dated February 13, 1998, as amended,
Barclay acquired all of the outstanding capital stock of R/S Truck Body, Inc.
(the "R/S Acquisition"). The aggregate consideration paid to the holders of the
capital stock of R/S (the "Shareholders") was $13,012,266 in cash and 95,124
shares of the Company's common stock. Also, pending the outcome of certain
events which will impact the financial results of R/S as of the closing, the
Shareholders may receive additional cash consideration in the amount of
approximately $657,000. This amount was escrowed at the closing.
The 95,124 shares are subject to a put agreement among the Shareholders,
Barclay and the Company (the "Put Agreement"). Under the Put Agreement, the
Shareholders may sell or "put" the 95,124 shares to Barclay or the Company for
an aggregate dollar amount of $1,000,000 during the period commencing on
November 30, 1999 and ending December 31, 1999. Concurrently with the R/S
Acquisition, the Company also entered into a consulting and non-competition
agreement with William Smith, a shareholder of R/S, and employment agreements
with several key employees of R/S.
In connection with the R/S Acquisition, the Company incurred $1,200,000 in
investment banking and finder's fees, and legal and accounting expenses. The
Company also incurred $1,632,000 in similar fees and expenses, including bank
fees, in connection with the procurement of the financing arrangement with PNC.
R/S is engaged in the design, manufacture and sale of customized dump
trucks and trailers, specialized truck suspension systems and related products
and parts. R/S also acts as a distributor for truck equipment manufactured by
other companies, including cranes, tarpaulins, spreaders, plows and specialized
service bodies. R/S has more than doubled its manufacturing capacity with the
completion of its new 140,000 square foot plant in Ivel, Kentucky. The total
cost of the plant is $8,100,000.
In September 1998, pursuant to the terms of an Amended and Restated Stock
Purchase Agreement and Agreement and Plan of Merger ("the agreement") dated
January 30, 1998, the Company completed the acquisition of all of the
outstanding capital stock of CPS Trailer Company, Inc. and its affiliate CPS
Enterprises, Inc. (collectively "CPS"; the "CPS Acquisition") The aggregate
consideration payable by the Company consists of (i) $7,410,000, plus five
sixths (5/6) of the adjusted net income (as defined in the Agreement) of CPS
during the period beginning January 1, 1998 and ending September 17, 1998, less
any dividends paid during such period, $370,000 was prepaid at the closing; (ii)
125,000 shares of the common stock of the Company and (iii) an earnout of up to
$1,000,000 contingent on the performance of CPS during the four year period
ending December 31, 2001.
In connection with the CPS Acquisition, the Company incurred an aggregate
of approximately $390,000 in investment banking and finder's fees, and legal and
accounting expenses.
CPS is engaged in the design, manufacture and sale of dump truck trailers,
specializing in trailers for hauling bulk commodities such as gravel, grain and
corn, and for the construction and waste hauling industries.
9
<PAGE>
The source of the funds to finance the R/S and CPS Acquisitions was a
$40,000,000 Credit Agreement which the Company and certain of its Guarantors
entered into in July 1998 with PNC, both individually and as agent for other
financial institutions.
10
<PAGE>
Item 2. 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 three and six months ended
September 30, 1998 include the unaudited consolidated operating results of
Standard and Ajax. The comparative financial statements for the period ended
September 30, 1997 pertain to sum total of the results of operations for Ajax
and SAC. SAC did not actually own AJAX until January 1998, therefore AJAX was
not consolidated with SAC during this period.
Overview
Ajax manufactures trailer chassis to customer 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. R/S is engaged in the design, manufacture and sale of customized
dump trucks and trailers, specialized truck suspension systems and related
products and parts. R/S also acts as a distributor for truck equipment
manufactured by other companies, including cranes, tarpaulins, spreaders, plows
and specialized service bodies. CPS is engaged in the design, manufacture and
sale of dump truck trailers, specializing in trailers for hauling bulk
commodities such as gravel, grain and corn, and for the construction and waste
hauling industries.
Part of the Company's strategy is to grow through expansion of product
lines and acquisitions such as the recently completed acquisitions of R/S Truck
Body Co., Inc. and CPS Trailer Company. 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.
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 revenues. Results of operations for the
three and six months ended September 30, 1997 reflect Ajax and SAC while the
three and six months ended September 30, 1998 reflect the consolidated amounts
of SAC, its subsidiaries, Ajax, R/S and CPS from their respective dates of
acquisition (rounded):
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Septmeber 30, Six Months Ended Septmeber 30,
---------------------------------- --------------------------------
1997 1998 1997 1998
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues, net $ 6,294 100.0% $17,245 100.0% $11,170 100.0% $25,125 100.0%
Cost of revenues 5,092 80.9 14,003 81.2 8,880 79.5 20,156 80.2
Selling, general and
administrative 483 7.7 1,195 6.9 800 7.2 1,923 7.7
Operating income 719 11.4 1,792 10.4 1,490 13.3 2,601 10.4
Income before provision
for taxes (269) (4.3) 1,267 7.3 521 4.7 1,934 7.7
Provision for income taxes (38) (0.6) 586 3.4 286 2.6 913 3.6
Net income $ (231) (3.7)% $ 681 3.9% $ 235 2.1% $ 1,021 4.1%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Comparison of Six Month Periods Ended September 30, 1998 and 1997
The following discussion provides information regarding the Company's
results of operations for the six months ended September 30, 1997 ("1997") and
September 30, 1998 ("1998").
Net Revenues in 1998 were $25,125,000, an increase of 125% from net
revenues of $11,170,000 for 1997. The increase in net revenues are due to the
acquisitions of R/S and CPS, increased volume of business particularly in the
sales of new chassis, as well as a general improvement in the trailer industry.
During 1998, sales of new chassis represented 59% of Ajax's net revenues as
compared to 37% in 1997. The increase in sales of new chassis resulted
principally from an increase in the volume of new chassis sold in 1998 as
compared to 1997. In contrast, sales of remanufactured chassis represented 31%
of net revenues in 1998 as compared to 50% in 1997. The Company's gross margins
were consistent in 1998 and 1997.
Cost of Revenues increased to $20,156,000 or 80% of net revenues in 1998
from $8,880,000 or 80% of net revenue in 1997. Cost of revenues as a percentage
of net revenues remained consistent during 1998 due to the growth in volume
which offset the increase in lower margin new chassis sales.
Selling, General & Administrative Expense were $1,923,000 during 1998, an
increase of 140% from the $800,000 during 1997. SG&A expenses increased to 8% of
net revenues up from 7% of net revenues during the prior year period. The
increase in SG&A during the current quarter was due to expenses related to the
new executive office space, officers' salaries, Directors & Officers Insurance,
public relations expense incurred since the public offering and additional
general and administrative expenses arising from the acquisitions of R/S and
CPS.
Interest Expense was $449,000 during 1998 as compared to $172,000 during
1997. The interest in 1998 pertains to the PNC Bank Credit Agreement and the
non-recurring interest on the note payable to the Ajax shareholder. In 1997, all
the interest was related to bridge notes provided by outside investors and is
non-recurring.
Comparison of Three Month Periods Ended September 30, 1998 and 1997
The following discussion provides information regarding the Company's
results of operations for the three months ended September 30, 1997 ("1997") and
September 30, 1998 ("1998").
Net Revenues in 1998 were $17,245,000, an increase of 173% from net
revenues of $6,294,000 for 1997. The increase in net revenues reflects the
acquisitions of R/S and CPS, an increase in the Company's sales of new chassis
and a general improvement in the trailer industry. During 1998, sales of new
chassis
12
<PAGE>
represented 70% of Ajax's net revenues as compared to 48% in 1997. The increase
in sales of new chassis resulted principally from an increase in the volume of
new chassis sold in 1998 as compared to 1997. In contrast, sales of
remanufactured chassis represented 20% of net revenues in 1998 as compared to
43% in 1997. The Company's gross margins remained consistent in 1998.
Cost of Revenues increased to $14,003,000 or 81% of net revenues in 1998
from $5,092,000 or 81% of net revenue in 1997. Cost of revenues as a percentage
of net revenues remained consistent during 1998 due to the growth in volume
which offset the increase in lower margin new chassis sales.
Selling, General & Administrative Expense were $1,195,000 during 1998, an
increase of 147% from the $483,000 during 1997. SG&A expenses actually decreased
to 7% of net revenues down from 8% of net revenues during the prior year period.
The dollar value increase in SG&A during the current quarter was due to expenses
related to the new executive office space, officers' salaries, Directors &
Officers Insurance, public relations expense incurred since the public offering
and additional general and administrative expenses arising from the acquisitions
of R/S and CPS..
Interest Expense was $363,000 during 1998 as compared to $172,000 during
1997. The interest in 1998 pertains to the PNC Bank Credit Agreement and the
non-recurring interest on the note payable to the Ajax shareholder. In 1997, all
the interest was related to bridge notes provided by outside investors and is
non-recurring.
Liquidity and Capital Resources
In January 1998, the Company completed its Initial Public Offering. The
Company sold Preferred and Common at a price of $12.00 and $10.00 per share,
respectively, for an aggregate offering price of $28,750,000, including exercise
of the over-allotment in February 1998, and 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 the selling stockholder of Ajax and $347,000 to retire
the Company's other debt including accrued interest. The balance was utilized
for general working capital purposes and acquisition costs.
The Company generated $4,260,000 of cash in operating activities during
1998 as compared to $903,000 used in operating activities during 1997. The cash
generated in operating activities during 1998 reflects primarily a decrease in
accounts receivable of $2,451,000, and an increase in accounts payable and
accrued expenses of $2,898,000 which was partially offset by an increase in
inventory of $2,189,000. The net cash used in investing activities was
$32,974,000 during 1998 as compared to $397,000 used in investing activities
during the prior year. The cash used in investing activities during 1998 was
primarily for the acquisition of R/S and CPS while the balance was used for the
acquisition of property, plant and equipment and additional capitalized
acquisition costs. The cash generated from finance activities during 1998 was
$28,198,000 compared to $325,000 generated by financing activities during the
prior year. The cash generated by finance activities was primarily the proceeds
from the PNC loan offset by repayment of the Ajax shareholder note, prepaid
financing cost, repayment of PNC loan and preferred dividend payments.
The terms on which the Company sells its products provide for payment
within 30 days of acceptance and the Company's accounts receivable were
collected in an average of less than 30 days.
Capital expenditures were $2,657,000 in 1998 as compared to $136,000 for
the comparable period in the prior year. Capital expenditures incurred during
1998 were primarily for the initial investment of $873,000 in a new plant to
service the Western part of the United States, the purchase and installation of
a new computer network system and the refurbishing of the new corporate office
facility. The Company anticipates that capital expenditures during the fiscal
year ending March 31, 1999 will substantially exceed those of the proceeding
years as the Company expands its operations. The Company estimates that total
capital expenditures relating to the new Western operation will total
approximately $3,000,000. The source of funds for the expansion will be from the
Company's internal cash flow and the Credit Agreement. Nevertheless, the Company
could require substantial additional capital if it were to expand its product
lines
13
<PAGE>
by substantially modifying, improving, or modernizing its facility, opening
additional facilities or acquiring a new business within the truck or trailer
chassis 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 $32,199,000 in debt
outstanding, consisting of the notes payable to PNC which currently bears
interest at a variable rate on LIBOR and payable monthly.
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 September 30, 1998, the Company had working capital of $5,012,000,
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 and from the Revolving Loan facility.
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 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.
Part 2. Other Information
Item 5. Significant Events
In July 1998, pursuant to the terms of the Stock Purchase Agreement dated
February 24, 1998, as amended, the Company completed the acquisition of all of
the outstanding capital stock of Barclay Investments, Inc. ("Barclay"). In
consideration for such capital stock, the Company issued to the shareholders of
Barclay an aggregate of 185,000 shares of the common stock of the Company.
Simultaneously with the Company's acquisition of Barclay, pursuant to the
terms of the Stock Purchase Agreement dated February 13, 1998, as amended,
Barclay acquired all of the outstanding capital stock of R/S Truck Body, Inc.
The aggregate consideration paid to the holders of the capital stock of R/S (the
"Shareholders") was $13,012,266 in cash and 95,124 shares of the Company's
common stock. Also, pending the outcome of certain events which will impact the
financial results of R/S as of the closing, the Shareholders may receive
additional cash consideration in the amount of approximately $657,000. This
amount was escrowed at the closing.
The 95,124 shares are subject to a put agreement among the Shareholders,
Barclay and the Company (the "Put Agreement"). Under the Put Agreement, the
Shareholders may sell or "put" the 95,124 shares to Barclay or the Company for
an aggregate dollar amount of $1,000,000 during the period commencing on
November 30, 1999 and ending December 31, 1999. Concurrently with the R/S
Acquisition, the Company also entered into a consulting and non-competition
agreement with William Smith, a shareholder of R/S, and employment agreements
with several key employees of R/S.
14
<PAGE>
In connection with the R/S Acquisition, the Company incurred $1,200,000 in
investment banking and finder's fees, and legal and accounting expenses. The
Company also incurred $1,632,000 in similar fees and expenses, including bank
fees, in connection with the procurement of the financing arrangement with PNC.
R/S is engaged in the design, manufacture and sale of customized dump
trucks and trailers, specialized truck suspension systems and related products
and parts. R/S also acts as a distributor for truck equipment manufactured by
other companies, including cranes, tarpaulins, spreaders, plows and specialized
service bodies. R/S has more than doubled its manufacturing capacity with the
completion of its new 140,000 square foot plant in Ivel, Kentucky. The total
cost of the plant is $8,100,000.
In September 1998, pursuant to the terms of an Amended and Restated Stock
Purchase Agreement and Agreement and Plan of Merger ("the agreement") dated
January 30, 1998, the Company completed the acquisition of all of the
outstanding capital stock of CPS Trailer Company, Inc. and its affiliate CPS
Enterprises, Inc. (collectively "CPS"; the "CPS Acquisition") The aggregate
consideration payable by the Company consists of (I) $7,410,000, plus five
sixths (5/6) of the adjusted net income (as defined in the Agreement) of CPS
during the period beginning January 1, 1998 and ending September 17, 1998, less
any dividends paid during such period, $370,000 was prepaid at the closing; (ii)
125,000 shares of the common stock of the Company and (iii) an earnout of up to
$1,000,000 contingent on the performance of CPS during the four year period
ending December 31, 2001.
In connection with the CPS Acquisition, the Company incurred an aggregate
of approximately $390,000 in investment banking and finder's fees, and legal and
accounting expenses.
CPS is engaged in the design, manufacture and sale of dump truck trailers,
specializing in trailers for hauling bulk commodities such as gravel, grain and
corn, and for the construction and waste hauling industries.
The source of the funds to finance the R/S and CPS Acquisitions was a
$40,000,000 Credit Agreement which the Company and certain of its Guarantors
entered into in July 1998 with PNC, both individually and as agent for other
financial institutions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.0 Financial Data Schedule
(b) Report on Form 8-K
Report dated July 21, 1998, as amended October 5, 1998, with respect
to the acquisition of R/S Truck Body Co., Inc.
Report dated September 18, 1998 with respect to the acquisition of
CPS Trailer Co., Inc.
Report dated September 29, 1998 with respect to the change in
auditors.
15
<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.
Date: STANDARD AUTOMOTIVE CORPORATION
- ---- ------------------------------------
(Registrant)
November 12, 1998 /s/ Steven Merker
------------------------------------
Steven Merker
Chairman and Chief Executive Officer
November 12, 1998 /s/ Roy Ceccato
------------------------------------
Roy Ceccato
Director and Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statement of Income found on pages 3 and 4 of the
Company's Form 10-Q for the three months ended September 30, 1998 and is
qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
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<S> <C>
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<PERIOD-END> SEP-30-1998
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<INVENTORY> 12,544
<CURRENT-ASSETS> 21,473
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