UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2000
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
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STANDARD AUTOMOTIVE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 52-2018607
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(State of Incorporation) (I.R.S. Employer
Identification No.)
321 Valley Road, Hillsborough, NJ 08876-4056
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(Address of principal executive (Zip Code)
offices)
(908) 874-7778
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(Registrant's telephone number)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Securities registered under Section 12(b) of the Exchange Act:
Name of each Exchange
Title of each Class on which Registered
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Common Stock American Stock Exchange
8 1/2% Senior Convertible Redeemable
Preferred Stock American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K of any amendment to this
Form 10-K. |_|
The aggregate market value of the voting common stock held by
non-affiliates of the registrant as of June 28, 2000 was $17,379,464 based upon
a last sale price of $8.00 on the American Stock Exchange for such date.
As of June 28, 2000, the registrant had a total of 3,722,400 shares of
Common Stock outstanding and 1,132,600 shares of Preferred Stock outstanding.
The Index of Exhibits filed with this Report begins at page 29.
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STANDARD AUTOMOTIVE CORPORATION
For the Year Fiscal Ended March 31, 2000
Form 10-K Annual Report
Index
Page
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Part I
Item 1. Business ...................................................... 3
Item 2. Properties .................................................... 12
Item 2A. Employees ..................................................... 12
Item 3. Legal Proceedings ............................................ 12
Item 4. Submission of Matters to a Vote of Security Holders ........... 13
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ....................................................... 14
Item 6. Selected Financial Data ....................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................... 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .... 20
Item 8. Financial Statements and Supplementary Data ................... 20
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure .......................................... 20
Part III
Item 10. Executive Officers and Directors of the Registrant ............ 21
Item 11. Executive Compensation ........................................ 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management .................................................... 27
Item 13. Certain Relationships and Related Transactions ................ 27
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ...................................................... 28
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PART I
Item 1. Business
The information in this Annual Report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained in this Annual Report that are not statements of historical
fact may be deemed to be forward-looking statements. For example, words such as
"may," "will," "should," "estimates," "predicts," "potential," "continue,"
"strategy," "believes," "anticipates," "plans," "expects," "intends," and
similar expressions are intended to identify forward-looking statements. Our
actual results and the timing of certain events may differ significantly from
the results discussed in the forward-looking statements.
General
Standard is a Delaware corporation and diversified holding company. We
commenced operations in January 1998 with the acquisition of Ajax Manufacturing
Company. We have substantially expanded our operations through acquisitions,
facility expansion and internal growth. Standard is comprised of seven operating
companies geographically dispersed throughout North America, including Canada
and Mexico.
We are currently organized into two operating divisions: the Truck
Body/Trailer Division and the Critical Components Division. These two divisions
operate separately and have distinct management at both the division level and
the operating subsidiary level.
Our Truck Body/Trailer Division designs, manufactures and sells trailer
chassis, dump truck bodies, specialty trailers, truck suspensions and related
assemblies through the following operating companies:
o Ajax manufactures trailer chassis and re-manufactures existing chassis.
Ajax operates in Hillsborough, New Jersey and Sonora, Mexico. The Mexican
facility commenced production in April 1999.
o R/S Truck Body Co. designs, manufactures and sells 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. We acquired R/S in July 1998.
o CPS Trailer Co. designs, manufactures and sells dump trailers,
specializing in trailers for hauling bulk commodities such as gravel and
grain and for the construction, agriculture and waste hauling industries.
We acquired CPS in September 1998.
Our Critical Components Division operates through the following operating
companies:
o Ranor Inc. fabricates and machines large metal precision components and
assemblies for the aerospace, nuclear, industrial and military markets. We
acquired Ranor in June 1999.
o Airborne Gear & Machine Ltd., located in Montreal, Canada, primarily
manufactures high-precision rotating parts for jet engines made from
exotic alloys. We acquired Airborne in April 2000.
o Arell Machining Ltd., also located in Montreal, Canada, manufactures
high-precision parts for aircraft engines, landing gear and aircraft
fuselages. We acquired Arell in April 2000.
Standard emphasizes growth and strong internal cash flow. Our business
strategy is to expand through both internal growth and the acquisition of
premier companies. Our strict acquisition protocol focuses on businesses that
are leaders in their markets as measured by market share, innovation,
profitability and return on assets. Moreover, as a result of our acquisitions,
we serve diverse industries which typically operate in varying business cycles.
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Truck Body/Trailer Division
Our Truck Body/Trailer Division designs, manufactures and sells trailer
chassis for use in the transport of shipping containers and a broad line of
highly specialized customized dump truck trailers, dump bodies, specialty
trailers, truck suspensions and related products. Standard's Truck Body/Trailer
Division commenced operations in January 1998 with the acquisition of Ajax and
we substantially expanded our operations with the acquisitions of R/S and CPS.
To further expand our business by reaching potential customers operating on the
west coast, we established a new manufacturing facility in Sonora, Mexico to
produce trailer chassis identical to those produced at our Ajax New Jersey
facility. Production at the Sonora, Mexico facility commenced in April 1999.
Product Lines
As a result of the acquisitions of Ajax, R/S and CPS, Standard offers an
extensive line of transportation equipment and related products. Moreover,
because of the strong relationships between management of our operating
companies and their customers, many of the Truck Body/Trailer Division's
products have been customized to fit customer needs and are otherwise designed
to meet market demands. The Truck Body/Trailer Division's current line of
transportation equipment includes:
o Container Chassis. A container chassis is a trailer chassis attached to a
truck cab which is used to transport international shipping containers.
Ajax manufactures new chassis and re-manufactures used chassis at its
facilities in New Jersey and Mexico.
o New Container Chassis. We manufacture and fabricate chassis pursuant
to customer orders, and in accordance with the International
Standards Organization (ISO) specifications or such other
specifications as customers may require.
o Re-manufactured Container Chassis. Ajax re-manufactures chassis to
customer order and ISO specifications, whether the chassis were
originally built by Ajax or another manufacturer. The
re-manufacturing process involves removing all components of a used
chassis, except 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 and cannot be decommissioned for re-manufacture.
However, in periods of reduced demand, customers are more likely to
remove chassis from service and present them for re-manufacturing in
an effort to prepare for periods of heightened demand.
o Chassis Kits/Chassis Parts. Ajax offers a complete line of replacement
parts, including front assemblies, slider assemblies and rear bolster
sets.
o Truck Trailers. Truck trailers are used to haul bulk products such as
refuse, scrap, demolition by-products, rocks, gravel, sand and
agricultural commodities. R/S and CPS produce a variety of specialized
truck trailers which serve diverse industries and are designed to meet the
specific needs of customers. These include:
o Bottom Dump Trailer. The bottom dump trailer is constructed of steel
and used to haul a variety of products and can be built to customer
specifications based on a variety of standard options. Lengths of
bottom dumps range from 20' to 43' to accommodate differing
regulations and demands throughout the United States. Recent
upgrades to the bottom dump trailer include anti-lock brakes and
rear underside protection.
o Half-Round End Dump Trailer. The half-round end dump trailer is the
newest addition to the Truck Body/Trailer Division's steel dump
trailer product line. This dump trailer is utilized in large
aggregate hauling, demolition, and construction. The trailer has a
hydraulic cylinder which allows the trailer bed to be raised to a
45-degree angle for end dumping, and is available in lengths ranging
from 24' to 39'. The body of the half-round is made of super tough
AR-400 steel.
o Grain Hopper Trailer. The grain hopper trailer is used to haul grain
and, with the availability of increased side heights, the trailer
has become attractive to growers of larger volume, lighter
commodities, such as peanuts. We believe our sloped end version of
the trailer, featuring a more aerodynamic shape, has increased the
grain hopper's popularity. The trailer has two manually operated
bottom dump doors and is designed to withstand rough terrain without
breakage. The grain hopper is constructed of steel and is available
in lengths ranging from 20' to 48'.
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o Walking Floor Van Trailer. The walking floor van trailer is an
innovative trailer that incorporates maximum strength with the
versatility to unload a wide variety of cargo. The combination of
heavy-duty steel construction and a live floor permits more
efficient use and higher load capacity. The trailer has many
applications and is often used in the waste industry. The live floor
is hydraulically driven and allows for the proper distribution of
the load.
o Rear Dump Trailers, Steel and Aluminum. The rear dump trailer
discharges its load from the rear of the trailer. The rear dump
trailer is available in either steel or aluminum, depending on its
intended use, and is available in lengths ranging from 19' to 40'
and is equipped with independent suspensions which permit heavier
payloads.
o Dump Truck Bodies, Steel and Aluminum. Dump bodies are often designed
according to customer order. The dump bodies are available in either steel
or aluminum. Aluminum bodies, which are better suited for less abrasive
materials, are lighter in weight and allow for greater payloads of
materials such as gravel and asphalt. Conversely, steel is appropriate to
handle more abrasive materials.
o Platform Bodies, Steel and Aluminum. Platform bodies are also designed
according to specific customer order and manufactured in either steel or
aluminum featuring either a dump or stationary capability. As the name
implies, platform bodies are used to haul materials of various shapes and
sizes, including lumber, construction block and brick.
o OEM and Manufactured Replacement Parts. We offer a complete line of
service parts through our Service Parts Department. All parts used in the
manufacturing process are available for replacement. We also offer parts
supplied as original equipment manufacture (OEM) by outside vendors
through our Parts Department. We also supply small parts for several of
the Truck Body/Trailer Division's manufacturing facilities.
o Suspensions for Truck and Trailers. Suspensions, both air and spring, are
available through the Truck Body/Trailer Division's Page Suspension
Division of R/S. Suspensions are the weight-carrying units mounted under
either a truck or trailer. These units provide lift either through spring
action or air pressure. The many configurations used in the industry are
available through our Page Suspension Division. These units are built
in-house and sold as complete units, installed or shipped to other
locations, as required by the customer.
o New Products. The Truck Body/Trailer Division has introduced or expects to
introduce the following new products through its operating companies:
o Superlite Trailers. In the summer of 1999, CPS unveiled a new
addition to the Truck Body/Trailer Division's steel trailer product
line, the Superlite. The Superlite utilizes many of the components
of the half round end dump trailer yet weighs significantly less.
The Superlite is ideal for small aggregate hauling such as sand and
gravel and is available in 24' to 39' lengths.
o Bottom Dump Doubles. CPS is in the process of developing a prototype
product which is comprised of two 20' long dump trailers and is
capable of larger-scale hauling of light aggregate products and
other materials. This product will provide its users with greater
versatility compared to a single standard bottom dump trailer and is
designed to enhance productivity in construction industry
applications. The Bottom Dump Double is expected to be introduced in
the first quarter of Fiscal Year 2001.
o Elliptical Body. In the fall of 1999, R/S introduced the hard-metal
elliptical truck body designed to address the market's needs for
durability and a high-clearance tailgate. This new offering has
rounded sides which promotes substantially easier material handling
during loading and unloading.
o Aluminum Platform Trailer. R/S is designing an aluminum platform
trailer which it anticipates introducing during Fiscal Year 2001.
o Aluminum Elliptical Body. R/S has designed an aluminum elliptical
body which it anticipates introducing during Fiscal Year 2001.
o Lightweight Steerable Suspension. R/S expects to introduce a
lightweight steerable suspension to the market during Fiscal Year
2001.
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In response to customer demands and the changing regulatory environment,
Standard constantly seeks to refine its product offerings to meet the demands of
the Truck Body/Trailer Division's marketplace. Standard considers the following
its key competitive advantages: (i) engineering expertise, (ii) experience of
its management, (iii) the skill of its work force and (iv) its state-of-the-art
facilities and equipment. All of the individuals who formerly owned or managed
the Truck Body/Trailer Division's operating companies have remained with the
businesses and provide comprehensive knowledge of customer needs and markets,
enabling the operating companies to design and manufacture customized products.
Revenues by Product
Set forth below are product revenues, presented by percentage, of the
entities operated by the Truck Body/Trailer Division for the last five years.
Standard acquired Ajax in January 1998, R/S in July 1999 and CPS in September
1999, and the table reflects their sales before and after Standard's
acquisition. The information below assumes that all other Truck Body/Trailer
Division operating companies were owned for the entire period.
Fiscal Year Ended March 31, Chassis Dump Bodies Dump Trailers Other
--------------------------- ------- ----------- ------------- -----
2000 62% 13% 17% 8%
1999 52% 14% 20% 14%
1998 54% 37% 9% -
1997 49% 45% 6% -
1996 90% 7% 3% -
Backlog
The Truck Body/Trailer Division's backlog of unfilled orders totaled
approximately $84,800,000 as of March 31, 2000, compared to approximately
$62,600,000 as of March 31, 1999. We believe that this backlog may reasonably be
filled during the fiscal year 2001.
Manufacturing
Trailer Chassis
We manufacture trailer chassis at our Hillsborough, New Jersey and Sonora,
Mexico facilities. All chassis are manufactured or re-manufactured pursuant to
specific customer orders. Customer orders range from several hundred to several
thousand trailer chassis. We generally schedule production three or more months
in advance.
Dump Truck Bodies and Trailers
We manufacture dump truck bodies and trailers at the facilities of R/S and
CPS in Oran, Missouri and Ivel, Kentucky from customized designs based on
customer specifications and applicable regulations. Examples of custom design
features include length, enhanced platform supports, steel or aluminum
construction depending on weight requirements and intended use, support systems,
contours of the dump bed (flat or round), specialized brake systems, underside
protection, specialized step placements and cargo tie downs. Production
scheduling at our CPS and R/S facilities is generally four to eight weeks in
advance.
Raw Materials
The Truck Body/Trailer Division uses a variety of raw materials and
components including steel, aluminum, lumber, tires, axles and hydraulics which
are purchased from a number of sources. Raw materials represent approximately
77% of the cost of goods manufactured.
We purchase materials on an as-needed basis from a number of suppliers and
vendors with whom we have long-term business relationships. Lead times are
generally four to six weeks, except for I-beams used in the production of
trailer
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chassis, where lead times are dependent upon production schedules at steel
mills. At each facility, we maintain inventory positions at levels which we
believe to be sufficient to prevent production delays due to material shortages
or our vendor allocations. To date, fluctuations in the cost or availability of
raw materials have not had a significant impact on operating profits.
Marketing and Distribution
The Truck Body/Trailer Division's customers include major leasing
companies that, in turn, lease trailer chassis to steamship and rail companies,
truck dealers and distributors, large private fleet owners and smaller
end-users. To a limited extent, the Truck Body/Trailer Division sells its
trailer chassis directly to steamship companies.
Trac Leasing (38%) and Flexi-Van Leasing (17%) represented 55% of the
sales of Truck Body/Trailer Division for the fiscal year ended March 31, 2000.
Trac Leasing (29%) and Flexi-Van Leasing (31%) represented 60% of the sales of
Truck Body/Trailer Division for the fiscal year ended March 31, 1999.
We also sell manufactured products directly to end users, fleet and
leasing companies, truck dealers and established distributors. The Truck
Body/Trailer Division maintains a staff of 15 sales managers and customer
service representatives. Management at all levels, including our President,
participates in the selling process.
Historically, the Truck Body/Trailer Division has relied on advertisements
in trade journals, participation at trade shows and direct mailings to market
its products. We believe that sales through truck dealers and truck equipment
distributors of the Truck Body/Trailer Division's dump trailers and dump bodies
enable us to expand our geographical reach without the costs associated with
in-house sales personnel. During the year ended March 31, 2000, R/S began to
offer extended term sales to its dealers. Management does not believe that there
is any excess inventory in the hands of its dealers.
In an effort to expand our dealer network, the Truck Body/Trailer Division
continues to support the advertising programs of its dealers. Cooperative
advertising has allowed the Truck Body/Trailer Division to gain product
awareness and develop dealer loyalty.
Machinery and Equipment
Our manufacturing equipment consists primarily of steel bending, cutting,
hole punching, welding and painting equipment. The Truck Body/Trailer Division
manufactures a portion of and maintains most of its tools and dies. CNC
(Computer Numeric Control) lasers and plasma/punch fabrication centers are used
extensively at our manufacturing facilities. We also use robotic welders. If
plans are implemented to manufacture new products, additional tooling and
equipment, as necessary, would be acquired or developed. We perform regular
preventive maintenance on machinery and equipment internally and at the
scheduled intervals. Standard is committed to maintaining state-of-the-art
equipment and facilities. To that end, we regularly upgrade and replace
machinery and equipment with advanced technology to improve product quality and
manufacturing efficiencies.
Research and Development
We emphasize design and product innovation. We continually seek to modify
our products to meet the needs of the marketplace. In addition to striving to
update our products, we also seek to modernize our manufacturing and tooling
equipment to achieve production efficiencies and improved product quality. We
have designed, fabricated and implemented much of our manufacturing equipment to
conform to our needs.
We utilize the latest in three-dimensional modeling in the design of
trailers and their components. Designers use AutoCAD to develop manufacturing
and presentation drawings. We also use computer aided manufacturing programs
which translate the lines on the drawings into cutting diagrams for computer
controlled high production plasma cutting tables. Once cut, many of these pieces
are used in sub-assemblies that are welded together using a robotic welding
cell. Robotic welding cells are used to manufacture a majority of our
labor-intensive subassemblies.
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We use advanced pulsed MIG welding technology throughout our manufacturing
process. This welding process virtually eliminates the splatter commonly
associated with MIG welding, reducing cleanup time and promoting higher
productivity throughout the manufacturing process.
Competition for the Manufacture of Chassis, Dump Trailers and Bodies
The dump truck trailer and dump body industry, and the trailer chassis
industries are highly competitive. We compete on the basis of product
innovations and capabilities, quality, durability, warranty, and customer
relationships, as well as on product pricing, availability and delivery times.
With respect to trailer chassis, shipping costs can substantially impact
purchasing decisions and, correspondingly, competition tends to be geographical.
Ajax's New Jersey facility faces competition from numerous competitors for sales
on the east coast, including Strick Corporation, HPA Monon and Hyundai, Mexico.
Similarly, the Sonora, Mexico facility faces competition from Hyundai, Mexico
and other large manufacturers for sales on the west coast.
With respect to dump trailers and bodies, the competition comes from
numerous independent producers as well as larger manufacturers, such as The Heil
Company, Galion Dump Bodies, Ranco and Clement, which generally produce
standardized products and compete primarily on the basis of price.
Product Warranties
We provide limited product warranties for product defects. These
warranties generally provide for the replacement or repair of defective parts
resulting from manufacturing defects or workmanship for a specified period
following the date of sale. Customers and end-users also receive warranties from
the suppliers of components incorporated into the final manufactured products.
Violation of Federal and State Air Quality Regulation
On March 16, 1999 Standard (on behalf of Ajax, New Jersey) and the New
Jersey Department of Environmental Protection (NJDEP) entered into a Stipulation
of Settlement by which Standard, without admission of liability, agreed to
withdraw legal challenges against NJDEP and pay NJDEP $234,000 over a three-year
period commencing December 31, 1999. The initial installment of $95,000 payable
on December 31,1999 has been paid. As part of the settlement, NJDEP (1) has
withdrawn and settled all alleged emission exceedences of air volatile compounds
("VOCs") dating from the initiation of Standard's predecessor business in 1992
through February 28, 1999; and (2) has granted Standard a new VOC permit that
roughly doubles allowable VOC emissions to 51.5 tons per year. As required under
the new VOC permit, Ajax has installed a system to compute VOC emissions and
periodically reconcile such computations with purchasing and production data. At
current rates of production, VOC permit limits may be exceeded. Options
available to Ajax include additional expansion of the VOC permit from NJDEP
(such application would likely be additionally reviewable by USEPA). Another
option may be to upgrade the production facility to allow use of zero-VOC or low
VOC production materials. This option might include Ajax purchasing Open-Market
VOC Emission Reduction Credits as permitted by recently adopted NJDEP
regulations.
Other Environmental and Regulatory Compliance
Truck trailer length, height, width, gross vehicle weight and other
specifications are regulated by the National Highway Traffic Safety
Administration and individual states. Changes and anticipated changes in these
regulations may impact demand for new trailers, thereby contributing to industry
cyclicality. We are also governed by a variety of regulations established by
various federal, state and local agencies governing such matters including
employee safety and working conditions, environmental protection and other
activities.
We are subject to Federal, state and local laws and regulations relating
to our operations, including building and occupancy codes, occupational safety
and environmental laws including laws governing the use, discharge and disposal
of hazardous materials. Except as otherwise described above with regard to air
quality regulations, Standard is not aware of any material non-compliance with
any such laws and regulations. We are a manufacturer of truck trailer chassis
and are
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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, we have begun an investigation for any
environmental "Areas of Concern" ("AOCs") that may be present at the Ajax, New
Jersey facility. We have entered into a Remediation Agreement with NJDEP by
which we will fulfill our obligations under ISRA. AOCs, if discovered, could
require remediation, which could have a material adverse effect on us.
In March 1998, as part of the ISRA Remediation Agreement with NJDEP, we
performed soil and sediment sampling at various locations at the Ajax, New
Jersey 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. We have engaged a contractor to perform additional
sampling at these locations, the results of which have been forwarded to NJDEP.
NJDEP and Standard are presently reviewing results generated March 1999. If the
additional sampling indicates additional areas of contamination above NJDEP
compliance levels, additional investigations may be necessary or remedial action
including removal and replacement of affected soil may be indicated. The cost of
such action, if necessary, is not expected to be material to our financial
position.
There can be no assurance that additional investigations will not reveal
additional environmental regulatory compliance liabilities, nor can there be 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 our
financial position or results of operations.
Critical Components Division
The Critical Components Division operates through its wholly-owned
subsidiary, Ranor Inc. In conjunction with the acquisition of Ranor in June
1999, we established a new, wholly-owned subsidiary, Critical Components
Corporation, to manage this and future acquisitions in our engineered products
line.
Ranor Inc.
Ranor, located in Westminster, Massachusetts, specializes in the machining
and precision fabrication of very large metal components used in a variety of
industries. The primary markets Ranor serves include nuclear, national
laboratories, aerospace, shipbuilding, plastic and process machinery, and power
generation. We believe that Ranor has gained a national reputation for its
ability to machine and fabricate large parts and assemblies while meeting
stringent requirements for tight tolerances. These projects typically involve
complex configurations, difficult handling and fixturing issues. These large
parts and assemblies require certified quality programs which Ranor possesses.
Ranor machines the 16-ft. diameter domes used to make the fuel tanks for
certain launch rockets. Ranor has also built much of the large precision vacuum
equipment for the National Ignition Facility in California. Ranor's largest
product by volume is the fabricated and machined canister used for the storage
of spent nuclear reactor fuel. We believe Ranor is the largest manufacturer of
this product in the United States. Ranor was the first company in the U.S. to
obtain a "Nuclear TP" (Transportation Package) stamp from the American Society
of Mechanical Engineers.
Utilizing some of the largest non-captive manufacturing equipment in the
United States, Ranor provides a broad range of fabrication services (cutting,
forming, rolling, welding, assembly, finishing) and large part machining, all
with the highest level quality certifications.
Product Lines
o Nuclear
Canisters and containers for the storage of spent nuclear fuel (SNF) and
other radioactive wastes are historically the highest revenue product line at
Ranor. The unique combination of very large machining and fabrication tools,
manufacturing engineering expertise, and nuclear-capable quality assurance has
led to Ranor's leadership in this market. The types of radioactive waste
containers produced by Ranor include:
o Dry storage canisters (DSCs) are used by utilities to contain
spent nuclear fuel rods for on-site horizontal
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storage in concrete modules. The 15-ft tall, 7-ft diameter DSCs combine
stainless and carbon steels with lead and other shielding materials.
Designs are very complex, requiring extensive manufacturing, engineering
and exacting machine and welding fabrication.
o Liners for vertical concrete storage modules are a related
product. Ranor is currently involved in manufacturing this modified
approach to on-site SNF storage, maintaining our commitment to this market
segment.
o Storage casks embody an alternative design for on-site SNF
storage. Utilizing its handling, shrink-fitting, and fabrication
expertise, Ranor produces storage casks from large, heavy forging, which
can be up to 9 in. thick.
o Ranor also fabricates smaller containers and vaults for
transuranic and lower-level wastes. The lighter, but dimensionally
difficult, construction typically employed makes high-quality welding,
fabrication experience and vendor management critical to manufacturing
success.
o National Laboratories
Ranor is involved in the precision manufacture of spatial filter vessels
and beam line vacuum vessels for the National Ignition Facility. This cutting
edge facility will test control nuclear fusion initiated by a family of high
intensity laser beams. Ranor will shortly commence work on confinement spheres
for a similar facility in Los Alamos. This facility conducts dual axis
radiography of explosive events, which are confined in high strength spherical
vessels manufactured by Ranor.
o Aerospace
Ranor is a long-term supplier of machining services supporting launch
rocket fuel tank production. Specializing in net configuration machining of the
domed end enclosures for launch rocket fuel tanks. Ranor believes it is the only
domestic corporation to perfect the finish machining process of the domed end
enclosures, negating the need for subsequent manufacturing operations and
thereby improving product quality and production efficiencies. Ranor has
delivered large domed fuel tank components for reusable launch rocket vehicles
and a prototype reusable launch vehicle. We believe the domes are the largest
one-piece dome enclosures manufactured in the world.
o Shipbuilding
Ranor believes it is currently the sole supplier of a family of ride
control devices used on high-speed multi-hull ferries used in ocean service.
These consist of precision fabricated and machined underwater foils (wing-like
devices) which are used to counteract the motions induced by waves. Ferries
which use these devices are generally able to offer greater comfort to
passengers and can operate in more severe weather conditions.
Ranor has supplied wet steam accumulators used on aircraft carriers. Each
accumulator is designed to support the high-pressure steam supply for aircraft
carrier catapult systems used to propel aircraft from carrier decks.
o Plastic & Process Machinery
Ranor has developed long-term relationships with major manufacturers of
large, industrial manufacturing equipment. Ranor provides two types of services
to these manufacturers including: (i) complete outsource manufacturing and (ii)
overflow capacity manufacturing.
Ranor fabricates major components for paper machinery manufacturers and
also produces complex dies for the plastic extruder industry. Many of these dies
are assembled exclusively by Ranor and weigh up to 50 tons.
o Power Generation
The market for new gas turbines for commercial power generation has
expanded tremendously over recent years. Gas turbine power plants offer
utilities clean, efficient operation at relatively low cost. Ranor currently
fabricates and machines
10
<PAGE>
a variety of components for large gas turbine engines for two of the three world
leaders in this business. Efforts are currently underway to expand Ranor's role
in this industry.
Revenues by Product
Product % Revenue
------- ---------
Nuclear 44
National Laboratories 21
Aerospace 11
Shipbuilding 10
Plastic & Process Machinery 8
Power Generation 3
Other 3
Backlog
Ranor's backlog of unfilled orders totaled approximately $27,700,000 as of
March 31, 2000. We believe that this backlog may reasonably be filled during the
fiscal year 2001.
Manufacturing
We believe that Ranor's state-of-the-art facility and problem solving,
manufacturing and engineering capabilities provide it with significant
competitive advantages. These competitive advantages enable Ranor to offer its
customers unique manufacturing approaches, design change recommendations,
specially designed fixturing and other solutions which either reduce cost or
increase manufacturability. The components produced by Ranor are technically
challenging. Ranor's customers have entered into long-term arrangements to
purchase products from Ranor. Ranor has more than 100 regular customers,
although some customers do not always place orders during a given 12-month
period.
Raw Materials
To date, fluctuations in the cost or availability of raw materials have
not had a significant impact on operating profits.
Marketing and Distribution
The components and assemblies produced by Ranor are extremely technical
and made to customer order. Ranor has established a national reputation with
more than 100 regular customers.
Machinery and Equipment
Ranor has a state-of-the-art and fully integrated CAD/CAM system with
direct numerical CNC link with CNC machine tools. Ranor utilizes some of the
largest non-captive manufacturing equipment in the United States.
Competition
Ranor's competitors include: ABB in Newington, New Hampshire; the
Bridgeville Division of Ionics outside Pittsburgh, Pennsylvania; Precision
Component Corporation in York, Pennsylvania; Hi Tech Manufacturing, Inc. in
Greensboro, North Carolina; Nooter Corp. in St. Louis, Missouri; Joseph Oats in
New Jersey; and Olympic Tool and Engineering, Inc. in Shelton, Washington.
11
<PAGE>
Item 2. Properties
We have seven manufacturing plants, as described below:
o We lease on a "triple net" basis, a 182,000 square foot factory
complex on 22 acres in Hillsborough Township, New Jersey. The
facility was built in 1964. Currently we use approximately 2,500
square feet for administrative offices and we use the balance for
manufacturing and warehousing. The site surrounding the plant is
primarily used for storing chassis, inventory and employee parking.
The lease for the Hillsborough facility provides for a five-year
initial term and is renewable at our option for four successive,
five-year renewal terms, at an annual base rent of $600,000 for the
initial term, subject to an increase during each renewal term equal
to the percentage increase in the Consumer Price Index over the
immediately preceding five year term. We have the option,
exercisable during the initial term of the lease, to purchase the
facility and land for a cash purchase price of $6,500,000, provided
we are not in default under the lease.
o We lease a 64,000 square foot manufacturing facility located on five
acres of property in Sonora, Mexico. The lease provides for a
six-year term at an annual rent of $289,000. Standard has the option
to purchase the land and facility at the end of the fifth year for a
price not to exceed $1,500,000. We also own seven acres of land
adjacent to our leased premises.
o We own a 140,000 square foot manufacturing facility located on 21
acres in Ivel, Kentucky. Approximately 10,000 square feet of the
facility houses administrative office space.
o We own a 120,000 square foot facility located on 25 acres in Oran,
Missouri. We utilize 105,000 square feet of the facility for
manufacturing purposes.
o We own 65 acres in Westminster, Massachusetts. Manufacturing
facilities total approximately 165,000 square feet, of which 25,000
square feet is newly constructed and was put into service in August
1999.
o We own a 25,000 square foot manufacturing facility located in
Montreal, Canada, acquired as part of the acquisition of Airborne.
o We own a 40,000 square foot manufacturing facility, also located in
Montreal, Canada, acquired as part of the acquisition of Arell.
We lease 4,100 square feet of executive office space at 280 Park Avenue in
New York for an annual rent of $193,000.
We also lease 4,200 square feet of office space at 401 U.S. Route 206 in
Somerville, New Jersey for an annual rent of $78,000. This space houses our
corporate finance and administrative personnel.
Item 2A. Employees
As of March 31, 2000, we had 867 full-time employees of whom 3 are
officers, 30 are managers, 33 are supervisors, 66 are administrative personnel
and 735 are production workers. Our employees do not belong to a collective
bargaining unit and we consider our relations with our employees to be
satisfactory. At the same time, Airborne and Arell had a total of 58 and 94 full
time employees, respectively. The production personnel of both Airborne and
Arell are unionized and the companies consider their relations with their
employees to be very good.
Item 3. Legal Proceedings
We are involved in litigation arising in the normal course of our
business. Management believes that the litigation in which we are currently
involved, either individually or in the aggregate, is not material to Standard's
financial position or results of operations. Furthermore, we are pursuing
through arbitration certain purchase price adjustments pursuant to the Ranor
Asset Purchase Agreement dated June 17, 1999. In addition, we are seeking
recovery against Ranor's former accountants relative to these matters.
12
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2000.
13
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of our Common Stock and Senior Convertible Redeemable
Preferred Stock
Our Common Stock and 8 1/2 % Senior Convertible Redeemable Preferred Stock
("Preferred Stock") are traded on the American Stock Exchange under the symbols
"AJX" and "AJX.PR," respectively. The following table sets forth on a per share
basis the high and low sale prices for our Common Stock and our Preferred Stock
for the period from April 1, 1998 through June 29, 2000.
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------ ---------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Quarter through June 30, 1998 12 5/8 8 3/4 13 9 7/8
Quarter through September 30, 1998 11 3/8 5 1/4 11 1/4 8
Quarter through December 31, 1998 8 1/2 4 5/8 10 7/8 6 3/8
Quarter through March 31, 1999 10 3/8 8 3/8 11 7/8 8 3/4
Quarter through June 30, 1999 18 3/8 8 1/2 18 3/8 9
Quarter through September 30, 1999 19 1/16 9 3/8 19 3/8 10 3/4
Quarter through December 31, 1999 11 7/8 7 3/8 13 9 1/4
Quarter through March 31, 2000 9 1/2 6 5/8 10 3/4 8 1/4
Quarter through June 27, 2000 8 3/4 4 1/4 10 3/4 7 3/4
</TABLE>
As of June 28, 2000 our Common Stock and Preferred Stock was held by
approximately 57 and 17 holders of record, respectively.
Dividend Policy
The holders of our Preferred Stock are entitled to receive cumulative
dividends at the rate of $1.02 per share per year, paid quarterly on the last
business day of March, June, September and December of each year, commencing on
March 31, 1998. To date, we have paid all required dividends on the Preferred
Stock with cash generated from operations.
We have not paid dividends on our Common Stock to date. The future payment
of dividends is subject to the discretion of the Board of Directors. Moreover
our Credit Agreement contains restrictions on our ability to pay dividends. The
present intention of the Board is to retain all earnings, other than amounts
required to be paid to holders of the Preferred Stock, for use in our business.
Accordingly, we do not currently anticipate paying dividends on our Common
Stock.
Item 6. Selected Financial Data
The following table sets forth for the periods indicated selected
historical financial information of Standard. We had no operating results prior
to the year ended March 31, 1998. Accordingly, the information set forth below
at and for the periods ended March 31, 1996, 1997, and January 26, 1998,
reflects only the results of Ajax prior to our ownership. The information for
the period ended March 31, 1998 represents the consolidated results of Ajax and
Standard for the period from January 27, 1998, the date Ajax was acquired by
Standard, through March 31, 1998. The information for the fiscal years ended
March 31, 1999 and March 31, 2000 reflects the consolidated results of Standard
including Ajax, R/S, CPS and Ranor, from the date each of such companies was
acquired by Standard through the respective fiscal year ends. The information
contained in the table has been derived from audited financial statements. The
selected historical financial information should be read in conjunction with our
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the audited consolidated financial statements (and notes thereto)
and other financial and statistical information of Standard appearing elsewhere
in this Annual Report.
14
<PAGE>
<TABLE>
<CAPTION>
Selected Income Data: Standard Ajax
--------------------------------- -----------------------------------
Period from
April 1, 1997
through
Year Ended March 31, January 26, Year Ended March 31,
-------------------------------- ------------- --------------------
2000 1999 1998 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues, net $159,476 $ 75,452 $ 7,936 $ 25,134 $ 22,356 $ 42,538
Selling, general and administrative 14,273 6,613 407 1,431 2,510 3,082
Operating income 14,647 7,841 1,305 3,805 2,819 5,482
Interest expense 5,045 1,813 450 -- -- 118
Income before income taxes 9,352 5,748 801 3,015 2,896 5,449
Net income $ 5,397 $ 3,482 $ 343 $ 1,743 $ 1,728 $ 3,344
======== ======== ======== ======== ======== ========
Preferred stock dividend $ 1,160 $ 1,173 $ 184 $ -- $ -- $ --
======== ======== ======== ======== ======== ========
Basic net income per share (1) $ 1.17 $ 0.69 $ 0 $ 1.09 $ 1.08 $ 2.09
======== ======== ======== ======== ======== ========
Diluted net income per share (1) $ 1.11 $ 0.69 $ 0 $ 1.09 $ 1.08 $ 2.09
======== ======== ======== ======== ======== ========
Basic weighted average number of
common shares outstanding (1) 3,623 3,356 1,846 1,600 1,600 1,600
Diluted weighted average number of
common shares outstanding (1) 4,867 3,356 1,846 1,600 1,600 1,600
</TABLE>
<TABLE>
<CAPTION>
Selected Balance Sheet Data: Standard Ajax
----------------------------- ------------------
As at March 31,
---------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 3,136 $ 3,686 $ 3,255 $ 1,558 $ 1,482
Accounts receivable, net 25,217 7,032 4,838 2,536 751
Inventory 20,602 13,466 5,399 3,515 3,341
Property and equipment, net 38,724 19,975 1,225 994 946
Intangible assets, net 44,151 29,000 15,127 -- --
Current liabilities (excluding debt) 32,086 13,717 2,851 2,093 1,464
Total debt 68,261 32,819 4,000 -- --
Stockholders' equity 36,918 30,916 24,709 7,222 5,495
Working capital 15,008 9,430 11,547 5,941 4,562
</TABLE>
(1) "Basic and Diluted net income 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 Standard acquiring Ajax.
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 in this
Annual Report.
Overview
As part of our business strategy, we seek to grow through expansion of
facilities, extension of product lines and acquisitions. Our continued expansion
may place a strain on management, operational, financial and other resources.
Our expansion plans will depend on our ability to identify appropriate targets
for acquisitions and to raise the necessary capital for new acquisitions.
Further, the success of our efforts will depend on our ability to market new
products, absorb new management and other personnel, reduce duplicative overhead
and manage geographically dispersed operations. We cannot assure you that we
will be able to successfully continue to expand our operations or manage our
growth.
15
<PAGE>
Results of Operations
The following table sets forth, for the indicated periods, some components
of our Consolidated Statements of Income expressed in dollar amounts (in
thousands) and as a percentage of net revenues. Results of operations for the
fiscal year ended March 31, 1997 and the period ended January 26, 1998, reflect
only Ajax's operations because Standard had no operations during these periods.
For the fiscal year ended March 31, 1998, Standard's results reflect the
operations of Standard for the entire year and those of Ajax for the period from
January 26 to March 31, 1998. The fiscal years ended March 31, 1999 and March
31, 2000 reflect the consolidated results of Standard including Ajax, R/S and
CPS from their respective dates of acquisition. For the fiscal year ended March
31, 2000, the results of operations also reflect the consolidated results for
Ranor from the date of acquisition.
<TABLE>
<CAPTION>
Standard Automotive Corporation Ajax Manufacturing Company
--------------------------------------------------------- ----------------------------------------
Period from
April 1, 1997
Year Ended March 31, through January 26, Year Ended March 31,
--------------------------------------------------------- ------------------- --------------------
2000 1999 1998 1998 1997
------------------ ----------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues, net $ 159,476 100.0% $ 75,452 100.0% $ 7,936 100.0% $ 25,134 100.0% $22,356 100.0%
Cost of revenues 129,090 80.9 59,954 79.5 6,094 76.8 19,898 79.2 17,027 76.2
Selling, general and
administrative 14,273 8.9 6,613 8.7 407 5.2 1,431 5.7 2,510 11.2
Amortization of intangible
assets 1,466 0.9 1,044 1.4 130 1.6 -- -- -- --
--------- ----- -------- ----- ------- ----- -------- ----- ------- -----
Operating income 14,647 9.2 7,841 10.4 1,305 16.4 3,805 15.1 2,819 12.6
Other income (expense) (5,295) (3.3) (2,093) (2.8) (504) (6.4) (790) (3.1) 77 0.3
--------- ----- -------- ----- ------- ----- -------- ----- ------- -----
Income before provision for
taxes 9,352 5.9 5,748 7.6 801 10.1 3,015 12.0 2,896 12.9
Provision for income taxes 3,955 2.5 2,266 3.0 458 5.8 1,272 5.1 1,168 5.2
--------- ----- -------- ----- ------- ----- -------- ----- ------- -----
Net income $ 5,397 3.4% $ 3,482 4.6% $ 343 4.3% $ 1,743 6.9% $ 1,728 7.7%
========= ===== ======== ===== ======= ===== ======== ===== ======= =====
</TABLE>
The following discussion provides information regarding Standard's results
of operations for the fiscal years ended March 31, 2000, March 31, 1999 and
March 31, 1998. For comparison purposes the Fiscal 1998 results include Ajax's
results of operations for the entire twelve month period.
Comparison of Year Ended March 31, 2000 to Year Ended March 31, 1999
Net Revenues in Fiscal 2000 were $159,476,000, an increase of 111% from
Fiscal 1999 revenues of $75,452,000. The increase reflects sales from our
chassis manufacturing facility in Sonora, Mexico, which commenced operations in
April 1999, nine months of ownership of Ranor and a general improvement in the
trailer industry. The Mexican facility represented 27% of total Fiscal 2000
revenue while R/S, CPS and Ranor contributed 20%, 14% and 13%, respectively.
Cost of Revenues for Fiscal 2000 increased to $129,090,000 or 81% of net
revenues, from $59,954,000 or 79% of net revenues in Fiscal 1999. Cost of
revenues as a percentage of net revenues increased slightly during Fiscal 2000,
as a more favorable cost mix associated with the products of R/S, CPS and Ranor
was offset by the start-up expenses resulting in lower margins at our Mexican
facility.
Selling, General & Administrative Expenses were $14,273,000 during Fiscal
2000, an increase of 116% from the $6,613,000 incurred during Fiscal 1999. SG&A
expenses were 9% of sales for each of the periods. During Fiscal 2000, Standard
experienced higher corporate oversight expenses which were offset by generally
more favorable sales to expense ratios at our manufacturing locations.
16
<PAGE>
Interest Expense increased to $5,045,000 in Fiscal 2000 from $1,813,000
during Fiscal 1999, reflecting debt incurred in pursuing our acquisition and
internal growth strategies.
Comparison of Year Ended March 31, 1999 to Year Ended March 31, 1998
Net Revenues in Fiscal 1999 were $75,452,000, an increase of 128% from net
revenues of $33,070,000 for Fiscal 1998. The increase in net revenues reflects a
shift of our business to the manufacture of new chassis from the re-manufacture
of used chassis, a general improvement in the trailer industry, and the
acquisitions of R/S and CPS each with revenues representing 21% and 12%,
respectively of net revenues. During Fiscal 1999, sales of new chassis
represented 53% of total sales as compared to 54% in Fiscal 1998. Although the
comparative percentage decreased due to the additional revenue from the
acquisitions, the volume of new chassis sold approximately doubled in Fiscal
1999 compared to Fiscal 1998. In contrast, sales of re-manufactured chassis
represented 9% of total sales in Fiscal 1999 compared to 37% in Fiscal 1998. The
reduction in the sales of re-manufactured chassis resulted from a decline in the
growth of re-manufactured chassis sold in Fiscal 1998 as compared to the
aforementioned growth of the sale of new chassis. Because of certain customer
requirements related to new chassis, our margins declined moderately in Fiscal
1998.
Cost of Revenues increased to $59,954,000 or 79% of net revenues in Fiscal
1999 from $25,992,000 or 79% of net revenues in Fiscal 1998, principally as a
result of the acquisitions of R/S and CPS and the shift in our product mix. Cost
of revenues as a percentage of net revenues remained constant during Fiscal 1999
as the mix of our business reflected an increase in the sale of new chassis.
Selling, General & Administrative Expenses were $6,613,000 during Fiscal
1999, an increase of 260% from the $1,838,000 incurred during Fiscal 1998. SG&A
expenses increased to 9% of net revenues, up from 5% of net revenues during
Fiscal 1998. The increase in SG&A as a percentage of net revenues in Fiscal 1999
principally reflects $2,547,000 arising from the addition of the R/S and CPS.
Additional expenses related to an increase in selling efforts, information
technology systems and general corporate overhead including officers' salaries
incurred subsequent to the initial public offering.
Interest Expense increased to $1,813,000 in Fiscal 1999 from $450,000
during Fiscal 1998, reflecting debt incurred to complete the acquisitions of R/S
and CPS during Fiscal 1999 as compared to interest on the nonrecurring bridge
loan which we incurred prior to completion of the acquisition of Ajax during
Fiscal 1998.
Liquidity and Capital Resources
We generated $3,820,000 of cash in operating activities during Fiscal 2000
as compared to $9,095,000 generated in operating activities during Fiscal 1999.
The cash generated in operating activities during Fiscal 2000 reflects primarily
an increase in net income which was more than offset by an increase in the
working capital requirements at Ajax. The net cash used in investing activities
was $31,147,000 during Fiscal 2000 as compared to $27,580,000 used in investing
activities during the prior year. The cash used in investing activities during
Fiscal 2000 was primarily for the acquisition of Ranor and for the acquisition
of other property, plant and equipment. Cash provided by financing activities
was predominately from the increase in the Company's Credit Facility, which was
used for the acquisition of Ranor. Standard also repaid $3,625,000 of bank debt
and made $1,160,000 of Preferred Stock dividend payments during Fiscal 2000.
Additionally, the prior owners of R/S exercised their put agreement requiring
Standard to purchase $1,000,000 of Company Common Stock which was retired to
treasury. Standard also incurred additional financing costs relating to the
acquisition of Ranor.
The funding for the Ranor acquisition was obtained by increasing from
$40,000,000 to $68,125,000 the amount outstanding under Standard's Credit
Facility. This Credit Facility, as amended, provides for a Term Loan in the
amount of $48,125,000 and a Revolving Loan in the principal amount of
$20,000,000 (collectively, the "Loans"). The principal of the Term Loan is
payable in two installments of $23,125,000 and $25,000,000 in June 2004 and June
2005, respectively. Amounts outstanding under the Revolving Loan are payable in
full in June 2002, subject to the Company's request, with the approval of the
lenders, to extend the due date for one year, with a maximum extension of two
one-year periods. All amounts due under the Credit Facility are secured by a
lien on substantially all the Company's assets. As of March 31, 2000 the rate of
interest for the amounts outstanding under the Credit Facility was 9.14%. The
Company made scheduled quarterly principal payments of $1,000,000 in March of
2000, $1,000,000 in December of 1999, $1,000,000 in September of 1999 and
$625,000 in June of 1999.
17
<PAGE>
In April 2000, we acquired Airborne and Arell. The funding to complete the
acquisitions was obtained through increasing our existing Credit Facility of
$68,125,000 to $125,000,000 of senior secured credit facilities ("Senior Secured
Credit Facilities"), comprised of a $25.0 million Revolving Credit Facility
("Revolver"), a $50.0 million six-year Term Loan ("Term Loan A"), a $25.0
million seven-year Term Loan ("Term Loan B") and a $25.0 million Acquisition
Line ("Acquisition Line"), which is available upon the fulfillment of certain
conditions precedent. ING Barings LLC and PNC Capital Markets ("PNC") arranged
this financing.
In addition to financing the acquisitions of Arell and Airborne, the
Senior Secured Credit Facilities are being used to finance capital expenditures,
to provide additional working capital and to provide the Company with financing
for future acquisitions.
The terms on which we sell our products vary by operating company but
generally provide for payment within 30 days. Our accounts receivable were
collected in an average of 37 days during the fiscal year ended March 31, 2000.
During Fiscal 2000, R/S began to offer extended term sales to its dealers. The
outstanding receivables on extended term sales as of March 31, 2000 were
$2,455,000.
Capital expenditures were $3,959,000 in Fiscal 2000 compared to $6,110,000
in Fiscal 1999. Capital expenditures incurred during Fiscal 2000 were primarily
for the purchase of new machinery for expanding the production capacity at Ranor
and for equipment purchased for the recently established chassis manufacturing
facility in Mexico. We anticipate that capital expenditures during the fiscal
year ending March 31, 2001 will not substantially exceed those of the preceding
years.
The annual dividend requirement on our Preferred Stock at March 31, 2000
is $1,160,000. Our future earnings, if any, may not be adequate to cover the
dividends on the Preferred Stock. Although we fully intend to pay these
quarterly dividends out of available capital surplus, we cannot assure you that
we will maintain sufficient capital surplus or that future earnings, if any,
will be adequate to fulfill Preferred Stock dividend obligations. In addition,
at March 31, 2000, we had $68,261,000 in total debt outstanding, consisting of
an outstanding Revolving Loan of $18,245,000, a Term Loan of $45,500,000 and a
note to the prior owners of Ranor of $5,300,000. Other debt is $216,000.
We continue to seek opportunities for growth through acquisitions.
Accordingly, we may seek to raise additional cash in the form of equity, bank
debt or other debt financing, or else it may seek to issue either common or
preferred stock as consideration for its acquisition targets.
At March 31, 2000, we had working capital of $15,008,000, which management
believes is sufficient to meet current operating requirements. If necessary,
such needs could be supplemented by funds provided by the Revolver.
Significant Events
In June 1999, pursuant to the terms of a Stock Purchase Agreement dated
April 1999, we acquired all of the outstanding capital stock of Critical
Components Corporation ("CCC"). In consideration for such capital stock we
issued to the shareholders of CCC an aggregate of 180,000 shares of common stock
of the Company.
Simultaneously with the acquisition of CCC, the Company, through CCC,
acquired substantially all of the assets of Ranor, Inc. (`Ranor"), a fabricator
of large precision assemblies for the aerospace, nuclear, industrial and
military markets. The consideration paid for Ranor was $28,800,000 subject to
final adjustment, of which $23,500,000 was paid in cash and $5,300,000 was paid
in the form of convertible subordinated notes of the Company. In addition, we
incurred approximately $2,070,000 of acquisition related expenses pertaining to
the purchase and financing of Ranor.
In April 2000, Standard, through its newly established Canadian
subsidiary, Critical Components Canada Ltd., acquired all of the outstanding
capital stock of Airborne and Arell. We believe that the acquisitions of
Airborne and Arell further diversify Standard's operations and should
significantly expand our manufacturing capability of high precision parts and
assemblies for use primarily in the aerospace industry.
We acquired Airborne and Arell for an aggregate purchase price of
$20,897,700, subject to final adjustment and potential earnouts estimated to be
$6,000,000 based on defined EBITDA hurdles.
18
<PAGE>
We incurred approximately $3,800,000 of additional acquisition costs
related to the purchase and financing of Airborne and Arell.
Airborne Gear & Machine Ltd.
Airborne, founded in 1969 and located in Montreal, Canada, specializes
primarily in the precision machining of rotating "hot" section parts used in jet
engines. Airborne has a particular expertise and reputation for machining parts
made from hard and expensive alloys such as titanium, stainless steel and
inconel (a nickel alloy).
Airborne owns and operates a 25,000 square foot facility with
state-of-the-art CNC milling and lathing machinery. Airborne manufactures, among
other items, thin-walled machined components up to 28 inches in diameter and
subassemblies for turbine engines. Airborne holds an ISO-9002 designation, which
is a sought after certification indicating quality management in production,
installation and service.
Airborne has developed and nurtured close relationships with its
customers, many of whom are leaders in the aerospace industry, with whom it
enjoys Preferred Supplier Status and long term supplier agreements to supply jet
engine components.
Standard anticipates that Airborne will continue to grow through
strengthening and expanding existing customer relationships and the addition of
new customers.
Airborne currently has 58 employees. The production personnel are
unionized with the Quebec Federation of Labour (Local 8990). The current
three-year contract expires September 30, 2001. Airborne considers its
relationship with its employees to be very good.
Arell Machining Ltd.
Arell is also an ISO-9002 certified facility located in Montreal, Canada.
Arell was founded in 1961 and manufactures high precision parts for aircraft
engines, landing gears and fuselages.
Arell owns a 40,000 square foot modern and efficient facility, equipped
with state-of-the-art CNC milling and lathing machinery.
Similar to Airborne, Arell has developed and maintained strong
relationships with its customers, many of whom are leaders in the aerospace
industry. These relationships have also developed into Preferred Supplier Status
and long-term agreements relating to the supply of parts for aircraft engines,
landing gears and fuselages.
Standard also anticipates that Arell will continue to grow through
strengthening and expanding existing customer relationships and the addition of
new customers.
Arell currently has 94 employees who are unionized with the "CSN." The
current three-year contract (which excludes management, office and supervisory
personnel, programmers and inspectors) expires in November 2002. Arell considers
its relationship with its employees to be very good.
Recently Issued Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133. The Statement defers
for one year the effective date of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which was issued in June 1998 and
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either as asset or liability
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. Management believes that the implementation of
SFAS No. 133 will not have a material impact on Standard's results of
operations.
19
<PAGE>
During March 2000, the FASB issued interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, which clarifies the
application of APB Opinion No. 25, regarding (a) the definition of an employee
for purposes of applying APB Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Interpretation No. 44 is effective on July 1,
2000. Certain events, as defined by Interpretation No. 44, may require earlier
consideration if they occurred after December 15, 1998 or January 12, 2000,
depending on the event, although no financial statement effect would be
recognized until July 1, 2000. The effects of applying Interpretation No. 44 are
recognized prospectively. Management has reviewed its stock compensation events
covered by Interpretation No. 44 and has determined that no events require early
consideration.
During December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.
Bulletin No. 101 expresses the views of the SEC staff in applying generally
accepted accounting principles to certain revenue recognition issues. Standard
has concluded that the implementation of this Bulletin will not have a material
impact on its financial position or its results of operations.
Item 7A. Quantitative and Qualitative Discussions Concerning Market Risk
We are exposed to interest rate risk primarily through our borrowings
under the Credit Facility. As of June 29, 2000, we had approximately $91,453,000
of prime based debt outstanding under the Credit Facility. A hypothetical 100
basis-point increase in the floating interest rate from the current level
corresponds to an increase in our interest expense over a one-year period of
$915,000. This sensitivity analysis does not account for the change in our
competitive environment indirectly related to the change in interest rates and
the potential managerial action which could be taken in response to these
changes. Further, on April 25, 2000 we entered into an interest rate hedge with
a notional amount of $37,500,000 to protect against interest rate increases.
As of April 1999, we commenced production at our facility in Sonora,
Mexico. Accordingly, fluctuation in the value of the Mexican Peso compared to
the U.S. Dollar upon currency conversion may affect our financial position and
cash flow. As of March 31, 2000, we had not established a foreign currency
hedging program. Because a majority of our transactions are U.S. based and U.S.
Dollar denominated, a hypothetical 10% change in the value of the Mexican Peso
would not have a material impact on our financial position and cash flow.
Item 8. Financial Statements and Supplementary Data
Financial statements required by this Item 8 are set forth at the pages
indicated in Item 14.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
20
<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) 42 Chairman of the Board and Chief Executive Officer
Karl Massaro 46 President and Director
Joseph Spinella (1)(2) 42 Chief Financial Officer, Secretary and Director
William Merker 39 Director
William Needham(1) (2) 59 Director
Paul Provost(1) 40 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. 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.
Joseph Spinella, CPA, has been a Director of the Company since August
1997, Secretary since June 1999 and Chief Financial Officer since August 1999.
From July 1998 to August 1999, Mr. Spinella was Chief Financial Officer and
Treasurer of the Terminal Marketing Company, Inc., an equipment leasing company.
From 1997 to 1998, Mr. Spinella was Controller of Sanwa Healthcare Finance
Corporation. From 1989 to 1996, Mr. Spinella was Vice President-Director of
Financial Services and Controller of Copelco Capital, a subsidiary of Itochu
International. Mr. Spinella graduated from Fairleigh Dickinson University with a
B.S. degree in Accounting in 1979 and with a M.B.A. in Finance in December 1988.
William Merker has been a Director of the Company since August 1997. In
January 1999, Mr. Merker resigned as Vice President and Secretary of the
Company, positions he had occupied since August 1997. Mr. 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 American University in 1982 and graduated from Georgetown
University Law School in 1985. William Merker is a brother of Steven Merker,
Chairman of the Board and Chief Executive Officer.
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 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. degree in Liberal Arts.
Paul Provost has been a Director of the Company since June 1999. He has
been the Chief Executive Officer and a Director of Loving Hands Healthcare
Services, Ltd. since 1984. Loving Hands provides home healthcare services in New
York, New Jersey and Connecticut. Mr. Provost holds a B.S. degree in Accounting
from American University and spent four years with Peat Marwick & Main LLP,
serving banking industry clients.
21
<PAGE>
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,
2000, 1999 and 1998 to its chief executive officer, the other most
highly-compensated executive officers and other key employees, whose annual
salaries and bonuses exceeded $100,000 and who were serving at March 31, 2000
(collectively, "Officers"):
Summary Compensation Table
Total Paid Compensation
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards - Options
Year to Purchase
Ended Common Stock Other Annual
Name and Principal Position March 31, Salary Bonus (number of shares) Compensation
--------------------------- --------- ------ ----- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Steven Merker, Chief 2000 $240,000 $60,000 120,000 $ --
Executive Officer
1999 136,154 30,000 75,000 --
1998 22,154 -- -- --
Karl Massaro, President 2000 215,000 90,000 30,000 --
1999 203,461 -- 15,000 --
1998 173,231 -- -- --
Joseph Spinella, Chief
Financial Officer (1) 2000 100,962 5,000 30,000 --
</TABLE>
(1) Joseph Spinella became an Officer of the Company in August 1999 and,
accordingly, received no compensation as an Officer during the fiscal year
ended March 31, 1999. During the fiscal year ended March 31, 1999, Mr.
Spinella received an option to purchase 2,000 shares of common stock in
his capacity as a Director of the Company.
22
<PAGE>
Option Grants In Last Fiscal Year
The following table sets forth all options granted to the Named Executive
Officers during Fiscal Year 2000:
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates Of Stock
Securities Total Options Price Appreciation For
Underlying Granted to Option Term (1)
Options Employee in Exercise Expiration -------------------------------
Name Granted Fiscal Year Price Date (2) 0%($) 5%($) 10% ($)
---- ------- ----------- ----- -------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Steven Merker 40,000 12.1% $15.87500 6/1/2009 $ -- $396,106 $1,001,957
80,000 24.3% 8.56250 1/10/2005 -- 189,340 418,415
Karl Massaro 20,000 6.1% 15.87500 6/1/2009 -- 198,053 500,979
10,000 3.0% 8.56250 1/10/2005 -- 23,668 52,302
Joseph Spinella 25,000 7.6% 17.25625 8/1/2009 18,594 301,645 735,930
5,000 1.5% 8.56250 1/10/2005 -- 11,834 26,151
</TABLE>
(1) The potential realizable value amounts shown illustrate the values that
might be realized upon exercise immediately prior to the expiration of
their term using zero percent, five percent and ten percent appreciation
rates as required to be used in this table by the Securities and Exchange
Commission, compounded annually, and are not intended to forecast possible
future appreciation, if any, of our Common Stock price. Additionally,
these values do not take into consideration the provisions of the options
providing for non-transferability or termination of the options following
termination of employment. Therefore, the actual values realized may be
greater or less than the potential realizable values set forth in the
table.
(2) Options granted vest as follows: 0% at date of grant and 33 1/3% on each
subsequent anniversary of the date of grant.
Year End Option Values
The following table sets forth the aggregate value as of March 31, 2000 of
unexercised stock options held by the Named Executive Officers. The Named
Executive Officers did not exercise any stock options during 2000 and the
relevant columns have therefore been omitted.
<TABLE>
<CAPTION>
Number of Shares Value(2) of
of Common Stock Underlying In-the-Money Options
Options at Fiscal Year End At Fiscal Year End ($)
--------------------------------- --------------------------------
Name Exercisable(1) Un-exercisable(1) Exercisable(1) Un-exercisble(1)
---- -------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
Steven Merker 25,000 170,000 $ -- $ --
Karl Massaro 5,000 40,000 4,685 9,370
Joseph Spinella 667 31,333 -- --
</TABLE>
(1) Options granted during Fiscal Year 1999 and 2000 vest as follows: 0% at
date of grant and 33 1/3% on each subsequent anniversary of the grant.
Options indicated as exercisable are those options which were vested as of
March 31, 2000. All options which had not vested as of March 31, 2000 are
indicated to be un-exercisable.
(2) Value of underlying In-the-Money options is based on the closing price of
our Common Stock on the American Stock Exchange on March 31, 2000 of
$6.875 minus the exercise prices.
Employment Agreements
We have entered into employment agreements with Steven Merker, Karl
Massaro and Joseph Spinella.
23
<PAGE>
In January 1998, we entered into an employment agreement with Steven
Merker. The agreement has a three year term, subject to earlier termination upon
the occurrence of certain specified events. Pursuant to his employment
agreement, Mr. Merker's current base annual salary is $240,000 and such bonus
compensation as the Board of Directors may determine.
In January 1998, we entered into an employment agreement with Karl
Massaro. The agreement has a three year term, subject to earlier termination
upon the occurrence of certain specified events. Pursuant to his employment
agreement, Mr. Massaro's current base annual salary is $215,000 and such bonus
compensation as the Board of Directors may determine. The agreement also
contains restrictive covenants prohibiting Mr. Massaro from directly or
indirectly competing with us east of the Mississippi River during the
three-month period commencing upon the termination of his agreement, and, during
the six-month period following such termination, from soliciting or servicing
any of our suppliers or customers 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 August 1999, we entered into an employment agreement with Joseph
Spinella. The agreement has a three year term, subject to earlier termination
upon the occurrence of certain specified events. Pursuant to his employment
agreement, Mr. Spinella's current base annual salary is $150,000 and such bonus
compensation as the Board of Directors may determine.
Board of Directors
Our 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 the year 2000, 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.
Non-employee directors will receive compensation of $500 per meeting attended
and options to purchase 2,000 shares of our Common Stock in respect of the first
year of such service as a director, and 500 shares of our Common Stock for each
year of such service thereafter. It is expected that Directors who are not
employees of the Company will receive compensation for their services in an
amount to be determined. We reimburse all Directors for any expenses incurred in
attending Directors' meetings. We have obtained Officers and Directors liability
insurance.
Audit Committee of the Board of Directors
The Board of Directors has designated an Audit Committee consisting of
Messrs. Spinella, Needham and Provost. The duties of the Audit Committee are to:
(1) recommend to the full Board the accounting firm to be selected each year as
our independent auditors and the terms and conditions upon which such firm is to
be engaged; (2) receive from the auditors their disclosures regarding their
independence and summarize findings from discussions with the auditors with
regard to matters pertaining to their independence; (3) recommend to the Board
of Directors that the audited financial statements be included in our Annual
Report on Form 10-K; (4) consult with the persons so chosen to be the
independent auditors with regard to the plan of audit; (5) review, in
consultation with the independent auditors, their report of audit, or proposed
report of audit, and the accompanying management letter, if any; (6) consult
with the independent auditors (periodically, as appropriate, out of the presence
of management) with regard to the adequacy of our internal accounting and
control procedures; (7) review the Company's financial condition and results of
operations with management and the independent auditors; and (8) 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. The Board of Directors has adopted an Audit Committee Charter.
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. Primarily, the duties of the Compensation Committee are to (1)
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), (2) prepare an Annual Report of the Compensation Committee for
24
<PAGE>
inclusion in our Proxy Statement, (3) 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 (4) 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, as Amended January 6, 2000
On January 6, 2000, Standard amended its 1997 Stock Option Plan (the
"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 1,000,000 shares of Common
Stock. To date, options have been granted pursuant to the Plan representing
815,815 shares.
The Board of Directors currently administers the Plan and has delegated
this responsibility to the Compensation Committee. 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 ("ISO's") 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 our Initial Public Offering in
January, 1998 ("IPO"), the exercise price will be the greater of 110% of fair
market value on the date of grant or the IPO price of the Common Stock. Upon
exercise of an option, the optionee may pay the purchase price with previously
acquired shares of our Common Stock, 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 us. In the event
of certain basic changes relating to Standard, including our reorganization,
merger or consolidation, or the purchase of shares pursuant to a tender offer
for shares of Common Stock, in the discretion of the Committee, each option may
become fully and immediately exercisable. ISO's 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 ISO's, 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.
1998 Profit Sharing Plan
We have adopted a Prototype Standardized Profit Sharing Plan with CODA.
This plan is qualified under the Internal Revenue Code section 401(a) provided
all terms of the plan are followed under the Summary Plan Description. The
eligibility requirements and contributions or benefit provisions, which are
determined to be discretionary, are not planned to be more favorable for highly
compensated employees than for other employees.
25
<PAGE>
Comparative Performance by the Company
The following graph shows a comparison of cumulative total returns for
Standard, the American Stock Exchange Market and a peer group index during the
period from January 22, 1998 through March 31, 2000.
[PERFORMANCE GRAPH OMITTED]
[The following was depicted as a line graph in the printed material.]
<TABLE>
<CAPTION>
1/22/98 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99 3/31/00
------- ------- ------- ------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STANDARD AUTOMOTIVE CORP 100 102.44 108.54 69.51 82.93 89.02 168.29 115.85 87.8 67.07
SIC CODE INDEX 100 96.69 89.96 55.29 72.24 49.27 81.12 79.84 61.01 56.03
S&P GROUP INDEX 100 114.42 91.65 78.99 95.12 97.91 119.57 106.81 120.88 118.02
AMEX MARKET INDEX 100 110.67 108.10 91.82 102.13 104.96 117.38 117.78 133.81 149.02
</TABLE>
ASSUMES $100 INVESTED ON JAN. 22, 1998
FISCAL YEAR ENDING MAR. 31, 2000
26
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to us regarding
beneficial ownership of the Company's Common Stock at June 29, 2000 by (i) each
person known by us to own beneficially more than 5% of the Company's Common
Stock, (ii) each of our directors and executive officers, and (iii) all officers
and directors as a group. Except as otherwise indicated, we believe, based on
information furnished by such owners, that the beneficial owners of the Common
Stock listed below have sole investment and voting power with respect to such
shares, subject to community property laws, where applicable.
Percent of
Name and Address of Number of Common Stock
Beneficial Owner Shares Owned
---------------- ------ -----
Karl Massaro (1) 145,000 3.9%
Andrew Levy (2) 395,430 10.6%
William Merker (3) 484,410 13.0%
Steven Merker (3) 525,160 14.1%
Joseph Spinella (1) -- --
William Needham(4) -- --
Paul Provost (5) -- --
All Directors and Officers as a
group (6 persons) 1,550,000 41.6%
(1) The addresses of such persons are c/o Standard at 401 Route 206 North,
Somerville, NJ 08876-4056.
(2) The address of such person is 46 Baldwin Farm N., Greenwich, CT 06831.
These shares include 30,000 shares owned by a family trust and 85,000
shares owned by Mr. Levy's wife. Mr. Levy disclaims beneficial ownership
as to all such shares.
(3) The addresses of such persons are c/o Standard, 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
(5) The address of such person is c/o Loving Hands Health Care Service, Ltd.,
676 Winters Avenue, Paramus NJ 07652
Item 13. Certain Relationships and Related Transactions
Steven Merker and William Merker are brothers. There are no other family
relationships among our officers, directors and 5% shareholders.
In January 1998, we together with Carl Massaro, the father of Karl
Massaro, entered into a "triple net" lease of the former Ajax factory and office
facility owned by Carl Massaro and presently occupied by us. The lease provides
for annual rent of $600,000, which is payable monthly, and approximately $63,000
annually in triple net expenses for the first year. During the initial five-year
term of the lease, we have the option to purchase the leased facility and land
for a cash purchase price of $6.5 million, provided we are not in default under
the lease. The terms of the lease, including the purchase option, were
determined through arms' length negotiation between us and Carl Massaro.
In April 2000, we completed the acquisition of all the outstanding capital
stock of Airborne and Arell. As part of the fees related to the acquisition,
Redstone Advisors, a partnership of which William Merker and Redstone Capital
Corp. (a corporation owned by Andrew Levy and certain of his affiliates) are
principals, received a cash fee of $785,000. In addition, for their interests as
former shareholders of CCC, William Merker and Andrew Levy (and certain of Mr.
Levy's affiliates) were each issued 60,000 shares of our Common Stock.
27
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K
Financial statements and schedules
The reports of independent certified public accountants, the consolidated
financial statements and the notes to the consolidated financial statements
required by this Item 14 are submitted as part of this Annual Report starting on
page F-1.
Financial Statements of Standard Automotive Corporation
Page
----
Report of Independent Public Accountants F-1
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of March 31, 2000 and 1999 F-3
Consolidated Statements of Income for the years ended March 31, 2000,
1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended March 31,
2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
Financial Statements of Ajax Manufacturing Company
(A wholly owned subsidiary of Standard Automotive Corporation)
Report of Independent Certified Public Accountants F-23
Statements of Income and Retained Earnings for the period from April 1,
1997 through January 26, 1998 F-24
Statements of Cash Flows for the period from April 1, 1997 through
January 26, 1998 F-25
Notes to the Financial Statements F-26
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.
28
<PAGE>
Exhibits
The following Exhibits are filed as a part of this Report as required by
Regulation S-K. The Exhibits designated a cross bar (+) are management contracts
and compensation plans and arrangements required to be filed as Exhibits to this
Report.
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 81/2%
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
(*) Form of Consulting Agreement between the Company and Carl
Massaro (*) Form of Employment Agreement between the Company and
Steven Merker (*) 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. (***)
10.23 Asset Purchase Agreement between Standard, Critical Components
Corp., Ranor, Inc. (Delaware), Ranor, Inc. (Massachusetts), its
shareholders and Five N Leasing Co. (****).
10.24 Amended and restated Credit Agreement dated June 16, 1999 between
Standard, its subsidiaries and PNC Bank, N.A., as agent. (****)
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.
*** Incorporated by reference to the Company's Form 8-K.
**** Incorporated by reference to the Company's Form 10-K for March 31, 1999.
***** Filed herewith.
29
<PAGE>
(b) Reports on Form 8-K
A Form 8-K dated August 27, 1999 was filed with respect to the Ranor
acquisition.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 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
STANDARD AUTOMOTIVE CORPORATION
By: /s/ Steven Merker Date: July 6, 2000
--------------------------------
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.
Signatures Date
---------- ----
/s/ Steven Merker July 6, 2000
-------------------------------------------
Steven Merker
Chairman and Chief Executive Officer
/s/ Karl Massaro July 6, 2000
-------------------------------------------
Karl Massaro
President and Director
/s/ Joseph Spinella July 6, 2000
-------------------------------------------
Joseph Spinella
Chief Financial Officer, Secretary and
Director
/s/ William Merker July 6, 2000
-------------------------------------------
William Merker
Director
/s/ William Needham July 6, 2000
-------------------------------------------
William Needham
Director
/s/ Paul Provost July 6, 2000
-------------------------------------------
Paul Provost
Director
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
Standard Automotive Corporation:
We have audited the accompanying consolidated balance sheets of Standard
Automotive Corporation (a Delaware Corporation) as of March 31, 2000 and 1999,
and the related consolidated statements of income, stockholders' equity and cash
flows for the two years ended March 31, 2000. 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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the results of their operations and their
cash flows for the two years ended March 31, 2000 in conformity with accounting
principles generally accepted in the United States.
New York, New York
June 29, 2000
Arthur Andersen LLP
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Standard Automotive Corporation
We have audited the accompanying balance sheet of Standard Automotive
Corporation as of March 31, 1998 and the related statements of income,
stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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, 1998 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Woodbridge, New Jersey
June 25, 1998
F-2
<PAGE>
STANDARD AUTOMOTIVE CORPORATION
Consolidated Balance Sheets
(in thousands, except share data )
<TABLE>
<CAPTION>
March 31,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,136 $ 3,686
Marketable securities 102 102
Accounts receivable, net 25,217 7,032
Other receivables -- 551
Inventory, net 20,602 13,466
Prepaid expenses 1,269 980
Deferred taxes 768 768
-------- --------
Total current assets 51,094 26,585
Property and equipment, net 38,724 19,975
Intangible assets, net of accumulated amortization of $2,522
and $1,173, respectively 44,151 29,000
Deferred financing costs 2,234 1,477
Other assets 1,062 415
-------- --------
Total assets $137,265 $ 77,452
======== ========
Liabilities and Stockholders' Equity
Accounts payable $ 19,037 $ 9,941
Accrued expenses 2,451 1,760
Current portion of long term debt 4,000 3,438
Income taxes payable 219 171
Other current liabilities 10,379 1,845
-------- --------
Total current liabilities 36,086 17,155
Long term debt 64,261 29,381
-------- --------
Total liabilities 100,347 46,536
Stockholders' equity:
Convertible Redeemable Preferred stock, $ .001 par value
3,000,000 shares authorized, 1,132,600 and 1,150,000
issued and outstanding, respectively 1 1
Common stock, $ .001 par value 10,000,000 shares authorized,
3,602,400 and 3,500,124 issued and outstanding, respectively 4 4
Additional paid-in capital 30,208 28,443
Retained earnings 6,705 2,468
-------- --------
Total stockholders' equity 36,918 30,916
-------- --------
Total liabilities and stockholders' equity $137,265 $ 77,452
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
<PAGE>
STANDARD AUTOMOTIVE CORPORATION
Consolidated Statements of Income
(in thousands, except net income per share data)
<TABLE>
<CAPTION>
For the Years Ended March 31,
----------------------------------
2000 1999 1998 (1)
-------- -------- --------
<S> <C> <C> <C>
Revenues, net $159,476 $ 75,452 $ 7,936
Operating costs and expenses:
Cost of revenues 129,090 59,954 6,094
Selling, general and administrative expenses 14,273 6,613 407
Amortization of intangible assets 1,466 1,044 130
-------- -------- --------
Total operating costs and expenses 144,829 67,611 6,631
-------- -------- --------
Operating income 14,647 7,841 1,305
Interest expense 5,045 1,813 450
Other expense (income), net 250 280 54
-------- -------- --------
Income before income taxes 9,352 5,748 801
Provision for income taxes 3,955 2,266 458
-------- -------- --------
Net income 5,397 3,482 343
Preferred dividend 1,160 1,173 184
-------- -------- --------
Net income available to common stockholders $ 4,237 $ 2,309 $ 159
======== ======== ========
Basic net income per share $ 1.17 $ 0.69 $ 0.09
======== ======== ========
Diluted net income per share $ 1.11 $ 0.69 $ 0.09
======== ======== ========
Basic weighted average number of shares outstanding 3,623 3,356 1,846
======== ======== ========
Diluted weighted average number of shares outstanding 4,867 3,356 1,846
======== ======== ========
</TABLE>
(1) 1998 represents the period since the Ajax acquisition on January 26, 1998
through March 31, 1998. The 1998 predecessor financial statements are
included in this Form 10-K.
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
Standard Automotive Corporation
Consolidated Statements 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, net of
expenses of $4,751 1,150 1 1,495 1 -- 23,997 -- 23,999
Issuance of shares to
Bridge Note Investors -- -- 33 -- -- 325 -- 325
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
Payment of Common
Stock Subscription
Receivable -- -- -- -- 2 -- -- 2
Shares Issued for
Acquisitions -- -- 405 1 -- 3,559 -- 3,560
Warrants and Options
Issued -- -- -- -- -- 336 -- 336
Preferred Stock
Dividend -- -- -- -- -- -- (1,173) (1,173)
Net Income -- -- -- -- -- -- 3,482 3,482
----- -------- -------- -------- -------- -------- -------- --------
Balance - March 31, 1999 1,150 1 3,500 4 -- 28,443 2,468 30,916
Shares Issued for
Acquisitions -- -- 180 -- -- 2,565 -- 2,565
Warrants and Options
Issued -- -- -- -- -- 200 -- 200
Preferred Stock
Dividend -- -- -- -- -- -- (1,160) (1,160)
Conversion of
Preferred Stock to
Common Stock (17) -- 17 -- -- -- -- --
Purchase of
Treasury Stock -- -- (95) -- -- (1,000) -- (1,000)
Net Income 5,397 5,397
----- -------- -------- -------- -------- -------- -------- --------
Balance - March 31, 2000 1,133 $ 1 3,602 $ 4 $ -- $ 30,208 $ 6,705 $ 36,918
===== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
STANDARD AUTOMOTIVE CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended March 31,
-----------------------------
Cash flows from operating activities: 2000 1999 1998 (1)
-------- -------- --------
<S> <C> <C> <C>
Net income $ 5,397 $ 3,482 $ 343
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,516 1,926 165
Non-cash interest and compensation 240 337 357
Deferred taxes -- (350) (38)
Change in assets and liabilities:
Accounts receivable (15,722) (331) 677
Inventory (1,849) (2,948) 145
Prepaid expenses and other 420 (656) (320)
Accounts payable and accrued expenses 10,770 6,665 (464)
Income taxes payable 48 (737) (604)
Other liabilities -- 1,707 --
-------- -------- --------
Net cash provided by operating activities 3,820 9,095 261
-------- -------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (26,387) (21,470) (19,361)
Deferred acquisition costs (801) -- (810)
Purchase of marketable securities -- -- (102)
Acquisition of property and equipment (3,959) (6,110) (197)
-------- -------- --------
Net cash used in investing activities (31,147) (27,580) (20,470)
-------- -------- --------
Cash flows from financing activities:
Proceeds from bank loan 33,744 26,710 --
Repayment bank loan (3,625) (1,875) --
Deferred financing costs (1,182) (667) --
Preferred dividend payment (1,160) (1,173) (184)
Proceeds from the issuance of common and preferred shares, net -- -- 23,998
Purchase of Treasury Stock (1,000) -- --
Repayment of acquisition note -- (4,000) --
Payments on short term borrowings -- -- (350)
Other -- (79) --
-------- -------- --------
Net cash provided by financing activities 26,777 18,916 23,464
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (550) 431 3,255
Cash and cash equivalents, beginning of period 3,686 3,255 --
-------- -------- --------
Cash and cash equivalents, end of period $ 3,136 $ 3,686 $ 3,255
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,934 $ 1,886 $ 114
Income taxes 3,914 2,822 1,100
</TABLE>
(1) 1998 represents the period since the Ajax acquisition on January 26, 1998
through March 31, 1998. The 1998 predecessor financial statements are
included in this Form 10-K.
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
STANDARD AUTOMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Organization and Business Combinations
Standard Automotive Corporation (the "Company" or "SAC") was formed and
incorporated in Delaware in January 1997. The Company had conducted no
operations for the year ended March 31,1997. The Company has two operating
divisions: the Truck Body/Trailer Division and the Critical Components Division.
Truck Body/Trailer Division
The Truck Body/Trailer Division's principal activity is the manufacture of
trailer chassis, dump truck bodies, dump trailers, truck suspensions and other
related assemblies for domestic customers in the inter-modal industry,
construction and agricultural industries, through its wholly owned subsidiaries,
Ajax Manufacturing Co., Inc. ("Ajax"), R/S Truck Body, Inc. ("R/S") and CPS
Trailer Co., Inc. ("CPS"), hereafter collectively referred to as the Company's
subsidiaries.
In January 1998 the Company executed an agreement to purchase all the
outstanding shares of Ajax for a total purchase price of approximately
$23,819,000 (including assumed liabilities of approximately $5,772,000),
comprised of a cash payment of approximately $19,618,000 and incurred a debt
obligation of approximately $4,000,000 to the Ajax shareholder 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 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 was subject to a post
closing balance sheet adjustment which increased the purchase price by $453,000.
The total amount due of $4,453,000 has been paid to the Ajax shareholder.
In July 1998, the Company purchased all the outstanding shares of Barclay
Investments, Inc. ("Barclay"), a non-operating entity, and R/S. In September
1998, the Company purchased all the outstanding shares of CPS. These
acquisitions were accounted for using the purchase-method of accounting. The
aggregate purchase price of approximately $24,000,000 (including assumed
liabilities of approximately $9,982,000) has been allocated to the assets
acquired and liabilities assumed based on respective fair values at the dates of
acquisition. The excess of the purchase price over the fair value of net assets
of R/S and CPS at the dates of acquisition totaled approximately $14,492,000.
This amount is being amortized on a straight-line basis over a period not to
exceed forty years. The Company had appraisals performed in order to properly
value and amortize the useful lives of the assets acquired.
Critical Components Division
In June 1999, pursuant to the terms of a Stock Purchase Agreement dated
April 1999, the Company acquired all of the outstanding capital stock of
Critical Components Corporation ("CCC"). Simultaneously with the acquisition of
CCC, the Company, through CCC, acquired substantially all of the assets of
Ranor, Inc., ("Ranor") a fabricator of large precision assemblies for the
aerospace, nuclear, industrial and defense markets. The consideration paid to
Ranor was $28,800,000 (including assumed liabilities of approximately
$1,398,000), subject to final adjustment, of which $23,500,000 was paid in cash
and $5,300,000 was paid in the form of convertible subordinated notes, issued by
the Company and convertible into common stock of Critical Components
Corporation. The acquisition was accounted for as a purchase. The excess of the
purchase price over the fair value of the net assets acquired was approximately
$16,200,000.
F-7
<PAGE>
2. Pro Forma Information (Unaudited)
The following summarized unaudited pro forma information (in thousands
except per share data) for the year ended March 31, 2000 assumes that the June
16, 1999 acquisition of Ranor had occurred on April 1, 1999:
<TABLE>
<CAPTION>
Adjust- As Adjusted
SAC Ranor ments Proforma
-------- ------- ------- -----------
<S> <C> <C> <C> <C>
Revenue $159,476 $ 3,930 $ -- $163,406
Operating income (loss) 14,647 733 (780) 14,600
Net income (loss) $ 5,397 $ 417 $ (445) $ 5,369
======== ======= ======= ========
Preferred dividend 1,160 -- -- 1,160
Basic net income per share $ 1.17 $ 1.16
======== ========
Diluted net income per share $ 1.11 $ 1.10
======== ========
Basic weighted average number of
shares outstanding 3,623 3,623
Diluted weighted average number of
shares outstanding 4,867 4,867
</TABLE>
The pro forma operating results reflect estimated adjustments for
amortization expense on intangibles arising from the acquisitions and interest
expense on the acquisition debt and also the related tax effects thereon.
Pro forma results of operations information is not necessarily indicative
of either the results of operations that would have occurred had the
acquisitions been consummated as of April 1, 1999 or future results of the
combined companies.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All inter-company accounts and transactions are eliminated
in consolidation.
Revenue Recognition
The Company recognizes revenue, aside from the Critical Components
Division and "bill and hold" arrangements, when the product is inspected and
accepted by its customers or the customers' authorized agents and title has
transferred.
Revenues related to "bill and hold" arrangements are recognized when the
products are completed and stored at the Company. These revenues meet the
criteria for revenue recognition as the risks of ownership of the inventory have
passed to the buyer upon completion. There is a fixed commitment by the buyer to
purchase the goods, the arrangement was requested by the buyer for a specified
business purpose with an agreed upon schedule for delivery, which is also
consistent with the buyer's business purpose. The Company has no other
performance obligations. The goods are segregated from other inventory, are
ready to be shipped and are not used to fill other orders. Billing and credit
terms for "bill and hold" arrangements are not modified from normal terms, the
buyer has risk of loss in the event of a decline in market value, all custodial
risks retained by the Company have been insured and the receivable is deemed
collectible by the Company.
The Critical Components Division records revenue using either the
completed contract or the percentage of completion method of accounting,
depending upon the specific nature and length of a given contract. Costs include
value-added raw materials, direct engineering and manufacturing costs,
applicable overheads, and special tooling and test equipment. Revenues and
earnings on uncompleted contracts are based on the Company's estimates to
complete and are reviewed periodically, with adjustments recorded in the period
in which the revisions are made. Management evaluates each contract to determine
the best indication of completion. Such indicators could be cost incurred, labor
incurred or units shipped. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Progress
billings are made according to the terms of the contract.
F-8
<PAGE>
Warranties
The Company accrues for its obligation to warrant that its products are
free from defects in design, materials and workmanship generally for one year
from the date of purchase.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
less than three months when purchased to be cash equivalents.
Marketable Securities
When applicable, the Company applies Statement of Financial Accounting
Standard ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Under SFAS No. 115, marketable debt and equity securities are
reported at fair value, with unrealized gains and losses from those securities
reported as separate component of stockholders' equity.
Accounts Receivable
The Company's terms on accounts receivable vary by subsidiary but
generally provide for payment within 30 days. During fiscal 2000 R/S began to
offer extended term sales to its dealers.
Income Taxes
The Company follows 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 from the acquisitions was
adjusted to its then fair market value. Costs of revenues include a charge of
$295,000, $531,000 and $275,000 in the fiscal years ended March 31, 2000, 1999
and 1998, respectively, 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
dates. Property and equipment purchased by the Company 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
Furniture, fixtures and office equipment 5 - 7
Machinery and equipment 5 - 7
Buildings 40
Leasehold improvements Shorter of lease term or
useful life
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.
F-9
<PAGE>
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.
Deferred Financing Costs
At March 31, 2000 and 1999 costs of approximately $2,234,000 and
$1,477,000, respectively, were capitalized in connection with financing
acquisitions. The deferred financing costs are amortized over the life of the
financing.
Computation of Net Income Per Share
Basic net income per share represents net income divided by the weighted
average shares outstanding. Diluted net income per share represents net income
divided by weighted average shares outstanding adjusted for the incremental
dilution of outstanding employee stock options and warrants.
Foreign Currency
Foreign currency transaction gains and losses and translation adjustments
are included in the accompanying consolidated financial statements. Such amounts
were immaterial for each of the fiscal years ended March 31, 2000, 1999 and
1998.
Recently Issued Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133. The Statement defers
for one year the effective date of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which was issued in June 1998 and
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either as asset or liability
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. Management believes that the implementation of
SFAS No. 133 will not have a material impact on Standard's results of
operations.
During March 2000, the FASB issued interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, which clarifies the
application of APB Opinion No. 25, regarding (a) the definition of an employee
for purposes of applying APB Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Interpretation No. 44 is effective on July 1,
2000. Certain events, as defined by Interpretation No. 44, may require earlier
consideration if they occurred after December 15, 1998 or January 12, 2000,
depending on the event, although no financial statement effect would be
recognized until July 1, 2000. The effects of applying Interpretation No. 44 are
recognized prospectively. Management has reviewed its stock compensation events
covered by Interpretation No. 44 and has determined that no events require early
consideration.
During December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.
Bulletin No. 101 expresses the views of the SEC staff in applying generally
accepted accounting principles to certain revenue recognition issues. Standard
has concluded that the implementation of this Bulletin will not have a material
impact on its financial position or its results of operations.
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
F-10
<PAGE>
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 intangible assets, the allocation of purchase
prices and 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, marketable
securities, accounts receivable, accounts payable, and debt instruments, it is
estimated that the carrying amounts at March 31, 2000 and 1999 approximated fair
values for these instruments because of their short-term maturity, their
interest rates or their payment terms.
Stock-Based Compensation
The Company accounts for its employee stock option plan in accordance with
the provisions of Accounting Principles Bulletin No. 25, Accounting for Stock
Issued to Employees ("APB 25") and related interpretations. Compensation expense
related to employee stock options is recorded only if, on the date of grant, the
fair value of the underlying stock exceeds the exercise price. The Company
adopted the disclosure-only requirements of SFAS No. 123, Accounting for
Stock-Based Compensation, which allows entities to continue to apply the
provisions of APB Opinion No. 25 for transactions with employees and provide pro
forma net income and pro forma earnings per share disclosures for employee stock
options as if the fair value based method of accounting in SFAS No. 123 had been
applied to these transactions.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable.
4. Inventory, net
Inventory is comprised of the following:
March 31,
---------
2000 1999
----------- -----------
Raw materials $ 9,977,000 $ 9,557,000
Work in progress 2,545,000 979,000
Finished goods 8,080,000 2,930,000
----------- -----------
$20,602,000 $13,466,000
=========== ===========
F-11
<PAGE>
5. Property and Equipment, net
Property and equipment are summarized by major classifications as follows:
<TABLE>
<CAPTION>
March 31,
---------
2000 1999
----------- -----------
<S> <C> <C>
Transportation equipment $ 765,000 $ 572,000
Leasehold improvements 3,713,000 2,697,000
Furniture, fixtures and office equipment 1,860,000 1,002,000
Machinery and equipment 20,142,000 5,116,000
Building 12,546,000 8,883,000
Land 3,139,000 2,622,000
----------- -----------
Total 42,165,000 20,892,000
Less: Accumulated depreciation and amortization 3,441,000 917,000
----------- -----------
$38,724,000 $19,975,000
=========== ===========
</TABLE>
Depreciation and amortization expense for the years ended March 31, 2000,
1999 and 1998 was $2,625,000, $581,000 and $250,000, respectively.
6. Long Term Debt and Credit Agreements
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 as additional 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 July 1998 the Company and certain of its subsidiaries (acting as
Guarantors) entered into, with PNC Bank ("PNC"), both individually and as agent
for other financial institutions a $40,000,000 Term Loan and Revolving Credit
Facility ("Credit Facility "). The Credit Facility provided 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 acquisitions of R/S and CPS 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.
In June 1999, the Company obtained an increase in its existing Credit
Facility arrangement from $40,000,000 to $68,125,000 through PNC and PNC Capital
Markets to consummate the acquisition of Ranor. The Company's Credit Facility,
as amended, provides for Term Loans in the principal amount of $48,125,000 and a
Revolving Loan in the principal amount of $20,000,000 (the "Loans"). The
principal of the Term Loans is payable in two installments: $23,125,000 due June
2004 and $25,000,000 due June 2005. Amounts outstanding under the Revolving Loan
are payable in full in July 2002, subject to the Company's request, with the
approval of the lenders, to extend the due date for one year, with a maximum
extension of two one year periods.
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 Credit Facility. As of
March 31, 2000 the rate of interest for the Loans is 9.14%. All amounts
outstanding under the Credit Facility are secured by a lien on substantially all
of the Company's assets. The Credit Facility requires the Company to maintain
compliance with certain financial and non-financial covenants.
At March 31, 2000 the total amount outstanding under the Credit Facility
was $ 62,745,000.
F-12
<PAGE>
Future net minimum principal payments under the terms of the Credit
Agreement are as follows:
Year Ending March 31, Amount
--------------------- ------
2001 $4,000,000
2002 4,938,000
2003 5,250,000
2004 5,250,000
2005 and thereafter 43,307,000
-----------
$62,745,000
===========
As part of the acquisition of Ranor in June 1999 the sellers of Ranor were
issued $5,300,000 of three year, 6% interest only, convertible subordinated
notes, convertible into common stock of Critical Components Corporation.
In connection with the acquisition of Ajax Manufacturing Co., Inc.
("Ajax"), the Company incurred an obligation of approximately $4,000,000 to the
Ajax shareholder. The note was secured by the assets of the Company and accrued
interest at a rate of 10% per annum. The outstanding principal was paid in full
in July 1999. Interest on the debt was paid on a current basis and interest
expense for the period from January 27, 1998 through March 31, 1998 totaled
approximately $71,000.
The Company has an additional $216,000 of long term debt payable to
various creditors.
In April 2000 the Company increased its existing Credit Facility to
consummate the acquisition of Airborne Gear & Machine Ltd. and Arell Machining
Ltd. The existing Credit Facility was increased to a $125,000,000 Senior Secured
Credit Facility, which is described in the Subsequent Events footnote. This
Credit Facility includes a $25,000,000 acquisition line which is available upon
the fulfillment of certain conditions precedent.
7. Stockholders' Equity
Initial Public Offering
In January 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.
Common Stock Reserved for Issuance
At March 31, 2000 and 1999, the Company had reserved 2,604,000 and
2,288,500 shares, respectively, for the exercise of stock options, warrants and
the conversion of preferred stock.
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 and is convertible into common stock on a one to
one basis after July 21, 1998. The Preferred Stock's conversion rate is subject
to adjustment under certain circumstances, which include the failure to pay the
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) at
certain stock market price levels for the Common Stock. The Preferred Stock
holders have the authority, voting as a class, to approve or disapprove issuance
of any security which is senior to or comparable to the rights of the Preferred
Stock, and also has preference with respect to 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 on the common
stock if there are any dividend arrearages on its preferred stock.
F-13
<PAGE>
During Fiscal 2000 the prior owners of R/S exercised a put option which
required the Company to purchase $1,000,000 of common stock. The common stock
repurchased was retired to treasury.
Stock Options and Warrants
Under the 1997 Stock Option Plan, as amended, the Company may grant
non-qualified and incentive stock options to certain officers, employees and
directors. The options expire one to ten years from the grant date or five years
for grants to shareholders who own more than 10% of the Company's 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 1,000,000 shares under the plan. To date the Company has granted a total of
815,815 shares.
The per share exercise price for options granted under the Plan is
determined by the Board of Directors, provided that the exercise price of
incentive stock options ("ISO's") 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). 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.
Under SFAS No. 123, 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: (1)
expected lives of one to seven years; (2) dividend yield of 0%; (3) expected
volatility of 46.5%; and (4) risk free interest rates of 5.43%. 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.
For the year ended March 31, 1999 the stock option and warrant grants were
valued with the following weighted average assumptions: (1) expected lives of
one to seven years; (2) dividend yield of 0%; (3) expected volatility of 62.9%;
and (4) risk-free interest rate of 4.89%. If compensation cost for the Company's
stock option grants had been determined in accordance with SFAS No. 123, net
income available to common stockholders and earnings per share would have been
reduced by approximately $221,000 and $0.07, respectively, for the year ended
March 31, 1999.
For the year ended March 31, 2000 the stock option and warrant grants were
valued with the following weighted average assumptions: (1) expected lives of
one to ten years; (2) dividend yield of 0%; (3) expected volatility of 54.4%;
and (4) risk-free interest rate of 6.36%. If compensation cost for the Company's
stock option grants had been determined in accordance with SFAS No. 123, net
income available to common stockholders and basic and diluted earnings per share
would have been reduced by approximately $399,984 and $0.11 and $0.08
respectively, for the year ended March 31, 2000.
F-14
<PAGE>
The following table summarizes information about stock options and
warrants outstanding at March 31, 2000:
<TABLE>
<CAPTION>
Options/Warrants Outstanding
---------------------------------- Options/Warrants Exercisable
Weighted ----------------------------------
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise of Options/Warrants Contractual Exercise of Options/Warrants Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$5.94 - 8.56 419,265 5.16 $ 7.38 82,833 $ 6.42
$9.94 - 11.50 540,000 4.84 $ 10.71 314,000 $ 10.82
$15.88 - 19.80 152,000 7.13 $ 16.58 10,000 $ 17.00
--------- -------
1,111,265 5.27 $ 10.24 406,833 $ 10.08
========= =======
<CAPTION>
1998 1999 2000
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Shares under Option/Warrant
beginning of period -- 352,000 $ 10.89 785,880 $ 9.38
Granted 352,000 $ 10.89 436,500 $ 8.12 329,315 $ 12.29
Canceled -- (2,620) $ 5.94 (3,930) $ 8.47
Exercised -- -- $ -- -- $ --
Shares under Option/Warrant ------- ------- ------- ------- --------- -------
end of period 352,000 $ 10.89 785,880 $ 9.38 1,111,265 $ 10.24
======= ======= ======= ======= ========= =======
</TABLE>
Options available for grant total 184,185. The weighted average fair value
of options and warrants granted during the years ended March 31, 1998, 1999 and
2000 was $4.85, $7.28, and $6.77 respectively.
The Company granted 120,000 warrants in 1999 to a non-related third party
in connection with services rendered to the Company. Such warrants vest over a
period of five years. The expense related to the grants approximates $200,000 in
1999 and 2000.
The Company granted 55,000 options to non-related third party in
connection with the acquisition of Ranor during the fiscal year ended March 31,
2000.
Underwriters' Warrants
In connection with the IPO, the Underwriters received 130,000 common stock
warrants and 100,000 preferred stock warrants with exercise prices of $16.50 and
$19.80, respectively. Such warrants expire on January 21, 2003.
During fiscal year 2000, the underwriter received an additional 2,080
common stock warrants and 1,601 preferred stock warrants with exercise prices of
$16.50 and $19.80, respectively. Such warrants expire on January 21, 2003.
8. Basic and Diluted Net Income Per Common Share
The Company accounts for net income per common share in accordance with
the provisions of SFAS No. 128, Earnings per Share. In accordance with SFAS No.
128, basic net income per share is calculated by dividing income available to
common shareholders by the weighted average number of common shares outstanding
during the period.
F-15
<PAGE>
Diluted net income per share is calculated by dividing income available to
common shareholders by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon the conversion of
convertible preferred stock and exercise of stock options and warrants (using
the "Treasury Stock" method); common equivalent shares are excluded from the
calculation if their effect is anti-dilutive.
<TABLE>
<CAPTION>
(in thousands, except net income per share data) For the Fiscal Year Ended March 31,
-----------------------------------
2000 1999 1998 (1)
------ ------ --------
<S> <C> <C> <C>
NUMERATOR:
Income from continuing operations: $5,397 $3,482 $ 343
Less: Preferred dividends 1,160 1,173 184
------ ------ ------
Income available to common stockholders
Used in basic net income per share $4,237 $2,309 $ 159
====== ====== ======
DENOMINATOR :
Weighted average number of
common shares outstanding 3,623 3,356 1,846
Impact of potential common shares:
Stock options, warrants, and
convertible preferred 1,244 -- --
------ ------ ------
Weighted average number of
common shares and potential common
stock used in dilutive net income per share 4,867 3,356 1,846
====== ====== ======
Basic net income per share $ 1.17 $ 0.69 $ 0.09
====== ====== ======
Diluted net income per share $ 1.11 $ 0.69 $ 0.09
====== ====== ======
</TABLE>
(1) 1998 represents the period since the Ajax acquisition on January 26, 1998
through March 31, 1998. The 1998 predecessor financial statements are
included in this Form 10-K.
9. Income Taxes
The provision (benefit) for income taxes for the years ended March 31,
2000,1999 and 1998 consists of the following components:
March 31,
---------
2000 1999 1998
----------- ----------- -----------
Current:
Federal $ 3,065,000 $ 2,141,000 $ 384,000
State 817,000 312,000 112,000
----------- ----------- -----------
3,882,000 2,453,000 496,000
----------- ----------- -----------
Deferred:
Federal 63,000 199,000 (30,000)
State 10,000 (386,000) (8,000)
----------- ----------- -----------
73,000 (187,000) (38,000)
----------- ----------- -----------
Total provision $ 3,955,000 $ 2,266,000 $ 458,000
=========== =========== ===========
F-16
<PAGE>
Deferred tax assets (liabilities) consist of the following items:
March 31,
---------
2000 1999
----------- -----------
Deferred tax asset:
KREDA $ 124,000 $ 373,000
Accounts receivable 84,000 94,000
Inventory 180,000 221,000
Accrued liabilities 45,000 45,000
Start-up costs 341,000 341,000
Other (6,000) 11,000
----------- -----------
Total deferred tax assets, gross 768,000 1,085,000
Less valuation allowance -- (317,000)
----------- -----------
Total deferred tax assets $ 768,000 $ 768,000
=========== ===========
During 1996, R/S applied for and was granted status under the Kentucky
Rural Economic Development Act ("KREDA"). KREDA allows the Company to receive a
tax credit on income earned as a result of the Company increasing its plant size
and conducting operations in a rural county. Under KREDA, the Company is allowed
to use this tax credit as debt repayment.
Reconciliation between the Company's effective tax rate and the U.S.
statutory rate for the years ended March 31, 2000, 1999 and 1998 are as follows:
March 31,
---------
2000 1999 1998
---- ---- ----
U.S. statutory rate applied to pretax income 34.0% 34.0% 34.0%
State tax provision, net of federal tax benefit 6.3 7.8 6.0
Non deductible acquisition costs -- (1.7) 11.5
Amortization of goodwill 4.9 6.2 5.5
KREDA -- (2.1) --
Valuation (3.4) (5.5) --
Other 0.5 0.7 --
---- ---- ----
Total effective tax rate 42.3% 39.4% 57.0%
==== ==== ====
10. Related Party Transactions
The Company leases its New Jersey manufacturing facility from the sole
stockholder of Ajax prior to acquisition. 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.
Fees paid to Directors and Related Parties for services rendered in
connection with the acquisitions of Airborne and Arell in April 2000 were
approximately $785,000, together with 120,000 shares of the Company's Common
Stock.
At March 31, 2000 and 1999, the Company had advanced $176,000 and
$215,000, respectively, to an entity controlled by a stockholder of the Company
for costs incurred on potential acquisitions.
F-17
<PAGE>
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
--------------------- ------
2001 803,000
2002 320,000
2003 110,000
----------
$1,233,000
==========
11. Major Customers and Concentrations
Major Customers
Three customers individually accounted for 33%, 15% and 5% of net sales
for the fiscal year ended March 31, 2000. Three customers individually accounted
for 21%, 19% and 14% of net sales for the fiscal year ended March 31, 1999. Two
customers individually accounted for 59% and 24% of net sales for the fiscal
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 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, 2000 approximately $1,018,000 and
$25,000 were invested in two domestic money market funds. At March 31, 1999
approximately $506,000 and $526,000 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.
At March 31, 2000, the Company has two customers with an individual
balance in excess of 10% of consolidated accounts receivable. In the aggregate,
these two customers comprise approximately 48% of the net accounts receivable
balance. At March 31, 1999, the Company had one customer with individual
balances in excess of 10% of consolidated accounts receivable. In the aggregate,
this one customer comprises approximately 18% of the net accounts receivable
balance.
12. Commitments and Contingencies
Environmental Matters
The Company is subject to various federal, state and local laws and
regulations including those 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.
On March 16, 1999 the Company (on behalf of Ajax, New Jersey) and the New
Jersey Department of Environmental Protection (NJDEP) entered into a Stipulation
of Settlement by which the Company, without admission of liability, agreed
F-18
<PAGE>
to withdraw legal challenges against NJDEP and pay NJDEP $234,000 over a
three-year period commencing December 31, 1999. The entire amount was expensed
in Fiscal 1999. As part of the settlement, NJDEP (1) has withdrawn and settled
all allegations of Ajax emission exceedences of air volatile compounds ("VOCs")
dating from the initiation of Company and predecessor business in 1992 through
February 28, 1999; and (2) has granted Ajax a new VOC emission permit that
roughly doubles allowable emissions to 51.5 tons per year. As required under the
new VOC permit, the Company has installed at the Ajax New Jersey facility a
system to compute VOC emissions and periodically reconcile such computations
with company purchasing and production data. The Company projects that at
current rates of production, VOC permit limits may be exceeded. The Company is
studying solutions to any such exceedence, the costs of which are not expected
to cause a material impact on the Company.
The Company is subject to federal, state and local regulation of
environmental matters relating to its operations, including investigation for
any possible environmental impact of historical activities of the Company
predecessor. The Company (on behalf of Ajax, New Jersey) is currently involved
in site investigations to ascertain whether any environmental remediation
efforts are required and, if necessary, the magnitude and extent of such costs.
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 Ajax, New Jersey facility. The Company has
not established reserves related to the associated disposal costs of such items
(in the event the current leasing arrangement ceases and Ajax, New Jersey
relocates), since such costs will be the responsibility of its lessor.
Legal
The Company is involved in litigation arising in the normal course of
business. Management believes that the litigation in which the Company is
currently involved, either individually or in the aggregate, is not material to
the Company's financial position or results of operations. Furthermore, the
Company is pursuing through arbitration certain purchase price adjustments
pursuant to the Ranor Asset Purchase Agreement dated June 17, 1999. In addition,
the Company is seeking recovery against Ranor's former accountants relative to
these matters.
Operating Leases
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:
Year Ending March 31, Amount
--------------------- ------
2001 870,000
2002 796,000
2003 685,000
2004 96,000
----------
$2,447,000
==========
Rent expense for the year ended March 31, 2000, 1999 and 1998 totaled
$1,273,000, $610,000 and $140,000, respectively.
Defined Contribution Plan
In Fiscal 1999 the Company adopted a defined contribution 401(k) plan. All
eligible employees of the Company may participate in the plan. Participants may
contribute up to 15% of their eligible compensation, as defined. The Company
F-19
<PAGE>
may make discretionary profit sharing contributions to the plan. For the fiscal
years ended March 31, 2000 and 1999 the Company's expense related to the plan
was $338,846 and $33,036, respectively.
13. Quarterly Information (Unaudited)
Below is selected quarterly information (in thousands, except for per
share data) for the year ended March 31, 2000.
<TABLE>
<CAPTION>
Fiscal Year 2000, Quarters ended
--------------------------------
March 31 December 31 (1) September 30 (1) June 30
-------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $38,374 $41,238 $44,820 $35,044
Operating income 3,696 3,808 3,773 3,370
Income Taxes 863 983 1,003 1,106
Net Income 1,220 1,311 1,326 1,540
Net income available to common stockholders $ 931 $ 1,022 $ 1,037 $ 1,247
=======================================================
Basic net income per share $ 0.26 $ 0.28 $ 0.28 $ 0.35
=======================================================
Diluted net income per share $ 0.23 $ 0.27 $ 0.26 $ 0.35
=======================================================
</TABLE>
(1) The results of operations for the quarter ended September 30, 1999
include the effect of a compensation change (determined by the then fair value
of the underlying shares compared to the exercise price) relating to 225,000
warrants, issued to a former employee and accounted for using variable plan
accounting. The results of operations for the quarter ending December 31, 1999
include the effect of subsequent reversal of such charges (also determined by
the then fair value of the underlying shares compared to the exercise price).
Below is selected quarterly information (in thousands, except for per
share data) for the year ended March 31, 1999.
<TABLE>
<CAPTION>
Fiscal Year 1999, Quarters ended
--------------------------------
March 31 December 31 September 30 June 30
-------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $26,595 $23,732 $17,245 $ 7,880
Operating income 2,418 2,822 1,792 809
Income Taxes 568 785 586 327
Net Income 1,306 1,155 681 340
Net income available to common stockholders $ 1,014 $ 861 $ 387 $ 47
=======================================================
Basic and diluted net income per share $ 0.30 $ 0.25 $ 0.12 $ 0.02
=======================================================
</TABLE>
14. Segment Information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information 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.
F-20
<PAGE>
The Company operated as one segment in the year ended March 31,1998. Below
are the selected financial segment data for the years ended March 31, 2000 and
1999:
Truck Body/ Critical
Trailer Components
March 31, 2000 Division Division Total
-------------- -------- -------- -----
(in thousands)
Revenue $139,803 $ 19,993 $159,796
Operating Income 16,161 3,945 20,106
Identifiable Assets 33,474 39,646 73,120
Capital Expenditures 2,276 1,683 3,959
March 31, 1999
--------------
(in thousands)
Revenue $ 75,452 $ -- $ 75,452
Operating Income 7,841 -- 7,841
Identifiable Assets 77,452 -- 77,452
Capital Expenditures 6,110 -- 6,110
The following is a reconciliation of reportable segment revenues,
operating income, assets and other significant items to the Company's
consolidated totals for March 31, 2000:
Revenue
Total revenues for reporting segments $ 159,796
Elimination of intersegment revenues (320)
---------
Total consolidated revenues $ 159,476
=========
Operating income
Total operating profit or loss for reporting segments $ 20,106
Other corporate expenses (5,459)
---------
Income before income taxes and extraordinary items $ 14,647
=========
Assets
Total assets for reporting segments $ 73,120
Goodwill not allocated to segments 44,151
Other unallocated amounts 19,994
---------
Consolidated total $ 137,265
=========
Other Significant Items
Segment Consolidated
Totals Adjustments Totals
------ ----------- ------
Interest expense $ 270 $ 4,775 $ 5,045
Goodwill amortization -- 1,466 1,466
15. Subsequent Events (Unaudited)
In April 2000 the Critical Components Division acquired two companies:
Airborne Gear & Machine Ltd. ("Airborne") and Arell Machining Ltd. ("Arell") for
an aggregate purchase price of $20,898,000, subject to final adjustments and
potential earnouts estimated to be $6,000,000 based on defined EBITDA hurdles.
In addition, the Company incurred approximately $3,800,000 of acquisition
expenses related to the purchase and financing of Airborne and Arell; the
Company also issued 120,000 shares of common stock to related parties.
F-21
<PAGE>
A portion of the funds to complete both the Airborne and Arell
acquisitions was obtained through an increase of our existing Credit Facilities
("Credit Facilities") to $125,000,000, comprised of a $25.0 million Revolving
Credit Facility ("Revolver"), a $50.0 million six-year Term Loan ("Term Loan
A"), a $25.0 million seven-year Term Loan ("Term Loan B") and a $25.0 million
Acquisition Line ("Acquisition Line"), which is available upon fulfillment of
certain conditions precedent. ING Barings LLC and PNC Capital Markets ("PNC")
arranged this financing.
The following table sets forth the key characteristics of the Senior
Secured Credit Facilities:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Senior Secured Credit Facilities
-------------------------------------------------------------------------------------------------------------------------
Total U.S. Canadian
Facility Amount Portion Portion Maturity Initial LIBOR Spread (1)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revolver $ 25,000,000 $ 20,000,000 $ 5,000,000 5 Years 350 basis points
Term Loan A 50,000,000 32,500,000 17,500,000 6 Years 350 basis points
Term Loan B 25,000,000 20,000,000 5,000,000 7 Years 400 basis points
Acquisition Line 25,000,000 25,000,000 -- 1 Year(2) 350 basis points
------------- ------------ ------------
Total (3) $ 125,000,000 $ 97,500,000 $ 27,500,000
============= ============ ============
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company also has a Base Rate option that is the higher of the PNC
Prime Rate or the Federal Funds Rate plus a variable spread.
(2) Amounts outstanding under the Acquisition Line at the end of 1 year will
then be amortized over a 5-year term.
(3) The Company partially hedged its interest rate risk exposure by entering
into an Interest Rate Cap transaction with a notional amount of
$37,500,000.
F-22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Standard Automotive Corporation
Hillsborough Township, New Jersey
We have audited the accompanying statement 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. 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 audit.
We conducted our audit 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 audit provides 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 in conformity
with generally accepted accounting principles.
BDO Seidman, LLP
Woodbridge, New Jersey
June 25, 1998
F-23
<PAGE>
Ajax Manufacturing Company
Statement of Income and Retained Earnings
(in thousands)
Period from
April 1, 1997
through January 26,
1998
-------------------
Revenues $ 25,134
Operating costs and expenses:
Cost of revenues 19,898
Selling, general and administrative expenses 1,431
--------
Total operating costs and expenses 21,329
--------
Operating income 3,805
Interest expense --
Other income (expense):
Excise tax settlement (830)
Investment income 40
--------
Income before income taxes 3,015
Provision for income taxes 1,272
--------
Net income 1,743
Retained earnings, beginning of period 6,952
--------
Retained earnings, end of period $ 8,695
========
See accompanying notes to financial statements.
F-24
<PAGE>
Ajax Manufacturing Company
Statement of Cash Flows
(in thousands)
Period from
April 1, 1997
through January 26,
1998
-------------------
Cash flows from operating activities:
Net income $ 1,743
Adjustments to reconcile net income to net cash
used in operating activities:
Bad debt provision 25
Depreciation and amortization 133
Deferred taxes (58)
Change in assets and liabilities:
Accounts receivable (3,004)
Inventory (2,429)
Other receivables --
Prepaid expenses 25
Accounts payable and accrued expenses 1,075
Income taxes payable 1,087
-------
Net cash used in operating activities (1,403)
-------
Cash flows from investing activities:
Issuance of note receivable - related parties (35)
Acquisition of property and equipment (211)
-------
Net cash used in investing activities (246)
-------
Cash flows from financing activities:
Borrowings from short term debt 350
-------
Net cash provided by financing activities 350
-------
Net decrease in cash and cash equivalents (1,299)
Cash and cash equivalents, beginning of period 1,558
-------
Cash and cash equivalents, end of period $ 259
=======
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ --
Income taxes 298
See accompanying notes to financial statements.
F-25
<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. 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
Furniture, fixtures and office equipment 5 - 7
Machinery and equipment 5 - 7
Leasehold improvements 10 - 25
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<PAGE>
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.
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.
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 period ending January
26, 1998 totaled $1,000.
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 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.
4. Income Taxes
The provision (benefit) for income taxes in the statement of income and
retained earnings consists of the following components:
Period from
April 1, 1997
through January 26,
1998
-------------------
Current:
Federal $ 1,031,000
State 300,000
Deferred:
Federal (46,000)
State (13,000)
-----------
Total provision $ 1,272,000
===========
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<PAGE>
A reconciliation between the Company's effective tax-rate and the U.S.
statutory rate is as follows:
Period from
April 1, 1997
through January 26,
1998
-------------------
U.S. statutory rate applied to pretax income 34.0%
State tax provision, net of federal tax benefit 7.0
Other 1.0
----
Total effective tax rate 42.0%
====
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 $508,000
for the period from April 1, 1997 through January 26, 1998.
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 was $113,846 for the period
from April 1, 1997 through January 26, 1998. Salaries and incentives expense for
the Officer was $173,231 for the period from April 1, 1997 through January 26,
1998.
Guarantees
Through various guarantees, the Company's Stockholder is contingently
liable for repayment of certain indebtedness of the Company. The principal
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 customers who individually accounted for 10% or more of
net sales for the period from April 1, 1997 through January 26, 1998.
1998
Customer Period
-------- ------
A 59%
B 24
------
Total 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.
F-28
<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
F-29
<PAGE>
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, 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 included $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.
F-30
