As filed with the Securities and Exchange Commission on November 18, 1997
Registration No. 333-33465
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------
STANDARD AUTOMOTIVE CORPORATION
(Exact name of registrant as specified in its charter)
----------------------------
Delaware 3715 52-2018607
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)
321 Valley Road
Hillsborough Township, NJ
08876-4056 (908) 369-5544
(Address, including zip code, and telephone number including area code of
registrant's principal executive offices)
Steven Merker
Karl Massaro
321 Valley Road
Hillsborough Township, NJ
08876-4056 (908) 369-5544
(Name, address including zip code, and telephone number including
area code of agent for service)
----------------------------
Copies to:
Vincent J. McGill, Esq. Lawrence B. Fisher, Esq.
Phillips Nizer Benjamin Krim & Ballon LLP Orrick, Herrington & Sutcliffe LLP
666 Fifth Avenue 666 Fifth Avenue
New York, New York 10103-0084 New York, New York 10103-0001
(212) 977-9700 (212) 506-5000
----------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. | |
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. | |
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. | |
(Continued on following page)
(Continued from preceding page)
CALCULATION OF REGISTRATION FEE
===================================================================================================
Proposed
Maximum Proposed
Offering Maximum
Title of Each Amount Price Aggregate Amount of
Class of Securities To Be Per Offering Registration
to be Registered Registered(1) Share(2) Price(2) Fee
- ----------------------------------------------------------------------------------------------------
Common Stock, $.001 par value .......... 1,495,000 shares $11.00 $16,445,000 $ 4,983.53
- ----------------------------------------------------------------------------------------------------
Preferred Stock, $.001 par value........ 1,150,000 shares $13.00 $14,950,000 $ 4,531.30
- ----------------------------------------------------------------------------------------------------
Common Stock issuable upon
conversion of Preferred Stock(3)........ 1,150,000 shares $ -- $ -- $ --
- ----------------------------------------------------------------------------------------------------
Representative's Warrants(4)(5)......... 230,000 $ -- $ -- $ --
- ----------------------------------------------------------------------------------------------------
Common Stock underlying
Representative's Warrants(4)(5)......... 130,000 $18.15 $ 2,359,500 $ 715.00
- ----------------------------------------------------------------------------------------------------
Preferred Stock underlying
Representative's Warrants(4)(5)......... 100,000 $21.45 $ 2,145,000 $ 650.00
- ----------------------------------------------------------------------------------------------------
Common Stock issuable upon
conversion of Preferred Stock
underlying Representative's
Warrants(4)(5).......................... 100,000 $ -- $ -- $ --
- ----------------------------------------------------------------------------------------------------
Total................................... $35,899,500 $10,879.83
- ----------------------------------------------------------------------------------------------------
Amount Previously Paid.................. $11,000.00
- ----------------------------------------------------------------------------------------------------
Amount Due.............................. $ (120.17)
====================================================================================================
(1) Includes 195,000 shares of Common Stock and 150,000 shares of Preferred
Stock issuable upon exercise of the Underwriters' Over-allotment Option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Reserved for issuance upon conversion of Preferred Stock.
(4) Pursuant to Rule 416, an indeterminate number of additional shares of
Common Stock are registered hereunder which may be issued in the event
that applicable antidilution provisions become operative. No additional
registration fee is included as to those shares.
(5) The Representative's Warrants are exercisable to purchase 130,000 shares
of Common Stock and 100,000 shares of Preferred Stock.
----------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION DATED NOVEMBER 18, 1997
PROSPECTUS
STANDARD AUTOMOTIVE CORPORATION
1,000,000 Shares of Convertible Redeemable Preferred Stock
1,300,000 Shares of Common Stock
Standard Automotive Corporation, a Delaware corporation (the "Company"),
hereby offers (this "Offering") 1,000,000 shares of 8 1/2% Senior Convertible
Redeemable Preferred Stock, par value $.001 per share and liquidation preference
of $_____ per share (the "Convertible Preferred Stock"), and 1,300,000 shares of
Common Stock, par value $.001 per share (the "Common Stock"). The Convertible
Preferred Stock and Common Stock are sometimes collectively referred to as the
"Securities." The Convertible Preferred Stock and the Common Stock are being
offered separately and not as a unit and will trade separately immediately after
this Offering. The Convertible Preferred Stock is convertible into Common Stock
at any time on or after _______, 1998 (180 days after the date hereof) prior to
redemption at the ratio of one share of Common Stock for each share of
Convertible Preferred Stock, an effective conversion price of $____ per share or
120% of the initial public offering price per share of Common Stock (subject to
adjustment under certain circumstances including in the event of the failure of
the Company to pay a dividend on the Convertible Preferred Stock within 30 days
after a dividend payment date, which will result in each instance in a reduction
of $.50 per share in the conversion price but not below $9.00 per share). The
Convertible Preferred Stock is subject to redemption by the Company at any time
on or after __________, 2000 (30 months after the date hereof), in whole but not
in part, at $_________per share, plus accumulated and unpaid dividends on 30
days' prior written notice, provided that the closing bid price of the Common
Stock for any 20 trading days within a period of 30 consecutive trading days
ending not more than five trading days prior to the date of the notice of
redemption equals or exceeds $____ per share (180% of the initial public
offering price per share of Common Stock). Cumulative dividends on the
Convertible Preferred Stock at the rate of $____ per share per annum are payable
quarterly, out of funds legally available therefor, on the last business day of
March, June, September and December of each year, commencing December 31, 1997.
See "Description of Securities."
Purchasers of the Securities offered hereby will experience immediate and
substantial dilution in net tangible book value per share from the initial
public offering price. New investors will contribute 100% of the consideration
for 44.8% of the total number of shares of Common Stock to be outstanding
following completion of this Offering (assuming no conversion of the Convertible
Preferred Stock); while existing investors will own the balance of the shares of
Common Stock for which they have paid nominal consideration.
Prior to this Offering, there has been no public market for the Securities
and there can be no assurance that such a market will develop after the
completion of this Offering or, if developed, that it will be sustained. It is
currently estimated that the initial public offering price per share of
Convertible Preferred Stock will be between $11.00 and $13.00 and that the
initial public offering price per share of Common Stock will be between $9.00
and $11.00. For information regarding the factors considered in determining the
initial public offering prices of the Securities and the terms of the
Convertible Preferred Stock, see "Risk Factors" and "Underwriting." The Company
has applied to have the Convertible Preferred Stock and the Common Stock listed
on The American Stock Exchange ("AMEX") for trading separately under the symbols
"AJX.Pr" and "AJX," respectively.
THESE ARE SPECULATIVE SECURITIES. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH
DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING
ON PAGE 9 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------------
================================================================================
Underwriting Proceeds to
Price to Public Discounts(1) Company(2)
- --------------------------------------------------------------------------------
Per share of Convertible
Preferred Stock ............... $ $ $
- --------------------------------------------------------------------------------
Per share of Common Stock ...... $ $ $
- --------------------------------------------------------------------------------
Total(3) ....................... $ $ $
================================================================================
(1) Does not include additional compensation to Westport Resources Investment
Services, Inc., the representative (the "Representative") of the several
Underwriters (the "Underwriters"), in the form of a non-accountable expense
allowance. In addition, see "Underwriting" for information concerning
indemnification and contribution arrangements with the Underwriters and
other compensation payable to the Representative.
(2) Before deducting estimated expenses of $810,000 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted the Underwriters an option exercisable within 45
days after the date of this Prospectus to purchase up to an aggregate of
150,000 additional shares of Convertible Preferred Stock and/or 195,000
additional shares of Common Stock upon the same terms and conditions as set
forth above, solely to cover over-allotments, if any (the "Over-allotment
Option"). The Over-allotment Option may be exercised to purchase shares of
Convertible Preferred Stock, shares of Common Stock or any combination
thereof. If such Over-allotment Option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$_________, $_________ and $__________, respectively.
It is expected that delivery of the Securities will be made at the offices of
the Representative's counsel on or about ___________, 1997.
WESTPORT RESOURCES INVESTMENT SERVICES, INC.
DIRKS & COMPANY, INC.
MILLENNIUM FINANCIAL GROUP, INC.
(European Co-Manager)
RAF FINANCIAL CORPORATION
The date of this Prospectus is ________, 1997
[Picture of Container Chassis]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING PURCHASES OF THE SECURITIES TO STABILIZE THE MARKET PRICE, PURCHASES
OF THE SECURITIES TO COVER SOME OR ALL OF A SHORT POSITION IN THE SECURITIES
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
THE SECURITIES OFFERED IN THIS OFFERING BY THE UNDERWRITERS ARE SUBJECT TO
PRIOR SALE. THE UNDERWRITERS RESERVE THE RIGHT TO WITHDRAW, CANCEL OR MODIFY
SUCH OFFER (WHICH MAY BE DONE ONLY BY FILING AN AMENDMENT TO THE REGISTRATION
STATEMENT) AND TO REJECT ORDERS IN WHOLE OR IN PART FOR THE PURCHASE OF ANY OF
THE COMPANY'S SECURITIES AND TO CANCEL ANY SALE EVEN AFTER THE PURCHASE PRICE
HAS BEEN PAID IF SUCH SALE, IN THE OPINION OF THE UNDERWRITERS, WOULD VIOLATE
FEDERAL OR STATE SECURITIES LAWS OR A RULE OR POLICY OF THE NATIONAL ASSOCIATION
OF SECURITIES DEALERS, INC. ("NASD").
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS AUDITED BY ITS INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANT AND QUARTERLY REPORTS CONTAINING UNAUDITED INTERIM FINANCIAL
STATEMENTS FOR THE FIRST THREE QUARTERS OF EACH FISCAL YEAR.
----------------------------
This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that may cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
2
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus. Except as otherwise specified, all information in
this Prospectus (i) assumes that the following transactions (collectively, the
"Closing Transactions") have been consummated upon the closing of this Offering
(the "Closing Date"): (a) the acquisition (the "Acquisition") of Ajax
Manufacturing Company ("Ajax" or the "Predecessor Company") by Standard
Automotive Corporation ("Standard"), (b) the filing prior to the date of this
Prospectus of a Certificate of Designation, Preferences and Rights amending the
Company's Certificate of Incorporation to authorize the Convertible Preferred
Stock, (c) the issuance to the holders of $325,000 in aggregate principal amount
of certain notes (the "Bridge Notes") of an aggregate number of shares of Common
Stock determined by dividing $325,000 by the initial public offering price per
share of Common Stock (which is assumed for purposes hereof to be $10.00,
yielding 32,500 shares), and (d) the repayment by Mr. Carl Massaro to the
Company of $220,000 in loans, and (ii) does not give effect to (x) any exercise
of the Over-allotment Option, (y) the issuance of up to 1,000,000 shares of
Common Stock upon conversion of the Convertible Preferred Stock, and (z) the
issuance of up to 100,000 shares of Convertible Preferred Stock and/or 130,000
shares of Common Stock upon exercise of the Representative's Warrants. See "The
Acquisition" and "Underwriting." References to "Ajax" or the "Company" mean Ajax
and Standard, respectively, as of dates and periods prior to the Closing Date
and to Standard and its subsidiaries, collectively, thereafter. References to
"Ajax" or the "Predecessor Company", as they relate to historical financial
information presented herein, mean the financial condition, results of
operations and statistics of Ajax Manufacturing Company on a separate company
basis. Historical financial statements as of and for the six month period ended
September 30, 1997 include the financial position and operating results of
Standard and Ajax, as if these entities were combined as of and for that period.
Standard had no operating results prior to the six month period ended September
30, 1997.
The Company
The Company is a specialized manufacturer of new trailer chassis which are
sold to leasing companies, large steamship lines, railroads and trucking
companies to transport overland 20', 40', 45' and 48' shipping containers. The
Company also remanufactures used trailer chassis. The Company recently began to
manufacture a new line of 20, 30 and 40 yard sanitary containers known as
roll-off dumpsters and to sell a new line of intermodal refuse containers that
can be shipped on trailer chassis, barge or railroad. The Company's net sales
and net income were $22,355,871 and $1,727,907 for the fiscal year ended March
31, 1997, as compared to $42,537,553 and $3,344,303 for the fiscal year ended
March 31, 1996, respectively. For the six months ended September 30, 1997, the
Company had net sales and net income of $11,170,153 and $310,216, as compared to
$8,780,895 and $468,139 for the comparable period of 1996.
A shipping cargo container is a reusable metal container designed for the
efficient carriage of cargo with a minimum of exposure to loss through damage or
theft. According to Containerization International, the world container fleet
has grown to an estimated 9,100,000 TEU (i.e., "Twenty-Foot Equivalent Unit") as
of mid-1995. The Company believes that the demand for new and remanufactured
container chassis is closely related to container use. The total size of the
United States chassis fleet was estimated at 515,000 units in 1996 as compared
to 481,000 units in 1995.
The Company leases its 182,000 square foot manufacturing facility in
Hillsborough, New Jersey. The Company has established production lines for the
manufacture of new chassis and the remanufacture of used chassis. In August 1997
the Company expanded its operations by establishing a production line for the
manufacture of refuse containers.
The Company's business strategy is to grow through the acquisition of
companies that manufacture complementary products, by diversifying its product
lines and establishing manufacturing facilities in the Western United States to
service potential customers on the West Coast. At this time the Company is not
engaged in any discussions with any acquisition candidates, nor has it
established a timetable for the establishment of a new manufacturing facility.
The Company will use the net proceeds of this Offering to pay the
Purchase Price of the Acquisition and to repay approximately $338,000 due under
the Bridge Notes.
The Company is a Delaware corporation formed on January 2, 1997, to
acquire and operate the business of Ajax Manufacturing Company. Ajax was
incorporated in 1964 under New Jersey law and commenced business in 1979. The
Company's office and manufacturing facilities are located at 321 Valley Road,
Hillsborough Township, New Jersey, 08876-4056, telephone (908) 369-5544.
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
The Acquisition
On the Closing Date, the Company will use the proceeds of this Offering to
consummate the acquisition (the "Acquisition") from Mr. Carl Massaro, the
founder and sole stockholder of Ajax, of all of the outstanding capital stock of
Ajax. The Stock Purchase and Redemption Agreement (the "Stock Purchase
Agreement") dated August 11, 1997 between the Company and Mr. Carl Massaro
provides for a purchase price (the "Purchase Price") of $20,625,000 adjusted by
an amount equal to 83.33% of the excess of Ajax's net worth as of the Closing
Date over $4,463,671 (the "Net Worth Adjustment"). The Purchase Price is payable
in cash on the Closing Date by Standard, except that to the extent that the
Purchase Price exceeds $19,903,257, the excess amount up to $4,000,000 is
payable by Ajax pursuant to a three-year promissory note bearing interest at the
annual rate of 10% (the "Redemption Note"), which will be issued in
consideration for stock of Ajax to be redeemed simultaneously with the Closing.
There is no ceiling on the Net Worth Adjustment and, the excess of the Purchase
Price over $23,903,257, is payable in cash by the Company. Promptly after the
Closing, Ajax will prepare a balance sheet to determine its net worth as of the
Closing Date. Upon final determination of Ajax's Closing Date net worth,
appropriate adjustments will be made to the Redemption Note or the cash portion
of the Purchase Price. After the Closing Date, Ajax will operate as a
wholly-owned subsidiary of the Company. See "The Acquisition."
This Offering
Securities Offered .................... 1,000,000 shares of Convertible
Preferred Stock and 1,300,000
shares of Common Stock.
Offering Prices:
Convertible Preferred Stock ......... $_____ per share.
Common Stock ........................ $_____ per share.
Securities outstanding prior to
this Offering(1) .................... 1,567,500 shares of Common Stock
and no shares of Convertible
Preferred Stock.
Securities to be outstanding after
this Offering(2):
Prior to conversion of the
Convertible Preferred Stock ........ 2,900,000 shares of Common Stock
and 1,000,000 shares of Convertible
Preferred Stock.
Giving effect to full conversion
of the Convertible Preferred Stock . 3,900,000 shares of Common Stock.
Terms of Convertible Preferred Stock:
Dividend Rate and Payment Dates ....... Cumulative dividends are payable at
the rate of $____ per share per
annum, quarterly on the last
business day of March, June,
September and December of each
year, commencing December 31, 1997,
when, as and if declared by the
Board of Directors, before any
dividends are declared or paid on
the Common Stock or any capital
stock ranking junior to the
Convertible Preferred Stock.
Failure to pay any quarterly
dividend will result in a reduction
of the conversion price. See
"Dividend Policy" and "Description
of Securities--Convertible
Preferred Stock."
- -------------------
(1) Does not give effect to the issuance to the holders of $325,000 in
aggregate principal amount of Bridge Notes of an aggregate number of shares
of Common Stock determined by dividing $325,000 by the initial public
offering price per share of Common Stock (which is assumed for purposes
hereof to be $10.00, yielding 32,500 shares).
(2) Does not give effect to the issuance of up to 50,000 shares of Common Stock
upon exercise of options at an exercise price of $_______ per share [115%
of the initial public offering price per share] granted to Mr. Carl Massaro
(the "Massaro Options"), and the issuance of up to 340,000 additional
shares of Common Stock reserved for issuance upon exercise of stock options
that may be granted under the Company's 1997 Stock Option Plan.
- --------------------------------------------------------------------------------
4
- --------------------------------------------------------------------------------
Conversion Rights ..................... Convertible into Common Stock at
any time on or after ______, 1998
(180 days after the date hereof)
and prior to redemption at a
conversion rate of one share of
Common Stock for each share of
Convertible Preferred Stock (an
effective conversion price of $____
per share or 120% of the initial
public offering price per share of
Common Stock), subject to
adjustment under certain
circumstances including in the
event of the failure of the Company
to pay a dividend on the
Convertible Preferred Stock within
30 days after a dividend payment
date, which will result in each
instance in a reduction of $.50 per
share in the conversion price but
not below $9.00 per share. See
"Description of
Securities--Convertible Preferred
Stock."
Optional Cash Redemption .............. Redeemable, in whole but not in
part, by the Company upon 30 days'
prior written notice at any time on
or after _____, 2000 (30 months
after the date hereof) at $_____
per share, plus accumulated and
unpaid dividends, provided the
closing bid price of the Common
Stock for any 20 trading days
within a period of 30 consecutive
trading days ending not more than
five trading days prior to the date
of the notice of redemption equals
or exceeds $_____ per share (180%
of the initial public offering
price per share of the Common
Stock). See "Description of
Securities--Convertible Preferred
Stock."
Voting Rights ......................... The holders of Convertible
Preferred Stock have the right,
voting as a class, to approve or
disapprove of the issuance of any
class or series of stock ranking
senior to or on a parity with the
Convertible Preferred Stock with
respect to declaration and payment
of dividends or the distribution of
assets on liquidation, dissolution
or winding-up. The affirmative vote
of the holders of 2/3 of the
outstanding shares of Convertible
Preferred Stock is required to
approve the issuance of stock
senior to the Convertible Preferred
Stock, and the affirmative vote of
the holders of a majority of the
outstanding shares of Convertible
Preferred Stock is required to
approve the issuance of stock on a
parity with the Convertible
Preferred Stock. In addition, if
the Company fails to pay dividends
on the Convertible Preferred Stock
for four consecutive quarterly
dividend payment periods, holders
of Convertible Preferred Stock
voting separately as a class will
be entitled to elect two directors
such voting right will be
terminated as of the next annual
meeting of stockholders of the
Company following payment of all
accrued dividends. See "Description
of Securities--Convertible
Preferred Stock."
- --------------------------------------------------------------------------------
5
- --------------------------------------------------------------------------------
Liquidation Preference ................ Upon liquidation, dissolution or
winding up of the Company, holders
of Convertible Preferred Stock are
entitled to receive liquidation
distributions equivalent to $____
per share (plus accumulated and
unpaid dividends) before any
distribution to holders of the
Common Stock or any capital stock
ranking junior to the Convertible
Preferred Stock. See "Description
of Securities--Convertible
Preferred Stock."
Priority .............................. The Convertible Preferred Stock
will be senior to and have priority
over the Common Stock with respect
to the payment of dividends and
upon liquidation, dissolution or
winding-up of the Company.
Use of Proceeds ....................... The Company intends to apply the
net proceeds of this Offering to
pay the Purchase Price of the
Acquisition, to repay all
indebtedness due under the Bridge
Notes, and to use any balance
thereof, and any proceeds of the
Over-allotment Option, for working
capital and general corporate
purposes. See "Use of Proceeds."
Proposed AMEX Symbols:
Convertible Preferred Stock ......... AJX.Pr
Common Stock ........................ AJX
Risk Factors .......................... An investment in the Securities
offered hereby involves a high
degree of risk and immediate and
substantial dilution, and should be
made only by investors who can
afford the loss of their entire
investment. See "Risk Factors" and
"Dilution."
Reverse Stock Split .................. All references to share and per
share data have been adjusted to
reflect a reverse stock split
effective November 10, 1997, which
reduced the number of shares of the
Company outstanding from 2,067,500
to 1,567,500.
- --------------------------------------------------------------------------------
6
- --------------------------------------------------------------------------------
Summary Financial Data
The following table sets forth (i) for the periods indicated and at the
dates indicated historical summary financial information of the Predecessor
Company, (ii) historical financial statements as of and for the six month period
ended September 30, 1997, that include the financial position and operating
results of Standard and Ajax, as if these entities were combined at that date
and for that period and (iii) adjusted pro forma financial information of the
Company for the fiscal year ended March 31, 1997 and the six months ended
September 30, 1997. The historical information contained in the table for the
fiscal years ended March 31, 1995, 1996 and 1997 has been derived from audited
financial statements, and is qualified in its entirety by, and should be read in
connection with "Management's Discussion and Analysis of Financial Condition and
Results of Operations", the audited financial statements (and notes thereto) and
other financial and statistical information of the Predecessor Company appearing
elsewhere in this Prospectus. The historical statements of operations, cash flow
and other financial data as of and for the years ended March 31, 1993 and 1994
and for the six months ended September 30, 1996 and 1997, have been derived from
unaudited financial statements. The financial statements as of September 30,
1997 and for the six month periods ended September 30, 1996 and 1997 are
unaudited; however, in the opinion of management all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of the
financial statements for the interim periods have been made. The historical
financial statements as of and for the six month period ended September 30, 1997
include a nonrecurring charge related to a settlement of excise tax assessments
with the Internal Revenue Service. The results of interim periods are not
necessarily indicative of the results to be obtained in a full fiscal year. The
accompanying pro forma unaudited statement of operations, cash flow and other
financial data reflect the effects of the Acquisition, the related equity
financing, and related expenses, costs and fees as if such transactions occurred
on April 1, 1996 (the beginning of the Predecessor Company's fiscal year). The
accompanying pro forma unaudited balance sheet data is adjusted to give effect
to the Acquisition and the other Closing Transactions as if they had occurred on
September 30, 1997.
Year Ended
March 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Amounts in thousands, except share and earnings per share data)
Statement of
Operations Data:
Net sales ........................ $ 7,245 $ 17,551 $ 33,407 $ 42,538 $ 22,356
Gross profit ..................... 1,160 1,406 2,696 8,565 5,329
Selling, general and
administrative ................. 839 861 1,149 3,082 2,510
Amortization of
goodwill ....................... -- -- -- -- --
Operating income ................. 321 545 1,547 5,482 2,818
Excise tax settlement(5) ......... -- -- -- -- --
Interest expense ................. 442 342 339 118 --
Interest expense related to
Bridge Notes(6) ................ -- -- -- -- --
Income (loss) before
income taxes and
extraordinary gain ............. (121) 172 1,282 5,449 2,896
Net income (loss) ................ $ (93) $ 103 $ 784 $ 3,344 $ 1,728
Preferred stock
dividends ...................... -- -- -- -- --
Earnings (loss)
attributable to Common
Stockholders ................... (93) 103 784 3,344 1,728
Primary and fully diluted
earnings (loss) per share(3) .. $ (.06) $ .06 $ .49 $ 2.09 $ 1.08
Weighted average
common and common
equivalent shares
outstanding(3):
Primary and fully diluted ......... 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000
Statement of Cash Flow Data:
Net cash provided by
(used in) operating
activities ..................... $ 719 $ 592 $ 2,254 $ 2,870 $ 547
Net cash provided by
(used in) investing
activities ..................... (158) 63 (600) 325 (471)
Net cash provided by (used
in) financing activities ....... (494) (676) (2,176) (2,225) --
Other Financial Data:
Ratio of earnings to
combined fixed charges
and preferred stock
dividends ...................... .74 1.46 4.46 33.1 47.7
EBITDA(4) ........................ $ 646 $ 881 $ 1,853 $ 5,709 $ 3,020
Acquisition of property
and equipment
(use of cash) ................... (158) (41) (136) (139) (171)
- -------------
Footnotes on Page 8
Pro Forma,
As Adjusted(2)
-----------------------
Six Months Ended Six Months
September 30, Year Ended Ended
----------------------- March 31, September
1996 1997(1) 1997 30, 1997
---- ------ ------- ---------
(Amounts in thousands, except share and earnings per share data)
Statement of
Operations Data:
Net sales ........................ $ 8,781 $ 11,170 $ 22,356 $ 11,170
Gross profit ..................... 1,835 2,290 5,057 2,300
Selling, general and
administrative ................. 1,073 675 1,917 867
Amortization of
goodwill ....................... -- -- 790 395
Operating income ................. 762 1,615 2,350 1,038
Excise tax settlement(5) ......... -- 829 -- --
Interest expense ................. -- -- 345 172
Interest expense related to
Bridge Notes(6) ................ -- 172 -- --
Income (loss) before
income taxes and
extraordinary gain ............. 794 646 2,082 898
Net income (loss) ................ $ 468 $ 310 $ 1,111 $ 530
Preferred stock
dividends ...................... -- -- 1,020 510
Earnings (loss)
attributable to Common
Stockholders ................... 468 310 91 20
Primary and fully diluted
earnings (loss) per share(3) .. $ .29 $ .19 $ .03 $ .01
Weighted average
common and common
equivalent shares
outstanding(3):
Primary and fully diluted ......... 1,600,000 1,600,000 2,716,000 2,716,000
Statement of Cash Flow Data:
Net cash provided by
(used in) operating
activities ..................... $ 828 $ (903) $ 547 $ (903)
Net cash provided by
(used in) investing
activities ..................... (154) (397) (19,903) (397)
Net cash provided by (used
in) financing activities ....... -- 325 21,000 325
Other Financial Data:
Ratio of earnings to
combined fixed charges
and preferred stock
dividends ...................... -- 4.20 1.18 1.05
EBITDA(4) ........................ $ 860 $ 893 $ 3,341 $ 1,540
Acquisition of property
and equipment
(use of cash) ................... (67) (136) (171) (136)
- --------------------------------------------------------------------------------
7
- --------------------------------------------------------------------------------
September 30, 1997
-------------------------
March 31, Unaudited
--------------------------------------------------- Historical Pro Forma, As
1993 1994 1995 1996 1997 (1) Adjusted (2)
------ ------ ------ ------ ------ ---------- -------------
(Amounts in thousands)
Balance Sheet Data:
Cash and Cash Equivalents . 37 15 512 1,482 1,558 583 1,899
Accounts Receivable, net .. 142 1,218 503 751 2,536 1,685 1,685
Inventory ................. 3,274 3,172 5,165 3,341 3,515 5,875 6,225
Property and Equipment,
net ...................... 1,268 1,045 949 946 994 1,064 1,064
Capitalized Acquisition
and Financing Costs ....... -- -- -- -- -- 792 92
Goodwill .................. -- -- -- -- -- -- 16,499
Current Liabilities
(excluding debt) ........ 882 2,056 3,288 1,464 2,093 3,643 3,492
Total Debt (including
current) ................ 3,699 3,113 2,373 -- -- 325 3,450
Stockholders' Equity ...... 1,264 1,367 2,151 5,495 7,222 7,533 21,463
- -------------
(1) Includes the financial position and operations of Standard and Ajax. The
September 30, 1997 balance sheet of Standard was comprised of Capitalized
Acquisition and Financing Costs of $792, accrued expenses of $639, short
term Bridge Notes of $325 and an accumulated deficit of $172. Results of
operations are comprised solely of $172 of interest expense for the six
months ended September 30, 1997.
(2) Pro forma, as adjusted amounts reflect the statement of operations and cash
flow data, balance sheet data and other financial data of the Predecessor
Company after giving effect to the Acquisition and the other Closing
Transactions, and the sale of the Securities offered hereby at the assumed
price of $10.00 per share for the Common Stock and $12.00 per share for the
Preferred Stock, in the manner described under "Unaudited Selected Pro
Forma Financial Data."
(3) "Primary and fully diluted earnings (loss) per share" and the "Weighted
average common and common equivalent shares outstanding" data assume the
Predecessor Company had 1,600,000 shares of Common Stock outstanding during
all periods presented. Such number of shares reflects the capitalization of
the Company prior to the Acquisition.
(4) As used herein, EBITDA reflects net income (loss) increased by the effects
of interest expense, income tax provisions, depreciation and amortization
expense. EBITDA is used by management, along with other measures of
performance, to assess the Company's financial performance. EBITDA should
not be considered in isolation or as an alternative to measures of
operating performance or cash flows pursuant to generally accepted
accounting principles. EBITDA, pro forma, as adjusted, reflects the effects
of amortizing preliminary goodwill and other pro forma adjustments. See
"Unaudited Selected Pro Forma Financial Data."
(5) Represents the effects of a nonrecurring charge related to Ajax's
settlement of excise tax assessments.
(6) Upon closing of this Offering, the Company will issue to the holders of the
Bridge Notes a number of shares of Common Stock. The Company incurs a
charge to operations (approximately $325) during the period that the Bridge
Notes are outstanding related to this issuance.
- --------------------------------------------------------------------------------
8
RISK FACTORS
The Securities offered hereby are speculative and involve a high degree of
risk. An investment should only be made by investors who can afford the loss of
their entire investment. Accordingly, prospective investors, before making an
investment, should carefully consider the following risk factors:
Risks of the Acquisition
The Company will commence operations upon the consummation of the
Acquisition of Ajax upon the closing of this Offering. There can be no
assurance, however, that any benefits will be achieved or that the results of
Ajax prior to the Acquisition will be improved upon. In addition, Carl Massaro,
the President and Chief Executive Officer of Ajax, will resign from those
positions upon consummation of the Acquisition, and become a consultant to the
Company. Although Carl Massaro's position will be filled by his son, Karl
Massaro, Ajax's Vice President and General Manager since 1991, there can be no
assurance that the management of the Company and Ajax will be successfully
combined, or that the new management will collectively have the necessary
experience to operate the Company. The process of combining the organizations
could cause the interruption of, or a loss of momentum in, the activities of
part or all of the Company's business, which could have an adverse effect on the
Company.
Limited Recourse Against Selling Shareholder
Pursuant to the Stock Purchase Agreement, Carl Massaro's obligation to
indemnify the Company for breaches of his representations and warranties therein
is, with certain exceptions, limited to $2.0 million. Consequently, the Company
will have no recourse against Mr. Massaro for claims in excess of such amount.
Incurring Additional Indebtedness and Issuing New Securities
In connection with the Acquisition of Ajax the Company will become
indebted to Carl Massaro in an amount estimated to be $3,450,000, based upon the
results of operations of Ajax through September 30, 1997, and which amount may
increase to up to $4,000,000 based upon the results of operations of Ajax
through the Closing Date. In addition, to consummate the Acquisition the Company
will issue the Common Stock and Convertible Preferred Stock offered hereby. The
Convertible Preferred Stock has an annual dividend requirement of $1,020,000
($1,173,000 if the Over-allotment Option is exercised in full; assuming a public
offering price of $12.00 per share of Convertible Preferred Stock).
Inadequate Dividend Coverage
The annual dividend requirement on the Convertible Preferred Stock is
$1,020,000 ($1,173,000 if the Over-allotment Option is exercised in full;
assuming a public offering price of $12.00 per share of Convertible Preferred
Stock). The future earnings of the Company, if any, may not initially be
adequate to pay the dividends on the Convertible Preferred Stock, and, although
the Company will pay quarterly dividends out of available capital surplus, there
can be no assurance that the Company will maintain sufficient capital surplus or
that future earnings, if any, will be adequate to pay the dividends on the
Convertible Preferred Stock. Under the Delaware General Corporation Law,
dividends may be paid only out of legally available funds. Failure to pay any
quarterly dividend will result in a reduction in the conversion price and
failure to pay a total of four consecutive quarterly dividends will entitle the
holders of the Convertible Preferred Stock, voting separately as a class, to
elect two directors. In addition, no dividends or distributions may be declared,
paid or made if the Company is or would be rendered insolvent by virtue of such
dividend or distribution. See "Dividend Policy" and "Description of
Securities--Convertible Preferred Stock."
Significant Leverage
On the Closing Date of this Offering and of the Acquisition, the Company
will have up to $4,000,000 in long-term indebtedness outstanding, consisting of
the Redemption Note, and related annual interest expense of up to $400,000. As a
result, the Company will be significantly leveraged and will have indebtedness
that is substantial in relation to its stockholders' equity. In contrast, at
March 31, 1995, 1996 and 1997 and September 30, 1997 (historical) and September
30, 1997 (pro forma, as adjusted), the Company had a ratio of indebtedness to
total capitalization of 2.43:1, .27:1, .53:1, and .32:1, respectively. For the
fiscal years ended March 31, 1995, 1996 and 1997, and the six months ended
September 30, 1997, the net increase (decrease) in cash and cash equivalents of
the
9
Company was $(522,837), $970,153, $76,329 and $(975,330), respectively. The
ability of the Company to make principal and interest payments will depend on
future performance, which is subject to many factors, some of which will be
outside the Company's control. In addition, the Redemption Note will be secured
by substantially all of the assets of the Company. In the case of a continuing
default by the Company under the Redemption Note, Mr. Carl Massaro will have the
right to foreclose on the Company's assets, which would have a material adverse
effect on the Company. Payment of principal and interest on such indebtedness
may limit the Company's ability to pay dividends to shareholders. The Company's
leverage may also adversely affect the ability of the Company to finance its
future operations and capital needs, may limit its ability to pursue other
business opportunities and may make its results of operations more susceptible
to adverse economic conditions. See "The Acquisition."
Additional Capital Requirements
Almost the entire proceeds of this Offering (assuming no exercise of the
Over-allotment Option) will be used to pay the Purchase Price of the Acquisition
and repay the Bridge Notes. As a result the Company may require additional
capital to expand its operations. The Company contemplates that it may seek to
expand its operations and product lines, which might require significant
modifications to and modernization of the Company's facilities and the
establishment of new manufacturing facilities outside the territory served by
the Company's current facility and the acquisition of companies in the trailer
chassis industry or related industries. Any such expansion would likely require
that the Company raise additional financing either in the form of debt or
equity. There can be no assurance that any such financing will be available to
the Company on favorable terms, if at all. Further, there can be no assurance
that the Company will be able to service its existing indebtedness or any debt
it may hereafter incur in connection with the expansion of its operations. If
the Company were to seek to raise additional equity, its then existing
shareholders would suffer dilution to their interests.
Absence of Principal Shareholder
Historically, the Company has obtained money and achieved other financial
accommodations through arrangements guaranteed by Mr. Carl Massaro. After the
Closing Date, the Company will no longer be able to rely upon Mr. Massaro's
credit when seeking to borrow money or obtain other financial accommodations.
Following the completion of this Offering, management intends to seek to obtain
bank credit facilities for the Company; however, the Company does not currently
have any specific plans or arrangements with respect to obtaining such
facilities. The fact that the Redemption Note will be secured by substantially
all of the assets of the Company may make it more difficult for the Company to
obtain such credit facilities.
Risks Associated with Rapid Expansion and Acquisitions
The Company's proposed expansion is expected to place a strain on its
management, administrative, operational, financial and other resources. The
Company's expansion will be largely dependent upon its ability to maintain its
operating margins, successfully market new products, hire and retain skilled
management, marketing and other personnel and successfully manage growth
(including monitoring operations, controlling costs and maintaining effective
management and credit controls). The Company has limited experience in
effectuating rapid expansion and in managing a broader range of new services and
operations which are geographically dispersed. There can be no assurance that
the Company will be able to successfully expand its operations or manage growth.
To date, the Company's customer base has been concentrated in the Northeastern
United States. The Company's growth prospects will be significantly affected by
its ability to achieve greater penetration in new and existing geographic areas.
The Company's prospects could be adversely affected by a decline in the trucking
and shipping industry in general or in particular geographic markets or related
market segments, which could result in reduction or deferral of expenditures by
prospective customers. While the Company regularly evaluates possible
acquisition opportunities, as of the date of this Prospectus, the Company has no
plans, agreements, commitments, understandings or arrangements with respect to
any such acquisition. There can be no assurance that the Company will ultimately
effect any acquisition or that the Company will be able to successfully
integrate into its operations any business which it may acquire. Any inability
to do so, particularly in instances in which the Company has made significant
capital investments, would have a material adverse effect on the Company.
10
The Company may determine, depending upon the opportunities available to
it, to seek additional debt or equity financing to fund the cost of continuing
expansion. To the extent that the Company finances an acquisition with a
combination of cash and equity securities, any such issuance of equity
securities would result in dilution to the interests of the Company's
shareholders. Additionally, to the extent that the Company incurs indebtedness
or issues debt securities in connection with any acquisition, the Company will
be subject to risks associated with incurring additional indebtedness and there
can be no assurance that cash flow will be sufficient to repay any such
indebtedness. See "Use of Proceeds" and "Business--Business of the
Company--Business Strategy."
Risks of New Products
The Company has recently begun to manufacture and market a new line of
sanitary containers, known as "roll-off" dumpsters. The Company may consider
manufacturing this product for inventory rather than upon receipt of customer
purchase orders. There can be no assurance that the Company will be able to
commercially exploit this new container line or any other new product. If it is
not able to do so, the Company will incur a loss with regard to any unsold
inventory.
Dependence on Trucking and Shipping Industries
The container chassis and marine container manufacturing industries and
related industries are dependent on the demand for their products from the
trucking and shipping industries. Unit sales of new container chassis have
historically been subject to substantial cyclical variation. Future economic
downturns, increases in the utilization rate of existing container chassis or
cyclical decreases in demand for marine cargo containers would likely have a
materially adverse effect on the Company. Similarly, downturn or cyclical
decreases in demand for container chassis would likely have a materially adverse
effect on the Company. See "Business--Industry Overview."
Reliance on Small Number of Customers
Due to the nature of the heavy-duty trailer chassis and container
industries, the available pool of potential customers is limited. The Company's
two largest customers, Trac Leasing and Ned Lloyd, accounted for a total of 90%
(57% and 33%, respectively), of the Company's total net sales for the year ended
March 31, 1997. The Company does not have a long-term contract with either of
these customers as sales are made pursuant to purchase orders. The loss of any
of such major customers could have a material adverse effect on the business of
the Company, its financial condition, and its future operating results. See
"Business--Business of the Company--Major Customers."
Dependence on One Manufacturing Site
All of the Company's products are manufactured at the Company's
Hillsborough Township, New Jersey facility. The Company leases the facility from
Mr. Carl Massaro. Long-term interruption in the operation of this plant, from
labor strikes or disputes, a natural disaster or other cause, whether or not
covered by insurance, could have a materially adverse effect on the Company. See
"Business--Business of the Company--Facilities and --Insurance."
Competition
The chassis and container manufacturing industries are highly competitive
and barriers to entry are relatively low. The Company directly competes with
Strick Corporation, Hyundai Mexico and Monon, three other manufacturers of new
trailer chassis, each of which has greater financial resources and higher sales
than the Company. Furthermore, the Company's products compete with alternative
forms of shipping, such as truck trailers, which the Company believes to have
experienced recent rapid growth in usage. There can be no assurance that the
Company will be able to continue to compete effectively with existing or
potential competitors or alternative forms of shipping. See "Business--Business
of the Company--Competition for the Manufacture of New Chassis."
Control by Management and Principal Stockholders
Upon completion of this Offering, the directors and officers of the
Company will own, as a group, shares equal to approximately 42% of the
outstanding shares of the Company's Common Stock, assuming no conversion of the
Convertible Preferred Stock, 31% assuming full conversion of such stock (40% and
30%, respectively if the Over-
11
allotment Option is exercised in full). As a result, management may be able to
elect the entire Board of Directors and control all matters requiring
stockholder approval. This concentration may also have the effect of delaying or
preventing a change in control of the Company. See "Management" and "Principal
Shareholders."
Dependence on Key Employees and Qualified Personnel
The Company's success is dependent in large measure on the efforts and
abilities of its executive officers, including Karl Massaro, its President, and
Steven Merker, its Chief Financial Officer. Upon closing of this Offering the
Company will enter into three year Employment Agreements with Karl Massaro and
Steven Merker. Although the Company will, prior to the Closing Date, obtain a $2
million "key man" insurance policy on the life of Karl Massaro, the loss of
either of these executive officers could have a materially adverse effect on the
Company. The future success of the Company will also depend in large part on its
ability to attract and retain talented management and skilled employees. There
can be no assurance that the Company can retain its key employees or that it can
attract and retain qualified personnel in the future. See "Business--Business of
the Company--Employees" and "Management."
Potential Adverse Effect of Government Regulation
Trailer chassis and container length, height, width, gross vehicle weight
and other specifications are regulated by the National Highway Traffic Safety
Administration and individual states. Historically, changes and anticipated
changes in these regulations have resulted in significant fluctuations in demand
for new trailer chassis and containers thereby contributing to industry
cyclicality. The Company's manufactured chassis are also subject to federal
excise taxes. Changes or anticipation of changes in these regulations or in
applicable tax laws may have a materially adverse impact on the Company's
manufacturing operations and sales.
Notice of Violation of Federal and State Air Quality Regulation
The New Jersey Department of Environmental Protection ("NJDEP"), which
administers Title V of the federal Clean Air Act in New Jersey, requires the
Company to obtain an air emission permit under Title V thereof (a "Title V
Permit") limiting 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 Company's
equipment that requires Title V permitting includes three paint spray booths,
three natural gas fired heaters and two shot blaster systems.
On March 13, 1997 the NJDEP issued two Notices of Violations, which
asserted that the Company had failed to obtain permits for the shot blasters
prior to February 5, 1997 and for the heaters for the paint spray booths. The
Company submitted permit applications for the heaters on March 26, 1997, which
are pending. On May 8, 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. The NJDEP could make further assessments with respect to other years
in which the allowable VOC limits were exceeded by the Company, although no
other assessments have yet been received.
The Company anticipates that it will exceed its permissible limits for VOC
emissions during 1997. The Company is presently preparing an amendment to its
Title V Permit application proposing that the Company and NJDEP enter into a
Administrative Consent Order or other form of agreement (a "Compliance
Schedule") as to VOC emissions from the three paint spray booths at the
facility. The Company plans to propose a timetable by which it will change its
primer and topcoat paint formulations from current, solvent based products that
generate high amounts of VOC upon drying to water-based and lower-solvent based
primers and topcoats, which would generate lower amounts of VOC upon drying. The
Company believes that such change is technically feasible and that by making
such change, the Company will reduce VOC emissions to levels allowable under the
Company's present permits while allowing the Company to produce numbers of
completed chassis comparable to those produced in recent years. The Company has
been advised by paint manufacturers that water-based primers and lower-VOC
topcoat paints are available and 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 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
12
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 5, 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 $2,000,000 or more. The Company
does not have allowances accrued for fines that may be assessed in respect of
its air quality violations or for potential purchases of any capital equipment
that may be mandated by the NJDEP or otherwise be necessary to avoid future
violations.
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 would have to bear the entire cost of any such capital
improvements subject to Carl Massaro's obligations under the Stock Purchase
Agreement to indemnify the Company for all environmental liability up to an
aggregate of $250,000. See "Business--Business of the Company--Violation of
Federal and State Air Quality Regulation."
Other Environmental and Regulatory Compliance
General
The Company is subject to Federal, state and local laws and regulations
relating to its operations, including building and occupancy codes, occupational
safety and environmental laws, and laws governing the use, discharge and
disposal of hazardous materials. Except as described above with regard to air
quality regulation and as described below, the Company is not aware of any
material non-compliance with any such laws and regulations. However, a Phase I
Environmental Site Assessment, prepared at the Company's request by a private
environmental consulting firm (the "Phase I Report"), and additional
investigation by such firm, has identified the matters described below for
additional compliance assessment. The Company is a manufacturer of truck
trailers and is covered by Standard Industrial Code (SIC) #3715. Companies
covered by SIC Code #3715 are among those companies subject to the New Jersey
Industrial Site Recovery Act ("ISRA"). Pursuant to ISRA, the Company has begun
an investigation for any environmental "Areas of Concern" ("AOCs") that may be
present at the facility. The Company intends to negotiate a standard Remediation
Agreement with NJDEP by which the Company will fulfill its obligations under
ISRA. AOCs, if discovered, could require remediation, which could have a
material adverse effect on the Company. There can be no assurance that such
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 the Company's financial position or results of
operations.
Hazardous Waste Generation
The Phase I Report indicates that the Company's facility is identified in
an environmental data base as a generator of large quantities of solid and/or
liquid hazardous waste within the scope of the Federal Resource Conservation and
Recovery Act (a "RCRA Large Quantity Generator"). RCRA Large Quantity Generators
are subject to quarterly and annual reporting requirements and, among other
things, are required to maintain contingency plans on site and to document the
disposal of applicable hazardous waste. Failure to comply with those
requirements may result in the imposition of potentially significant fines. The
Company believes that it is not an RCRA Large Quantity Generator, and that
identification as such in the data base is in error. The Company presently is
investigating its hazardous waste generator status. Failure to comply with the
Federal Resource Conservation and Recovery Act ("RCRA") may result in regulatory
enforcement proceedings that could result in the imposition of significant fines
on the Company. The imposition of such fines, which may be calculated on a per
diem basis based on the number of days that a company is in violation of RCRA,
could have a material adverse impact on the Company's financial condition or
results of operations.
Superfund Amendments and Re-authorization Act of 1986
Title III of the Superfund Amendments and Re-authorization Act of 1986
("SARA") provides for reporting the use of specified quantities of certain
chemicals. The Company believes it is not currently required to submit SARA
Title III reports. Based on the Phase I Report, the Company is assessing whether
its use prior to 1995 of paints and
13
coatings that contained SARA-reportable chemicals was of a magnitude to which
SARA Title III applied. Failure to comply with SARA Title III reporting
requirements may result in regulatory enforcement proceedings that could result
in the imposition of significant fines on the Company. The imposition of such
fines, which may be calculated on a per diem basis based on the number of days
that a company is in violation of SARA Title III, could have a material adverse
impact on the Company's financial condition or results of operations.
Stormwater Permit
The Company has not obtained, but believes it is required to obtain, a
general stormwater permit in connection with the outdoor storage at its facility
of certain materials and products used and manufactured by the Company. The
Company will apply for such a permit, and based on its application submission,
the NJDEP will determine if the Company must also institute a stormwater
pollution prevention plan.
Storage of Certain Materials
The Company presently maintains on the grounds of its facility a rail car
containing a liquid hardening agent for concrete. While no evidence of leakage
was observed in the Phase I Report, the Company plans to empty the rail car of
its contents in accordance with applicable law.
Indemnification by the Company
Under the Stock Purchase Agreement, the Company is required to indemnify
Carl Massaro for liability in excess of $250,000 that Mr. Massaro may incur in
connection with compliance with the New Jersey Industrial Site Recovery Act and
other environmental laws, with respect to the premises leased by the Company
from Mr. Massaro. The Company would be responsible for any liabilities imposed
above $250,000. The imposition of any such liabilities resulting from a
violation of environmental laws, rules or regulations could have a material
adverse impact on the Company's financial condition or results of operations.
Uncertain Availability of Environmental Risk Insurance
The Company is considering obtaining insurance to cover potential
environmental liabilities, including those outlined above. There can be no
assurance that such insurance coverage is or will be available on terms
favorable to the Company, if at all. If the Company is not able to obtain such
insurance, pursuant to the indemnification described above it will have to bear
the cost of any environmental liabilities to the extent they exceed $250,000. At
present, the possible magnitude of such potential liabilities is largely unknown
and not quantifiable, and could have a materially adverse impact on the
Company's financial condition or results of operations.
Inflation
The Company produces its products upon receipt of confirmed fixed-price
orders. The Company normally does not attempt to negotiate inflation-based price
adjustment provisions into its orders. Consequently, the price of the chassis is
determined at the time an order is accepted. Additionally, competition may limit
the amount by which the Company can increase chassis prices. The Company may
thus have limited ability to pass on cost increases caused by inflation to its
customers on a short term basis.
Variability of Operating Results
The Company's sales, cash flow and net earnings fluctuate considerably
from quarter-to-quarter depending in large part on the availability, timing and
success of individual projects. Consequently, year to year comparisons of
quarterly results may not be meaningful and quarterly results during the course
of a fiscal year may not be indicative of the results for that year. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operation."
Federal Excise Tax Liability
On July 3, 1997, the Internal Revenue Service notified Ajax of a proposed
$1,434,931 increase in federal excise tax liability relating to Ajax's valuation
of tires included in the sale of new chassis for the period from March 1995
through December 1996 and a $286,986 penalty thereon. In November 1997 the
Company and its outside counsel, based on an assessment of preliminary
discussions with the IRS, decided to pursue a settlement agreement. On November
7, 1997 the Company paid approximately $829,000 to settle this matter. The
Company recognized the effects of this settlement as a charge in the six month
period ended September 30, 1997. There can be no assurance that additional
liability will not be assessed for subsequent periods. Pursuant to certain
amendments to the Internal Revenue Code, commencing on January 1, 1998, the
value of such tires will no longer be excluded from the federal excise tax
imposed on such chassis sales. Instead, the amount of federal excise tax imposed
upon the tire
14
manufacturer will be deductible from the excise tax payable by Ajax on the sale
of new chassis. For periods after January 1, 1998, this may result in
significant increases in the federal excise taxes paid by Ajax as compared to
prior periods. See "Business--Litigation."
Dilution
Purchasers of shares of Common Stock in this Offering will experience an
immediate and substantial dilution of $11.72 per share (based on an assumed
initial public offering price of $10.00 per share of Common Stock in this
Offering and no conversion of the Convertible Preferred Stock), or approximately
117% of the purchase price of the shares of Common Stock purchased by them in
this Offering. Purchasers of Convertible Preferred Stock will experience an
immediate and substantial dilution of $10.73 per share (based on an assumed
initial public offering price of $12.00 per share of Convertible Preferred Stock
and conversion into an equal number of Common Shares), or approximately 89% of
the effective purchase price of $12.00 per share of Common Stock. Additional
dilution to future net tangible book value per share may occur upon exercise of
outstanding stock options and warrants (including the Massaro Options and the
Representative's Warrants) and may occur, in addition, if the Company issues
additional equity securities in the future, including issuances of Common Stock
pursuant to the conversion of the Convertible Preferred Stock. Existing
stockholders of the Company acquired their shares of Common Stock for cash
consideration which was substantially less than the initial public offering
price of the shares of Common Stock offered hereby. As a result, new investors
will bear substantially all of the risks inherent in an investment in the
Company. See "Dilution" and "Management--1997 Stock Option Plan."
No Dividends on Common Stock
The Company has never paid any dividends on its Common Stock, and has no
plans to pay dividends on its Common Stock in the foreseeable future.
Furthermore, pursuant to the terms governing the Convertible Preferred Stock,
the Company's Board of Directors may not declare dividends payable to holders of
Common Stock unless and until all accrued cash dividends through the most recent
past quarterly dividend payment date have been paid in full to holders of the
Convertible Preferred Stock. Payment of principal and interest on the Redemption
Note and any other indebtedness that the Company may obtain in the future
pursuant to bank credit facilities or otherwise may limit the Company's ability
to pay dividends to shareholders. In addition, any bank credit facilities that
the Company obtains in the future may contain covenants restricting the payment
of dividends on the Common Stock and the Convertible Preferred Stock. See
"Dividend Policy."
Potential Adverse Effect on Market Price of Securities from Future Sales of
Common Stock
Future sales of Common Stock by stockholders (including option holders)
under Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"),
or through outstanding registration rights granted to the holders of the
Representative's Warrants, could have an adverse effect on the market prices of
the Securities. All holders of the Company's outstanding Common Stock and
securities exercisable for or convertible into Common Stock, have agreed not to,
directly or indirectly, issue, agree or offer to sell, sell, transfer, assign,
distribute, grant an option for purchase or sale of, pledge, hypothecate or
otherwise encumber or dispose of any beneficial interest in such securities
until the expiration of 18 months following the date of this Prospectus and
until such time after the expiration of such 18 months that the closing bid
price of the Common Stock has been at least $18.00 for any 20 trading days
within a period of any consecutive 30 trading days without the prior written
consent of the Representative. Sales of substantial amounts of Common Stock or
the perception that such sales could occur could adversely affect prevailing
market prices for the Convertible Preferred Stock and/or the Common Stock. All
of the shares of Convertible Preferred Stock and all shares of Common Stock
issuable upon conversion of the Convertible Preferred Stock will have been
registered under the Securities Act and, at any time on or after 180 days after
the date hereof, may be converted into up to 1,000,000 additional shares of
Common Stock, all of which are immediately salable. Such sales may further
adversely affect the market price of the Common Stock. See "Shares Eligible For
Future Sale."
Current Prospectus and State Blue Sky Registration Required to Convert
Convertible Preferred Stock
The shares of Common Stock underlying the Convertible Preferred Stock will
be restricted and not freely transferable unless, at the time of conversion, the
Company has a current prospectus covering such shares of Common Stock and such
shares have been registered, qualified or deemed to be exempt under the
securities or "blue
15
sky" laws of the state of residence of the converting holder thereof. There can
be no assurance that the Company will be able to have all of the shares of
Common Stock issuable upon conversion of the Convertible Preferred Stock
registered or qualified on or before the conversion date and will be able to
maintain a current prospectus relating thereto until the redemption of the
Convertible Preferred Stock. The value of the Convertible Preferred Stock may be
greatly reduced if a current prospectus covering the common Stock issuable upon
the conversion thereof is not kept effective or if such Common Stock is not
qualified or exempt from qualification in the states in which the holders of the
Convertible Preferred Stock reside. The Convertible Preferred Stock will be
separately tradeable immediately after this Offering. In the event investors
purchase the Convertible Preferred Stock in the secondary market or move to a
jurisdiction in which the shares underlying the Convertible Preferred Stock are
not registered or qualified during the period that the Convertible Preferred
Stock is convertible, the Company will be unable to issue shares to those
persons desiring to convert their Convertible Preferred Stock unless and until
the shares are qualified for sale in jurisdictions in which such purchasers
reside, or an exemption from such qualification exists in such jurisdictions,
and holders of the Convertible Preferred Stock will have no choice but to
attempt to sell the Convertible Preferred Stock in a jurisdiction where such
sale is permissible or allow them to be redeemed prior to conversion. See
"Description of the Securities--Convertible Preferred Stock."
Effect of Stock Options
In accordance with the Stock Option Plan, the Company has reserved a total
of 340,000 authorized but unissued shares of Common Stock for issuance to
executive employees and directors. The committee administering the Stock Option
Plan will have sole authority and discretion to grant options under the Stock
Option Plan. Options granted will be exercisable during the period specified by
the committee administering the Stock Option Plan except that options may become
immediately exercisable in the event of a Change in Control (as defined in the
Stock Option Plan) of the Company and in the event of certain mergers and
reorganizations of the Company. The existence of such options could limit the
price that certain investors might be willing to pay in the future for shares of
the Company's Common Stock and may have the effect of delaying or preventing a
change in control of the Company. The issuance of additional shares upon the
exercise of such options could also decrease the amount of earnings and assets
available for distribution to the holders of the Securities and could result in
the dilution of voting power of the Securities. See Management--1997 Stock
Option Plan."
Certain Anti-Takeover Provisions and Potential Adverse Effect on Market Price of
Securities from Issuance of Preferred Stock
The Company's Certificate of Incorporation and By-Laws contain certain
provisions that could have the effect of delaying or preventing a change of
control of the Company, which could limit the ability of security holders to
dispose of their Convertible Preferred Stock and/or Common Stock in such
transactions. The Certificate of Incorporation authorizes the Board of Directors
to issue one or more series of preferred stock without stockholder approval.
Such preferred stock could have voting and conversion rights that adversely
affect the voting power of the holders of Convertible Preferred Stock and/or
Common Stock, or could result in one or more classes of outstanding securities
that would have dividend, liquidation or other rights superior to those of the
Convertible Preferred Stock and/or Common Stock. Issuance of such preferred
stock may have an adverse effect on the then prevailing market price of the
Convertible Preferred Stock and/or Common Stock. Additionally, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
Section 203 could have the effect of delaying or preventing a change of control
of the Company. See "Description of Securities--Preferred Stock" and "--Delaware
Law and Certain Provisions of the Certificate of Incorporation and By-Laws."
Possible Issuance of Additional Preferred Stock Senior to the Convertible
Preferred Stock
In addition to the Convertible Preferred Stock, the Company will have
1,500,000 shares of Preferred Stock authorized after the designation of
Convertible Preferred Stock which may be issued with dividend, liquidation,
voting and redemption rights senior to the Convertible Preferred Stock;
provided, however, that any such issuance of senior preferred stock must be
approved by the holders of two-thirds of the outstanding shares of Convertible
Preferred Stock. See "Description of Securities--Convertible Preferred Stock."
16
Adverse Effect of Possible Redemption of Preferred Stock
The Convertible Preferred Stock may be redeemed by the Company in whole
but not in part, at any time on 30 days' prior written notice at the initial
public offering price of the Convertible Preferred Stock plus accumulated and
unpaid dividends, provided the closing bid price of the Common Stock for any 20
trading days within a period of 30 consecutive trading days ending not more than
five trading days prior to the date of notice of redemption equals or exceeds
$_____ per share [180% of the initial public offering price per share of Common
Stock]. The Company may choose to redeem the Convertible Preferred Stock rather
than incur the cost of keeping a registration statement current with the
Securities and Exchange Commission (the "Commission") for the shares of Common
Stock underlying the Convertible Preferred Stock. Redemption or automatic
conversion of the Convertible Preferred Stock could force the holders to convert
the Convertible Preferred Stock at a time when it may be disadvantageous for the
holders to do so, to sell the Convertible Preferred Stock at the then current
market price when they might otherwise wish to hold the Convertible Preferred
Stock for possible additional appreciation and receipt of dividends, or to
accept the redemption price, which is likely to be substantially less than the
market value of the Convertible Preferred Stock at the time of redemption.
No Assurance of Public Trading Market; Arbitrary Determination of Public
Offering Prices
Prior to this Offering, there has been no public market for the
Convertible Preferred Stock or the Common Stock, and there can be no assurance
that an active trading market for any of the Securities will develop or, if
developed, be sustained after this Offering. The initial public offering prices
of the Securities offered hereby and the terms of the Convertible Preferred
Stock have been arbitrarily determined by negotiations between the Company and
the Representatives, and do not necessarily bear any relationship to the
Company's assets, book value, results of operations or any other generally
accepted criteria of value. See "Underwriting."
THE ACQUISITION
The Stock Purchase Agreement
On the Closing Date, the Company will use the proceeds of this Offering to
consummate the acquisition (the "Acquisition") from Mr. Carl Massaro, the
founder and sole stockholder of Ajax, of all of the outstanding capital stock of
Ajax. The Stock Purchase and Redemption Agreement (the "Stock Purchase
Agreement") dated August 11, 1997 between the Company and Mr. Carl Massaro
provides for a purchase price (the "Purchase Price") of $20,625,000 adjusted by
an amount equal to 83.33% of the excess of Ajax's net worth as of the Closing
Date over $4,463,671 (the "Net Worth Adjustment"). The Purchase Price is payable
in cash on the Closing Date by Standard, except that to the extent that the
Purchase Price exceeds $19,903,257, the excess amount up to $4,000,000 is
payable by Ajax pursuant to a three-year promissory note bearing interest at the
annual rate of 10% (the "Redemption Note"), which will be issued in
consideration for stock of Ajax to be redeemed simultaneously with the Closing.
There is no ceiling on the Net Worth Adjustment, and the excess of the Purchase
Price over $23,903,257 is payable in cash by the Company. Promptly after the
closing, Ajax will prepare a balance sheet as of the Closing Date to determine
its net worth as of the Closing Date. Upon final determination of the Closing
Day net worth, appropriate adjustments will be made to the Redemption Note or
cash portion of the Purchase Price. After the Closing Date, Ajax will operate as
a wholly-owned subsidiary of the Company. In November, 1997 the Stock Purchase
Agreement was amended to defer Mr. Massaro's termination rights until January
20, 1998.
The Stock Purchase Agreement contains various customary representations
and warranties by Carl Massaro. With certain exceptions, Mr. Massaro's
obligation to indemnify the Company for a breach of his representations and
warranties is limited to $2 million, and becomes effective if and to the extent
that the amount of such losses exceeds $250,000. In particular, Mr. Massaro's
obligation to indemnify the Company for environmental liability is limited to an
aggregate of $250,000. The Company is required to indemnify Mr. Massaro for such
environmental liability that he may incur in excess of $250,000.
The Stock Purchase Agreement contains restrictive covenants prohibiting
Carl Massaro for the five year period commencing on the Closing Date, from
directly or indirectly owning, having an ownership interest (other than less
than a 2% stock ownership interest in a publicly traded corporation) in,
managing, controlling or being employed by any company that is competitive with
the business of the Company within the United States, from otherwise competing
with the Company and from soliciting the Company's customers and employees.
17
Related Transactions with Carl Massaro
On the Closing Date, the Company will grant Carl Massaro options (the
"Massaro Options") to purchase up to 50,000 shares of Common Stock. The Massaro
Options are initially exercisable at a price of 115% of the initial public
offering price per share of Common Stock. The Massaro Options may be exercised
for a period of four years, commencing at the beginning of the second year after
the Closing Date and are restricted from sale, transfer, assignment or
hypothecation for a period of 12 months from the Closing Date. The Massaro
Options provide for adjustment in the number of shares of Common Stock issuable
upon the exercise thereof and in the exercise price thereof as a result of
certain events, including subdivisions and combinations of the Common Stock.
On the Closing Date, the Company and Carl Massaro will enter into a
three-year consulting agreement providing for annual base compensation of
$160,000 and a "triple net" lease of the factory and office facility owned by
Mr. Massaro and presently occupied by Ajax. The lease will provide for annual
rent of $600,000, payable monthly, and the estimated amount of triple net
expenses for the first year are approximately $63,000, without giving effect to
maintenance expenses currently being paid by Ajax. During the initial five-year
term of the lease, so long as the Company is not in default thereunder or under
the Redemption Note, the Company will have the option to purchase the leased
facility and land for a cash purchase price of $6.5 million. Ajax will also
terminate an existing credit facility with Summit Bank, under which no amounts
will be outstanding on the Closing Date, and Mr. Massaro will terminate his
guaranty of the Company's obligations thereunder. The terms of the lease,
including the purchase option, were determined through arms' length negotiation
between the Company and Carl Massaro. See "Management--Employment Agreements"
and "Business--Business of the Company--Facilities."
Bridge Financing
On August 8, 1997, the Company sold $325,000 in aggregate principal amount
of Bridge Notes to the following third party investors: Gary Dorsi, Thomas
Szemiot, Robert H. Rathauser, Dr. Stephen Jankovic, Ghanshyambhai G. Patel,
Martin R. Lesh, Mark M. Wiener, Abbas K. Shikary, Swayam Prakash, Financial
Merchant Group, Inc., and David Leibman (collectively, the "Bridge Lenders").
Upon closing of this Offering, the Company will repay the principal amount of
the Bridge Notes together with interest thereon at the annual rate of 12% from
the date of issuance and issue to the holders of the Bridge Notes a number of
shares of Common Stock determined by dividing such principal amount by the
initial public offering price per share of the Common Stock offered hereby. The
Company incurs a charge to operations during the period that the Bridge Notes
are outstanding.
18
USE OF PROCEEDS
The net proceeds to be received by the Company from this Offering,
assuming an initial public offering price of $10.00 per share of Common Stock
and $12.00 per share of Convertible Preferred Stock, are estimated to be
approximately $21.4 million (approximately $24.8 million if the Over-allotment
Option is exercised in full). The Company will use almost the entire proceeds of
this Offering to pay the cash portion of the Purchase Price of the Acquisition
due to Mr. Carl Massaro on the Closing Date, to repay approximately $338,000
(including accrued interest), due under the Bridge Notes to the Bridge Lenders,
and to pay expenses of approximately $25,000, $40,000 and $25,000 to Redstone
Capital Corporation, Steven Merker and William Merker, respectively. See
"Certain Transactions." Any balance, and any proceeds received upon the exercise
of the Over-allotment Option will be used for working capital and general
corporate purposes. Pending utilization as described above, the proceeds of this
Offering will be invested principally in United States government securities,
short term certificates of deposit, money market funds or other short-term
interest-bearing investments.
DIVIDEND POLICY
The Company has never declared or paid cash dividends, and does not intend
to pay any dividends in the foreseeable future on its shares of Common Stock.
Pursuant to the terms governing the Convertible Preferred Stock, the Company's
Board of Directors may not declare dividends payable to holders of Common Stock
unless and until all accrued cash dividends through the most recent past
quarterly payment date have been paid in full to holders of the Convertible
Preferred Stock. Earnings of the Company, if any, not paid as dividends to
holders of the Convertible Preferred Stock are expected to be retained for use
in expanding the Company's business. The payment of dividends on the Common
Stock is within the discretion of the Board of Directors of the Company and will
depend upon the Company's earnings, if any, capital requirements, financial
condition and such other factors as are considered to be relevant by the Board
of Directors from time to time. The dividends payable annually on the
Convertible Preferred Stock are $1,020,000 ($1,173,000 if the Over-allotment
Option is exercised in full) [assuming an initial public offering price of
$12.00 per share of Convertible Preferred Stock]. The Company's future earnings,
if any, may not initially be adequate for the payment of dividends on the
Convertible Preferred Stock, in which event such dividends will be paid out of
the Company's then capital surplus (the Company's net assets minus the aggregate
par or stated value of the outstanding shares of the Company's capital stock),
if any. On a pro forma, as adjusted basis, after giving effect to this Offering,
the Company's capital surplus as of September 30, 1997 was $21,459,000. The
payment of dividends and any future operating losses will reduce such capital
surplus, which may adversely affect the Company's ability to continue to pay
dividends on the Convertible Preferred Stock. The failure to pay quarterly
dividends will result in a reduction of the conversion price on the Convertible
Preferred Stock and may in certain circumstances give rise to voting rights to
the holders of such Convertible Preferred Stock and allow them, voting as a
class, to elect two directors. See "Risk Factors--Inadequate Dividend Coverage"
and "Description of Securities--Convertible Preferred Stock."
19
CAPITALIZATION
The following table sets forth: (a) the capitalization of the Predecessor
Company and Standard as if they were combined at September 30, 1997, and (b) the
capitalization of the Company on a pro forma, as adjusted basis, to give effect
to the consummation of the Acquisition, the repayment of the Bridge Notes, the
issuance of 32,500 shares of Common Stock to the holders of the Bridge Notes,
the issuance of the Securities and the receipt of the estimated net proceeds of
this Offering, the initial application of such estimated net proceeds as
described in "Use of Proceeds" and the consummation of the Closing Transactions
without conversion of the Convertible Preferred Stock into Common Stock. See
"The Acquisition" and "Certain Transactions."
September 30, 1997
(in thousands)
--------------------------
(a) (b)
Pro Forma
Historical As Adjusted
---------- -----------
Long-Term Debt ..................................... $ -- $ 3,450
Standard - Bridge Note Payable ..................... 325 --
Stockholders' Equity
AJAX
Ajax Common stock, no par value, 100 shares
authorized, 75 shares issued and
outstanding .................................... 1 --
STANDARD
Common Stock: par value $.001,
10,000,000 shares authorized and
2,900,000 outstanding (Pro Forma
As Adjusted) ................................... -- 3
Preferred Stock: par value $.001,
1,500,000 authorized, no shares
outstanding (Pro Forma As Adjusted) ............ -- --
Convertible Preferred Stock: par value
$.001, 8.5% cumulative dividend;
1,500,000 shares authorized and 1,000,000
shares outstanding (Pro Forma
As Adjusted) ................................... -- 1
Additional Paid in Capital - Convertible
Preferred Stock ................................. -- 10,320
Additional Paid in Capital - Common Stock .......... -- 11,502
Ajax - Retained Earnings ........................... 7,704 --
Standard - (Accumulated Deficit) ................... (172) (363)(c)
------- --------
Total Stockholders' Equity ......................... 7,533 21,463
------- --------
Total Capitalization ............................... $ 7,858 $ 24,913
======= ========
- --------------
(c) Represents principally interest charges incurred in connection with the
settlement of the Bridge Notes.
20
DILUTION
Common Stock
The net tangible book value of the Company and the Predecessor Company as
if they were combined at September 30, 1997 was approximately $7,533,000 or
$4.71 per share of Common Stock, assuming for this purpose there were 1,600,000
shares of Common Stock outstanding. Net tangible book value (deficit) per share
of Common Stock, represents the amount of the Company's total tangible assets
less total liabilities less capital (net of underwriter discounts and offering
costs) attributable to the Convertible Preferred Stock, divided by the number of
shares of Common Stock outstanding at that date. After giving effect to the sale
of the Common Stock, at an assumed initial public offering price of $10.00 per
share and after deducting allocable underwriting discounts and commissions and
estimated offering expenses payable by the Company, and the application of the
net proceeds therefrom as described under "Use of Proceeds," as well as the
issuance of 32,500 shares of Common Stock pursuant to the terms of the Bridge
Notes at no additional cost, the Company's pro forma, as adjusted net tangible
book value (deficit) at September 30, 1997 (assuming no conversion of the
Company's Convertible Preferred Stock) would have been approximately
$(4,981,000) or $(1.72) per share of Common Stock. This represents an immediate
decrease in the net tangible book value per share of Common Stock of $6.43 when
compared to the net tangible book value per common share of the Company and the
Predecessor Company as if they were combined, and an immediate dilution of
$11.72 per share of Common Stock (approximately 117% of the initial public
offering price) to investors purchasing shares of Common Stock in this Offering.
The following table illustrates this per share dilution allocable to the
Company's Common Stockholders (assuming no conversion of the Company's
Convertible Preferred Stock):
Initial public offering price per
share of Common Stock ............................ $10.00
Net tangible book value per share of Common
Stock of Standard and Ajax (Historical)
at September 30, 1997 ............................ $4.71
Pro forma as adjusted net tangible
book value (deficit) per share of
Common Stock at September 30, 1997
after giving effect to the of
Convertible Preferred Stock and the
addition of a pro rata portion of an intangible
prior to the issuance of the Common Stock ....... (4.87)
----
Pro Forma as adjusted net tangible book value
(deficit) decrease per share to the effects
of Acquisition and issuance of Common Stock ...... (1.56)
----
Pro forma as adjusted net tangible book
value (deficit) per share of Stock at
September 30, 1997 after the Acquisition
and this Offering ................................ (1.72)
-------
Dilution per share to new Common Stock investors . $(11.72)
=======
The computations in the table set forth above assume that the
Over-allotment Option is not exercised. If the Over-allotment Option for the
Common Stock is exercised in full, the pro forma net tangible book value
(deficit) at September 30, 1997 allocable to the Company's Common Stock
(assuming no conversion of the Company's Convertible Preferred Stock) would have
been $(3,246,000) or $(1.05) per share of Common Stock, representing immediate
dilution of $11.05 per share or approximately 110% of the initial public
offering price per share of Common Stock.
The following table summarizes, on a pro forma, as adjusted basis, after
giving effect to this Common Stock Offering and the Closing Transactions, the
number of shares purchased from the Company, the total consideration paid and
the average price per share paid by the existing stockholders and by the new
investors:
Total Average
Shares Purchased Consideration Price
------------------ ------------------- Per
Number Percent Amount Percent Share
--------- ------- ------ ----- --------
Existing Stockholders ...... 1,600,000 55.2% $ 2,067 0% $.001
Purchasers of Common Stock . 1,300,000 44.8% 13,000,000 100% $10
--------- ----- ----------- ---
2,900,000 100.0% $13,002,067 100%
========= ===== =========== ---
The information presentabove, with respect to existing stockholders,
assumes no exercise of the Over-allotment Option. In addition, 130,000 shares of
Common Stock and 100,000 shares of Convertible Preferred Stock have been
reserved for issuance upon exercise of the Representative's Warrants, 340,000
shares of Common Stock have been reserved for future issuance upon exercise of
options available for grant pursuant to the Stock Option Plan and 50,000 shares
of Common Stock have been reserved for future issuance upon exercise of the
Massaro Options. The issuance of such shares of Common Stock may result in
further dilution to new investors. See "The Acquisition;" "Management--1997
Stock Option Plan" and "Underwriting."
21
The information set forth above gives no effect to the conversion of the
shares of Convertible Preferred Stock offered hereby. If one assumes conversion
of the Convertible Preferred Stock, (which is not convertible until 180 days
following the date of this Prospectus) the net tangible book value of the
Company's Common Stock as of September 30, 1997, would have been $1.27,
representing dilution to the purchasers of Common Stock offered hereby of $8.73
per share or approximately 87% of the initial public offering price per share of
Common Stock.
Conversion of Convertible Preferred Stock into Common Stock
The net tangible book value (deficit) of the Company at September 30, 1997
was approximately $(4,981,000), or $(1.72) per share of Common Stock, after
giving effect to the Closing Transactions and the sale of the Common Stock
offered hereby. This net tangible book value (deficit) per share represents the
amount of the Company's total tangible assets less total liabilities less
capital attributable to the Convertible Preferred Stock divided by the number of
shares of Common Stock outstanding at that date. After giving effect to the sale
of the Convertible Preferred Stock at an assumed initial public offering price
of $12.00 per share and conversion of the Convertible Preferred Stock into an
equal number of shares of Common Stock (which conversion cannot occur until 180
days after the date of this Prospectus), and after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, and the application of the net proceeds therefrom as described under
"Use of Proceeds," as well as the issuance of 32,500 shares of Common Stock
pursuant to the terms of the Bridge Notes at no additional cost, the Company's
pro forma, as adjusted net tangible book value at September 30,1997 would have
been $4,964,000 or $1.27 per share of Common Stock. This represents an immediate
decrease in the net tangible book value of $(3.44) per share to existing Company
stockholders and an immediate dilution of $10.73 per share (or approximately
89%) to new Convertible Preferred Stock investors who elect to convert shares
into Common Stock. The following table illustrates this per share dilution:
Weighted average initial public
offering price per common
share and equivalents ............................ $12.00
Net tangible book value per common
share and equivalents of Standard
and Ajax (Historical) at September 30,
1997 before this Offering ........................ $4.71
Decrease in net tangible book value
per common share and equivalents
attributable to new investors .................... (3.44)
-----
Pro forma, as adjusted, net tangible
book value per common share and equivalents
after this Offering .............................. 1.27
------
Dilution in net tangible book value per
common share and equivalents to new investors .... $10.73
======
The computations in the table set forth above assume that the
Over-allotment Option for the Common Stock and the Convertible Preferred Stock
are not exercised. If the Over-allotment Option is exercised in full, the pro
forma net tangible book value at September 30, 1997 would have been $8,302,000
or $1.96 per share of Common Stock, as converted representing an immediate
dilution of $10.04 per share of Common Stock or 84% per share.
The following table summarizes, on a pro forma, as adjusted basis, after
giving effect to this Offering and the Closing Transactions, the number of
shares purchased from the Company, the total consideration paid and the average
price per share paid by the existing stockholders and by the new investors:
Shares Purchased Total Consideration Average
----------------------- ----------------------- Price
Number Percent Amount Percent Per Share
--------- ------- ------------ -------- ---------
Existing Stockholders ........................ 1,600,000 41.0% $ 2,067 0% $ .001
Purchasers of Common Stock ................... 1,300,000 33.3% 13,000,000 52% $10.00
Purchasers of Convertible Preferred Stock .... 1,000,000 25.7% 12,000,000 48% $12.00
--------- ----- ----------- ---
3,900,000 100.0% $25,002,067 100%
========= ===== =========== ===
The information presented above, (i) assumes conversion of the Convertible
Preferred Stock into an equal number of shares of Common Stock (which conversion
cannot occur until 180 days after the date of this Prospectus) and (ii) with
respect to existing stockholders, assumes no exercise of the Over-allotment
Option. In addition, 130,000 shares of Common Stock and 100,000 shares of
Convertible Preferred Stock have been reserved for issuance upon exercise of the
Representatives' Warrants, 340,000 shares of Common Stock have been reserved for
future issuance upon exercise of options available for grant pursuant to the
Stock Option Plan and 50,000 shares of Common Stock have been reserved for
future issuance upon exercise of the Massaro Options. The issuance of such
shares of Common Stock may result in further dilution to new investors. See "The
Acquisition;" "Management--1997 Stock Option Plan" and "Underwriting."
22
SELECTED FINANCIAL DATA
The following table sets forth for the periods indicated and at the dates
indicated summary historical financial information of Standard and the
Predecessor Company. Historical financial statements as of and for the six month
period ended September 30, 1997 include the financial position and operating
results of Standard and Ajax, as if these entities were combined as of and for
that period. Standard had no operating results prior to the six month period
ended September 30, 1997. The historical information contained in the table for
the fiscal years ended March 31, 1995, 1996 and 1997 has been derived from
audited financial statements, and is qualified in its entirety by, and should be
read in connection with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", the audited financial statements (and
notes thereto) and other financial and statistical information of the
Predecessor Company appearing elsewhere in this Prospectus. The historical
information as of and for the years ended March 31, 1993 and 1994 and the six
months ended September 30, 1996 and 1997 have been derived from unaudited
financial statements. The financial statements as of September 30, 1997 and for
the six month periods ended September 30, 1996 and 1997 are unaudited; however
in the opinion of management all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of the financial
statements for the interim periods have been made. The results of interim
periods are not necessarily indicative of the results to be obtained in a full
fiscal year.
Six Months Ended
Year Ended March 31, September 30,
--------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1996 1997(1)
---- ---- ---- ---- ---- ---- ------
(Amounts in thousands, except share and earnings per share data)
Statement of Operations Data:
Net sales ................................ $ 7,245 $ 17,551 $ 33,407 $ 42,538 $ 22,356 $ 8,781 $ 11,170
Gross profit ............................. 1,160 1,406 2,696 8,565 5,329 1,835 2,290
Selling, general and administrative ...... 839 861 1,149 3,082 2,510 1,073 675
Amortization of goodwill ................. -- -- -- -- -- -- --
Operating income ......................... 321 545 1,547 5,482 2,818 762 1,615
Excise tax settlement .................... -- -- -- -- -- -- 829
Interest expense ......................... 442 342 339 118 -- --
Interest expense related to
Bridge Notes (4) ...................... -- -- -- -- -- -- 172
Income (loss) before income taxes and
extraordinary gain .................... (121) 172 1,282 5,449 2,896 794 646
Net income (loss) ........................ $ (93) $ 103 $ 784 $ 3,344 $ 1,728 $ 468 $ 310
Preferred stock dividends ............... -- -- -- -- -- -- --
Earnings (loss) attributable to Common
Stockholders .......................... (93) 103 784 3,344 1,728 468 310
Primary and fully diluted earnings (loss)
per share(2) .......................... $ (.06) $ .06 $ .49 $ 2.09 $ 1.08 $ .29 $ .19
Weighted average common and common
equivalent shares outstanding(2):
Primary and fully diluted ............... 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000
Statement of Cash Flow Data:
Net cash provided by (used in) operating
activities ............................ $ 719 $ 592 $ 2,254 $ 2,870 $ 547 $ 828 $ (903)
Net cash provided by (used in) investing
activities ............................ (158) 63 (600) 325 (471) (154) (397)
Net cash provided by (used in)
financing activities .................. (494) (676) (2,176) (2,225) -- -- 325
Other Financial Data:
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends ......... .74 1.46 4.46 33.1 47.7 -- 4.20
EBITDA(3) ................................ $ 646 $ 881 $ 1,853 $ 5,709 $ 3,020 860 893
Acquisition of property and equipment
(use of cash) ......................... (158) (41) (136) (139) (171) (67) (136)
Balance Sheet Data:
Cash and Cash Equivalents ................ 37 15 512 1,482 1,558 583
Accounts Receivable, net ................. 142 1,218 503 751 2,536 1,685
Inventory ................................ 3,274 3,172 5,165 3,341 3,515 5,875
Property and Equipment, net .............. 1,268 1,045 949 946 994 1,064
Capitalized acquisition and
financing costs ....................... -- -- -- -- -- -- 792
Current Liabilities (excluding debt) ..... 882 2,056 3,288 1,464 2,093 3,643
Total Debt (including current) ........... 3,699 3,113 2,373 -- -- 325
Stockholders' Equity ..................... 1,264 1,367 2,151 5,495 7,222 7,533
- ----------
(1) Includes the financial position and operations of Standard and Ajax. The
September 30, 1997 balance sheet of Standard was comprised of Capitalized
Acquisition and Financing Costs of $792, accrued expenses of $639, short
term Bridge Notes of $325 and an accumulated deficit of $172. Results of
operations are comprised solely of $172,000 interest expense for the six
months ended September 30, 1997.
(2) "Primary and fully diluted (loss) per share" and the "Weighted average
common shares and common equivalent shares outstanding" data assume the
Predecessor Company had 1,600,000 shares of Common Stock outstanding
during all periods presented. Such number of shares reflects the
capitalization of the Company prior to the Closing Date.
(3) As used herein -- EBITDA reflects net income (loss) increased by the
effects of interest expense, income tax provisions, depreciation and
amortization expense. EBITDA should not be considered in isolation or as
an alternative to measures of operating performance or cash flows pursuant
to generally accepted accounting principles.
(4) Upon closing of this Offering, the Company will issue to the holders of
the Bridge Notes a number of shares of Common Stock. The Company incurs a
charge to operations (approximately $325) during the period that the
Bridge Notes are outstanding related to this issuance.
23
UNAUDITED SELECTED PRO FORMA FINANCIAL DATA
The following unaudited pro forma statements of operations and other
financial data are based upon the historical financial statements for the year
ended March 31, 1997 of the Predecessor Company, and the historical financial
statements for the six month period ended September 30, 1997 of Standard and
Ajax, as if they were combined, adjusted to give effect to the Acquisition
(accounted for as a purchase), the other Closing Transactions and the sale of
the Securities offered hereby at the assumed price of $10.00 per share for the
Common Stock and $12.00 per share for the Preferred Stock, as if the Closing
Transactions and the sale of the Securities had occurred at April 1, 1996 (the
beginning of the Predecessor Company's fiscal year). Standard had no operating
results prior to the six month period ended September 30, 1997. The accompanying
unaudited pro forma selected balance sheet data is adjusted to give effect to
the Acquisition, the other Closing Transactions and the sale of the Securities
as if they had occurred on September 30, 1997. The unaudited pro forma selected
statements of operations and other financial data are not necessarily indicative
of the results that would have been obtained if the Acquisition, the other
Closing Transactions and the sale of the Securities had occurred on the dates
indicated or for any future period or date. The pro forma financial data should
be read in conjunction with the Company's historical financial statements and
notes thereto and the historical financial statements of the Predecessor Company
and the notes thereto. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Unaudited Pro Forma Selected Statements of
Operations
Combined Pro forma
Ajax Pro forma Historical As Adjusted
Historical As Adjusted Six Months Six Months
Year Ended Closing Year Ended Ended Closing Ended
March 31, Transactions March 31, September 30, Transactions September 30,
1997 Adjustments 1997 1997 Adjustments 1997
---------- ----------- ---------- ------------ ----------- ------------
( Amounts in thousands, except share and earnings per share data)
Pro Forma, As Adjusted
Statement of Operations
Data
Net sales ..................... $22,356 -- $22,356 $11,170 -- $11,170
Gross profit .................. 5,329 (272)(b,e) 5,057 2,290 10(e) 2,300
Selling, general and ..........
administrative ............. 2,510 (593)(d,e) 1,917 675 192(d) 867
Amortization of goodwill ...... -- 790(a) 790 -- 395(a) 395
Operating income .............. 2,818 (468) 2,350 1,615 (577) 1,038
Excise tax settlement ......... -- -- -- 829 (829)(i) --
Interest expense .............. -- 345(c) 345 172(c) 172
Interest expense related to
Bridge Notes ............... -- -- -- 172 (172)(g) --
Income (loss) before income
taxes and extraordinary
gain ....................... 2,896 (814) 2,082 646 252 898
Net income (loss) ............. 1,728 (617)(f) $ 1,111 $ 310 220(f) $ 530
======= ====== =======
Preferred stock dividends ..... 1,020 (510)
Earnings (loss) attributable to
Common Stockholders ........ $ 91 $ 20
Primary and fully diluted .....
earnings per share(h) $ .03 $ .01
Weighted average common and
common equivalent shares
outstanding:
Primary and fully diluted .... 2,716,000 2,716,000
Notes to Unaudited Pro Forma Selected Statements of Operations
(a) The increase in amortization expense of $790 for the year ended March 31,
1997 and $395 for the six months ended September 30, 1997 relates to the
amortization of goodwill and related costs arising from the Acquisition.
The allocation of preliminary goodwill (i.e., the excess of the Purchase
Price over the book value of Ajax's net assets) and related amortization
expense are subject to adjustment based on the completion of certain
valuations and the consummation of the Acquisition, and assumes an
amortization period of 20 years. A defined lease agreement for the
Company's facilities has yet to be formally executed with Mr. Carl
Massaro. Accordingly, the accounting treatment to be afforded to this
lease has not been determined. For purposes of preparing the Pro Forma, As
Adjusted, Statement of Operations Data, the effects of this contemplated
lease arrangement is treated as an operating lease.
(b) The decrease in gross profit of $287 reflects the effects of the write up
of acquired inventory to fair market value, which was subsequently sold in
the year ended March 31, 1997. The effects of this write up will result in
a charge to the Company in the period subsequent to the Acquisition.
24
(c) The interest expense of $345 and $172 for the year ended March 31, 1997
and the six months ended September 30, 1997, respectively, principally
relates to the Redemption Note.
(d) Historical Selling, General and Administrative Expenses for the year ended
March 31, 1997 are reduced (increased) as a result of the following
conditions and agreements:
Consulting Agreement with Mr. Carl Massaro ............. $423
Employment Agreement with Mr. Karl Massaro ............. 430
Employment Agreement with Mr. Steven Merker ............ (150)
Additional Administrative Salary requirements .......... (175)
Amortization of Massaro Options ........................ (22)
Redundant Administrative Costs ......................... 82
----
$588
====
The effects of these conditions and agreements was to increase Selling,
General and Administrative Expenses by $192 for the six months ended
September 30, 1997. The pro forma adjustments do not encompass bonuses
that may be paid in the future, inasmuch as these amounts are not
presently determinable. However, such amounts may be material to
operations.
(e) Reductions in rent expense of $20 for the year ended March 31, 1997
(allocated $15 to Cost of Sales and $5 to Selling, General and
Administrative Expense) related to the effects of the rent agreement with
Mr. Carl Massaro. The effects were $10 (allocated to Cost of Sales) in the
six months ended September 30, 1997.
(f) The provision for income taxes for the year ended March 31, 1997 and the
six months ended September 30, 1997 were increased (decreased) by $(197)
and $32 respectively, as a result of the net income tax benefits related
to adjustments (a), (c), (d) and (e) at an effective rate of 40%. With
respect to adjustment (b), there is no related tax benefit recognized in
operations for the year ended March 31, 1997.
(g) In connection with the settlement of the Bridge Notes, the Company will
issue 32,500 shares of common stock to the holders of the Bridge Notes.
The assumed issuance price of $10 per share will result in an interest
charge of $325 during the period that the Bridge Notes are outstanding.
The unaudited selected pro forma statements of operations for the year
ended March 31, 1997 and the six months ended September 30, 1997 do not
reflect the effects of this nonrecurring charge. Likewise, the pro forma
adjustments for the six months ended September 30, 1997 do not reflect the
effects of the interest charges related to the Bridge Notes ($172).
(h) In calculating primary earnings per common share, preferred stock
dividends were based on an assumed 1,000,000 shares of Convertible
Preferred Stock outstanding during the year ended March 31, 1997 and the
six months ended September 30, 1997. The proceeds from the sale of
1,116,000 shares of Common Stock represent the funding from Common Stock
issuances necessary to consummate the Acquisition and fund related costs
(in addition to the proceeds from the sale of 1,000,000 shares of
Convertible Preferred Stock).
For purposes of determining primary earnings per share, the convertible
preferred stock is not considered a common stock equivalent. For purposes
of determining fully diluted earnings per share, the effects of such
conversion is anti-dilutive.
(i) The effects of the nonrecurring excise tax settlement have been eliminated
in the pro forma statement of operations for the six months ended
September 30, 1997.
25
Unaudited Pro Forma Selected Balance Sheet Data
Combined Closing Pro Forma
September 30, 1997 Transactions As Adjusted
Historical Adjustments September 30, 1997
----------------- ------------ -----------------
(Amounts in thousands)
Assets:
Cash and Cash Equivalents ............... $ 583 $ 1,316(b,c) $ 1,899
Accounts Receivable ..................... 1,685 -- 1,685
Inventory ............................... 5,875 350(b) 6,225
Other current assets .................... 953 953
------- ------- -------
Total current ......................... 9,096 1,666 10,762
Property & Equipment .................... 1,064 1,064
Other assets ............................ 1,353 (1,261)(b) 92
Intangibles 16,499 16,499
------- ------- -------
Total ................................. $11,513 $16,904 $28,417
======= ======= =======
Liabilities & Stockholders' Equity:
Accounts Payable ........................ $ 1,221 $ 1,221
Accrued Expenses ........................ 551 551
Accrued obligation on Note Settlement ... 151 (151)(c) --
Note payable ............................ 325 (325)(c) --
Income taxes ............................ 891 891
Accrued settlement ...................... 829 -- 829
------- ------- -------
Total current ......................... 3,968 (476) 3,492
Other noncurrent liabilities ............ 12 12
Long term debt .......................... -- 3,450(b) 3,450
------- ------- -------
Total liabilities ..................... 3,980 2,974 6,954
------- ------- -------
Common Stock ............................ 1 2(a)(c) 3
Convertible Preferred Stock ............. -- 1(a) 1
Additional Paid In Capital .............. -- 21,822(a)(c) 21,822
Retained Earnings (Accumulated Deficit) . 7,532 (7,895)(b,c) (363)
------- ------- -------
Total Stockholders' Equity ............ 7,533 13,930 21,463
------- ------- -------
Liabilities & Stockholders' Equity ...... $11,513 $16,904 $28,417
======= ======= =======
Notes to Unaudited Pro Forma Selected Balance Sheet Data
Adjustments to reflect the Closing Transactions as if they had occurred on
September 30, 1997 are as follows:
(a) The issuance of the Securities offered hereby at the assumed price of
$10.00 per share for the Common Stock and $12.00 per share for the Preferred
Stock, for aggregate proceeds, net of underwriting discounts, of $22,250
(excluding $1,250 in capitalized transaction expenses, see "Use of Proceeds");
(b) The acquisition of Ajax by the Company for $23,326; $19,903 funded by
cash received in (a) with the balance (assuming funding under the Redemption
Note of $3,450) payable in a three year promissory note bearing an interest rate
of 10%; and excess cash of $1,097 reverting to the Company. In connection with
the Acquisition, inventory was written up by $350 to estimated fair market
values, repayments of officer loans of $561 were received, and approximately
$700 of Capitalized Acquisition Costs was reclassified to Goodwill. The
stockholder's equity of Ajax was eliminated in connection with the Acquisition,
which is accounted for as a purchase. The preliminary allocation of the purchase
price related to the Acquisition has been determined as follows (in thousands):
Estimated purchase price ............................ $23,326
Estimated Acquisition related costs ................. 1,200
Net Assets of Ajax at September 30, 1997 ............ 7,705
Write up of inventory to fair market value .......... 350
Other adjustments ................................... (28)
-------
Less: Fair market value of net assets at
September 30, 1997 ................................. (8,027)
-------
Value ascribed to Goodwill .......................... $16,499
=======
The preliminary allocation of the purchase price is based on estimates;
however, management believes that the final allocations will not materially
differ from the allocations noted above.
(c) The principal repayment of $325 to Bridge Note holders (including
accrued interest) and the effects of the issuance of 32,500 shares to Bridge
Note holders. This issuance results in a charge to operations (estimated to
approximate $325; $151 of which was accrued in the Combined Historical Balance
sheet as of September 30, 1997.
(d) Options to purchase 50,000 shares at an exercise price of $________
[115% of the initial public offering price per share] to be issued to Mr. Carl
Massaro have been valued at $1.80 per share. Such value was determined by
management using the Black Scholes option pricing formula and accepted valuation
methodologies. Because such options have been granted to the previous owner of
Ajax in connection with the Acquisition, the value thereof has been recorded as
a deferred charge. The related amortization period is four years.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read together with the
consolidated financial statements and notes thereto included elsewhere herein.
Historical financial statements as of and for the six month period ended
September 30, 1997 include the financial position and operating results of
Standard and Ajax, as if these entities were combined as of and for that period.
Standard had no operating results prior to the six month period ended September
30, 1997. Overview
The Company manufactures and remanufactures trailer chassis. The Company
manufactures and remanufactures all of its chassis to order and revenues are
recognized when the finished product is inspected and accepted by the customer
or its agent. The market for chassis is cyclical and is affected by overall
economic conditions, in particular the needs of the transportation industry.
Remanufacturing existing chassis tends to be counter-cyclical to manufacturing
new chassis. To reduce the effect of industry cyclicality on its business, in
September 1996 the Company began to manufacture roll-off refuse containers.
Sales of such containers comprised less than 1% of the Company's sales for the
year ended March 31, 1997.
Prior to the Acquisition, the Company had no business operations and
engaged in no activities other than those related to its organization, the
negotiation of the Acquisition and obtaining the funds necessary to complete the
Acquisition, including the issuance of the Bridge Notes. Accordingly, the
discussion contained herein relates solely to the operating results and
financial position of Ajax. Simultaneously with the consummation of this
Offering, the Company will consummate the Acquisition and the other Closing
Transactions, and, among other things, Ajax will deliver the Redemption Note to
Carl Massaro.
The Company anticipates that the number of chassis it remanufactures will
increase as compared to the number of new chassis it manufactures as a result of
(i) a contemplated increase in the Company's marketing of its remanufacturing
capabilities, (ii) the potentially large number of purchasers of remanufactured
chassis among the lessors and steamship lines that use the Company's chassis,
(iii) the fact that the container chassis fleet is growing and aging and (iv)
potential regulatory changes affecting the container chassis fleet. The chassis
that the Company remanufactures for a particular customer are provided by that
customer. Results of Operations
The following table sets forth, for the period indicated, certain
components of the Company's Statements of Income expressed in dollar amounts (in
thousands) and as a percentage of net sales (rounded):
Six Months Ended
Year Ended March 31, September 30,
----------------------------------------------------- --------------------------------
1995 1996 1997 1996 1997
--------------- -------------- ---------------- --------------- --------------
Net Sales ................. $33,407 100% $42,538 100% $22,356 100% $8,781 100% $11,170 100%
Costs of Sales ............ 30,711 92% 33,973 80% 17,027 76% 6,946 80% 8,880 80%
Selling, General
and Administrative ........ 1,149 3% 3,082 7% 2,510 11% 1,073 12% 675 6%
Interest Expense .......... 339 1% 118 --% -- --% -- --% 172 2%
Excise tax settlement ..... -- --% -- --% -- --% -- --% 829 7%
Other Income (net) ........ 74 --% 84 --% 77 --% 32 --% 32 --%
Provision for Taxes ....... 498 1% 2,195 5% 1,168 5% 326 4% 336 3%
Extraordinary Gain ........ -- --% 90 --% -- --% -- --% -- --%
Net Income ................ 784 2% 3,344 8% 1,728 8% 468 6% 310 3%
The following discussion provides information regarding the Company's
results of operations for the fiscal years ended March 31, 1995 ("Fiscal 1995"),
March 31, 1996 ("Fiscal 1996") and March 31, 1997 ("Fiscal 1997") and the six
months ended September 30, 1996 and 1997.
Comparison of Six Months Ended September 30, 1997 to Six Months Ended September
30, 1996.
Net Sales. Net sales in the six months ended September 30, 1997, were
$11,170,000 an increase of 27% from net sales of $8,781,000 for the six months
ended September 30, 1996. The increase in net sales reflects an increase in the
six months ended September 30, 1997, of approximately $586,000 in sales of new
chassis and an increase of approximately $662,000 in sales of remanufactured
chassis resulting from an increase in the volume of new and remanufactured
chassis sold in the six months ended September 30, 1997, as compared to the six
months ended September 30, 1996, and continued growth in sales of roll-off
refuse containers and parts, which increased in the six months ended September
30, 1997, by $1,146,000 as compared to net sales in the six months ended
September 30, 1996. During the six months ended September 30, 1997, net sales of
new chassis, remanufactured
27
chassis, spare parts and roll-off containers represented 38%, 47%, 6% and 9% of
net sales, as compared to 41%, 53%, 6% and 0%, respectively, for the six months
ended September 30, 1996.
Cost of Sales. Cost of sales increased to $8,880,000 in the six months
ended September 30, 1997, compared to $6,946,000 for the six months ended
September 30, 1996. The increase in the cost of sales reflects the increase in
net sales; however, in both periods cost of sales remained relatively constant
as a percentage of net sales.
Gross Profit. Gross profit was $2,290,000 in the six months ended
September 30, 1997, an increase of 25% from gross profit of $1,835,000 during
the six months ended September 30, 1996. The increase in gross profit reflects
the fact that the Company's overall margins decreased only slightly as net sales
increased. The Company's ability to maintain its gross margins reflects the
increase in the sale of remanufactured chassis during the first six months of
1997 as compared to the first six months of 1996, as well as the increased
volume of new chassis, which enabled the Company to effectuate economies of
scale in the production of new chassis.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $675,000 during the six months ended
September 30, 1997, a decrease of 37% from the $1,073,000 of SG&A incurred
during the six months ended September 30, 1996. The decrease in SG&A is
primarily attributable to the fact that the Company accrued $568,000 for
officers' incentives during the six months ended September 30, 1996 and accrued
- -$0- in respect of such incentives during the six months ended September 30,
1997. The Stock Purchase Agreement prohibits the payment of officers' incentives
and thus no accrual can be made in the current fiscal year. The decrease in
respect of officers' incentives was partially offset by increases in the six
months ended September 30, 1997, as compared to the six months ended September
30, 1996, of $70,000 in respect of officers' salaries resulting from an increase
in such salaries; $34,000 in office personnel salary resulting from an increase
in office personnel and $30,000 in legal and professional fees. Despite the
increase in net sales, SG&A represented approximately 6% of net sales in the six
months ended September 30, 1997, as compared to 12% of net sales in the six
months ended September 30, 1996.
Total Operating Costs. Total operating costs and expenses were $9,555,000
for the six months ended September 30, 1997, an increase of 19% from the
$8,019,000 of total operating costs and expenses incurred during the six months
ended September 30, 1996. Although total operating costs and expenses increased
during the six months ended September 30, 1997, total operating costs and
expenses were 86% of net sales in the six months ended September 30, 1997, as
compared to 91% of net sales during the year earlier period, reflecting the
increase in the Company's net sales.
Operating Income. Operating income was $1,615,000 during the six months
ended September 30, 1997, an increase of 112% from operating income of $762,000
recorded during the year earlier period. As a percentage of net sales, operating
income increased to 14% of net sales during the six months ended September 30,
1997, from 9% during the earlier period, reflecting operating efficiencies
attained through the increase in the level of the Company's manufacturing
operations.
Other Income (Expense). Other income (expense) for the six months ended
September 30, 1997 included a charge of approximately $829,000 (the effects of
which have been accounted for as a change in estimate) related to the settlement
of an assessment of excise tax liabilities with the Internal Revenue Service. In
November of 1997, based on assessment of information obtained and compiled by
its outside counsel, management decided to pursue a settlement agreement.
Interest Expense. Interest expense was $172,000 during the six months
ended September 30, 1997 compared to $-0- during the six months ended September
30, 1996. The interest expense relates to the issuance of Bridge Notes to third
parties in August 1997. Upon consummation of the initial public offering, the
Company will repay the principal amount of Bridge Notes along with interest
thereon at the annual rate of 12% from the date of issuance and issue holders of
the Bridge Notes a sufficient number of shares of common stock to equal the
principal amount of the Bridge Notes, determined by the initial public offering
price per share of the Company's common stock. The Company incurs a charge to
operations in the period that the Bridge Notes are outstanding. Interest expense
on the anticipated issuance of common stock to Bridge Notes investors (based
upon an estimated issuance date of November 30, 1997) totalled $151,000 for the
six months ended September 30, 1997.
28
Comparison of Fiscal Year Ended March 31, 1997 to Fiscal Year Ended March 31,
1996
Net Sales. Net sales in Fiscal 1997 were $22,356,000, a decrease of 47%
from net sales of $42,538,000 for Fiscal 1996. The decrease in net sales
reflects a shift of the Company's business from the manufacture of new chassis
to the remanufacture of used chassis, and a general slowdown in the trailer
industry. During Fiscal 1997, sales of new chassis represented 60% of total
sales as compared to 82% in Fiscal 1996; the reduction in sales of new chassis
resulted principally from a decrease in the volume of new chassis sold in Fiscal
1997 as compared to Fiscal 1996. In contrast, sales of remanufactured chassis
represented 40% of total sales in Fiscal 1997 as compared to 18% in Fiscal 1996;
the increase in sales of remanufactured chassis resulted from an increase in the
number of remanufactured chassis sold in Fiscal 1997 as compared to Fiscal 1996.
Despite the shift to the remanufacture of used chassis, the Company maintained
its margins in Fiscal 1997 due to the fact that gross profit on a remanufactured
chassis is approximately 85% of gross profit on a new chassis while the
Company's cost to remanufacture a chassis is approximately 62% of the cost to
manufacture a new chassis, reflecting, in part, the lower cost of materials used
to remanufacture a chassis. Sales of refuse containers were not material during
Fiscal 1997, the first year the Company manufactured refuse containers.
Cost of Sales. Cost of sales decreased to $17,027,000 or 76% of net sales
in Fiscal 1997 from $33,973,000 or 80% of net sales in Fiscal 1996. The decrease
in the cost of sales as a percentage of net sales reflects the fact that during
Fiscal 1997 the mix of the Company's business reflected an increase in the sale
of remanufactured chassis.
Gross Profit. Gross profit was $5,329,000 in Fiscal 1997, a decrease of
38% from gross profit of $8,565,000 in Fiscal 1996 due to decreased sales.
Nevertheless, gross profit increased to 24% of net sales in Fiscal 1997 from 20%
of net sales in Fiscal 1996 due to higher margins attributable to the change in
the mix of the Company's products. The Company's decision to shift personnel
from the production of new chassis to the sale of remanufactured chassis
reflects intense price competition for new chassis, which adversely impacted its
gross margins on new chassis.
SG&A. SG&A were $2,510,000 during Fiscal 1997, a decrease of 19% from the
$3,082,000 of SG&A incurred during Fiscal 1996. Although SG&A expenses decreased
from Fiscal 1996 to Fiscal 1997, SG&A represented 11% of net sales during Fiscal
1997 as compared to 7% of net sales during Fiscal 1996. The increase in SG&A as
a percentage of net sales in Fiscal 1997 reflects the relatively constant nature
of the SG&A expenses despite the decrease in the Company's revenues. The
decrease in Fiscal 1997 SG&A principally reflects a reduction in executive
incentive compensation paid of $349,000 due to decreased profitability of the
Company in fiscal 1997. This was partially offset by an increase to $121,000
from $97,000 in the amounts paid to outside professionals. See
"Management--Executive Compensation."
Total Operating Costs. Total operating costs and expenses were $19,537,000
for Fiscal 1997 a decrease of 47% from total operating costs and expenses of
$37,055,000 incurred during Fiscal 1996. Consistent with the decrease in net
sales, total operating costs and expenses as a percentage of net sales remained
relatively constant at 87% for Fiscal 1997 and Fiscal 1996. The consistency of
total operating costs and expenses as a percentage of net sales reflects the
shift in the Company's business from the production of new chassis to the
remanufacture of used chassis. The costs of materials related to the
remanufacture of a chassis are significantly less than those related to the
manufacture of a new chassis. Thus, in Fiscal 1997, when the Company's
operations shifted to the production of remanufactured chassis from the
production of new chassis, the Company's operating costs and expenses decreased
proportionately to the decrease in its net sales.
Operating Income. Operating income was $2,818,000 during Fiscal 1997, a
decrease of 49% from the $5,482,000 of operating income during Fiscal 1996.
Despite the dollar decrease in the Company's operating income, operating income
as a percentage of net sales remained constant primarily as a result of the
shift in the mix of the Company's products to remanufactured chassis.
Interest Expense. Interest expense decreased to $0 in Fiscal 1997 from
$118,000 during Fiscal 1996, reflecting full repayment of all interest bearing
debt.
Comparison of Fiscal Year Ended March 31, 1996 to Fiscal Year Ended March 31,
1995
Net Sales. Net sales for Fiscal 1996 were $42,538,000, an increase of 27%
from net sales of $33,407,000 for Fiscal 1995. The increase in net sales
reflects a substantial increase in the volume of new chassis manufactured during
Fiscal 1996 resulting from an increase in orders and a slight increase in the
average price per new chassis.
29
Cost of Sales. Cost of sales were $33,973,000 in Fiscal 1996, an increase
of 11% from $30,711,000 in Fiscal 1995. Cost of sales as a percentage of net
sales decreased from 92% for Fiscal 1995 to 80% of net sales for Fiscal 1996.
The decrease in cost of sales as a percentage of net sales reflects increased
efficiencies resulting from the increase in the volume of the Company's net
sales as well as decreases in the cost of net sales as a percentage of net sales
resulting from the change in the Company's product mix. The increase in cost of
sales reflects the corresponding growth of sales in the Company's business which
occurred during Fiscal 1996.
Gross Profit. Gross profit was $8,565,000 during Fiscal 1996, an increase
from gross profit of $2,696,000 generated in Fiscal 1995. Further, gross profit
increased to 20% of net sales during Fiscal 1996 from 8% of net sales during
1995, reflecting, in part, improved production efficiency and reduced unit cost.
The proportion of the Company's products sold which were new chassis increased
to 82% in Fiscal 1996 as compared to 70% in Fiscal 1995. The Company's ability
to increase gross profit while increasing the proportion of sales represented by
new chassis reflects an increase in the gross profit derived from the sale of
new chassis resulting from the aforementioned improvement in production and
reduced unit costs and a slight increase in the prices for new chassis.
SG&A. SG&A expenses were $3,082,000 during Fiscal 1996, an increase from
the $1,148,000 incurred during Fiscal 1995. SG&A expenses increased to 7% of net
sales during Fiscal 1996 from 3% of net sales during Fiscal 1995. The increase
in SG&A expenses as a percentage of net sales reflects the increase in executive
compensation of $1,505,000, related to the amounts paid to Carl Massaro and Karl
Massaro and an increase of approximately $127,000 in sales volume related costs
compared to the amount of such costs incurred during Fiscal 1995. The increases
in executive compensation in Fiscal 1996 as compared to Fiscal 1995 reflects the
policy of Carl Massaro, as the shareholder of Ajax, of paying higher incentives
to himself and certain other executives in those years when Ajax generated
higher profits. The increase in rent expense (allocated to cost of sales and
SG&A) resulted from a new agreement between Mr. Massaro and the Company during
1996 that effectively doubled the base rent for the premises occupied by Ajax
from that paid in Fiscal 1995. The base rent, reflecting this increase, is
currently at the same level as that paid in Fiscal 1996.
Total Operating Costs and Expenses. Total operating costs and expenses as
a percentage of net sales decreased to 87% for Fiscal 1996 as compared to 95%
for Fiscal 1995. Consistent with the increase in revenues from Fiscal 1995 to
Fiscal 1996 actual total operating costs and expenses increased 16% to
$37,055,000 for Fiscal 1996 from $31,860,000 for Fiscal 1995. The decrease in
total operating costs and expenses as a percentage of net sales reflects the
substantial increase in the Company's sales volume.
Operating Income. Operating income was $5,482,000 during Fiscal 1996, an
increase of $3,935,000 from the $1,547,000 of operating income generated during
Fiscal 1995 due to an increase in net sales. As a percentage of net sales,
operating income increased to 13% in Fiscal 1996 from 5% of net sales in Fiscal
1995.
Interest Expense. Interest expense was $118,000 during Fiscal 1996, a
decrease of 65% from $339,000 during Fiscal 1995, reflecting debt reduction and
improved operating cash flows.
Liquidity and Capital Resources
Historically, the Company has financed its operations through debt
provided by its sole stockholder and loans from financial institutions. In
addition, to provide the Company with working capital, Carl Massaro varies the
amount of his compensation to reflect the performance of the Company's business.
In 1989, the Company borrowed $300,000 from an officer of Ajax at an interest
rate of 9% with principal to be amortized over a term of 30 years. The Company
repaid the entire balance of this loan in September 1995. In November 1995 the
Company entered into a revolving line of credit agreement with a bank permitting
borrowing up to the lesser of $2,000,000 or the sum of certain inventory and
receivables plus $750,000. As of September 30, 1997 there were no amounts
outstanding on the Company's bank credit facilities. Upon completion of the
Acquisition this facility will be terminated and the Company will seek a new
bank credit facility. The fact that the Redemption Note payable to Carl Massaro
will be secured by substantially all of the Company's assets may make it more
difficult for the Company to obtain a new credit facility.
Capital expenditures, primarily for the acquisition of equipment at the
Company's facility were $171,000, $139,000 and $136,000 in Fiscal 1997, Fiscal
1996 and Fiscal 1995, respectively. The Company anticipates that capital
expenditures during fiscal 1998 will slightly exceed those of the preceding
years as the Company expands
30
its roll-off refuse container business and expands its product line to include
intermodal containers. Nevertheless, the Company could require substantial
additional capital if it were to seek to expand its product lines by
substantially modifying or modernizing its facility, open additional facilities
or acquire a new business within the chassis industry or related industries.
The Company used $578,000 in operating activities during the six months
ended September 30, 1997, as compared to $828,000 provided by operating
activities during the six months ended September 30, 1996. The use of cash in
operating activities during the six months ended September 30, 1997, reflects
primarily an increase of approximately $2,360,000 in the Company's inventory and
a decrease of $564,000 in accounts payable and accrued expenses partially offset
by a decrease of $851,000 in accounts receivable. Net cash used by investing
activities was $397,000 during the six months ended September 30, 1997, as
compared to $153,000 used in investing activities during the six months ended
September 30, 1996. The use of cash in investing activities during the earlier
period reflects a loan of $80,000 to a related party and the application of
$67,000 to the acquisition of property and equipment. The $397,000 used by
investing activities during the six months ended September 30, 1997 reflects a
$261,000 loan by the related party partially offset by the application of
$136,000 applied to the acquisition of property and equipment.
Net cash provided by operating activities decreased to $547,000 in Fiscal
1997 from $2,870,000 in Fiscal 1996. The decrease in cash provided by operating
activities reflects the reduction in the Company's net income, the growth in
accounts receivable from $271,000 in Fiscal 1996 to $1,792,000 in Fiscal 1997,
partially offset by an increase in the Company's accounts payable and accrued
expenses from $806,000 as of the end of Fiscal 1996 to $1,849,000 as of the end
of Fiscal 1997. The increase in accounts receivable at March 31, 1997, as
compared to March 31, 1996, is attributable to the fact that although net sales
for all of Fiscal 1997 were less than those for Fiscal 1996, net sales during
the month of March 1997 were approximately $2,240,000 as compared to net sales
of $1,512,000 for the month of March 1996. Further, a large portion of the month
of March 1997 sales occurred during the end of the month, temporarily increasing
accounts receivable until payments were received. Net cash used in investing
activities in Fiscal 1997 was $471,000 as compared to $325,000 of net cash
provided by investing activities in Fiscal 1996. The cash used in investing
activities in Fiscal 1997 reflects a loan of $300,000 (which is evidenced by a
note which does not bear interest or stipulate payment terms) primarily to the
Company's principal shareholder and the application of $171,000 to the
acquisition of property and equipment. The net cash of $325,000 provided by
investing activities in Fiscal 1996 represents the repayment of a note from a
related party of approximately $464,000 partially offset by $139,000 applied to
the acquisition of property and equipment. Net cash used in financing activities
in Fiscal 1997 was --$0-- as compared to $2,225,000 used in financing activities
during Fiscal 1996. Cash used by financing activities in Fiscal 1996 represented
principally $1,406,000 applied to reduce short term borrowings and $525,000
applied to reduce restructured debt.
Net cash provided by operating activities increased to $2,869,000 in
Fiscal 1996 from $2,254,000 in Fiscal 1995 reflecting the increase in the amount
of $2,560,000 in the Company's net income and decreases in inventory of
$2,205,000 offset by decreases in accounts payable and accrued expenses of
$2,800,000 and increases in accounts receivable of $986,000. Net cash provided
by investing activities was $325,000 in Fiscal 1996 compared to approximately
$600,000 of net cash used in investing activities in Fiscal 1995 due primarily
to the repayment during Fiscal 1995 of notes receivable from related parties.
The use of net cash in investing activities in Fiscal 1995 represents loans to
related parties of approximately $464,000 and approximately $136,000 applied to
the purchase of property and equipment. Net cash used in financing activities of
$2,225,000 in Fiscal 1996 remained approximately unchanged from the $2,176,000
used in Fiscal 1995. The use of net cash in financing activities in Fiscal 1995
principally reflects a reduction of $1,701,000 in the Company's short term
borrowings and approximately $316,000 paid to reduce loans from related parties.
The terms on which the Company manufactures and remanufactures chassis
provide for payment within 30 days of acceptance and the Company's accounts
receivable were collected in an average of less than 30 days during Fiscal 1996
and Fiscal 1997.
On the Closing Date, the Company will repay $325,000 in aggregate
principal amount to the holders of the Bridge Notes, together with interest
thereon at the annual rate of 12% per annum, and issue to the holders of the
Bridge Notes an aggregate of 32,500 shares of Common Stock (assuming an initial
public offering price of $10.00
31
per share of the Common Stock). The Company will incur a charge to operations in
the period that such shares are issued. In addition, Carl Massaro will repay
$561,000 in loans from the Company and the Company will terminate its line of
credit with Summit Bank.
The annual dividend requirement on the Convertible Preferred Stock is
$1,020,000 ($1,173,000 if the Over-allotment Option is exercised in full;
assuming an initial public offering price of $12.00 per share of Convertible
Preferred Stock). The future earnings of the Company, if any, may not initially
be adequate to pay the dividends on the Convertible Preferred Stock, and,
although the Company will pay quarterly dividends out of available capital
surplus, there can be no assurance that the Company will maintain sufficient
capital surplus or that future earnings, if any, will be adequate to pay the
dividends on the Convertible Preferred Stock. In addition, on the Closing Date
of this Offering and the Acquisition, the Company will have up to $4,000,000 in
debt outstanding, consisting of the Redemption Note, which bears interest at an
assumed rate of 10%, payable quarterly, and an aggregate annual interest expense
of up to $400,000.
The Company anticipates that the proceeds of this Offering (assuming no
exercise of the Over-allotment Option) and cash generated from operations will
be sufficient to satisfy all working capital needs for 12 months after the date
hereof. The Company intends to seek opportunities for growth through
acquisitions, and, in connection therewith, may seek to raise additional cash in
the form of equity, bank debt or other debt financing, or may seek to issue
stock as consideration for assets. At this time the Company is not party to any
agreements for acquisitions or joint ventures.
Recent Pronouncements of the Financial Accounting Standards Board
The Financial Accounting Standards Board has issued Statements of
Financial Accounting Standard Statement ("SFAS") No. 123, "Accounting and
Disclosure of Stock-Based Compensation." Statement No. 123 is effective for
years beginning after December 15, 1995. The adoption of Statement No. 123 did
not have a material effect on the Company's financial statements as the Company
has adopted only the disclosure requirements of Statement No. 123 for options to
be granted to employees.
In February 1997, SFAS No. 128, "Earnings per Share", was issued. The
pronouncement, which is effective for periods ending after December 15, 1997,
requires dual presentation of basic and diluted earnings per share. This
statement is not expected to have a material impact on the primary earnings per
share of the Company.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information, were
issued. SFAS No. 130 addresses standards for reporting and display of
comprehensive income and its components and SFAS No. 131 requires disclosure of
reportable operating segments. Both statements are effective for the Company's
1999 fiscal year. The Company will be reviewing these pronouncements to
determine their applicability.
32
BUSINESS
Overview of the Company
The Company is a specialized manufacturer of new trailer chassis which are
sold to leasing companies, large steamship lines, railroads and trucking
companies to transport overland 20', 40', 45' and 48' shipping containers. The
Company also remanufactures used trailer chassis. Ajax recently began to
manufacture a new line of 20, 30 and 40 yard sanitary containers known as
roll-off dumpsters and to sell a new line of intermodal refuse containers that
can be shipped on trailer chassis, barge or railroad. The Company's net sales
and net income were $22,355,871 and $1,727,907 for the fiscal year ended March
31, 1997, as compared to $42,537,553 and $3,344,303 for the fiscal year ended
March 31, 1996, respectively. For the six months ended September 30, 1997, the
Company had net sales and net income of $11,170,153 and $310,216, as compared to
$8,780,895 and $468,139 for the comparable period of 1996.
A shipping container is a reusable metal container designed for the
efficient carriage of cargo with a minimum of exposure to loss through damage or
theft. According to industry sources, the world container fleet has grown to an
estimated 9,100,000 TEU as of mid-1995. The Company believes that demand for new
and remanufactured container chassis is closely related to container use. The
total size of the United States chassis fleet was estimated at 515,000 units in
1996 as compared to 481,000 in 1995.
The Company leases its 182,000 square foot manufacturing facility in
Hillsborough, New Jersey. The Company has established production lines for the
manufacture of new chassis and for the remanufacture of used chassis. In August
1997 the Company expanded its operations by establishing a production line for
the manufacture of refuse containers.
The Company's business strategy is to grow through the acquisition of
companies that manufacture complementary products, by diversifying its product
lines and establishing manufacturing facilities in the Western United States to
service potential customers on the West Coast, who are currently constrained by
freight cost considerations from purchasing from the Company's East Coast
facility. At this time the Company has not established a timetable for the
establishment of a new manufacturing facility and is not party to any
acquisition agreement. The Company and its agents have begun to identify and
evaluate potential acquisition candidates, and in that connection the Company's
agents had entered into three letters of intent with potential acquisition
candidates. The Company was not a party to any of these letters of intent, two
of which have expired and one of which has been terminated. The parties to all
of these letters of intent have executed and delivered releases of their
respective obligations thereunder. The Company may determine, depending upon the
opportunities available to it, to seek additional debt or equity financing to
fund the cost of continuing expansion. To the extent that the Company finances
an acquisition with a combination of cash and equity securities, any such
issuance of equity securities would result in dilution to the interests of the
Company's shareholders. Additionally, to the extent that the Company incurs
indebtedness or issues debt securities in connection with any acquisition, the
Company will be subject to risks associated with incurring additional
indebtedness and there can be no assurance that cash flow will be sufficient to
repay any such indebtedness.
The Company will use the proceeds of this Offering to pay the Purchase
Price of the Acquisition, repay approximately $338,000 (including accrued
interest), due under the Bridge Notes, and to pay expenses of approximately
$25,000, $40,000 and $25,000 to Redstone Capital Corporation (which is a party
related to Steven Merker and William Merker, who are officers, directors and
principal stockholders of the Company, and to Andrew Levy, who is a principal
stockholder of the Company and a consultant and advisor to the Company), Steven
Merker and William Merker, respectively.
Industry Overview
The Shipping Container and Chassis Market
The Company manufactures and remanufactures chassis used in the transport
of shipping containers.
Steamship companies use chassis by attaching them to a truck cab, driving
it to a customer's warehouse, having a container loaded upon it, transporting
the container to an ocean going vessel, removing the container from the chassis
and loading the container on a ship. At the destination, the container is
unloaded from the ship onto another chassis which is attached to a truck cab for
transportation to the container's next or final destination. Rail freight users
stack the chassis either separately or together with the containers on rail
cars.
33
A shipping container is a reusable metal container designed for the
efficient overland carriage of cargo with a minimum of exposure to loss through
damage or theft. Containers are manufactured to conform to worldwide standards
of container dimensions and container ship fittings adopted by the International
Standards Organization ("ISO") in 1968. The standard container is either 20'
long x 8' wide x 8'6" high (i.e., one "20 foot Equivalent Unit" or "TEU") or 40'
long x 8' wide x 8'6" high (two TEU). Standardization of the construction,
maintenance and handling of containers allows containers to be picked up,
dropped off, stored and repaired efficiently. This standardization is the
foundation on which the container industry has developed.
The Container Market
The Company believes that one of the primary benefits of containerization
has been the ability of the shipping industry to effectively lower freight rates
due to the efficiencies created by standardized intermodal containers.
Containers can be handled much more efficiently than loose cargo and are
typically shipped via several modes of transportation, including truck, railway
and ship. Containers require loading and unloading only once and remain sealed
until arrival at the final destination, significantly reducing transport time,
labor and handling costs, and losses due to damage and theft. Efficient movement
of containerized cargo between ship and shore reduces the amount of time that a
ship must spend in port and the transit time of freight moves.
The Company believes that greater use of containers on cargo ships has led
railroad and trucking companies to increase their capacity to transport
containers domestically by chassis and railcar, and shipping companies have
begun soliciting domestic freight in order to mitigate the cost of moving empty
containers back to the port areas for use again in international trade. The
Company believes that the introduction in the mid-1980's of the double stack
railroad car, specially designed to carry containers stacked one on top of
another, accelerated the growth of domestic intermodal transportation by
reducing shipping costs still further. Due to these trends, the Company believes
that an increasing portion of domestic cargo is now being shipped by container
instead of by a conventional highway trailer.
The Container Chassis Market
The total size of the United States chassis fleet was estimated at 515,000
units in 1996 as compared to 481,000 units in 1995. Most chassis are owned by
leasing companies or by maritime shipping companies. Two of the largest U.S.
owners of container chassis are Flexi Van Leasing, Inc. and Trac Lease, Inc.,
customers of the Company.
Factors Affecting Demand for Container Chassis in the United States
The Company believes that the demand for container chassis is closely
related to container use. The Company believes that the primary factors
affecting demand for new or remanufactured container chassis are: domestic and
international business conditions, technical changes (resulting from a desire
for greater payloads), regulatory developments (such as a requirement for a new
braking system) and foreign use of containerization, railroad containerization
and over-the-road containerization. Increased ocean and rail freight usage has a
direct relationship with chassis demand, and such increase is affected by
general business conditions, domestically and internationally.
Chassis Design, Technology and Useful Life
There has been little change in container chassis design over the last
five years. Over a more extended time, customers have sought longer chassis
capable of carrying larger payloads. As a result, chassis length has increased
from 40' to 45' to 53'. In addition, moving the running gear further to the rear
to increase load-bearing capacity and increasing container height by six inches
has affected the design of the chassis "gooseneck." The Company believes that
such redesigns have increased the demand for remanufactured chassis. The Company
believes that, if properly used and maintained, a chassis generally will last
between 15 and 20 years. Legal obsolescence (which is in part a function of
technological advances) plays a large role in the useful life of a chassis.
Proposed changes in laws concerning the vehicles' braking systems would add $700
to $1,800 to the cost of a chassis. This would increase demand for
remanufacturing and have a favorable effect on the Company's business. Changes
in industry practice also affect the life of a chassis. Shippers generally
demand the ability to carry the largest possible payload, thereby forcing
carriers to upgrade their chassis to accommodate such demands.
34
Business of the Company
Products
New Container Chassis. The Company manufactures its new chassis from raw
materials and purchased parts to customer order, in accordance with
International Standards Organization ("ISO") specifications or such other
specifications as the customer may require.
Remanufactured Container Chassis. The Company remanufactures chassis
originally built by the Company and by other manufacturers to customer order and
to ISO specifications. The Company remanufactures a used chassis by removing all
of its components except the axles, which are refurbished, and replacing the
discarded components with new components. In periods of high demand, customers
tend to purchase new chassis because their existing chassis are in use and
cannot be returned for remanufacture. When demand eases, leasing companies are
able to remove chassis from service for remanufacturing at the end of their
lease terms.
Chassis Parts. Chassis parts include front assemblies ("goosenecks"),
slider assemblies and rear bolster sets. Sales of chassis parts and
sub-assemblies have historically been small. However, the Company anticipates
that such sales will increase as the number of chassis in service grows.
Sanitary Containers. Ajax has recently begun to manufacture and market a
new line of 20, 30 and 40 yard sanitary containers known as roll-off dumpsters,
which will be available in standard and watertight containers. The Company
anticipates that the potential market for its sanitary containers will include
waste haulers, scrap metal dealers, construction and demolition companies and
leasing companies in the Northeast. Although the Company is unable to estimate
the total demand for its sanitary containers, the Company contemplates that it
may manufacture such containers for sale from inventory rather than upon receipt
of a customer purchase order. The Company is in discussions with several waste
haulers regarding their requirements for these products. In addition, the
Company has begun to offer for sale a line of enclosed, intermodal refuse
containers that can be shipped on trailer chassis, barge or railroad.
New Products. The Company's new product lines include converter dollies,
for which manufacturing has commenced, as well as platform trailers and "drop
frame" trailers. Converter dollies are used to link tandem trailers and are
manufactured in a similar (but simpler) manner as a chassis. The Company expects
that these dollies would be marketed directly to fleet over-the-road haulers.
Revenue by Product
The table set forth below shows the Company's approximate sales as a
percentage of total sales by product group for the last six years:
Fiscal Year Ended New Remanufactured
March 31, Chassis Chassis
----------------- ------- --------------
1997 ........................ 60% 40%
1996 ........................ 82% 18%
1995 ........................ 70% 30%
1994 ........................ 67% 33%
1993 ........................ (1) 100%
1992 ........................ (1) 100%
- ----------
(1) Due to intense price competition during these years the Company focused
exclusively on the remanufacture of used chassis.
During the six months ended September 30, 1997, sales of new chassis and
remanufactured chassis represented 38% and 47% of the Company's net sales, the
balance being comprised of spare parts and roll-off refuse containers.
In general, the Company's cost to remanufacture a chassis is approximately
62% of the Company's cost to build a new chassis. However, gross profit earned
by the Company on a remanufactured chassis is approximately 85% of the Company's
gross profit on a new chassis. Although the Company has historically received
only limited revenues from the sale of parts and subassemblies, it anticipates
that such sales will increase as the number of chassis in service grows.
35
Backlog
The Company's backlog of firm unfilled orders totalled approximately
$8,225,000 as of September 22, 1997, as compared to approximately $8,911,000 as
of September 22, 1996. The Company estimates that approximately all of its
current backlog will be filled by March 31, 1998.
Business Strategy
The Company's business strategy is to grow through the acquisition of
companies that manufacture complementary products, by diversifying its product
lines and, establishing manufacturing facilities in the Western United States to
service potential customers on the West Coast. At this time the Company has not
established a timetable for the establishment of a new manufacturing facility
and is not party to any acquisition agreement. The Company and its agents have
begun to identify and evaluate potential acquisition candidates, and in that
connection the Company's agents had entered into three letters of intent with
potential acquisition candidates. The Company was not a party to any of these
letters of intent, two of which have expired and one of which has been
terminated. The parties to all of these letters of intent have executed and
delivered releases of their respective obligations thereunder. The Company may
determine, depending upon the opportunities available to it, to seek additional
debt or equity financing to fund the cost of continuing expansion. To the extent
that the Company finances an acquisition with a combination of cash and equity
securities, and such issuance of equity securities would result in dilution to
the interests of the Company's shareholders. Additionally, to the extent that
the Company incurs indebtedness or issues debt securities in connection with any
acquisition, the Company will be subject to risks associated with incurring
additional indebtedness and there can be no assurance that cash flow will be
sufficient to repay any such indebtedness. See "Use of Proceeds."
Marketing and Distribution
The Company sells directly to its customers, and does not use outside
dealers or distributors. The Company anticipates that new products, such as
sanitary containers and truck trailers, will be sold both directly and through
dealers and distributors. The Company currently employs one person in sales who,
together with senior management, maintain customer contacts. The Company intends
to increase the size of its sales force. The Company participates in industry
trade shows and is listed in industry registers. The Company does not currently
rely on printed advertisement of its products. Magazine and trade publication
promotion of its products is limited.
Manufacturing
The Company manufactures all of its products to order. The Company
maintains little finished goods inventory. All products are pre-inspected by the
buyer before title passes. Products are then shipped FOB manufacturer. Customer
orders run from as little as 100 units to as many as 2,000 units. Production
scheduling, except for customer emergencies, is generally planned three months
in advance. Each of the Company's production lines is capable of producing
between 13 and 15 chassis per single daily shift on a continuous basis. The
Company currently operates three production lines for one shift per day. The
Company has the capacity to operate four production lines for two shifts per
day.
The Company manufactures most of the components that are used in the
chassis from commercially available, standard supplies and materials. Where
possible, the Company purchases pre-sized material. Lead times are generally
between four to eight weeks. In the case of steel I beams, lead time is tied to
the steel mills' production scheduling. The Company maintains an inventory
position which it believes is sufficient to prevent delays due to inventory
shortages. The Company engages independent contractors to arrange, at no cost to
the Company, for the disposal of parts of refurbished chassis and used equipment
that are stored at its present location.
Raw Materials
Materials, such as steel, tires and wheels, represent approximately 82% of
the cost of sales of manufactured chassis and 51% of the cost of sales of
remanufactured chassis, the remainder consisting of labor and factory overhead.
Labor represents about 11% and 40% of product cost for new and remanufactured
chassis, respectively, and is the other significant cost factor. Any change in
the price of materials or labor would have a direct effect on the price of the
product. Other factors affecting product cost include design changes, changes in
available materials and changes in government regulations. The Company has
generally been able to pass any such cost increases through to its customers.
36
The Company does business with suppliers with which it has generally had
long relationships. All of its primary suppliers are well-known in the industry,
substantial and have a reputation for reliability. The Company purchases its
materials on an as-needed basis, and does not have any long-term agreements with
any of its suppliers. The Company does not rely upon a single supplier for
steel, tires or wheels, but rather maintains relationships with a few suppliers
of each of these components.
Machinery and Equipment
The Company's manufacturing equipment consists primarily of steel bending,
cutting, hole punching and welding equipment. There have been little basic
changes in this type of equipment over time. The basic equipment used by the
Company has a useful life of 40 or more years. The Company manufactures some and
maintains most of its tools and dies. If the Company implements its plans to
manufacture new products, it would acquire additional tooling and equipment as
necessary. The Company also uses paint spraying and material handling equipment.
The Company has its own internal maintenance department and performs regular
preventive maintenance on its equipment.
Major Customers
The Company generally sells to leasing companies that, in turn, lease
chassis to steamship companies. The Company also negotiates purchase orders
directly with steamship companies. Although the Company typically has
long-standing relationships with such steamship companies, it does not have any
long-term contracts with them, as all sales are made pursuant to purchase
orders. The Company does not offer any special discounts or credit terms.
Set forth below are the Company's sales by percentage of net sales to five
customers which individually accounted for 10% of more of net sales for the
fiscal years ended March 31, 1995, 1996 and 1997.
Six Months
Fiscal Year Ended March 31, Ended
---------------------------- September 30,
Customer 1995 1996 1997 1997
-------- ---- ---- ---- ----
Trac Leasing .............. 32% 33% 57% 59%
Ned Lloyd ................. -- 26% 33% --
Nadag Lloyd ............... -- 18% -- --
Flexi Van Leasing ......... 30% 10% -- 24%
Maersk Lines .............. 37% -- -- --
--- --- --- ---
Total 99% 87% 90% 83%
=== === === ===
Trac Leasing and Flexi Van Leasing each purchase new chassis from the
Company for the account of approximately 12 steamship lines and other lessees
and end users and purchase remanufactured chassis for their own account.
Historically, the Company has relied on a limited number of customers for a
substantial portion of its total net revenues. The Company expects that a
significant portion of its future revenues from chassis sales will continue to
be generated by a limited number of customers.
Competition for the Manufacture of New Chassis
The Company believes that it has only three significant domestic
competitors in manufacturing new chassis. The Company believes that it has no
significant competitors in remanufacturing chassis on a production line basis
and is aware of only a limited number of companies that remanufacture on a
piece-by-piece basis. Because container chassis are purchased FOB manufacturer,
shipping costs affect customer purchase decisions. The market is thus segmented
geographically. The Company currently competes mainly on the Eastern seaboard,
with some Gulf Coast sales. The Company's primary competitors are Strick
Corporation (located in Pennsylvania) which also services the Northeast market
primarily, Hyundai Mexico (located on the California border), and Monon (located
in Chicago, Illinois), all of which manufacture products in addition to trailer
chassis. The Company believes that none of the competitors in the industry has a
price advantage.
In making purchase decisions, the customer generally considers
engineering, quality, availability, price and transportation cost. The Company
believes that it competes well with regard to each of these factors, as a result
of the Company's design and manufacturing integrity, its flexibility in making
design changes to meet customer requirements, its ability to meet delivery
schedules and its competitive pricing.
37
Manufacturing labor, both direct and indirect, represents approximately
11% of the value of a new chassis, while materials represent in excess of 82% of
value and the balance is SG&A expense. This ratio, plus the cost of shipment,
tends to protect the domestic container chassis market from low labor cost
foreign competition. Additionally, chassis used elsewhere in the world are
manufactured to local standards in addition to ISO specifications. The Company
believes that, with the exception of chassis being manufactured by Hyundai in
Mexico and shipped to California, there are no chassis imported into the United
States.
Due to freight cost considerations, the industry competes on a regional
basis. The Company thus believes that there is currently no significant export
market. The Company is evaluating the feasibility of establishing a facility in
the Western United States to serve potential customers on the West Coast,
although the Company has not identified any such facility and there can be no
assurance that any such facility, if identified, will be established.
Product Warranties
The Company provides limited warranties against construction defects in
its products. These warranties generally provide for the replacement or repair
of defective parts or workmanship for a specified period following the date of
sale. Customers and end-users also receive warranties from suppliers of
components incorporated into the Company's chassis.
Facilities
Upon closing of the Acquisition, Ajax and Carl Massaro will enter into a
new lease whereby Ajax will continue to lease from Mr. Massaro, on a "triple
net" basis, the 189,000 square foot factory complex it currently occupies. The
facility is located on 22 acres in Hillsborough Township, New Jersey,
approximately 45 miles southwest of New York City. The area is rural to suburban
and is convenient to major expressways and points of delivery. The facility was
built in 1964. Currently approximately 2,500 square feet is devoted to
administrative offices and the balance is used for manufacturing and
warehousing. The 22 acre site is part of approximately 70 acres owned by Mr.
Massaro. The site is primarily used for storing chassis and inventory and
employee parking. The Company believes that it has sufficient storage and
warehousing space.
The lease will provide for a five-year initial term and will be renewable
at the Company's option for four successive, five year renewal terms, at an
annual base rent of $600,000 for the initial term, subject to increase during
each renewal term by the percentage increase in the Consumer Price Index over
the immediately preceding five year term. The lease will contain customary
provisions indemnifying Mr. Massaro for the acts of the Company and its
employees, agents, contractors and the like, and against certain specified
environmental liabilities other than those arising out of Mr. Massaro's use of
the leased facility and land prior to the closing of the Acquisition and acts
which at Mr. Massaro's discretion are required to be performed by the Company.
Additionally, so long as the lease remains in effect, the Company is not in
default thereunder or under the Redemption Note, the Company will have the
option, exercisable during the initial term of the lease, to purchase the leased
facility and land for a cash purchase price of $6,500,000.
Violation of Federal and State Air Quality Regulation
The New Jersey Department of Environmental Protection ("NJDEP") requires
the Company to obtain air emission permits which limit 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. NJDEP deems the facility to be a "major" facility because
the facility has the potential to emit more than 25 tons per year of VOCs.
Accordingly, the Company is required to obtain a permit under Title V of the
federal Clean Air Act (a "Title V Permit") from NJDEP, which administers Title V
Permits in New Jersey. A Title V Permit consolidates a permit holder's various
air quality permits. The NJDEP determined the Company's Title V permit
application to be complete on November 14, 1996 and NJDEP is reviewing the
application. Pursuant to NJDEP Title V regulations, the Company presently pays
an annual air contaminant fee.
The equipment from which emissions are limited by permit includes three
paint spray booths, three natural gas fired heaters and two shot blaster
systems. NJDEP has issued permits for the spray booths and shot blasters. On
March 13, 1997 the NJDEP issued two Notices of Violations to the Company, which
respectively asserted that the Company had failed to obtain permits for (i) the
shot blasters prior to February 5, 1997 and (ii) the heaters for the paint spray
booths. The Company submitted permit applications for the heaters on March 26,
1997, which are pending.
38
The Company has emitted VOCs in excess of its permit limits. NJDEP
requires the Company to file an annual Emission Statement to report the
estimated actual emissions of regulated air contaminants, including VOCs. The
Company's Emission Statements show that the facility emitted 58.28, 92.995,
90.46 and 56.91 tons per year of VOCs in 1993, 1994, 1995 and 1996,
respectively. The paint spray booths account for approximately 97% of the
reported VOCs. The permits for the paint spray booths allow a combined total of
26.89 tons of VOCs per year to be emitted. In March 1997, the Company applied
for new permits which seek to increase the VOC emission limits of the paint
spray booths by almost 25 additional tons per year, which application was denied
by NJDEP on July 30, 1997. The Company has applied for a hearing to appeal the
NJDEP denial. If the Company does not succeed in obtaining new permit limits for
VOCs, the Company is not expected to be in compliance with its allowable
emission limits during 1997.
The Company is presently preparing an amendment to its Title V Permit
application proposing that the Company and NJDEP enter into a Administrative
Consent Order or other form of agreement (a "Compliance Schedule") as to VOC
emissions from the three paint spray booths at the facility. The Company plans
to propose a timetable by which it will change its primer and topcoat paint
formulations from current, solvent based products that generate high amounts of
VOC upon drying to water-based and lower-solvent based primers and topcoats,
which would generate lower amounts of VOC upon drying. The Company believes that
such change is technically feasible and that by making such change, the Company
will reduce VOC emissions to levels allowable under the Company's present
permits while allowing the Company to produce numbers of completed chassis
comparable to those produced in recent years. The Company has been advised by
paint manufacturers that water-based primers and lower-VOC topcoat paints are
available and 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.
On May 8, 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. The NJDEP could make further assessments with respect to other years
in which the allowable VOC limits were exceeded by the Company, although no
other assessments have yet been received.
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 5, 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 $2,000,000 or more. 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.
Other Environmental and Regulatory Compliance
The Company is subject to extensive Federal, state and local laws and
regulations relating to its operations, including building and occupancy codes,
occupational safety and environmental laws, and laws governing the use,
discharge and disposal of hazardous materials. Except as otherwise described
above with regard to its compliance with air quality regulations and under "Risk
Factors--Notice of Violation of Federal and State Air Quality Regulations
and--Other Environmental and Regulatory Compliance", the Company is not aware of
any material non-compliance with any such laws and regulations. The Company is a
manufacturer of truck trailers and is covered by Standard Industrial Code (SIC)
#3715. Companies covered by SIC Code #3715 are among those companies subject to
the New Jersey Industrial Site Recovery Act ("ISRA"). Pursuant to ISRA, the
Company has begun an
39
investigation for any environmental "Areas of Concern" ("AOCs") that may be
present at the facility. The Company intends to negotiate a standard Remediation
Agreement with NJDEP by which the Company will fulfill its obligations under
ISRA. AOCs, if discovered, could require remediation, which could have a
material adverse effect on the Company.
Insurance
The Company maintains auto liability and comprehensive coverage of
$300,000, contents/physical loss coverage of $350,000 and statutory workmen's
compensation coverage. The Company also intends to obtain directors' and
officers' liability coverage and environmental liability coverage with expected
policy limits of $5,000,000 each. The Company has not experienced any
significant claim under any of its insurance policies.
Employees
As of March 31, 1997, the Company had 146 full-time employees of whom four
were managers, eight were administrative personnel and the rest were in
production. The Company's employees do not belong to a collective bargaining
unit and the Company considers its relations with employees to be satisfactory.
Litigation
On July 3, 1997, the Internal Revenue Service notified Ajax of a proposed
$1,434,931 increase in federal excise tax liability relating to Ajax's valuation
of tires included in the sale of new chassis for the period from March 1995
through December 1996 and a $286,986 penalty thereon. In November 1997 the
Company and its outside counsel, based on an assessment of preliminary
discussions with the IRS, decided to pursue a settlement agreement. On November
7, 1997 the Company paid approximately $829,000 to settle this matter. The
Company recognized the effects of this settlement as a charge in the six month
period ended September 30, 1997. There can be no assurance that additional
liability will not be assessed for subsequent periods. Pursuant to certain
amendments to the Internal Revenue Code, commencing on January 1, 1998, the
value of such tires will no longer be excluded from the federal excise tax
imposed on such chassis sales. Instead, the amount of federal excise tax imposed
upon the tire manufacturer will be deductible from the excise tax payable by
Ajax on the sale of new chassis.
In August 1997, a former employee of the Company instituted a lawsuit
against the Company, Carl Massaro and Karl Massaro for $121,500 in back salary
and $135,000 plus interest for repayment of a loan made to the Company. The
Company and the individual defendants intend to vigorously contest this action
and have filed an answer and a counterclaim.
The Company is involved in litigation arising in the normal course of its
business, none of which is believed, individually or in the aggregate, to be
material to the Company's financial position and results of operations.
40
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company are as follows:
Name Age Position with the Company
------ --- -----------------------
Roy Ceccato (1) ........... 38 Director
Karl Massaro .............. 44 President and Director
Steven Merker (2) ......... 40 Treasurer, Chief Financial Officer and
Director
William Merker ............ 37 Vice President, Secretary and Director
Joseph Spinella (1)(2) .... 40 Director
William Needham (2) ....... 56 Director
----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Roy Ceccato has been a Director of the Company since August 1997. Since
1995, Mr. Ceccato has been Director of Finance of Complete Management, Inc., an
AMEX-listed physician practice management company. From 1990 to 1995, he was
President of Broad Partners, Inc., a management consulting firm. From 1986 to
1989, he was Vice President of The R.O.I. Group, Inc., an investment banking
firm specializing in retailing and machine tool parts manufacturing companies
for the aerospace industry. Mr. Ceccato graduated from Pace University in 1980
with a BBA in management accounting.
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.
Steven Merker has been Treasurer, Chief Financial Officer and a Director
of the Company since August 1997. Mr. Merker is the Managing Director of Barclay
Partners LLC, an investment banking firm specializing in corporate buy-outs,
which he formed in 1995 with his brother, William Merker. From 1993 to 1995 he
was Senior Vice President of Branin Investments. From 1988 to 1993, he was a
partner with the Redstone Group, an investment banking firm. Prior to joining
Redstone, Mr. Merker was the Chief Financial Officer of The R.O.I. Group, Inc.,
an investment banking firm. Mr. Merker graduated with a B.S. degree in
accounting from Fairleigh Dickinson University in 1979.
William Merker has been a Vice President, Secretary and a Director of the
Company since August 1997. William Merker has been associated with the law firm
of Loeb, Block & Partners LLP since 1990, specializing in the field of corporate
law. In 1995, Mr. Merker and his brother, Steven Merker, founded Barclay
Partners LLC.
Mr. Merker received a B.S. degree in accounting from The American
University in 1982 and graduated from Georgetown University Law School in 1985.
Joseph Spinella has been a Director of the Company since August 1997.
Since October 1997, Mr. Spinella has been controller of Morcroft Capital
Corporation (an equipment leasing company). From November 1996 until October
1997, Mr. Spinella was manager of financial reporting for Gruntal Financial
L.L.C. (an investment banking and brokerage company). From 1989 through 1995,
Mr. Spinella was Vice President-Director of Financial Services and Controller of
Copelco Capital, a subsidiary of Itochu International. From 1987 to 1989, he was
an Assistant Vice President with First Fidelity Bank. Mr. Spinella graduated
from Fairleigh Dickinson University with a B.S in Accounting in 1979 and with an
MBA in Finance in December 1988.
William Needham has been a Director of the Company since November 1997.
Since March 1995, Mr. Needham has been a private merchant banker and investor.
From 1994 to March 1995 he was a registered representative and corporate finance
specialist at Hanover Securities, an investment banking and brokerage firm.
41
From 1990 to 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.
Consultant
Andrew A. Levy has acted as a consultant and advisor to Steven Merker
since August 1996. Since June 1983, Mr. Levy has been the chief executive
officer of Redstone Capital Corporation, an investment banking firm specializing
in oil and gas and energy cogeneration project financings, and in leveraged
buy-outs. From March 1993 to August 1994, Mr. Levy was vice-president and a
director of NR Marine, Inc., a company engaged in the business of owning and
operating off-shore oil and gas drilling rigs. In August 1994, NR Marine filed
for bankruptcy protection under chapter 11 of the U.S. Bankruptcy Code. Mr. Levy
graduated from Yale University in 1968 with a B.S. in engineering, and graduated
from Harvard Law School in 1972.
Executive Compensation
The following table sets forth the compensation paid by Ajax for services
rendered in all capacities during the fiscal years ended March 31, 1997, 1996
and 1995 to its chief executive officer and to the most highly-compensated
executive officer and key employee (other than the chief executive officer)
whose annual salary and bonus exceeded $100,000 and who were serving at March
31, 1997 (collectively, the "Named Officers").
Summary Compensation Table
Annual Compensation
----------------------------------
Name and Principal Position Year Other Annual
- --------------------------- Ended Salary Bonus Compensation
March 31 ($) ($) ($)
-------- ----------- ----- ------------
Carl Massaro .................. 1997 $ 581,947 0 0
Consultant 1996 $ 1,232,500 0 0
1995 $ 13,000 0 0
Karl Massaro .................. 1997 $ 680,546 0 0
Director and President 1996 $ 386,613 0 0
1995 $ 110,500 0 0
Employment Agreements
The Company has entered into employment agreements with each of Karl
Massaro and Steven Merker, and into a consulting agreement with Carl Massaro.
The employment agreement of Karl Massaro will become effective on the
Closing Date, and will terminate three years thereafter, subject to earlier
termination upon the occurrence of certain specified events. Pursuant to his
Employment Agreement, Mr. Massaro will receive a base salary at the annual rate
of $200,000 and such bonus compensation as the Board of Directors may determine.
The agreement will also contain restrictive covenants prohibiting Mr. Massaro
from directly or indirectly competing with the Company east of the Mississippi
River during the three-month period commencing upon the termination of his
agreement, and, during the six-month period commencing upon such termination,
from soliciting or servicing any supplier to or customer of the Company for any
competitive purpose, and from employing or retaining any employee of or
consultant to the Company or soliciting any such employee or consultant to
become affiliated with any entity other than the Company.
The employment agreement of Steven Merker will become effective on the
Closing Date, and will terminate three years thereafter, subject to earlier
termination upon the occurrence of certain specified events. Pursuant to his
employment agreement, Mr. Merker will receive a base salary at the annual rate
of $144,000. Mr. Merker will be required to devote at least 40 hours per week to
the business of the Company. Mr. Merker's employment agreement also contains
covenants prohibiting him during the one year period commencing upon termination
of the agreement, from soliciting or servicing any party who was a supplier or
customer of the Company during the term of his
42
agreement for any purpose which is in competition with the Company, and from
soliciting any employee or consultant of the Company with a view towards causing
such employee or consultant to become affiliated with the entity with which the
employee is then affiliated.
Carl Massaro's consulting agreement will become effective on the Closing
Date, and will terminate three years thereafter, subject to earlier termination
on the occurrence of certain specified events. Mr. Massaro will receive
consulting fees at the annual rate of $160,000. Mr. Massaro will be required to
devote at least 40 hours per month to the business of the Company. Mr. Massaro
will have the right to attend Board meetings as an observer. The agreement also
contains restrictive covenants prohibiting Mr. Massaro, during the one-year
period commencing upon the termination of the agreement, from directly or
indirectly competing with the Company east of the Mississippi River, soliciting
or servicing any supplier to or customer of the Company for any competitive
purpose, and employing or retaining any employee of or consultant to the Company
or soliciting any such employee or consultant to become affiliated with any
entity other than the Company.
Executive Recruitment
The Company is actively engaged in the process of recruiting a chief
financial officer to assume those duties, which presently are being rendered by
Steven Merker. The Company expects that such chief financial officer initially
will be compensated at the rate of approximately $125,000 per year.
Board of Directors
The Certificate of Incorporation divides the Board of Directors into three
classes, with, initially, one class having a term of one year, one class having
a term of two years and one class having a term of three years. Commencing with
the annual meeting of stockholders to be held in 1998, directors will be elected
to succeed those directors whose terms have expired, and each newly elected
director will serve for a three-year term. All officers are appointed annually
by the Board of Directors and, subject to existing employment agreements, serve
at the discretion of the Board. Directors who are employees of the Company
receive no compensation for serving on the Board of Directors. It is expected
that Directors who are not employees of the Company will receive compensation
for their services in an amount to be determined. All Directors are reimbursed
by the Company for any expenses incurred in attending Director's meetings and,
upon completion of this Offering, non-employee directors will receive
compensation of $500 per meeting attended and options to purchase _____ shares
of the Company's Common Stock per annum of service on the Board. The Company
intends to obtain Officers and Directors liability insurance.
Audit Committee of the Board of Directors
The Board of Directors has designated an Audit Committee of the Board of
Directors consisting initially of Messrs. Ceccato and Spinella. The duties of
the Audit Committee are to (i) recommend to the full Board the auditing firm to
be selected each year as the Company's independent auditors and the terms and
conditions upon which such firm is to be engaged, (ii) consult with the persons
so chosen to be the independent auditors with regard to the plan of audit, (iii)
review, in consultation with the independent auditors, their report of audit, or
proposed report of audit, and the accompanying management letter, if any, (iv)
consult with the independent auditors (periodically, as appropriate, out of the
presence of management) with regard to the adequacy of the Company's internal
accounting and control procedures, (v) review the Company's financial condition
and results of operations with management and the independent auditors and (vi)
review any non-audit services and special engagements to be performed by the
independent auditors and consider the effect of such performance on the
auditors' independence.
Compensation Committee of the Board of Directors
The Board of Directors has designated a Compensation Committee of the
Board of Directors, consisting initially of Steven Merker, Joseph Spinella and
William Needham. The primary duties of the Compensation Committee are to (i)
determine the annual salary, bonus and other benefits, direct and indirect, of
any and all executive officers (as defined under Regulation S-K promulgated by
the Commission), (ii) prepare an Annual Report of the Compensation Committee for
inclusion in the Company's Proxy Statement, (iii) review and recommend to the
full Board any and all matters related to benefit plans covering the foregoing
officers and any other employees in the event such matters are appropriate for
stockholder approval, and (iv) administer any stock option plan or other bonus
or incentive plan or pool adopted by the Company (including the 1997 Incentive
Stock Option Plan).
43
1997 Stock Option Plan
The Company has adopted its 1997 Stock Option Plan ("Plan"). The Board
believes that the Plan is desirable to attract and retain executives and other
key employees of outstanding ability. Under the Plan, options to purchase an
aggregate of not more than 340,000 shares of Common Stock may be granted from
time to time to all employees of the Company or any parent corporation or
subsidiary corporation of the Company. To date, no options have been granted
pursuant to the Plan.
The Plan is currently administered by the Board of Directors which has
empowered the Compensation Committee to administer the Plan. The Compensation
Committee is generally empowered to interpret the Plan, prescribe rules and
regulations relating thereto, determine the terms of the option agreements,
amend them with the consent of the optionee, determine the individuals to whom
options are to be granted, and determine the number of shares subject to each
option and the exercise price thereof. The per share exercise price for options
granted under the Plan are determined by the Compensation Committee; provided
that the exercise price of incentive stock options ("ISOs") will not be less
than 100% of the fair market value of a share of the Common Stock on the date
the option is granted (110% of fair market value on the date of grant of an ISO
if the optionee owns more than 10% of the Common Stock of the Company); and
further provided that, for a period of 18 months after the Closing Date, the
exercise price will be the greater of 110% of fair market value on the date of
grant and the initial public offering price of the Common Stock. Upon exercise
of an option, the optionee may pay the purchase price with previously acquired
shares of Common Stock of the Company, or at the discretion of the Board, the
Company may loan some or all of the purchase price to the optionee.
Options will be exercisable for a term determined by the Compensation
Committee which will not be greater than ten years from the date of grant (or
five years in the case of ISO's granted to holders of more than 10% of the
Common Stock). The Compensation Committee shall determine the effect on an
option of the termination of the optionee's relationship with the Company. In
the event of certain basic changes in the Company, including a reorganization,
merger or consolidation of the Company, or the purchase of shares pursuant to a
tender offer for shares of Common Stock of the Company, in the discretion of the
Committee, each option may become fully and immediately exercisable. ISOs are
not transferable other than by will or the laws of descent and distribution.
Non-qualified stock options may be transferred to the optionee's spouse or
lineal descendants, subject to certain restrictions. Options may be exercised
during the holder's lifetime only by the holder, his or her guardian or legal
representative.
Options granted pursuant to the Plan may be designated as ISOs, with the
attendant tax benefits provided under Section 421 and 422 of the Internal
Revenue Code of 1986. Accordingly, the Plan provides that the aggregate fair
market value (determined at the time an ISO is granted) of the Common Stock
subject to ISOs exercisable for the first time by an employee during any
calendar year (under all plans of the Company and its subsidiaries) may not
exceed $100,000. The Board may modify, suspend or terminate the Plan; provided,
that certain material modifications affecting the Plan must be approved by the
stockholders, and any change in the Plan that may adversely affect an optionee's
rights under an option previously granted under the Plan requires the consent of
the optionee.
44
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock at the date of this
Prospectus (assuming (a) consummation of the Acquisition and (b) no conversion
of the Convertible Preferred Stock) by (i) each person known by the Company to
own beneficially more than 5% of the Company's Common Stock, (ii) each of the
Company's directors and executive officers, and (iii) all officers and directors
of the Company as a group. Except as otherwise indicated, the Company believes
that the beneficial owners of the Common Stock listed below based on information
furnished by such owners, have sole investment and voting power with respect to
such shares, subject to community property laws, where applicable.
Percent of Common Percent of Common
Name and Address of Number of Stock Owned Before Stock Owned After
Beneficial Owner Shares Offering(4) Offering(5)
------------------- --------- ------------------ -----------------
Roy Ceccato (1) ............. 70,000 4.5% 2.4%
Andrew Levy (2) ............. 178,430 11.4% 6.2%
Karl Massaro (1) ............ 145,000 9.3% 5.0%
Steven Merker (3) ........... 525,160 33.5% 18.1%
William Merker (3) .......... 304,410 19.4% 10.5%
Joseph Spinella (1) ......... __ __ __
William Needham ............. __ __ __
All Directors and Officers
as a group (6 persons) ... 1,223,000 78% 42%
- ----------
(1) The address of such person is c/o the Company, 321 Valley Road,
Hillsborough Township, N.J.
(2) The address of such person is c/o Redstone Capital Corp., 375 Park Avenue,
New York, N.Y. Includes 30,000 shares owned by a family trust and 50,000
shares owned by Mr. Levy's wife. Mr. Levy disclaims beneficial ownership
as to all such shares.
(3) The address of such person is c/o Loeb, Block, Wacksman & Selzer LLP, 505
Park Avenue, New York, N.Y. Steven and William Merker each disclaim
beneficial ownership of shares owned by the other.
(4) Does not give effect to the issuance to the holders of $325,000 in
aggregate principal amount of Bridge Notes (the "Bridge Note Holders") of
an aggregate of 32,000 shares of Common Stock (based on an assumed initial
public offering price per share of Common Stock of $10.00).
(5) Gives effect to the issuance of 32,500 shares of Common Stock to the
Bridge Note Holders.
Steven Merker and William Merker are brothers. Carl Massaro, the founder
of Ajax and its sole stockholder prior to the Acquisition, is the father of Karl
Massaro, the President and a Director of the Company. There are no other family
relationships among the Company's officers, directors and 5% shareholders.
45
CERTAIN TRANSACTIONS
The Acquisition
On the Closing Date, the Company will use the proceeds of this Offering to
consummate the Acquisition of all of the outstanding capital stock of Ajax from
Mr. Carl Massaro. The Stock Purchase Agreement provides for a Purchase Price of
$20,625,000 adjusted by an amount equal to the Net Worth Adjustment, which is
payable in cash on the Closing Date, except that, to the extent that the
Purchase Price exceeds $19,903,257, the excess amount up to $4,000,000 is
payable by Ajax pursuant to the Redemption Note. On the Closing Date, the
Company will grant Carl Massaro options to purchase up to 50,000 shares of
Common Stock at 115% of the initial public offering price thereof, and enter
into (i) a three-year consulting agreement with Carl Massaro providing for
annual base compensation of $160,000 and (ii) a "triple net" lease with Carl
Massaro of the factory and office facility presently occupied by Ajax. On the
Closing Date, Carl Massaro will repay $561,000 in loans from the Company. Carl
Massaro repaid the Company $300,000 in loans in 1995. In addition, Ajax will
terminate an existing credit facility with Summit Bank, and Mr. Massaro will
terminate his guaranty of Ajax's obligations thereunder. See "The Acquisition,"
"Management--Employment Agreements" and "Business--Business of the
Company--Facilities."
Fees to Affiliated Parties
The Company will reimburse Redstone Capital Corporation (which is a party
related to Steven Merker and William Merker, who are officers, directors and
principal stockholders of the Company, and to Andrew Levy, who is a principal
stockholder of the Company and a consultant and advisor to Steven Merker),
Steven Merker and William Merker approximately $25,000, $40,000 and $25,000,
respectively (an aggregate of $90,000), representing amounts advanced by them in
respect of expenses incurred in connection with the Acquisition and this
Offering.
46
DESCRIPTION OF SECURITIES
General
The Company is authorized by its amended and restated Certificate of
Incorporation (the "Certificate") to issue an aggregate of 10,000,000 shares of
Common Stock, par value $.001 per share, and 3,000,000 shares of preferred
stock, par value $.001 per share (the "Preferred Stock"), which Preferred Stock
may be issued with such rights, designations and privileges (including
redemption and voting rights) as the Board of Directors may, from time to time,
determine.
Common Stock
Holders of the Common Stock are entitled to one vote per share and,
subject to the rights of the holders of the Preferred Stock (discussed below),
to receive dividends when and as declared by the Board of Directors, and to
share ratably in the assets of the Company legally available for distribution in
the event of the liquidation, dissolution or winding up of the Company. The
Board of Directors may not declare dividends payable to holders of Common Stock
unless and until all accrued cash dividends through the most recent past
quarterly dividend payment date have been paid in full to holders of the
Convertible Preferred Stock. Holders of the Common Stock do not have
subscription, redemption or conversion rights, nor do they have any preemptive
rights. In the event the Company were to elect to sell additional shares of its
Common Stock following this Offering, investors in this Offering would have no
right to purchase such additional shares. As a result, their percentage equity
interest in the Company would be diluted. The shares of Common Stock offered
hereby will be, when issued and paid for, fully-paid and not liable for further
call or assessment. Holders of the Common Stock do not have cumulative voting
rights, which means that the holders of more than half of the outstanding shares
of Common Stock (subject to the rights of the holders of the Preferred Stock)
can elect all of the Company's directors, if they choose to do so. In such
event, the holders of the remaining shares would not be able to elect any
directors. The Board is empowered to fill any vacancies on the Board. Except as
otherwise required by the Delaware Law, all stockholder action is taken by vote
of a majority of the outstanding shares of Common Stock voting as a single class
present at a meeting of stockholders at which a quorum (consisting of a majority
of the outstanding shares of the Company's Common Stock) is present in person or
by proxy.
Preferred Stock
The Company is authorized by the Certificate to issue a maximum of
3,000,000 shares of Preferred Stock, in one or more series and containing such
rights, privileges and limitations, including voting rights, conversion
privileges and/or redemption rights, as may, from time to time, be determined by
the Board of Directors of the Company. Preferred Stock may be issued in the
future in connection with acquisitions, financings or such other matters as the
Board of Directors deems to be appropriate. In the event that any such shares of
Preferred Stock shall be issued, a Certificate of Designation, setting forth the
series of such Preferred Stock and the relative rights, privileges and
limitations with respect thereto, shall be filed with the Secretary of State of
the State of Delaware. The effect of such Preferred Stock is that the Company's
Board of Directors alone, within the bounds and subject to the federal
securities laws and the Delaware Law, may be able to authorize the issuance of
Preferred Stock which could have the effect of delaying, deferring or preventing
a change in control of the Company without further action by the stockholders
and may adversely affect the voting and other rights of holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may also
adversely affect the voting power of the holders of Common Stock, including the
loss of voting control to others.
Convertible Preferred Stock
The issuance of 1,500,000 shares of Convertible Preferred Stock has been
authorized by resolutions adopted by the Board of Directors and set forth in a
Certificate of Designation, Preferences and Rights of 8 1/2% Senior Convertible
Redeemable Preferred Stock filed with the Secretary of State of the State of
Delaware, which contains the designations, rights, powers, preferences,
qualifications and limitations of the Convertible Preferred Stock. Upon
issuance, the shares of Convertible Preferred Stock offered hereby will be fully
paid and non-assessable.
Dividends. The holders of the Convertible Preferred Stock are entitled to
receive if, when and as declared by the Board of Directors out of funds legally
available therefor, cumulative dividends at the rate of $____ per share
47
per annum, payable quarterly on the last business day of March, June, September
and December of each year, commencing December 31, 1997 (each a "Dividend
Payment Date"), to the holders of record as of a date, not more than 60 days
prior to the Dividend Payment Date, as may be fixed by the Board of Directors.
Dividends accrue from the first day of the quarterly period in which such
dividend may be payable, except with respect to the first quarterly payment
which shall accrue from the date of issuance of the Convertible Preferred Stock.
Dividends on the Convertible Preferred Stock will accrue whether or not
the Company has earnings, whether or not there are funds legally available for
the payment of such dividends and whether or not such dividends are declared.
Dividends accumulate to the extent they are not paid on the Dividend Payment
Date to which they relate. Accumulated unpaid dividends will not bear interest.
Under Delaware Law, the Company may declare and pay dividends or make other
distributions on its capital stock only out of capital surplus (as defined in
the Delaware Law) and in case there shall be no such surplus, out of its net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. On September 30, 1997, the Company had available capital
surplus of $21,459,000 (on a pro forma as adjusted basis, after giving effect to
this Offering). The payment of dividends and any future operating losses will
reduce such surplus of the Company, which may adversely affect the ability of
the Company to continue to pay dividends on the Convertible Preferred Stock. In
addition, no dividends or distributions may be declared, paid or made if the
Company is or would be rendered insolvent by virtue of such dividend or
distribution.
No dividends may be paid on any shares of capital stock ranking junior to
the Convertible Preferred Stock (including the Common Stock) unless and until
all accumulated and unpaid dividends on the Convertible Preferred Stock have
been declared and paid in full.
Conversion. At the election of the holder thereof, each share of
Convertible Preferred Stock will be convertible into Common Stock at any time on
or after ______, 1998 (180 days after the date hereof) and prior to redemption
at a conversion rate of one share of Common Stock for each share of Convertible
Preferred Stock (an effective conversion price of $__ per share or 120% of the
initial public offering price per share of Common Stock) (the "Conversion
Price"). The Conversion Price is subject to adjustment from time to time in the
event of (i) the issuance of Common Stock as a dividend or distribution on any
class of capital stock of the Company; (ii) the combination, subdivision or
reclassification of the Common Stock; (iii) the distribution to all holders of
Common Stock of evidences of the Company's indebtedness or assets (including
securities, but excluding cash dividends or distributions paid out of earned
surplus); (iv) the failure of the Company to pay a dividend on the Convertible
Preferred Stock within 30 days after a Dividend Payment Date, which will result
in each instance in a reduction of $.50 per share in the Conversion Price but
not below $9.00 per share, or __% of the initial per share Conversion Price of
the shares of Common Stock issuable upon conversion of the Convertible Preferred
Stock; or (v) the sale of Common Stock at a price, or the issuance of options,
warrants or convertible securities with an exercise or conversion price per
share, less than the lower of the then current Conversion Price or the then
current market price of the Common Stock (except upon exercise of options
outstanding on the date of this Prospectus and options thereafter granted to
employees, officers, directors, stockholders or consultants pursuant to existing
stock option plans). No adjustment in the Conversion Price will be required
until cumulative adjustments require an adjustment of at least 5% in the
Conversion Price. No factional shares will be issued upon conversion, but any
fractions will be adjusted in cash on the basis of the then current market price
of the Common Stock. Payment of accumulated and unpaid dividends will be made
upon conversion to the extent of legally available funds. The right to convert
the Convertible Preferred Stock terminates on the date fixed for redemption.
In case of any consolidation or merger to which the Company is a party
(other than a consolidation or merger in which the Company is the surviving
party and the Common Stock is not changed or exchanged), or in case of any sale
or conveyance of all or substantially all the property and assets of the
Company, each share of Convertible Preferred Stock then outstanding will be
convertible from and after such merger, consolidation or sale or conveyance of
property and assets into the kind and amount of shares of stock or other
securities and property receivable as a result of such consolidation, merger,
sale or conveyance by a holder of the number of shares of Common Stock into
which such share of Convertible Preferred Stock could have been converted
immediately prior to such merger, consolidation, sale or conveyance.
Optional Cash Redemption. The Company may, at its option, redeem the
Convertible Preferred Stock, in whole but not in part, upon 30 days prior
written notice at any time on or after _______, 2000 (30 months after the date
hereof) at a redemption price of $___ per share, plus accumulated and unpaid
dividends, if the Market Price of the
48
Common Stock (as defined below) equals or exceeds $___ per share (180% of the
initial public offering price per share) for at least 20 trading days within a
period of 30 consecutive trading days ending not more than five trading days
prior to the date of the notice of redemption. The term "Market Price" means the
closing bid price as reported by the principal securities exchange on which the
Common Stock is listed or admitted to trading or by Nasdaq or, if not traded
thereon, the high bid price as reported by Nasdaq or, if not quoted thereon, the
high bid price on the OTC Bulletin Board or in the National Quotation Bureau
sheet listing for the Common Stock, or, if not listed therein, as determined in
good faith by the Board of Directors.
Provisions Relating to Optional Cash Redemption. Notice of redemption must
be mailed to each holder of Convertible Preferred Stock to be redeemed at his
last address as it appears upon the Company's registry books not less than 30
days nor more than 60 days prior to the date fixed for redemption (the
"Redemption Date"). On and after the Redemption Date, dividends will cease to
accumulate on shares of Convertible Preferred Stock called for redemption.
On or after the Redemption Date, holders of Convertible Preferred Stock
which have been redeemed shall surrender their certificates representing such
shares to the Company at its principal place of business or as otherwise
specified in the notice of redemption and thereupon either (i) the redemption
price of such shares shall be payable to the order of, or (ii) the shares of
Common Stock shall be issued to, the person whose name appears on such
certificate or certificates as the owner thereof; provided, that a holder of
Convertible Preferred Stock may elect to convert such shares into Common Stock
at any time prior to the Redemption Date.
From and after the Redemption Date, all rights of the holders of redeemed
shares shall cease with respect to such shares and such shares shall not
thereafter be transferred on the books of the Company or be deemed to be
outstanding for any purpose whatsoever.
Voting Rights. The holders of Convertible Preferred Stock are not entitled
to vote, except as set forth below and as provided by applicable law. On matters
subject to a vote by holders of Convertible Preferred Stock, the holders are
entitled to one vote per share.
The affirmative vote of at least: (i) two-thirds of the shares of
Convertible Preferred Stock, voting as a class, shall be required to authorize,
effect or validate the creation and issuance of any class or series of stock
ranking superior to; and (ii) a majority of the shares of Convertible Preferred
Stock, voting as a class, shall be required to authorize, effect or validate the
creation and issuance of any class or series of stock ranking on parity with,
the Convertible Preferred Stock with respect to the declaration and payment of
dividends or distribution of assets on liquidation, dissolution or winding-up.
In the event that the Company has the right to redeem the Convertible Preferred
Stock, no such vote is required if, prior to the time such class is issued,
provision is made for the redemption of all shares of Convertible Preferred
Stock and such Convertible Preferred Stock is redeemed on or prior to the
issuance of such class.
In the event that the Company fails to pay any dividends for four
consecutive quarterly dividend payment periods, the holders of the Convertible
Preferred Stock, voting separately as a class, shall be entitled to elect two
directors. Such right will be terminated as of the next annual meeting of
stockholders of the Company following payment of all accrued dividends.
Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Company, before any payment or distribution of
the assets of the Company (whether capital or surplus), or the proceeds thereof,
may be made or set apart for the holders of Common Stock or any stock ranking
junior to Convertible Preferred Stock, the holders of Convertible Preferred
Stock will be entitled to receive, out of the assets of the Company available
for distribution to stockholders, a liquidating distribution of $________ per
share, plus any accumulated and unpaid dividends. If, upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the assets of
the Company are insufficient to make the full payment of $________ per share,
plus all accumulated and unpaid dividends on the Convertible Preferred Stock and
similar payments on any other class of stock ranking on a parity with the
Convertible Preferred Stock upon liquidation, then the holders of Convertible
Preferred Stock and such other shares will share ratably in any such
distribution of the Company's assets in proportion to the full respective
distributable amounts to which they are entitled.
49
A consolidation or merger of the Company with or into another corporation
or sale or conveyance of all or substantially all the property and assets of the
Company will not be deemed to be a liquidation, dissolution or winding-up,
voluntary or involuntary, of the Company for purposes of the foregoing.
Miscellaneous. The Company is not subject to any mandatory redemption or
sinking fund provision with respect to the Convertible Preferred Stock. The
holders of the Convertible Preferred Stock are not entitled to preemptive rights
to subscribe for or to purchase any shares or securities of any class which may
at any time be issued, sold or offered for sale by the Company. Shares of
Convertible Preferred Stock redeemed or otherwise reacquired by the Company
shall be retired by the Company and shall be unavailable for subsequent issuance
as any class of the Company's Preferred Stock.
Indemnification of Officers and Directors
The Company's Certificate of Incorporation provides that a director shall
not be personally liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except to the extent that
the elimination or limitation of liability is not permitted under the Delaware
General Corporation Law as in effect when such liability is determined. The
General Corporation Law of the State of Delaware limits the personal liability
of a director or officer to the Company for monetary damages for breach of
fiduciary duty or care as a director. Liability is not limited for (i) any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) unlawful payment of dividends or stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit. This limitation does not eliminate the
liability for violation of federal securities laws. The Company's by-laws
provide that the Company shall, to the fullest extent permitted under Delaware
law, indemnify its officers and directors.
Delaware Law and Certain Provisions of the Certificate of Incorporation and
By-Laws
The Company's Certificate of Incorporation (the "Certificate") and By-Laws
include provisions that could make more difficult the acquisition of the Company
by means of a merger, tender offer, a proxy contest or otherwise. These
provisions, as described below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of the Company first to negotiate with the
Company. These provisions may also, however, inhibit a change in control of the
Company in circumstances that could give the holders of the Common Stock the
opportunity to realize a premium over the then prevailing market price of the
Common Stock. In addition, such provisions could adversely affect the market
price for the Common Stock. The Company believes that the benefits of increased
protection of its potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure the Company
outweigh the disadvantages of discouraging such proposals because, among other
things, negotiations with respect to such proposals could result in an
improvement of their terms.
The Certificate and the By-Laws provide that the Board of Directors (the
"Board") will be divided into three classes of directors, with the term of each
class expiring in a different year. See "Management." The By-Laws provide that
the number of directors will be fixed from time to time exclusively by the
Board, but shall consist of not more than 15 nor less than three directors. A
majority of the Board then in office has the sole authority to fill any
vacancies on the Board. The Certificate provides that directors may be removed
only by the affirmative vote of holders of at least 75% of the voting power of
all of the then outstanding shares of stock entitled to vote generally in the
election of directors ("Voting Stock"), voting together as a single class.
The Certificate provides that stockholder action can be taken only at an
annual or special meeting of stockholders and prohibits stockholder action by
written consent in lieu of a meeting. The Certificate and By-Laws provide that
special meetings of stockholders can be called by the Chairman of the Board of
the Company, pursuant to a resolution approved by a majority of the total number
of directors which the Company would have if there were no vacancies on the
Board, or by the stockholders owning at least 20% of the stock entitled to vote
at the meeting. The business permitted to be conducted at any special meeting of
stockholders is limited to the business brought before the meeting by the
Chairman of the Board, or at the request of a majority of the members of the
Board, or as specified in the stockholders' notice of a meeting.
50
The By-Laws set forth an advance notice procedure with regard to the
nomination, other than by or at the direction of the Board, of candidates for
election as directors and with regard to business brought before an annual
meeting of stockholders of the Company.
The Certificate and By-Laws contain provisions requiring the affirmative
vote of the holders of at least 75% of the Voting Stock, voting together as a
single class, to amend certain provisions of the Certificate relating primarily
to anti-takeover provisions and to the limitations on director liability.
The Certificate empowers the Board, when considering a tender offer or
merger or acquisition proposal, to take into account factors in addition to
potential economic benefits to stockholders. Such factors may include (i)
comparison of the proposed consideration to be received by stockholders in
relation to the then current market price of the capital stock, the estimated
current value of the Company in a freely negotiated transaction, and the
estimated future value of the Company as an independent entity; (ii) the impact
of such a transaction on the customers and employees of the Company, and its
effect on the communities in which the Company operates; and (iii) the ability
of the Company to fulfill its objectives under applicable statutes and
regulations.
The Certificate prohibits the Company from purchasing any shares of the
Company's stock from any person, entity or group that beneficially owns 5% or
more of the Company's Voting Stock at a price exceeding the average closing
price for the 20 trading days prior to the purchase date, unless a majority of
the Company's disinterested stockholders approve the transaction. This
restriction on purchases by the Company does not apply to any offer to purchase
shares of a class of the Company's stock which is made on the same terms and
conditions to all holders of that class of stock, to any purchase of stock owned
by such a 5% stockholder occurring more than two years after such stockholder's
last acquisition of the Company's stock, to any purchase of the Company's stock
in accordance with the terms of any stock option or employee benefit plan, or to
any purchase at prevailing market prices pursuant to a stock purchase program.
Section 203 of the Delaware General Corporation Law ("DGCL") is applicable
to corporations organized under the laws of the State of Delaware. Subject to
certain exceptions set forth therein, Section 203 of the DGCL provides that a
corporation may not engage in any business combination with any "interested
stockholder" for a three-year period following the date that such stockholder
becomes an interested stockholder unless (a) prior to such date, the Board of
Directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (b) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding certain shares) or (c) on or subsequent to such
date, the business combination is approved by the Board of Directors of the
corporation and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the interested stockholder. Except as
specified therein, an interested stockholder is defined to mean any person that
(i) is the owner of 15% or more of the outstanding voting stock of the
corporation, or (ii) is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within three years immediately prior to the relevant date, and the
affiliates and associates of such person referred to in clause (i) or (ii) of
this sentence. Under certain circumstances, Section 203 of the DGCL makes it
more difficult for an interested stockholder to effect various business
combinations with a corporation for a three-year period, although the
stockholders may, by adopting an amendment to the corporation's certificate of
incorporation or by-laws, elect not to be governed by this section, effective 12
months after adoption. The Company's Certificate and By-Laws do not exclude the
Company from the restrictions imposed under Section 203 of the DGCL. It is
anticipated that the provisions of Section 203 of the DGCL may encourage
companies interested in acquiring the Company to negotiate in advance with the
Board.
51
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, 2,900,000 shares of Common Stock
and 1,000,000 shares of Convertible Preferred stock will be outstanding
(3,095,000 shares of Common Stock and 1,150,000 shares of Convertible Preferred
Stock if the Over-allotment Option is exercised in full). The 1,300,000 shares
of Common Stock and 1,000,000 shares of Convertible Preferred Stock sold in this
Offering (1,495,000 shares of Common Stock and 1,150,000 shares of Convertible
Preferred Stock if the Over-allotment Option is exercised in full) will be
freely tradeable without restrictions or further registration under the
Securities Act unless acquired by an "affiliate" of the Company (as that term is
defined in the Securities Act), in which case such Shares will be subject to the
resale limitations of Rule 144 under the Securities Act ("Rule 144").
The remaining 1,600,000 shares of Common Stock which will be outstanding
upon the consummation of this Offering have been issued by the Company in
private transactions in reliance upon the "private placement" exception under
Section 4(2) of the Securities Act in connection with the organization of the
Company, and are therefore "restricted securities" within the meaning of Rule
144 ("Restricted Securities"). In general, under Rule 144 as currently in
effect, a stockholder who has beneficially owned for at least one year shares
privately acquired, directly or indirectly, from the Company or from an
affiliate of the Company, and persons who are affiliates of the Company, will be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) 1% of the outstanding shares of Common Stock, or (ii)
the average weekly trading volume of shares during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements relating to the manner and notice of sale and the availability of
current public information about the Company.
The existing stockholders, and the holders of the Bridge Notes (and any
other holders of outstanding securities exercisable for or convertible into
Common Stock) have agreed not to, directly or indirectly, issue, agree or offer
to sell, sell, transfer, assign, distribute, grant an option for purchase or
sale of, pledge, hypothecate or otherwise encumber or dispose of ("Sell") any
beneficial interest in such securities until the expiration of 18 months from
the date of this Prospectus and until such time after the expiration of such 18
months that the closing bid price of the Common Stock has been at least $18.00
for any 20 trading days within a period of any consecutive 30 trading days
without the prior written consent of the Company and the Representative other
than (x) shares of Common Stock transferred pursuant to bona fide gifts where
the transferee agrees in writing to be similarly bound, or (y) securities
transferred through the laws of descent or (z) Common Stock or Convertible
Preferred Stock that has been pledged, where the pledgee has agreed in writing
to be bound by such restriction. Upon the occurrence of these events, all such
shares may be sold subject to the limitations of and in accordance with Rule
144, and these 1,600,000 shares will be available for sale in the public market
subject to certain volume and resale restrictions, as described below.
Additional shares of Common Stock and Convertible Preferred Stock, including
shares issuable upon exercise of (i) up to 340,000 options granted in accordance
with the Stock Option Plan, (ii) 50,000 options granted to Carl Massaro (the
"Massaro Options"), and (iii) the Representative's Warrants will also become
eligible for sale in the public market from time to time in the future.
The Company has reserved 390,000 shares of Common Stock for issuance under
the Stock Option Plan and the Massaro Options. At appropriate times subsequent
to completion of this Offering, the Company may file registration statements
under the Securities Act to register the Common Stock to be issued under the
Stock Option Plan and the Massaro Options. After the effective date of such
registration statements, and subject to the lock-up agreement executed by
existing shareholders, shares issued under the Plan will be freely tradeable
without restriction or further registration under the Securities Act, unless
acquired by affiliates of the Company.
Prior to this Offering, there has been no market for the Common Stock. No
prediction can be made with respect to the effect, if any, that public sales of
shares of the Common Stock or the availability of shares for sale will have on
the market price of the Common Stock after this Offering. Sales of substantial
amounts of the Common Stock in the public market following this Offering, or the
perception that such sales may occur, could adversely affect the market price of
the Common Stock the ability of the Company to raise capital through sales of
its equity securities.
52
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States
federal income tax considerations relevant to the purchase, ownership and
disposition of the Convertible Preferred Stock and the Common Stock by the
holders thereof, but does not purport to be a complete analysis of the relevant
tax issues. The discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations, Internal Revenue Service ("IRS")
rulings and pronouncements and judicial decisions in effect as of the date
hereof, all of which are subject to change at any time, and any such change may
be applied retroactively in a manner that could adversely affect a holder of any
such stock. The discussion does not address all of the federal income tax
consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as certain
financial institutions, tax-exempt organizations, insurance companies, dealers
in securities, foreign investors and persons holding either or both of the
Convertible Preferred Stock and the Common Stock as part of a "straddle,"
"hedge" or "conversion transaction." Moreover, the effect of any applicable
state, local or foreign tax laws is not discussed. The discussion deals only
with investors who hold Convertible Preferred Stock and Common Stock as "capital
assets" within the meaning of section 1221 of the Code.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS.
Distributions on Stock
Distributions on the Convertible Preferred Stock and the Common Stock will
be taxable as ordinary income to the extent that the amount distributed does not
exceed the Company's current or accumulated earnings and profits (as determined
for federal income tax purposes). To the extent that the amount of distributions
exceeds the Company's current or accumulated earnings and profits (as determined
for federal income tax purposes), a distribution will be treated as a return of
capital, thus reducing the holder's adjusted tax basis in such stock. The amount
of any such excess distribution that is greater than the holder's adjusted basis
in the stock with respect to which a distribution is made will be taxed as
capital gain and will be long-term capital gain if the holder's holding period
for such stock exceeds one year. For purposes of the remainder of this
discussion, the term "dividend" refers to a distribution taxed as ordinary
income as described above, unless the context indicates otherwise.
Dividends on the Convertible Preferred Stock and the Common Stock received
by corporate holders will be eligible for the 70% dividends-received deduction
under Section 243 of the Code, subject to limitations generally applicable to
the dividends-received deductions, including those contained in Sections 246 and
246A of the Code and the corporate alternative minimum tax. The 70%
dividends-received deduction may be reduced if a holder's shares with respect to
which a dividend was received are "debt financed." In addition, the availability
of the 70% dividends received deduction is subject to the satisfaction of
holding period requirements under Section 246(c) of the Code (generally 45 days
for the Common Stock and 90 days for the Convertible Preferred Stock). The
length of time that a holder is deemed to have held stock for these purposes is
reduced for periods during which the holder's risk of loss with respect to the
stock is diminished by reason of the existence of certain options, contracts to
sell, short sales or other similar transactions. Section 246(c) of the Code also
denies the 70% dividends received deduction to the extent that a corporate
holder is under an obligation, with respect to substantially similar or related
property, to make payments corresponding to the dividend received. Under Section
246(b) of the Code, the aggregate dividends-received deductions allowed
generally may not exceed 70% of the taxable income, with certain adjustments, of
the corporate shareholder.
In general, under Section 1059 of the Code, the tax basis of stock that
has been held by a corporate shareholder for two years or less (determined as of
the earliest of the date on which the Company declares, announces or agrees to
the payment of an actual or constructive dividend) is reduced (but not below
zero) by the non-taxed portion of an "extraordinary dividend" for which a
dividends-received deduction is allowed. In addition, such corporate holder will
recognize gain in the year in which the extraordinary dividend is received to
the extent that its tax basis would have been reduced below zero but for the
foregoing limitation. Generally, an "extraordinary dividend" is a dividend that
(i) equals or exceeds, in the case of preferred stock, 5% of the holder's basis
in such stock or 10% in the case of any other stock (computed by treating all
dividends having ex-dividend dates within an 85-day period as a single
53
dividend) or (ii) exceeds 20% of the holder's adjusted basis in its stock
(treating all dividends having ex-dividend dates within a 365-day period as a
single dividend). If an election is made by a holder, under certain
circumstances in applying these tests, the fair market value of its stock as of
the day before the ex-dividend date may be substituted for the holder's basis.
An "extraordinary dividend" would also include amounts received in the
case of certain redemptions of the Convertible Preferred Stock and the Common
Stock that are non-pro rata as to all shareholders, without regard to the period
the holder held the stock.
Special rules apply with respect to "qualified preferred dividends." A
qualified preferred dividend is any fixed dividend payable with respect to
preferred stock which (i) provides for fixed preferred dividends payable no less
often than annually and (ii) is not in arrears as to dividends when acquired,
provided the actual rate of return as determined under Section 1059(e)(3) of the
Code on such stock does not exceed 15%. A qualified preferred dividend will not
be treated as an extraordinary dividend if the taxpayer holds the stock for more
than five years. In addition, if the taxpayer disposes of the stock before it
has been held for more than five years, the aggregate reduction in basis will
not exceed the excess of the qualified preferred dividends paid on such stock
during the period held by the taxpayer over the qualified preferred dividends
which would have been paid during such period on the basis of the stated rate of
return as determined under Section 1059(e)(3) of the Code. The length of time
that a taxpayer is deemed to have held stock for purposes of the extraordinary
dividend rules is determined under principles similar to those applicable for
purposes of the dividends-received deduction discussed above.
Conversion of Convertible Preferred Stock
Conversion of the Convertible Preferred Stock into Common Stock will not
result in the recognition of gain or loss (except with respect to cash received
in lieu of fractional shares). The holders's adjusted tax basis in the Common
Stock received upon conversion would be equal to the holder's tax basis in the
shares of Convertible Preferred Stock converted, reduced by the portion of such
basis allocable to the fractional share interest exchanged for cash. The holding
period for the Common Stock received upon conversion would include the holding
period of the Convertible Preferred Stock converted.
Redemption or Other Disposition of Stock
In the event the Company exercises its right to redeem the Convertible
Preferred Stock, the redemption proceeds will generally be treated as a sale or
exchange if the holder does not own, actually or constructively, within the
meaning of Section 318 of the Code, any stock of the Company other than the
stock redeemed. If a holder does own, actually or constructively, such other
stock, a redemption of stock may be treated as a dividend to the extent of the
Company's current or accumulated earnings and profits (as determined for federal
income tax purposes). Such dividend treatment would not apply and the redemption
would be treated as a sale or exchange if the redemption is "substantially
disproportionate" with respect to the holder under Section 302(b)(2) of the Code
or is "not essentially equivalent to a dividend" with respect to the holder
under Section 302(b)(1) of the Code. A distribution to a holder will be "not
essentially equivalent to a dividend" if it results in a "meaningful reduction"
in the holder's stock interest in the Company. A redemption of stock for cash
that results in a reduction in the proportionate interest in the Company (taking
into account any constructive ownership) of a holder whose relative stock
interest in the Company is minimal and who exercises no control over corporate
affairs may be regarded as a "meaningful reduction" in the holder's stock
interest in the Company. In all cases, amounts of cash received upon redemption
of the Convertible Preferred Stock which represents declared and unpaid
dividends will be subject to taxation in the manner discussed under
"Distributions on Stock" above.
If a redemption of stock is treated as a distribution that is taxable as a
dividend, the amount of the distribution will be measured by the amount received
by the holder. The holder's adjusted tax basis in the redeemed stock will be
transferred to his remaining stock holdings in the Company. If the holder does
not retain any stock ownership in the Company, the holder may lose such basis
entirely.
Upon a redemption of stock that is not treated as a distribution taxable
as a dividend or upon a sale or other disposition of stock, the holder will
recognize capital gain or loss equal to the difference between the amount of
cash and the fair market value of property received and the holder's adjusted
tax basis in the stock that is redeemed, sold or disposed of. Such gain or loss
would be long-term capital gain or loss if the holding period for the stock
exceeded
54
one year. For corporate taxpayers, long-term capital gains are taxed at the same
rate as ordinary income. For individual taxpayers, net capital gains (the excess
of the taxpayer's net long-term capital gains over his net short-term capital
losses) are subject to a maximum tax rate of (i) 28%, if such stock was held for
more than one year but not more than 18 months or (ii) 20%, if such stock was
held for more than 18 months. The deductibility of capital losses are restricted
and, in general, may only be used to reduce capital gains to the extent thereof.
However, individual taxpayers generally may deduct annually $3,000 of capital
losses in excess of their capital gains. Capital losses which cannot be utilized
because of the aforementioned limitation are, for corporate taxpayers carried
back three years and, in most circumstances, carried forward for five years; for
individual taxpayers, capital losses may only be carried forward without a time
limitation.
Proposed Legislation
The President has previously proposed legislation which would reduce the
70% dividends-received deduction to 50%. Although such legislation was not
enacted as part of the recently enacted Taxpayer Relief Act of 1997, it cannot
be predicted with certainty whether in the future such proposal will be enacted
into law or, if enacted, what would be its effective date. Corporate holders of
stock are urged to consult their own tax advisors regarding the possible effects
of such proposed legislation.
Backup Withholding
A holder of the Convertible Preferred Stock or Common Stock may be subject
to backup withholding at a rate of 31% with respect to dividends thereon and
gross proceeds upon sale, exchange or retirement of such stock, unless such
holder (i) is a corporation or other exempt recipient and, when required,
demonstrates that fact, or (ii) provides a correct taxpayer identification
number, certifies, when required, that such holder is not subject to backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. Backup withholding is not an additional tax; any amounts so
withheld are creditable against the holder's federal income tax, provided the
required information is provided to the IRS. A holder who does not provide the
Company with a correct taxpayer identification number may be subject to
penalties imposed by the IRS. Holders should consult their tax advisors
regarding their qualification for exemption from backup withholding and the
procedure for obtaining any applicable exemption.
EACH PROSPECTIVE HOLDER OF CONVERTIBLE PREFERRED STOCK OR COMMON STOCK SHOULD
CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OF
HOLDING OR DISPOSING OF SUCH STOCK INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL, OR FOREIGN INCOME TAX LAWS, AND ANY RECENT OR PROSPECTIVE CHANGES
IN APPLICABLE TAX LAWS.
55
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Westport
Resources Investment Services, Inc. is acting as Representative, have severally
agreed, subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") to purchase from the Company and the Company has
agreed to sell to the Underwriters on a firm commitment basis, the respective
number of shares of Convertible Preferred Stock and Common Stock set forth
opposite their names:
Number of Shares
of Convertible Number of Shares
Underwriters Preferred Stock of Common Stock
------------ --------------- ---------------
Westport Resources ....................
Investment Services, Inc ..............
Dirks & Company, Inc. .................
Millennium Financial Group, Inc. ......
RAF Financial Corporation .............
Total ............................. 1,000,000 1,300,000
========= =========
The Underwriters are committed to purchase all the Securities offered
hereby, if any of such Securities are purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to
conditions precedent specified therein.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering price, set forth on the cover page of this Prospectus and to certain
dealers at such price less concessions not in excess of $________ per share of
Common Stock and $________ per share of Convertible Preferred Stock. Such
dealers may re-allow a concession not in excess of $________ per share of Common
Stock and $________ per share of Convertible Preferred Stock to certain other
dealers. After the commencement of this Offering, the public offering price,
concession and reallowance may be changed by the Representative.
The Representative has informed the Company that it does not expect sales
to discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make. The Company has also
agreed to pay to the Representative a non-accountable expense allowance equal to
three percent of the gross proceeds derived from the sale of the Securities
underwritten, of which $50,000 has been paid to date.
The Company has granted to the Underwriters an Over-allotment Option,
exercisable during the 45 day period from the date of this Prospectus, to
purchase up to 150,000 shares of Convertible Preferred Stock and 195,000 shares
of Common Stock at the initial public offering prices per share of Common Stock
and Convertible Preferred Stock offered hereby, less underwriting discounts and
the non-accountable expense allowance. Such option may be exercised only for the
purpose of covering over-allotments, if any, incurred in the sale of the
Securities offered hereby. To the extent such option is exercised in whole or in
part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional Securities proportionate to
its initial commitment.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the Company
up to 130,000 shares of Common Stock and 100,000 shares of Preferred Stock. The
Representative's Warrants are initially exercisable at a price of ___% of the
initial public offering price per share of Common Stock and ___% of the initial
public offering price per share of Convertible Preferred Stock. The
Representative's Warrants are restricted from sale, transfer, assignment or
hypothecation for a period of 12 months from the date hereof, except to the
respective officers of the Representative and may be exercised for a period of
four years, commencing at the beginning of the second year after their issuance
and sale. The Representative's Warrants provide for adjustment in the number of
shares of Common Stock issuable upon the exercise thereof and in the exercise
price of the Representative's Warrants as a result of certain events, including
subdivisions and combinations of the Common Stock. The Representative's Warrants
grant to the holders thereof certain demand and "piggyback" rights of
registration for the securities issuable upon exercise thereof.
56
All officers, directors and existing stockholders of the Company, and all
holders of any outstanding options, warrants or other securities (including Carl
Massaro and the holders of the Bridge Notes) convertible, exercisable or
exchangeable for or convertible into shares of Common Stock have agreed not to,
directly or indirectly, issue, offer, agree or offer to sell, sell, transfer,
assign, encumber, grant an option for the purchase or sale of, pledge,
hypothecate or otherwise dispose ("Sell") of any beneficial interest in such
securities until the expiration of 18 months following the date of this
Prospectus and until such time after the expiration of such 18 months that the
closing bid price of the Common Stock has been at least $18.00 for any 20
trading days within a period of any consecutive 30 trading days without the
prior written consent of the Representative other than (x) shares of Common
Stock transferred pursuant to bona fide gifts where the transferee agrees in
writing to be similarly bound, (y) securities transferred through the laws of
descent or (z) Common Stock or Convertible Preferred Stock that has been
pledged, where the pledgee has agreed in writing to be similarly bound. An
appropriate legend shall be marked on the face of certificates representing all
such securities.
The Company has agreed not to, directly or indirectly, without the prior
written consent of Westport Resources Investment Services, Inc., issue, sell,
agree or offer to sell, grant an option for the purchase or sale of, or
otherwise transfer or dispose of any of its securities for a period of 12 months
following the date of this Prospectus, except (x) pursuant to the exercise of
the Representative's Warrants, the Massaro Options or the Stock Option Plan or
(y) debt under certain circumstances in connection with bona fide business
acquisitions and/or expansions consistent with the Company's business plans as
generally described in this Prospectus.
The Company has agreed for a period of three years after the date hereof,
if requested by Westport Resources Investment Services, Inc., to use its best
efforts to nominate for election to the Company's Board of Directors one person
designated by Westport Resources Investment Services, Inc. In the event Westport
Resources Investment Services, Inc. elects not to exercise such right, Westport
Resources Investment Services, Inc. may designate a person to receive all
notices of meetings of the Company's Board of Directors and all other
correspondence and communications sent by the Company to its Board of Directors
and to attend all such meetings of the Company's Board of Directors. The Company
has agreed to reimburse designees of Westport Resources Investment Services,
Inc. for their out-of-pocket expenses incurred in connection with their
attendance of meetings of the Company's Board of Directors.
Prior to this Offering, there has been no public market for the
Securities. Consequently, the initial public offering prices of the Securities
and the terms of the Convertible Preferred Stock have been determined by
negotiation between the Company and the Representative and do not necessarily
bear any relationship to the Company's asset value, net worth, or other
established criteria of value. The factors considered in such negotiations, in
addition to prevailing market conditions, included the history of and prospects
for the industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure, the market for
initial public offerings and certain other factors as were deemed relevant.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Securities. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase
Convertible Preferred Stock or Common Stock for the purpose of stabilizing their
respective market prices. The Underwriters also may create a short position for
the account of the Underwriters by selling more Securities in connection with
this Offering than they are committed to purchase from the Company, and in such
case may purchase Securities in the open market following completion of this
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position by exercising the
Over-allotment Option referred to above. In addition, the Representative, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in this Offering) for the account of other
Underwriters, the selling concession with respect to Securities that are
distributed in this Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Securities at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
57
Westport Resources Investment Services, Inc. has agreed to share its
compensation and rights under the Underwriting Agreement with Dirks & Company,
Inc., Millennium Financial Group, Inc. and RAF Financial Corporation.
The foregoing is a summary of the principal terms of the agreements
described above. Reference is made to the copies of such agreements which are
filed as exhibits to the Registration Statement of which this Prospectus is a
part for a more complete description thereof. See "Additional Information."
LEGAL MATTERS
The legality of the Securities offered hereby will be passed upon for the
Company by Phillips Nizer Benjamin Krim & Ballon LLP, New York, New York. Orrick
Herrington & Sutcliffe LLP, New York, New York, has acted as counsel for the
Underwriters in connection with this Offering.
EXPERTS
The financial statements and schedules included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of said firm
as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement
(together with all amendments and exhibits thereto, the "Registration
Statement") on Form S-1 under the Securities Act with respect to the Securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. The Company
will provide without charge to each person who receives a prospectus, upon
written or oral request of such person, a copy of any of the information that
was incorporated by reference in the prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are themselves
specifically incorporated by reference). Any such request shall be directed to:
Standard Automotive Corporation, 321 Valley Road, Hillsborough Township, New
Jersey 08876-4056, telephone (908) 369-5544, Attn: Secretary.
The Registration Statement, including all exhibits and schedules thereto
may be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 219
South Dearborn Street, Chicago, Illinois 60604; 7 World Trade Center, New York,
New York 10048; and 5757 Wilshire Boulevard, Los Angeles, California 90036.
Copies of such material, including the Registration Statement, can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material may also be accessed
electronically at the Commission's site on the World Wide Web located at
http:\\www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and with quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information. In addition, after this Offering, the Company will be subject to
the information requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith, will file reports, proxy statements and other
information with the Securities and Exchange Commission. The Company's fiscal
year end is March 31.
58
INDEX TO FINANCIAL STATEMENTS
Page
-----
Standard Automotive Corporation
Report of Independent Certified Public Accountants .......... F-2
Balance Sheets .............................................. F-3
Statement of Operations ..................................... F-4
Statement of Cash Flows ..................................... F-4
Notes to Balance Sheets ..................................... F-5
Ajax Manufacturing Company
Report of Independent Certified Public Accountants .......... F-6
Financial Statements
Balance Sheets .............................................. F-7
Statements of income and retained earnings .................. F-8
Statements of cash flows .................................... F-9
Notes to financial statements ............................... F-10
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS
STANDARD AUTOMOTIVE CORPORATION:
We have audited the accompanying balance sheet of Standard Automotive
Corporation (the "Company"), as of March 31, 1997. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet 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 balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 1 to the balance sheet, the Company was formed in
January 1997 and has entered into a definitive agreement for the acquisition of
Ajax Manufacturing Company, concurrently with the consummation of an initial
public offering of its common and preferred stock.
In our opinion, the balance sheet referred to above presents fairly, in
all material aspects, the financial position of Standard Automotive Corporation
as of March 31, 1997 in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
Woodbridge, New Jersey
August 11, 1997
F-2
STANDARD AUTOMOTIVE CORPORATION
BALANCE SHEETS
(Unaudited)
March 31, September 30,
--------- -------------
1997 1997
--------- ---------
ASSETS:
Capitalized Acquisition and Financing Costs .......... $ 375,000 $ 792,000
--------- ---------
Total ................................................ $ 375,000 $ 792,000
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accrued expenses ..................................... $ 375,000 $ 482,000
Accrued interest ..................................... -- 6,000
Accrued obligation on settlement of Bridge
Note payable ....................................... -- 151,000
Note payable ......................................... -- 325,000
--------- ---------
Total liabilities .................................... 375,000 964,000
--------- ---------
Stockholders' Equity
Preferred Stock: $.001 par value, 3,000,000
shares authorized, none issued and outstanding .... -- --
Common Stock: $.001 par value 10,000,000 shares
authorized, 1,567,500 issued and outstanding ..... 1,567 1,567
Common Stock Subscription Receivable ................. (1,567) (1,567)
Accumulated deficit .................................. -- (172,000)
--------- ---------
Total Stockholders' Equity ........................... 0 0
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $ 375,000 $ 792,000
========= =========
See accompanying notes to financial statements.
F-3
STANDARD AUTOMOTIVE CORPORATION
STATEMENT OF OPERATIONS
For the Three Months Ended
September 30, 1997
(Unaudited)
Revenues .................................................... $ --
---------
Interest expense related to Bridge Notes .................... 172,000
---------
Total Expenses .............................................. 172,000
---------
Loss before income taxes .................................... (172,000)
Tax benefit ................................................. --
---------
Net loss .................................................... $(172,000)
=========
-------------------
STANDARD AUTOMOTIVE CORPORATION
STATEMENT OF CASH FLOWS
For the Three Months Ended
September 30, 1997
(Unaudited)
Cash flows from operating activities:
Net Loss .................................................... $(172,000)
---------
Adjustments to reconcile net income to net cash
used in operations:
Accretion of interest expense related to
settlement of Bridge Notes payable ........................ 151,000
Amortization of Financing Fees .............................. 15,000
Accrued expenses ............................................ (319,000)
---------
Net cash used in operations ................................. (325,000)
---------
Cash flows provided by financing activities:
Proceeds from issuance of Bridge Notes ...................... 325,000
---------
Net cash provided by financing activities ................... 325,000
---------
Net change in cash ............................................ 0
Cash, beginning of period ..................................... 0
---------
Cash, end of period ........................................... $ 0
=========
See accompanying notes to financial statements.
F-4
STANDARD AUTOMOTIVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organizational and General
Standard Automotive Corporation (the "Company") was formed and
incorporated in January 1997. The Company has conducted no operations to date.
Concurrent with its acquisition of Ajax Manufacturing Company ("Ajax"), the
Company has incurred certain costs related to this transaction. The Company has
capitalized approximately $375,000 and $775,000 (unaudited) of such costs at
March 31, 1997 and September 30, 1997, respectively. The acquisition agreement
was executed on August 11, 1997. The acquisition of Ajax is to be funded from
the proceeds of an initial public offering of the Company's common and preferred
stock. Of the total amount of 3,000,000 authorized shares of Preferred Stock,
the Company has reserved 1,150,000 shares in connection with the acquisition of
Ajax. Of the total amount of 10,000,000 authorized shares of Common Stock, the
Company has reserved 1,495,000 in connection with the acquisition of Ajax.
The Company maintains its books and records on the accrual basis of
accounting.
Common Stock was issued to the Company's founders and principals at
nominal values, which approximated management's assessment of the fair values of
such securities at the date of issuance. At that time, the Company had conducted
no business and the probability of consummating the acquisition of Ajax could
not be predicted with any degree of certainty.
Note 2 - Unaudited Interim Statements
The financial statements as of and for the three months ended September
30, 1997 are unaudited; however in the opinion of management all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim period have been made.
Based on an assessment of all available evidence, including the lack of
historical positive operating trends, management concluded that the realization
of the deferred tax asset (approximately $70,000 at September 30, 1997) could
not be considered more likely than not. Accordingly, a valuation allowance was
established against the deferred tax asset.
Note 3 - Bridge Financing (Unaudited)
In August 1997, the Company obtained $325,000 in Bridge Financing ("Bridge
Notes") from third party investors. Upon consummation of the initial public
offering, the Company will repay the principal amount of bridge notes along with
interest thereon at the annual rate of 12% from the date of issuance and issue
holders of the bridge notes a sufficient number of shares of common stock to
equal the principal amount of the bridge notes, determined by the initial public
offering price per share of the Company's common stock. The Company incurs a
charge to operations in the period that the Bridge Notes are outstanding.
Interest expense on the anticipated issuance of common stock to Bridge Notes
investors (based upon an estimated issuance date of November 30, 1997) totalled
$151,000 for the three months ended September 30, 1997. Interest expense on the
Bridge Notes totalled $6,000 for the three months ended September 30, 1997.
Note 4 - Subsequent Event (Unaudited)
On November 10, 1997, the Company effected a reverse stock split which
reduced the number of shares of the Company outstanding from 2,067,500 to
1,567,500. All references to share and per share data have been changed
accordingly.
F-5
Report of Independent Certified Public Accountants
Ajax Manufacturing Company
Hillsborough Township, New Jersey
We have audited the accompanying balance sheets of Ajax Manufacturing
Company as of March 31, 1996 and 1997, and the related statements of income and
retained earnings, and cash flows for each of the three years in the period
ended March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ajax Manufacturing Company
as of March 31, 1996 and 1997 and the results of its operations and its cash
flows for each of the three years in the period ended March 31, 1997 in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
June 3, 1997 (August 11, 1997 as to Note 11 and November 7, 1997 as to the last
paragraph of Note 10)
F-6
Ajax Manufacturing Company
Balance Sheets
(Unaudited)
March 31, September 30,
----------------- -------------
1996 1997 1997
----- ----- -----
Assets
Current:
Cash and cash equivalents ............... $1,482,069 $1,558,398 $ 583,068
Accounts receivable (net of allowance
for doubtful accounts of $22,800 at
March 31, 1996 and $30,000 at
March 31, 1997 and September 30, 1997) . 750,882 2,536,336 1,685,451
Inventory (Note 3) .................... 3,341,095 3,514,923 5,874,765
Other receivables ..................... 94,019 -- --
Prepaid expenses (Note 8) ............. 158,304 219,505 236,712
Deferred taxes (Note 7) ............... 199,000 205,000 716,000
---------- ---------- -----------
Total current assets ................ 6,025,369 8,034,162 9,095,996
---------- ---------- -----------
Property and equipment, net of accumulated
depreciation and amortization of
$2,422,780 at March 31, 1996, $2,539,307
at March 31, 1997 and $2,605,309 at
September 30, 1997 (Note 4) ............ 946,315 993,649 1,064,144
---------- ---------- -----------
Other assets:
Loans receivable - related parties
(Note 8) .............................. -- 300,000 561,000
---------- ---------- -----------
Total assets ........................ $6,971,684 $9,327,811 $10,721,140
========== ========== ===========
Liabilities and Stockholder's Equity
Current:
Accounts payable ......................... $ 567,071 $1,179,028 $1,221,651
Accrued expenses ......................... 239,104 669,923 62,552
Accrued Excise Tax Settlement (Note 10) .. -- -- 828,862
Income taxes payable .................... 657,643 244,087 891,086
---------- ---------- -----------
Total current liabilities ............ 1,463,818 2,093,038 3,004,151
Long-term liabilities:
Deferred income taxes (Note 7) ........... 13,000 12,000 12,000
---------- ---------- -----------
Total liabilities .................... 1,476,818 2,105,038 3,016,151
---------- ---------- -----------
Commitments and contingencies
(Notes 8 and 10)
Stockholder's equity:
Common stock, no par value 100 shares
authorized, 75 shares issued and
outstanding ........................... 1,000 1,000 1,000
Retained earnings ........................ 5,493,866 7,221,773 7,703,989
---------- ---------- -----------
Total stockholder's equity ........... 5,494,866 7,222,773 7,704,989
---------- ---------- -----------
Total liabilities and
stockholder's equity ............. $6,971,684 $9,327,811 $10,721,140
========== ========== ===========
See accompanying notes to financial statements.
F-7
Ajax Manufacturing Company
Statements of Income and Retained Earnings
Years ended Six months ended
March 31, September 30,
----------------------------------- ----------------------
1995 1996 1997 1996 1997
------ ------ ------ ----- -----
(Unaudited) (Unaudited)
Net sales (Note 9) .......................... $33,406,612 $42,537,553 $22,355,871 $8,780,895 $11,170,153
Operating costs and expenses:
Cost of sales (Note 8) .................... 30,710,595 33,973,010 17,027,441 6,945,652 8,880,509
Selling, general and administrative
expenses (Note 8) ...................... 1,148,843 3,082,402 2,509,947 1,073,526 674,529
----------- ----------- ----------- ---------- -----------
Total operating costs and expenses .... 31,859,438 37,055,412 19,537,388 8,019,178 9,555,038
----------- ----------- ----------- ---------- -----------
Operating income ............................ 1,547,174 5,482,141 2,818,483 761,717 1,615,115
Interest expense (Notes 5 and 6) ............ (338,869) (117,501) -- -- --
Other income (expense):
Excise tax settlement (Note 10) ........... -- -- -- -- (828,862)
Investment income ......................... 7,384 49,520 77,424 32,422 31,963
Legal settlements (Note 10) ............... 66,700 35,003 -- -- --
----------- ----------- ----------- ---------- -----------
Income before income taxes and
extraordinary gain on extinguishment
of restructured debt .................. 1,282,389 5,449,163 2,895,907 794,139 818,216
Provision for income taxes (Note 7) ......... 498,000 2,195,000 1,168,000 326,000 336,000
----------- ----------- ----------- ---------- -----------
Income before extraordinary gain on
extinguishment of restructured debt .. 784,389 3,254,163 1,727,907 468,139 482,216
Extraordinary gain on extinguishment of
restructured debt (net of taxes of
$62,640) (Note 6) ........................ -- 90,140 -- -- --
----------- ----------- ----------- ---------- -----------
Net income .................................. 784,389 3,344,303 1,727,907 468,139 482,216
Retained earnings, beginning of period ...... 1,365,174 2,149,563 5,493,866 5,493,866 7,221,773
----------- ----------- ----------- ---------- -----------
Retained earnings, end of period ............ $ 2,149,563 $ 5,493,866 $ 7,221,773 $5,962,005 $ 7,703,989
=========== =========== =========== ========== ===========
See accompanying notes to financial statements.
F-8
Ajax Manufacturing Company
Statements of Cash Flows
Years ended Six Months ended
March 31, September 30,
-------------------------------- -----------------
1995 1996 1997 1996 1997
------ ------ ------ ----- -----
(Unaudited)(Unaudited)
Cash flows from operating activities:
Net income ...................................... $ 784,389 $ 3,344,303 $ 1,727,907 $ 468,139 $ 482,216
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Extraordinary gain on extinguishment of
restructured debt .......................... -- (152,780) -- -- --
Interest expense on restructured debt ......... 69,390 5,000 -- -- --
Bad debt provision ............................ -- 22,800 7,200 -- --
Depreciation and amortization ................. 232,201 141,616 123,795 75,000 66,000
Deferred taxes ................................ (98,000) (1,000) (7,000) (233,000) (511,000)
Accounts receivable ........................... 714,807 (270,921) (1,792,654) (538,945) 850,885
Inventory ..................................... (681,423) 1,523,539 (173,828) 859,000 (2,359,842)
Other receivables ............................. (16,604) (53,355) 94,019 94,019 --
Prepaid expenses .............................. (60,486) 14,249 (61,201) (37,063) (17,207)
Accounts payable and accrued expenses ......... 941,545 (1,858,289) 1,042,776 435,368 (564,747)
Accrued Settlement ............................ -- -- -- -- 828,862
Income taxes payable .......................... 367,891 154,531 (413,556) (294,940) 646,999
---------- ----------- ----------- ---------- ---------
Net cash provided by (used in)
operating activities .................. 2,253,710 2,869,693 547,458 827,578 (577,834)
---------- ----------- ----------- ---------- ---------
Cash flows used in investing activities:
Issuance of note receivable - related parties .. (464,400) -- (300,000) (86,541) (261,000)
Repayments of note receivable - related parties . -- 464,400 -- -- --
Acquisition of property and equipment ........... (135,661) (139,048) (171,129) (67,090) (136,496)
---------- ----------- ----------- ---------- ---------
Net cash provided by (used in)
investing activities ................... (600,061) 325,352 (471,129) (153,631) (397,496)
---------- ----------- ----------- ---------- ---------
Cash flows used in financing activities:
Decrease in bank acceptances payable ............ (158,893) -- -- -- --
Repayment of restructured debt .................. -- (525,000) -- -- --
Repayments of loans to related parties .......... (316,144) (293,873) -- -- --
Payments on short term borrowings ............... (1,701,449) (1,406,019 -- -- --
---------- ----------- ----------- ---------- ---------
Net cash used in financing activities ..... (2,176,486) (2,224,892) -- -- --
---------- ----------- ----------- ---------- ---------
Net increase (decrease) in cash and
cash equivalents ............................... (522,837) 970,153 76,329 673,947 (975,330)
Cash and cash equivalents, beginning of period .... 1,034,753 511,916 1,482,069 1,482,069 1,558,398
---------- ----------- ----------- ---------- ---------
Cash and cash equivalents, end of period .......... $ 511,916 $ 1,482,069 $ 1,558,398 $2,156,016 $ 583,068
========== =========== =========== ========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .......................................... $ 261,668 $ 139,921 $ -- $ -- $ --
========== =========== =========== ========= =========
Income taxes ...................................... $ 114,000 $ 2,003,100 $ 1,720,620 $ 383,000 $ 200,000
========== =========== =========== ========= =========
See accompanying notes to financial statements.
F-9
Ajax Manufacturing Company
Notes to Financial Statements
1. Business Description. Ajax Manufacturing Company (the "Company" or
"Ajax") principally manufactures and refurbishes 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
Company's Stockholder; related costs were funded by the Company and reflected in
the accompanying financial statements.
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.
Inventory at September 30, 1997 has been costed using the gross-profit
method which was utilized in arriving at cost of sales for the six months ended
September 30, 1997 and 1996.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight line method for financial reporting purposes. The estimated lives
used in depreciating the assets are:
Years
------
Transportation equipment .................................... 3 - 5
Leasehold improvements ...................................... 10 - 25
Furniture, fixtures and office equipment .................... 5 - 7
Machinery and equipment ..................................... 5 - 7
Depreciation on leasehold improvements is recorded over the lesser of the
useful lives of the assets or lease term. Expenditures for major renewals and
improvements that extend the useful lives of property and equipment are
capitalized. Expenditures for routine maintenance and repairs are charged to
expense as incurred.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The costs the Company will ultimately incur and the value of
assets ultimately realized could differ in the near term from the related
amounts reflected in the accompanying financial statements.
Significant accounting estimates include valuation of inventory, useful
lives of property and equipment and in the measurement of contingencies.
Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing fair value to
the extent practicable for financial instruments which are recognized or
unrecognized in the balance sheet. The fair value of the financial instruments
F-10
Ajax Manufacturing Company
Notes to Financial Statements -- (Continued)
disclosed herein is not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider the tax
consequences of realization or settlement. For cash equivalents, accounts
receivable and accounts payable, it is estimated that the carrying amounts at
March 31, 1996 and 1997 approximated fair values for these instruments because
of their short-term maturities or payment terms. Due to unspecified repayment
terms of the amounts due from related parties, it is not practicable to
determine the fair value of these non-interest bearing amounts.
Effects of Recent Accounting Pronouncements
In February 1997, SFAS No. 128, "Earnings per Share", was issued. The
pronouncement, which is effective for periods ending after December 15, 1997,
requires dual presentation of basic and diluted earnings per share. Given its
current ownership structure, the disclosure of earnings per share is not
required and, accordingly, this statement is not expected to have an impact on
the Company's disclosures.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information, were
issued. SFAS No. 130 addresses standards for reporting and display of
comprehensive income and its components and SFAS No. 131 requires disclosure of
reportable operating segments. Both statements are effective for the Company's
1999 fiscal year. The Company will be reviewing these pronouncements to
determine their applicability, if any.
3. Inventory. Inventory is comprised of the following:
(Unaudited)
March 31, September 30,
------------------------ -------------
1996 1997 1997
------ ------ ------
Raw materials ............... $1,936,467 $1,837,542 $
Work in progress ............ 958,117 766,000
Finished goods .............. 446,511 911,381
---------- ---------- ----------
$3,341,095 $3,514,923 $5,874,765
========== ========== ==========
4. Property and Equipment. Property and equipment are summarized by major
classifications as follows:
(Unaudited)
March 31, September 30,
---------------------- -------------
1996 1997 1997
------ ------ -----
Transportation equipment ..... $ 150,907 $ 181,197 $ 213,904
Leasehold improvements ....... 1,096,307 1,096,307 1,111,257
Furniture, fixtures and
office equipment .......... 169,011 190,045 192,570
Machinery and equipment ...... 1,952,870 2,065,407 2,151,722
----------- ----------- ----------
3,369,095 3,532,956 3,669,453
Less: Accumulated depreciation
and amortization .......... 2,422,780 2,539,307 2,605,309
----------- ----------- ----------
$ 946,315 $ 993,649 $1,064,144
=========== =========== ==========
5. 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 is payable monthly at the bank's rate, plus 2%. There was no
outstanding balance as of March 31, 1996 and 1997 and September 30, 1997
(unaudited). Interest expense for the years ended March 31, 1996 and 1997 and
the six months ended September 30, 1997 (unaudited), totaled $41,962, $0 and $0,
respectively.
The Agreement contains certain restrictions, including prohibitions on
additional borrowings or guarantees, the sale of assets and the payment of
dividends. The Company is also required to maintain certain financial ratios. As
of March 31, 1997 and September 30, 1997 (unaudited), the Company was in
compliance with all financial and operating covenants as specified in the
Agreement. Substantially all of the assets of the Company are pledged as
collateral against outstanding borrowings. This Agreement will be terminated
upon completion of the sale of the Company, discussed in Note 11.
The Company's previous line of credit facilities were replaced by the
Agreement. Related interest expense for the years ended March 31, 1995 and 1996
were $243,539 and $57,705, respectively. The interest rates in effect on
outstanding borrowings as of March 31, 1995 was 12 1/2%.
F-11
Ajax Manufacturing Company
Notes to Financial Statements -- (Continued)
6. Restructured Debt. At March 31, 1992, the Company was in technical
default of the payment terms of the balance ($485,343) of its 11 1/2% notes. The
Company and the creditor commenced negotiations on restructuring the payment
terms of this note and on April 19,1995, a settlement was reached. In return for
a full release of the obligation and interests in related collateral, the
Company paid $525,000 to the creditor. The accompanying financial statements
reflect the accrual of compounded interest expense through the settlement date.
The balance outstanding at March 31, 1995 was $672,780, including $187,437 of
accrued interest. The excess of the carrying value of this contractual
obligation over the settlement amount ($90,140, net of a current tax benefit of
$16,000 and a deferred tax provision of $78,640) has been recognized as an
extraordinary gain for the year ended March 31, 1996.
Interest expense for this note totaled $69,390 and $5,000 for the years
ended March 31, 1995 and 1996, respectively.
7. Income Taxes. The provision (benefit) for income taxes in the
statements of income and retained earnings consists of the following components:
(Unaudited)
Six Months Ended
Year ended March 31, September 30,
------------------------------- -------------
1995 1996 1997 1997
----- ---- ----- -----
Current:
Federal ............. $435,000 $1,674,000 $ 910,000 $702,000
State ............... 161,000 522,000 265,000 145,000
-------- ---------- ---------- --------
Deferred:
Federal ............. (81,000) (800) (6,000) (424,000)
State ............... (17,000) (200) (1,000) (87,000)
-------- ---------- ---------- --------
Total provision ....... $498,000 $2,195,000 $1,168,000 $336,000
======== ========== ========== ========
Deferred tax assets (liabilities) consist of the following items:
(Unaudited)
March 31, September 30,
--------------------- ------------
1996 1997 1997
---- ---- ----
Deferred tax asset:
Accounts receivable ......... $ 9,000 $ 12,000 $ 12,000
Inventory ................... 154,000 160,000 289,000
Accrued liabilities ......... -- -- 382,000
Warranty accrual ............ 36,000 33,000 33,000
--------- --------- ---------
$ 199,000 $ 205,000 $ 716,000
========= ========= =========
Deferred tax liabilities:
Principally property,
plant and equipment
basis difference ........ $ (13,000) $ (12,000) $ (12,000)
========= ========= =========
A reconciliation between the Company's effective tax-rate and the U.S.
statutory rate is as follows:
(Unaudited)
Six Months Ended
Year ended March 31, September 30,
--------------------------- ----------------
1995 1996 1997 1997
---- ----- ---- ----
U.S. statutory rate applied
to pretax income .............. 34.0% 34.0% 34.0% 34.0%
State tax provision, net of
federal tax benefit ........... 7.0 7.0 7.0 7.0
Other ............................ (2.0) (.7) (.7) --
---- ---- ---- ----
Total effective tax rate ......... 39.0% 40.3% 40.3% 41.0%
==== ==== ==== ====
8. Related Party Transactions. Lease Obligations with Stockholder. The
Company leases its manufacturing and office facilities from its sole Stockholder
on a monthly basis. (See Note 11). Rent expense incurred by the Company is
$310,000, $516,667, $620,000 and $310,000 for the years ended March 31, 1995,
1996 and 1997 and the six months ended September 30, 1997 (unaudited),
respectively. At March 31, 1997 and September 30, 1997 (unaudited), prepaid rent
totaled $103,333 and $51,667, respectively.
Selling, General and Administrative Expenses
The Company does 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
F-12
Ajax Manufacturing Company
Notes to Financial Statements -- (Continued)
performance of the Company and is generally subject to limitations imposed by
financial institutions, which have outstanding indebtedness with the Company.
Salary and incentives expense for the Company's Stockholder were $13,000,
$1,232,500 and $581,947 for the years ended March 31, 1995, 1996 and 1997,
respectively. Salaries and incentives expense for the Officer was $110,500,
$386,613 and $680,546 for the years ended March 31, 1995, 1996 and 1997,
respectively.
Loans
At March 31, 1997, and September 30, 1997 the Company had loan receivables
of $300,000 and $561,000 (unaudited), respectively, from related parties,
principally an officer and the Stockholder. The loans do not bear interest or
stipulate payment terms; accordingly, the receivables are considered
non-current.
In 1989, the Company borrowed approximately $300,000 from an officer, with
an interest rate of 9% with principal amortized over a term of 30 years. The
outstanding balance at March 31, 1995 was $279,323. The Company repaid the
entire balance of this loan in September 1995. There was no gain or loss on the
early repayment of the debt. Interest expense for this note totaled $25,940 and
$12,834 for the years ended March 31, 1995 and 1996, respectively.
Guarantees
Through various guarantees, the Company's Stockholder is contingently
liable for repayment of certain indebtedness of the Company. There was no
outstanding principal of such borrowings at March 31, 1996 and 1997. There are
no direct costs to the Company associated with these guarantees.
9. Major Customers and Concentrations.
Major Customers
Listed below are five customers who individually accounted for 10% or more
of net sales for the years ended March 31, 1995, 1996 and 1997, respectively and
the six months ended September 30, 1997 (unaudited):
September 30,
Customer 1995 1996 1997 1997
-------- ----- ------ ----- -----
A 32% 33% 57% 59%
B -- 26 33 --
C -- 18 -- --
D 30 10 -- 24
E 37 -- -- --
-- -- -- --
99% 87% 90% 83%
== == == ==
Historically, the Company has relied on a limited number of customers for
a substantial portion of its total revenues. The Company expects that a
significant portion of its future revenues will continue to be generated by a
limited number of customers. The loss of any of these customers or any
substantial reduction in orders by any of these customers could have a material
adverse effect on operating results.
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.
Credit Risk
Accounts receivable are primarily composed of unsecured balances. The
Company does not require collateral as a condition of sale.
The Company has $634,000 (84% of total) and $1,660,000 (65% of total) of
accounts receivable with a sole customer at March 31, 1996 and 1997,
respectively. At March 31, 1997, another customer had an accounts receivable
balance of approximately $882,000 (34% of total). At September 30, 1997 two
customers had accounts receivable balances of approximately $385,000 and
$1,100,000. This represents approximately 22% and 65%, respectively, of the
accounts receivable balance at September 30, 1997.
F-13
Ajax Manufacturing Company
Notes to Financial Statements -- (Continued)
10. Commitments and Contingencies.
Environmental Matters
The Company is subject to various Federal, state and local laws and
regulations governing the use, discharge and disposal of hazardous materials.
Except as noted below, management believes that the Company is in substantial
compliance with current laws and regulations. Accordingly, no reserve has been
established for such exposures. Compliance with current laws and regulations has
not had, and is not expected to have, a material adverse effect on the Company's
financial condition. However, it is possible that additional health related or
environmental issues may arise in the future which the Company cannot predict at
present.
The Company is subject to 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.
On May 8, 1997, the New Jersey Department of Environmental Protection
("NJDEP") issued an Administrative Order of Civil Administrative Penalty
Assessment ("Order and Notice") assessing the Company a $9,000 penalty for
emitting volatile organic compounds ("VOC") 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 and outlines
the steps that the Company has taken to comply with the air quality regulatory
requirements for volatile compound emissions. The NJDEP could make further
assessments with respect to other years in which the allowable volatile compound
limits were exceeded by the Company, although no other assessments have yet been
received.
In March 1997, the Company applied for new permits which seek to increase
the VOC emission limits of the paint spray booths by almost 25 additional tons
per year, which application was denied by NJDEP on July 30, 1997. The Company
has appealed the NJDEP denial, and if new permits are not granted the Company
will not be in compliance with its allowable emission limits during 1997.
The Company is presently preparing an amendment to its permit application
proposing that the Company and NJDEP enter into a Administrative Consent Order
or other form of agreement (a "Compliance Schedule") as to VOC emissions from
the three paint spray booths at the facility. The Company plans to propose a
timetable by which it will change its primer and topcoat paint formulations from
current, solvent based products that generate high amounts of VOC upon drying to
water-based and lower-solvent based primers and topcoats, which would generate
lower amounts of VOC upon drying. The Company believes that such change is
technically feasible and that by making such change, the Company will reduce VOC
emissions to levels allowable under the Company's present permits while allowing
the Company to produce numbers of completed chassis comparable to those produced
in recent years. The Company has been advised by paint manufacturers that
water-based primers and lower-VOC topcoat paints are available and 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 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 5, 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 $2,000,000 or more.
F-14
Ajax Manufacturing Company
Notes to Financial Statements -- (Continued)
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, results of
operations, and financial condition.
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.
Included in "Other income," in the accompanying 1995 and 1996 statements
of income and retained earnings are the proceeds from legal settlements of
$66,700, and $35,003 respectively. The Company initiated litigation against
certain inventory manufacturers for damages arising from purchases of
substandard product.
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. On July 3, 1997, the IRS
notified Ajax of an assessment totaling $1,722,000 (which includes $287,000 of
penalties) for the period from March 1995 through December 1996. In November of
1997 the Company and its outside counsel, based on preliminary discussions with
the IRS, decided to pursue a settlement agreement. On November 7, 1997 the
Company paid approximately $829,000 to settle this matter. The Company
recognized the effects of this settlement as a charge in the six month period
ended September 30, 1997. The Company will be indemnified for this liability by
the Stockholder under terms of the sale agreement discussed in Note 11, if such
a sale is consummated and the Company's Stockholder's Equity will be increased
by the amount of the settlement.
11. Sale of Company. On August 11, 1997 the Company's Stockholder executed
an agreement to sell the Company to an independent third party, Standard
Automotive Corporation ("SAC"), for consideration approximating $23.9 million.
The exact purchase price is subject to adjustment by the parties and will be
based on the financial position of the Company as of the closing date. The
amount of the contested IRS assessments discussed in Note 10 will be placed in
escrow pending the settlement of the matter.
In connection with the sale, the Company will execute a lease with its
Stockholder for an initial term of five years with four renewal options totaling
twenty years. The estimated annual base rent over the initial term will be
$600,000.
12. Unaudited Interim Statements
The financial statements as of September 30, 1997 and for the six month
periods ended September 30, 1996 and 1997 are unaudited; however in the opinion
of management all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the financial statements for
the interim periods have been made. The results of interim periods are not
necessarily indicative of the results to be obtained in a full fiscal year.
F-15
================================================================================
No Underwriter, dealer, sales person or other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or any Underwriter.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the hereof or that the information contained herein
is correct as of any time subsequent to the date hereof. This Prospectus does
not constitute an offer to sell or a solicitation of any offer to buy any
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
--------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 9
The Acquisition ........................................................... 17
Use of Proceeds ........................................................... 19
Dividend Policy ........................................................... 19
Capitalization ............................................................ 20
Dilution .................................................................. 21
Selected Financial Data ................................................... 23
Unaudited Selected Pro Forma Financial Data ............................... 24
Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................... 27
Business .................................................................. 33
Management ................................................................ 41
Principal Shareholders .................................................... 45
Certain Transactions ...................................................... 46
Description of Securities ................................................. 47
Shares Eligible for Future Sale ........................................... 52
Certain Federal Income Tax Considerations ................................. 53
Underwriting .............................................................. 56
Legal Matters ............................................................. 58
Experts ................................................................... 58
Additional Information .................................................... 58
Index to Financial Statements ............................................. F-1
--------------------------
Until _______, 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities whether or not participating
in this distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligations of dealers to deliver a Prospectus
when acting as Underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
================================================================================
STANDARD AUTOMOTIVE
CORPORATION
1,000,000 Shares
of
Convertible Redeemable
Preferred Stock
1,300,000 Shares
of
Common Stock
----------
PROSPECTUS
----------
WESTPORT RESOURCES
INVESTMENT SERVICES, INC.
DIRKS & COMPANY, INC.
MILLENNIUM FINANCIAL GROUP, INC.
(European Co-Manager)
RAF FINANCIAL CORPORATION
_________, 1997
================================================================================
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below are the expenses (other than underwriting discounts and
commissions) expected to be incurred in connection with the issuance and
distribution of the securities registered hereby. With the exception of the
Securities and Exchange Commission registration fee and the AMEX filing fee, the
amounts set forth below are estimates.
Securities and Exchange Commission registration fee ........ $ 9,114
AMEX filing fee ............................................ 20,000
NASD filing fee ............................................ 3,508
Printing and engraving expenses ............................ 100,000*
Legal fees and expenses .................................... 400,000*
Accounting fees and expenses ............................... 250,000*
Blue Sky fees and expenses ................................. 5,000*
Transfer agent fees and expenses ........................... 5,000*
Miscellaneous Expenses ..................................... 17,378*
Total ...................................................... $ 810,000
=========
- ----------
* Estimated.
Item 14. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director. Pursuant to section 102(b)(7) of the General
Corporation Law of the State of Delaware, the Restated Certificate of
Incorporation of the Company provides that the directors of the Company,
individually or collectively, shall not be held personally liable to the
Registrant or its stockholders for monetary damages for breaches of fiduciary
duty as directors, except that any director shall remain liable (1) for any
breach of the director's fiduciary duty of loyalty to the Company or its
stockholders, (2) for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (3) for liability under
Section 174 of the General Corporation Law of the State of Delaware or (4) for
any transaction from which the director derived an improper personal benefit.
The by-laws of the Company provide for indemnification of its officers and
directors to the full extent authorized by law.
Reference is made to Section 7 of the form of Underwriting Agreement filed
as Exhibit 1.1 to this Registration Statement.
Item 15. Recent Sales of Unregistered Securities
In March 1997, the Company issued an aggregate of 1,567,500 shares (after
giving effect to the November 10, 1997 reverse stock split) of Common Stock to
Karl Massaro, William Merker, Steven Merker and Andrew Levy in connection with
its organization for an aggregate of $2,067.50. The Company believes that the
issuance of such shares is exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Act") pursuant to Section 4(2) thereof
as a transaction not involving a public offering.
On August 8, 1997, for aggregate consideration of $325,000, the Company
sold $325,000 in aggregate principal amount of Notes (the "Bridge Notes") to the
following third party investors: Gary Dorsi, Thomas Szemiot, Robert H.
Rathauser, Dr. Stephen Jankovic, Ghanshyambhai G. Patel, Martin R. Lesh, Mark M.
Wiener, Abbas K. Shikary, Swayam Prakash, Financial Merchant Group, Inc., David
Leibman. The Company paid an aggregate of $32,500 as commissions in connection
with the sale of the Bridge Notes. The Company believes that the issuance of the
Bridge Notes is exempt from the registration requirements of the Act, pursuant
to Section 4(2) thereof as a
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transaction not involving a public offering. Upon closing of this Offering, the
Company will issue to the holders of the Bridge Notes a number of shares of
Common Stock determined by dividing such principal amount by the initial public
offering price per share of the Common Stock offered hereby. The Company
believes that the issuance of such shares will be exempt from the registration
requirements of the Act pursuant to Section 4(2) thereof as a transaction not
involving a public offering.
Upon closing of this Offering, the Company will grant options to purchase
up to 50,000 shares of Common Stock to Mr. Carl Massaro. The Company believes
that the grant of such options is exempt from the registration requirements of
the Act pursuant to Section 4(2) thereof as a transaction not involving a public
offering.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
Exhibit No. Description of Exhibit
---------- ----------------------
1.1 Form of Underwriting Agreement***
3.1 Amended and Restated Certificate of Incorporation of the Company***
3.2 Form of Certificate of Designation, Preferences and Rights of
8 1/2% Senior Convertible Redeemable Preferred Stock***
3.3 By-Laws of the Company***
4.1 Form of Common Stock Certificate**
4.2 Form of Representative's Warrant Agreement and Form of Warrant***
4.3 Form of Preferred Stock Certificate**
5.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP**
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
dated _______, 1997***
10.3 Form of Consulting Agreement between the Company and Carl Massaro
dated _______, 1997***
10.4 Form of Employment Agreement between the Company and Steven Merker
dated _______, 1997***
10.5 Form of Lease between the Company and Carl Massaro
dated ____________, 1997***
10.6 Form of Option Agreement dated _________ 1997 between the Company
and Carl Massaro**
10.7 1997 Incentive Stock Option Plan***
10.8 Advisory Agreement between the Company and Barclay Partners LLC
dated ___________, 1997*** 10.9 Advisory Agreement between
the Company and Redstone Capital Corp. dated ___________, 1997***
10.10 Redemption Note to be executed by the Company in favor of Carl
Massaro dated _______, 1997.***
10.11 Security Agreement between the Company and Carl Massaro
dated _______, 1997.***
10.12 Guaranty made by the Company in favor of Carl Massaro
dated _______, 1997.***
10.13 Escrow Agreement among the Company, Carl Massaro and Phillips
Nizer Benjamin Krim & Ballon LLP dated _______, 1997.***
12. Computation of Pro Forma, As Adjusted Ratio of Earnings to
Combined Fixed Charges and Preferred
Stock Dividends*
23.1 Consent of BDO Seidman, LLP*
23.2 Consent of BDO Seidman, LLP*
23.3 Consent of Phillips Nizer Benjamin Krim & Ballon LLP
(included in Exhibit 5.1)
24.1 Power of Attorney (included in Part II)
- ----------
Filed herewith
** To be filed by amendment
*** Previously filed
(b) Financial Statement Schedules:
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All financial statement schedules are omitted because the information is
not required, is not material or is otherwise included in the financial
statements or related notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers or
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be a part of this Registration Statement as of
the time it was declared effective.
(2) For the purposes of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
this Offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof
The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in this Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar volume of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
this Offering of such securities at that time shall be deemed to be the
initial bona fide Offering thereof;
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of this Offering.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this amendment to registration statement to be signed
on its behalf by the undersigned in the City of New York, State of New York, on
November 18, 1997.
STANDARD AUTOMOTIVE CORPORATION
By: /s/ Karl Massaro
-------------------------------------
Karl Massaro, President and Director
(Principal Executive Officer)
In accordance with the requirements of the Securities Act of 1933, this
amendment to registration statement has been signed by the following persons in
the capacities and on the dates stated.
Signature Titles Date
--------- ------ ----
* Director November 18, 1997
- -------------------------
Roy Ceccato
/s/ Karl Massaro President and Director November 18, 1997
- ------------------------- (Principal Executive Officer)
Karl Massaro
/s/ Steven Merker Treasurer and November 18, 1997
- ------------------------- Principal Financial
and Accounting Officer
Steven Merker and Director
* Vice President, Secretary November 18, 1997
- ------------------------- Director
William Merker
* Director November 18, 1997
- -------------------------
Joseph Spinella
Director November __, 1997
- -------------------------
William Needham
*By: /s/Steven Merker
-----------------
Steven Merker
Attorney-in-Fact
- ----------
* Executed pursuant to a power of attorney contained in Registration Statement.
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