UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended June 30, 2001
Or
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From ___________________ to _________________________
Commission File Number: 001-13657
STANDARD AUTOMOTIVE CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-2018607
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(State of Incorporation) (I.R.S. Employer Identification No.)
321 Valley Road, Hillsborough, NJ 08844-4056
--------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(908) 874-7778 3715
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(Registrant's telephone number) (Primary Standard Industrial Code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [ X ] No [ ]
As of August 14, 2001, the registrant had a total of
3,822,400 shares of Common Stock outstanding and 1,132,600 shares of Preferred
Stock outstanding.
STANDARD AUTOMOTIVE CORPORATION
For the Three Months Ended June 30, 2001
Form 10-Q Quarterly Report
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 2001 (unaudited) and
March 31, 2001 (audited) 3
Consolidated Condensed Statements of Income (Loss) for the three months ended
June 30, 2001 (unaudited) and June 30, 2000 (unaudited) 4
Consolidated Condensed Statement of Stockholders' Equity for the period ended
June 30, 2001 (unaudited) 5
Consolidated Condensed Statements of Cash Flows for the three months ended
June 30, 2001 (unaudited) and June 30, 2000 (unaudited) 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 24
Item 3. Defaults Upon Senior Securities 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
2
PART I. Financial Information
Item 1. Financial Statements
STANDARD AUTOMOTIVE CORPORATION
Consolidated Condensed Balance Sheets
(in thousands, except share data )
June 30, 2001 March 31, 2001
(Unaudited) (Audited)
---------------- -----------------
Assets
Cash and cash equivalents $ 1,647 $ 857
Marketable securities 102 102
Accounts receivable, net 14,766 10,620
Inventory, net 30,087 32,052
Other current assets 10,049 9,649
--------- ---------
Total current assets 56,651 53,280
Property and equipment, net 43,968 44,891
Intangible assets, net of accumulated amortization
of $6,008 and $5,408, respectively 59,118 60,538
Other assets 4,043 4,296
--------- ---------
Total assets $ 163,780 $ 163,005
========= =========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 24,721 $ 20,447
Liabilities due to banks and other lenders 95,639 95,641
Income and federal excise taxes payable 8,258 7,547
Cumulative preferred stock dividend 866 578
Other current liabilities 7,226 7,944
--------- ---------
Total current liabilities 136,710 132,157
Other long term liabilities 4,404 4,397
--------- ---------
Total liabilities 141,114 136,554
--------- ---------
Commitments and contingencies
Stockholders' equity:
Convertible redeemable preferred stock; $ .001 par value;
3,000,000 shares authorized; 1,132,600 issued
and outstanding 1 1
Common stock; $ .001 par value; 10,000,000 shares
authorized; 3,822,400 issued and outstanding 4 4
Additional paid-in capital 31,358 31,308
Deferred compensation (75) (90)
Retained earnings (deficit) (8,572) (4,665)
Accumulated other comprehensive income (loss) (50) (107)
--------- ---------
Total stockholders' equity 22,666 26,451
--------- ---------
Total liabilities and stockholders' equity $ 163,780 $ 163,005
========= =========
The accompanying notes are an integral part of these
consolidated condensed statements.
3
STANDARD AUTOMOTIVE CORPORATION
Consolidated Condensed Statements of Income (Loss)
(Unaudited)
(in thousands, except net income per share data)
Three months ended
June 30,
------------------------------
2001 2000
-------- ----------
(Restated)
Revenues, net $ 31,815 $ 44,169
Operating costs and expenses:
Cost of revenues 25,945 34,935
Selling, general and administrative expenses 5,416 4,327
-------- --------
Total operating costs and expenses 31,361 39,262
-------- --------
Operating income 454 4,907
Interest and other expense 3,234 2,580
-------- --------
Income before income taxes (2,780) 2,327
Provision (benefit) for income taxes 838 1,077
-------- --------
Net income (loss) (3,618) 1,250
Preferred dividend 289 289
-------- --------
Net income (loss) available to common stockholders $ (3,907) $ 961
======== ========
Basic net income (loss) per share $ (1.02) $ 0.26
======== ========
Diluted net income (loss) per share $ (1.02) $ 0.26
======== ========
Basic weighted average number of shares outstanding 3,814 3,689
Diluted weighted average number of shares outstanding 3,814 4,831
The accompanying notes are an integral part
of these consolidated condensed statements.
4
Standard Automotive Corporation
Consolidated Condensed Statement of Stockholders' Equity (Unaudited)
(in thousands)
Preferred Common Additional
Shares Preferred Shares Common Paid In
Outstanding Stock Outstanding Stock Capital
------------ ---------- ----------- ------- -----------
Balance - March 31, 2001 1,133 $ 1 3,822 $ 4 $31,308
Currency Translation
Adjustment -- -- -- -- --
Warrants and Options
Issued -- -- -- -- 50
Preferred Stock Dividend -- -- -- -- --
Net Loss -- -- -- -- --
Amortization of Deferred
Compensation -- -- -- -- --
------- ------- ------- ------- -------
Balance - June 30, 2001 1,133 $ 1 3,822 $ 4 $31,358
======= ======= ======= ======= =======
Accumulated
Retained Other Total
Deferred Earnings Comprehensive Stockholders'
Compensation (Deficit) Income (Loss) Equity
------------- ----------- ------------------- -----------------
Balance - March 31, 2001 $ (90) $ (4,665) $ (107) $26,451
Currency Translation
Adjustment -- -- 57 57
Warrants and Options
Issued -- -- -- 50
Preferred Stock Dividend -- (289) -- (289)
Net Loss -- (3,618) -- (3,618)
Amortization of Deferred
Compensation 15 -- -- 15
------ ------------ ------- -------
Balance - June 30, 2001 $ (75) $ (8,572) $ (50) $22,666
===== ======== ======= ========
The accompanying notes are an integral part
of this consolidated condensed statement.
5
STANDARD AUTOMOTIVE CORPORATION
Consolidated Condensed Statements of Cash Flows (Unaudited)
(in thousands)
Three months ended
June 30,
------------------------------
2001 2000
------------ -------------
(Restated)
Cash flows from operating activities:
Net income (loss) $ (3,618) $ 1,250
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,997 1,580
Non-cash interest and compensation 75 60
Change in assets and liabilities:
Accounts receivable (4,146) 5,899
Inventory 1,965 (1,105)
Prepaid expenses and other 358 (108)
Accounts payable, accrued expenses expenses and other 4,668 (9,940)
------------ -------------
Net cash provided (used) by operating activities 1,299 (2,364)
------------ -------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired - (21,393)
Acquisition of property and equipment (239) (1,031)
------------ -------------
Net cash used by investing activities (239) (22,424)
------------ -------------
Cash flows from financing activities:
Proceeds from bank loan - 28,708
Repayment of bank loan - (1,313)
Bank forbearance (350) -
Deferred financing costs 80 (2,313)
Preferred dividend payment - (289)
------------ -------------
Net cash provided (used) by financing activities (270) 24,793
------------ -------------
Net increase in cash and cash equivalents 790 5
Cash and cash equivalents, beginning of period 857 3,136
------------ -------------
Cash and cash equivalents, end of period $ 1,647 $ 3,141
============ =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2 $ 2,509
Income taxes 324 1,723
Noncash investing and financing activities:
Capital stock and debt issued for acquisition of
businesses and assets - 780
The accompanying notes are an integral part
of these consolidated condensed statements.
6
STANDARD AUTOMOTIVE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
General
The information in this Quarterly Report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such statements are based upon current expectations that involve risks and
uncertainties. Any statements contained in this Quarterly Report that are not
statements of historical fact may be deemed to be forward-looking statements.
For example, words such as "may," "will," "should," "estimates," "predicts,"
"potential," "continue," "strategy," "believes," "anticipates," "plans,"
"expects," "intends" and similar expressions are intended to identify
forward-looking statements. Actual results and the timing of certain events may
differ significantly from the results discussed in forward-looking statements.
The financial statements for the three months ended June 30, 2001 and June
30, 2000 are unaudited. The financial statements for the three months ended June
30, 2000 have been restated for a change in accounting policy in the method of
recognizing revenue and for accrued interest expense incurred on delinquent
federal excise taxes. In the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of the
financial statements for the interim period have been made. The financial
statements for the three months ended June 30, 2001 should be read in
conjunction with our audited financial statements for the fiscal year ended
March 31, 2001.
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 we will ultimately incur and the value of assets
ultimately realized could differ in the near term from the related amounts
reflected in the accompanying financial statements.
Significant accounting estimates include valuation of inventory, useful
lives of property, equipment and intangible assets, the allocation of purchase
prices, the measurement of contingencies and percentage of completion on
long-term contracts.
1. Organizational and Business Combination
Standard Automotive Corporation (the "Company" or "Standard") is a Delaware
corporation that commenced operations in January, 1998. Standard currently
operates two divisions: (i) the Truck Body/Trailer Division, which designs,
manufactures and distributes trailer chassis for use primarily in the transport
of shipping containers and a broad line of specialized dump truck bodies, dump
trailers, truck suspensions and other related assemblies, and (ii) the Critical
Components Division, which specializes in the fabrication of precision
assemblies for the aerospace, nuclear, industrial and military markets.
Standard's Truck Body/Trailer Division operates through its wholly-owned
subsidiaries: Ajax Manufacturing Company ("Ajax"), R/S Truck Body Co. ("R/S")
and CPS Trailer Co. ("CPS"). Standard's Critical Components Division operates
through its wholly-owned subsidiaries: Ranor Inc. ("Ranor"), Airborne Gear &
Machine Ltd. ("Airborne"), Arell Machining Ltd. ("Arell") and The Providence
Group, Inc. ("TPG").
2. Recently Issued Accounting Pronouncements
In June 2001, the FASB approved SFAS Nos. 141 and 142 entitled Business
Combinations and Goodwill and Other Intangible Assets, respectively. The
statement on business combinations, among other things, eliminates the "Pooling
of Interests" method of accounting for business acquisitions entered into after
June 30, 2001. SFAS No. 142, among other things, discontinues goodwill
amortization and requires companies to use a fair-value approach to determine
whether there is an impairment of existing and future goodwill. These statements
are effective for the Company beginning April 1, 2002 and have certain
transition rules which must be implemented within six months from adoption.
3. Derivative Instruments and Hedging Activities
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was effective for the Company beginning April 1, 2001. The implementation of
SFAS No. 133 did not have a material impact on our financial position or results
of operations.
7
4. Inventory
Inventory is comprised of the following:
June 30, 2001 March 31, 2001
------------- -------------
(Unaudited) (Audited)
Raw materials $ 9,654,000 $10,762,000
Work in progress 7,623,000 8,057,000
Finished goods 12,810,000 13,233,000
----------- -----------
$30,087,000 $32,052,000
=========== ===========
5. Long Term Debt and Credit Agreements
Classification
Due to the effects of the default events described below, certain long
term debt has been classified as a current liability on the accompanying
consolidated condensed balance sheets.
Term and Revolver Loans
Our Term Loan and Revolving Credit Facility ("Credit Facility"), as amended
to date, provides for term loans in principal amounts of up to $75.0 million and
revolving loans in principal amounts of up to $25.0 million. The principal of
the term loans is payable quarterly commencing in June 2000 in specified amounts
ranging from approximately $1.3 million quarterly commencing in June 2000 and
increasing annually thereafter to approximately $1.6 million in June 2001, $1.9
million in June 2002, $2.3 million in June 2003, $2.6 million in June 2004, and
$3.2 million in June 2005. Amounts outstanding under the revolving loans are
payable in full in April, 2005. All remaining principal then outstanding is due
in April 2007. In addition, the amounts outstanding under the Credit Facility
are subject to mandatory prepayments in certain circumstances. Subject to our
request, together with the approval of the lenders, the maturity of the
revolving loans may be extended for one year with a maximum extension of two
one-year periods. We made scheduled principal payments of approximately $4.0
million during the nine months ended December 31, 2000. However, we did not make
the March 2001 principal payment of $1.3 million or the June 2001 principal
payment of $1.6 million.
All amounts outstanding under the Credit Facility are secured by a lien on
substantially all of our assets. In addition, the Credit Facility imposes
significant operating and financial restrictions on us, including certain
limitations on our ability to incur additional debt, make payments on
subordinated indebtedness, pay loans, transact business with affiliates, enter
into sale and leaseback transactions, and place liens on our assets. In
addition, our Credit Facility contains covenants regarding the maintenance of
certain financial ratios.
In December 2000, we informed the agent under the Credit Facility that we
were then in default of certain financial covenants under the Credit Facility.
In addition, we failed to make scheduled interest and principal payments
totaling approximately $2.8 million and $4.2 million under the Credit Facility
on March 31, 2001 and July 2, 2001, respectively, which constituted additional
events of default thereunder. Absent significant additional financing or a
restructuring, we expect to be unable to pay additional principal and interest
payments totaling approximately $4.1 million on the next payment date of
September 30, 2001. We have engaged an investment banking firm to assist us in
obtaining additional financing, although we can give no assurance that our
efforts to obtain additional financing or restructure our existing indebtedness
will be successful.
From May 21, 2001 to July 17, 2001, we and the bank lenders under the
Credit Facility had been operating under the terms of a forbearance agreement
pursuant to which the banks had agreed to refrain from exercising their remedies
under the Credit Facility until such date. During the forbearance period, and
since then, we have been engaged in efforts to obtain additional financing to
facilitate a restructuring of our existing indebtedness. As disclosed in our
Form 8-K filed with the Securities and Exchange Commission on August 1, 2001, we
received an acceleration notice from PNC Bank, N.A. ("PNC"), the administrative
agent under our Credit Facility, terminating the commitments to make loans under
the Credit Facility and declaring all amounts due under the Credit Facility,
approximately $91 million at June 30, 2001, excluding costs and legal fees, to
be immediately due and payable. According to the notice of acceleration, if the
amounts due were not paid by Wednesday, August 1, 2001, the administrative
agents and the banks under the Credit Facility reserved their rights without
further notice to exercise all of their rights and remedies under the Credit
Facility documents, including but not limited to collecting receivables owed to
us and our subsidiaries directly from the parties owing such amounts, taking
8
control of and voting and managing all or part of the pledged stock of our
subsidiaries and instituting suit, including foreclosure actions, to collect the
debt as well as cost and legal fees. In the event that the banks were to take
the foregoing actions, our ability to operate our business would be severely
impaired and, in all likelihood, we would be required to seek protection from
our creditors to continue operations, which could involve filing for bankruptcy
protection in the United States and possibly Canada and Mexico, where we have
operations.
On August 9, 2001, we received a letter from the administrative agent under
the Credit Facility, withdrawing the acceleration notice previously sent to us.
The withdrawal letter is subject to our acknowledgement that the defaults set
forth in the acceleration notice continue to exist, including the default of
certain financial covenants under the Credit Facility since December 2000, and
the failure to make scheduled interest and principal payments totaling
approximately $2.8 million and $4.2 million under the Credit Facility on March
31, 2001 and July 2, 2001, respectively. We have agreed that the lenders under
the Credit Facility may send an acceleration notice at any time and that the
lenders have reserved all rights and remedies under the Credit Facility.
We are currently negotiating with the lenders under the Credit Facility to
enter into a new forbearance agreement that would extend the forbearance period
to mid-September, although no assurance can be given that we will be able to
obtain such forbearance or that during any extended forbearance period we will
be able to obtain additional financing or restructure our indebtedness. Even if
we are able to enter into an additional forbearance agreement with the lenders
under the Credit Facility, they would retain their rights to foreclose on the
collateral under the Credit Facility to the extent we defaulted under such
forbearance agreement or at any time following the termination of such
forbearance agreement.
Interest on the amounts outstanding under the Loans is payable monthly and
generally accrues at a variable rate based upon LIBOR or the Base Rate of PNC,
plus a percentage which adjusts from time to time based upon the ratio of the
Company's indebtedness to EBITDA, as such terms are defined in the Credit
Facility. As of June 30, 2001 the rate of interest for the Loans is 10.75%,
which is the default rate. All amounts outstanding under the Credit Facility are
secured by a lien on substantially all of the Company's assets. The Credit
Facility requires the Company to maintain compliance with certain financial and
non-financial covenants.
At June 30, 2001 the total amount outstanding under the Credit Facility was
$91.0 million, excluding $4.1 million of accrued interest.
We are currently unable to meet our payment obligations under the Credit
Facility and will be unable to achieve compliance with the terms of the Credit
Facility absent additional equity or debt financing, restructuring of the terms
of the Credit Facility or a combination of such financing and restructuring. We
have engaged an investment banking firm to assist us in obtaining additional
financing, although we can give no assurance that our efforts to obtain
additional financing or restructure our existing indebtedness will be
successful. Due to our current condition of default, our entire long-term debt
has been reclassified to current liabilities.
We are currently in arrears on payment of certain federal excise taxes of
approximately $6.7 million, on which approximately $1.5 million of interest was
accrued as of June 30, 2001. We expect to attempt to negotiate a payment plan
with the Internal Revenue Service ("IRS") to resolve the arrearage. Although no
formal plan is yet in place, we made a voluntary tax payment in the amount of
$634,135 on March 9, 2001 as well as $20,000 on July 16, 2001, and intend to
make voluntary monthly payments of $20,000 on August 15, 2001 and September 15,
2001. This arrearage has also resulted in an additional event of default under
our Credit Facility. Furthermore, the IRS has the statutory authority to impose
penalties which could be material.
We have been advised by our independent accountants that if these matters
are not resolved prior to issuance of our March 31, 2002 annual report, they may
have to modify their report as to whether we are a going concern.
6. Basic and Diluted Net Income per Common Share
Basic net income per share is calculated by dividing income available to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted net income per share is calculated by dividing income
available to common shareholders plus convertible preferred dividends, if there
is any dilutive convertible preferred stock used in computing common equivalent
shares, by the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon the conversion of convertible preferred
stock and the exercise of stock options and warrants (using the "Treasury Stock"
method); common equivalent shares are excluded from the calculation if their
effect is anti-dilutive.
9
The following table sets forth, for the periods indicated, the calculation
of basic and diluted net income (loss) per share:
For the Three Months Ended
June 30,
----------------------------------------
2001 2000
-------------- ---------------
(Restated)
(in thousands, except per share data)
NUMERATOR:
Income (loss) available to common stockholders
used in computing basic net income per share $ (3,907) $ 961
Convertible preferred dividends on dilutive
convertible preferred stock 289 289
-------------- ---------------
Income (loss) available to common stockholders
used in computing diluted net income per share $ (3,618) $ 1,250
============== ===============
DENOMINATOR:
Weighted average number of common shares outstanding
used in basic net income (loss) per share 3,814 3,689
Common equivalent shares:
Convertible preferred stock - 1,133
Options - 9
Warrants - -
-------------- ---------------
Weighted average number of common
shares and common equivalent shares
used in diluted net income per share 3,814 4,831
============== ===============
Basic net income (loss) per share $ (1.02) $ 0.26
============== ===============
Diluted net income (loss) per share $ (1.02) $ 0.26
============== ===============
7. Related Party Transactions
On May 16, 2001, we entered into an agreement with William Merker, then a
director, to settle a dispute regarding the propriety of William Merker's
relationship with the agent associated with the purchase of Airborne, Arell and
TPG. Pursuant to the terms of this agreement, Mr. William Merker agreed to
transfer to us 200,000 shares of common stock held by him. In addition, Mr.
William Merker agreed to provide us with a promissory note, payable in three
months, in an aggregate principal amount equal to the amount by which $800,000
exceeds the fair market value of the transferred shares as determined by an
independent appraiser.
8. Segment Information
As a result of the acquisition of Ranor in June 1999 we reorganized
operations by creating two operating divisions: the Truck Body/Trailer Division
and the Critical Components Division.
The segment information for the period ended June 30, 2000 for our Critical
Components Division represents Ranor's results of operations for the full period
and also Airborne's and Arell's from April 26, 2000 through June 30, 2000.
10
Below is the selected financial segment data for the three months ended
June 30, 2001 and 2000:
Truck Critical
Body/Trailer Components Segment
June 30, 2001 Division Division Totals
- ------------- --------------- -------------- -------------
(in thousands)
Revenue $ 19,766 $ 12,049 $ 31,815
Operating income 4 2,592 2,596
Identifiable assets 56,872 43,045 99,917
Capital expenditures 84 155 239
Truck Critical
Body/Trailer Components Segment
June 30, 2001 Division Division Totals
- ------------- --------------- -------------- -------------
Revenue $ 35,102 (a) 9,067 $ 44,169
Operating income 4,076 (a) 1,868 5,944
Identifiable assets 56,382 40,929 97,311
Capital expenditures 509 522 1,031
(a) Restated
The following is a reconciliation of reportable segment operating income
and assets to the Company's consolidated totals for the three months ended June
30, 2001 and June 30, 2000:
June 30,
Operating income 2001 2000
-------------- --------------
(Restated)
(in thousands)
Total operating income for reporting segments $ 2,596 $ 5,944
Other corporate expenses 2,142 1,037
-------------- --------------
Consolidated operating income $ 454 $ 4,907
============== ==============
June 30,
Assets 2001 2000
-------------- --------------
(in thousands)
Total assets for reporting segments $ 99,917 $ 97,311
Goodwill 59,118 55,169
Other unallocated amounts (primarily deferred financing costs) 4,745 7,114
-------------- --------------
Consolidated total assets $ 163,780 $ 159,594
============== ==============
Revenues by geographical area are comprised as follows:
Three months ended June 30,
----------------------------
2001 2000
---------- -------
(Restated)
(in thousands)
United States $ 26,833 $ 40,755
Canada 4,982 3,414
--------- --------
Total net revenues $ 31,815 $ 44,169
========= ========
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The financial statements for the three months ended June 30, 2001 and June
30, 2000 are unaudited. The financial statements for the three months ended June
30, 2000 have been restated for a change in accounting policy in the method of
recognizing revenue and for accrued interest expense incurred on delinquent
federal excise taxes. In the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of the
financial statements for the interim period have been made.
The following discussion and analysis of the financial condition and
results of operations of Standard Automotive Corporation should be read together
with the consolidated financial statements and notes thereto included elsewhere
herein.
This discussion contains forward-looking statements that involve risks and
uncertainties. Standard Automotive Corporation's actual results may differ
materially from those expressed or implied by these forward-looking statements
as a result of various factors, such as those set forth under "Risk Factors."
Recently Issued Accounting Pronouncements
In June 2001, the FASB approved SFAS Nos. 141 and 142 entitled Business
Combinations and Goodwill and Other Intangible Assets, respectively. The
statement on business combinations, among other things, eliminates the "Pooling
of Interests" method of accounting for business acquisitions entered into after
June 30, 2001. SFAS No. 142 requires companies to use a fair-value approach to
determine whether there is an impairment of existing and future goodwill. These
statements are effective for the Company beginning April 1, 2002 and have
certain transition rules which must be implemented within six months from
adoption.
Derivative Instruments and Hedging Activities
SFAS No. 133 was effective for the Company beginning April 1, 2001. The
implementation of SFAS No. 133 did not have a material impact on our financial
position or results of operations.
Overview
Standard Automotive Corporation is a diversified holding company. We
commenced operations in January 1998 with the acquisition of Ajax Manufacturing
Company ("Ajax"). We have expanded our operations through subsequent
acquisitions and growth within acquired companies. Standard is comprised of
seven operating companies located throughout the United States, Canada and
Mexico.
Our subsidiaries are currently organized into two operating divisions: the
Truck Body/Trailer Division and the Critical Components Division. These two
divisions operate separately.
Truck Body/Trailer Division
Our Truck Body/Trailer Division designs, manufactures and sells trailer
chassis, dump truck bodies, specialty trailers, truck suspensions and related
assemblies through the following operating companies:
o Ajax designs, manufactures and sells container chassis, refurbishes
(or "re-manufactures") used chassis, and manufactures specialty
transportation equipment. Container chassis are used to transport
maritime shipping containers from container ships to inland
destinations. Container chassis are sold to leasing companies, large
steamship lines, railroads and trucking companies to transport
overland 20-, 40-, 45- and 48-foot shipping containers. Ajax operates
facilities in Hillsborough, New Jersey and Sonora, Mexico.
o R/S Truck Body Co., Inc. ("R/S"), located in Ivel, Kentucky, designs,
manufactures and sells customized, high end, steel and aluminum dump
truck bodies, platform bodies, custom large dump trailers, specialized
truck suspension systems and related products and parts. R/S recently
introduced several new products to the market, including the aluminum
platform trailer and the aluminum elliptical body.
12
o CPS Trailer Co. ("CPS"), located in Oran, Missouri, designs,
manufactures and sells bottom dump trailers, half-round end dump
trailers, light-weight end dump trailers, grain hopper trailers and
walking floor van trailers, used for hauling bulk commodities such as
gravel and grain, and for the construction, agriculture and waste
hauling industries.
Critical Components Division
Our Critical Components Division designs, manufactures, and sells
precision-machined components to original equipment manufacturers ("OEMs") in
the aerospace, nuclear, defense and industrial markets through the following
operating companies:
o Ranor, Inc. ("Ranor"), located in Westminster, Massachusetts,
specializes in the fabrication and precision machining of large metal
components that exceed one hundred tons for the aerospace, nuclear,
defense, shipbuilding and power generation markets as well as national
laboratories. Ranor manufactures domes, machined in one piece, for
Boeing's Delta rocket program. Additionally, Ranor manufactures and
supplies steam accumulator tanks for U.S. Navy nuclear-powered
aircraft carriers, as well as large precision vacuum chambers for the
National Ignition Laboratories at Lawrence Livermore. Ranor also
manufactures and supplies large machined casings for ground-based, gas
turbine power generation engines, and nuclear spent fuel canisters.
o Airborne Machine & Gear, Ltd. ("Airborne"), located in St. Leonard,
Quebec, Canada, is principally engaged in the manufacture and sale of
hot section engine components in exotic materials including Inconel (a
nickel alloy), titanium and beryllium copper. Airborne operates under
long-term agreements with, and is considered a preferred vendor by its
significant customers. We acquired Airborne in April 2000.
o Arell Machining, Ltd. ("Arell"), located in Anjou, Quebec, Canada,
manufactures hot and cold section engine components, airframe
structural components and landing gear kits and assemblies for the
aerospace market. Arell operates under long term agreements with, and
is considered a preferred supplier by its significant customers. We
acquired Arell in April 2000.
o The Providence Group, Inc. ("TPG"), located in Knoxville, Tennessee,
is a specialized engineering services company that provides
engineering services predominately in the environmental and nuclear
industries. TPG designs, manufactures and operates a line of remote
robotic retrieval systems used in the cleaning and transferring of
stored nuclear waste. We acquired TPG in September 2000.
Strategy
In light of our recent history of losses and the unavailability of
additional acquisition financing, we have shifted our strategic emphasis from
growth through acquisitions to growth and management of our current core
businesses. Notwithstanding our strategic initiatives, we cannot provide any
assurance that we will achieve or sustain profitability in the future.
Our current business strategy is to create efficiencies by integrating the
companies in each of our operating units, to increase sales by improving the
quality of our products and to decrease our costs through progressive inventory
and purchasing management, more effective cash management, and improved labor
efficiencies. Implementing our business strategy will, during the continuation
of defaults under our Credit Facility, require the continued forbearance of our
senior lenders, which cannot be assured.
We believe that our competitive advantages include management experience
and the skill of our work force, as well as established relationships with
customers. Most of the individuals who formerly owned or managed our operating
companies have remained with the businesses after acquisition by Standard, and
provide comprehensive knowledge of customer needs and markets, enabling our
operating companies to design and manufacture customized products.
Results of Operations (Unaudited)
The following table sets forth, for the indicated periods, certain
components of our Consolidated Statements of Income expressed in dollar amounts
and as a percentage of net revenues. The three months ended June 30, 2001
reflect the consolidated results of all operating companies including TPG, which
was acquired on August 31, 2000, for the entire period. The three months ended
June 30, 2000 reflect the consolidated amounts of Standard, Ajax, R/S, CPS and
Ranor
13
for the entire period and also Airborne and Arell from the date of their
acquisitions on April 26, 2000. The financial statements for the three months
ended June 30, 2000 have been restated for a change in accounting policy in the
method of recognizing revenue and for accrued interest expense incurred on
delinquent federal excise taxes.
For the Three Months Ended June 30,
--------------------------------------------------
2001 2000
------------------------- ------------------------
(Restated)
(dollar amounts are in thousands)
Revenues, net $ 31,815 100.0 % $ 44,169 100.0 %
Cost of revenues 25,945 81.5 34,935 79.1
Selling, general and
administrative 5,416 17.0 4,327 9.8
----------- ---------- ----------- --------
Operating income 454 1.4 4,907 11.1
Interest and other expense 3,234 10.2 2,580 5.8
----------- ---------- ----------- --------
Income before provision
for taxes (2,780) (8.7) 2,327 5.3
Provision for income taxes 838 2.6 1,077 2.4
----------- ---------- ----------- --------
Net income (loss) $ (3,618) (11.4) % $ 1,250 2.8 %
=========== ========== =========== ========
Comparison of Three Months Ended June 30, 2001 to June 30, 2000
Net Revenues for the three months ended June 30, 2001 were $31.8 million, a
decrease of 28% from net revenues of $44.2 million, as restated, for the
comparable period in 2000. Net revenues for our Truck Body/Trailer Division
decreased from approximately $35.1 million, as restated, for the three months
ended June 30, 2000 to approximately $19.8 million for the three months ended
June 30, 2001, a decrease of 44%. The decrease in net revenues was primarily
attributable to the significant downturn in the truck body and trailer
industries. The decrease in net revenues in our Truck Body/Trailer Division was
partially offset by higher net revenues in our Critical Components Division due
to the inclusion of Airborne, Arell and TPG, which were acquired during the
fiscal year ended March 31, 2001. As a result of acquisitions, the Critical
Components Division contributed 37.9% of revenues for the three months ended
June 30, 2001 versus 20.5% for the three months ended June 30, 2000. Our
Critical Components Division experienced an overall net revenue increase of 33%,
to $12.0 million for the three months ended June 30, 2001, compared to $9.1
million for the three months ended June 30, 2000.
Cost of Revenues decreased to $25.9 million, or 81.5% of net revenues, for
the three months ended June 30, 2001 versus $34.9 million, as restated, or 79.1%
of net revenues for the comparable period in 2000. This decrease is principally
attributed to lower demand for our Truck/Trailer Division products. The
consolidated ratio of our cost of revenues to revenues increased primarily due
to the application of our fixed costs against decreased revenues in our
Truck/Trailer Division. Conversely, the ratio of our cost of revenues to
revenues at our Critical Components Division remained relatively constant, with
increased Critical Components Division product sales, principally at our
Canadian subsidiaries, which generally carry lower costs relative to selling
prices, offsetting the higher cost products at our Truck/Trailer Division, where
volume declined period to period.
Selling, General & Administrative Expenses ("SG&A") were $5.4 million
during the three months ended June 30, 2001, an increase of $1.1 million from
$4.3 million incurred during the comparable period in 2000. SG&A, as a
percentage of net revenue, increased to 17.0% of net revenues, up from 9.8% for
the comparable period in 2000. The dollar increases include significantly higher
legal and other professional fees associated with our efforts to restructure our
Credit Facility and obtain additional forbearance from the bank, as well as
final adjustments for amortization of goodwill. The increases also resulted from
our continued expansion into product lines with higher selling and
administrative expenses as well as higher corporate oversight expense associated
with changes in management and our restructuring efforts.
Interest and Other Expense increased to $3.2 million for the three months
ended June 30, 2001 from $2.6 million, as restated, during the comparable period
in 2000. This increase primarily reflects the effect of increased interest rates
as a consequence of our defaults under the Credit Facility.
14
Liquidity and Capital Resources
We have historically funded our operations and capital expenditures through
cash flow generated by operations, from borrowings under our Credit Facility
and, to a lesser extent, through the incurrence of subordinated indebtedness,
capital lease transactions and the issuance of common and preferred stock.
Our cash position as of June 30, 2001 was $1.6 million, a decrease of
approximately $1.5 million from our cash and cash equivalents of approximately
$3.1 million at June 30, 2000.
Approximately $1.3 million of cash was provided by operating activities
during the three months ended June 30, 2001 compared to $2.4 million of cash
used during the three months ended June 30, 2000. The cash provided by operating
activities for the three months ended June 30, 2001 primarily reflects deferral
of payments to our lenders and suppliers and also reduction of inventories,
offset by increased receivables resulting from significantly higher sales levels
during the quarter ended June 30, 2001 versus the quarter ended March 31, 2001,
as well as the net cash loss from operations.
Net cash used in investing activities was approximately $239,000 during the
three months ended June 30, 2001 as compared with $22.4 million during the
comparable period in 2000. The cash used in investing activities during the
quarter ending June 30, 2001 was solely for capital expenditures, while the cash
used in investing activities during the quarter ending June 30, 2000 primarily
reflected the acquisitions of Airborne and Arell. The $270,000 of cash used by
financing activities for the quarter ending June 30, 2001 was principally for
the forbearance agreement related to the events of default under our Credit
Facility while the cash provided by financing activities during the quarter
ending June 30, 2000 principally reflected the financing obtained through an
increase in our Credit Facility for the acquisitions of Airborne and Arell. In
addition to financing the acquisitions of Arell and Airborne during the quarter
ending June 30, 2000, the Credit Facility was also used to finance capital
expenditures and to provide additional working capital.
Excluding payment obligations in respect of indebtedness, preferred stock,
Internal Revenue Service payments and potential penalties, and earn-out payments
relating to acquired businesses, as discussed below, we believe that cash on
hand, together with cash provided from operations, would be sufficient to fund
our operations through March 31, 2002. As of August 13, 2001 our existing cash,
together with cash generated from our operations will not be sufficient to fund
our current obligations in respect of our senior indebtedness, subordinated
indebtedness, preferred stock dividends and payment obligations under earn-out
arrangements relating to acquired businesses. We are currently in default under
our Credit Facility and are unable to borrow thereunder to fund our operations
and other obligations.
At June 30, 2001, we had $95.6 million in total debt outstanding,
consisting of an outstanding revolving loan of $20.0 million, term loans of
$71.0 million and subordinated notes to the prior owners of Ranor of $4.6
million. Due to continuing conditions of default described below, the entire
$95.6 million of outstanding debt has been reclassified, for reporting purposes,
from long-term debt to current liabilities.
Our Credit Facility, as amended to date, provides for term loans in
principal amounts of up to $75.0 million and revolving loans in principal
amounts of up to $25.0 million. The principal of the term loans is payable
quarterly commencing in June 2000 in specified amounts ranging from
approximately $1.3 million quarterly commencing in June 2000 and increasing
annually thereafter to approximately $1.6 million in June 2001, $1.9 million in
June 2002, $2.3 million in June 2003, $2.6 million in June 2004, and $3.2
million in June 2005. Amounts outstanding under the revolving loans are payable
in full in April, 2005. All remaining principal then outstanding is due in April
2007. In addition, the amounts outstanding under the Credit Facility are subject
to mandatory prepayments in certain circumstances. Subject to our request,
together with the approval of the lenders, the maturity of the revolving loans
may be extended for one year with a maximum extension of two one-year periods.
We made scheduled principal payments of approximately $4.0 million during the
nine months ended December 31, 2001. However, we did not make the March 2001
principal payment of $1.3 million and the June 2001 principal payment of $1.6
million as well as the related concurrent interest payments of $1.5 million and
$2.6 million, respectively.
All amounts outstanding under the Credit Facility are secured by a lien on
substantially all of our assets. In addition, the Credit Facility imposes
significant operating and financial restrictions on us, including certain
limitations on our ability to incur additional debt, make payments on
subordinated indebtedness, pay dividends, redeem capital stock, sell assets,
engage in mergers and acquisitions or make investments, make loans, transact
business with affiliates, enter into sale and leaseback transactions, and place
liens on our assets. In addition, our Credit Facility contains covenants
regarding the maintenance of certain financial ratios.
In December 2000, we informed the agent under the Credit Facility that we
were then in default of certain financial covenants under the Credit Facility.
In addition, we failed to make scheduled interest and principal payments
totaling
15
approximately $2.8 million and $4.2 million under the Credit Facility on March
31, 2001 and July 2, 2001, respectively, which constituted additional events of
default thereunder. Absent significant additional financing or a restructuring,
we expect to be unable to pay additional principal and interest payments
totaling approximately $4.1 million on the next payment date of September 30,
2001. We have engaged an investment banking firm to assist us in obtaining
additional financing, although we can give no assurance that our efforts to
obtain additional financing or restructure our existing indebtedness will be
successful.
From May 21, 2001 to July 17, 2001, we and the bank lenders under the
Credit Facility had been operating under the terms of a forbearance agreement
pursuant to which the banks had agreed to refrain from exercising their remedies
under the Credit Facility until such date. During the forbearance period, and
since then, we have been engaged in efforts to obtain additional financing to
facilitate a restructuring of our existing indebtedness. As disclosed in our
Form 8-K filed with the Securities and Exchange Commission on August 1, 2001, we
received an acceleration notice from PNC Bank, N.A. ("PNC"), the administrative
agent under our Credit Facility, terminating the commitments to make loans under
the Credit Facility and declaring all amounts due under the Credit Facility,
approximately $91 million at June 30, 2001, excluding costs and legal fees, to
be immediately due and payable. According to the notice of acceleration, if the
amounts due were not paid by Wednesday, August 1, 2001, the administrative
agents and the banks under the Credit Facility reserved their rights without
further notice to exercise all of their rights and remedies under the Credit
Facility documents, including but not limited to collecting receivables owed to
us and our subsidiaries directly from the parties owing such amounts, taking
control of and voting and managing all or part of the pledged stock of our
subsidiaries and instituting suit, including foreclosure actions, to collect the
debt as well as cost and legal fees. In the event that the banks were to take
the foregoing actions, our ability to operate our business would be severely
impaired and, in all likelihood, we would be required to seek protection from
our creditors to continue operations, which could involve filing for bankruptcy
protection in the United States and possibly Canada and Mexico where we have
operations.
On August 9, 2001, we received a letter from the administrative agent under
the Credit Facility, withdrawing the acceleration notice previously sent to us.
The withdrawal letter is subject to our acknowledgement that the defaults set
forth in the acceleration notice continue to exist, including the default of
certain financial covenants under the Credit Facility since December 2000, and
the failure to make scheduled interest and principal payments totaling
approximately $2.8 million and $4.2 million under the Credit Facility on March
31, 2001 and July 2, 2001, respectively. We have agreed that the lenders under
the Credit Facility may send an acceleration notice at any time and that the
lenders have reserved all rights and remedies under the Credit Facility.
We are currently negotiating with the lenders under the Credit Facility to
enter into a new forbearance agreement that would extend the forbearance period
to mid-September, although no assurance can be given that we will be able to
obtain such forbearance or that during any extended forbearance period we will
be able to obtain additional financing or restructure our indebtedness. Even if
we are able to enter into an additional forbearance agreement with the lenders
under the Credit Facility, they would retain their rights to foreclose on the
collateral under the Credit Facility to the extent we defaulted under such
forbearance agreement or at any time following the termination of such
forbearance agreement.
The terms on which we sell our products vary by operating company, but
generally provide for payment within 30 days.
Capital expenditures were approximately $239,000 for the three months ended
June 30, 2001 compared to approximately $1.0 million for the comparable period
last year. Capital expenditures incurred during the three months ended June 30
2001 were primarily for the purchase of production equipment and computer
software to maintain our current plant capacity. We expect that capital
expenditures during the fiscal year ending March 31, 2002 will not exceed those
of the preceding year.
The annual dividend requirement on our preferred stock at June 30, 2001 is
currently $1,155,000. We suspended payment of the quarterly dividend of $289,000
during the quarter ended December 31, 2000. Unpaid dividends on the preferred
stock are cumulative. Our future earnings, if any, may not be adequate to pay
the cumulative dividend or future dividends on the preferred stock. Although we
intend to pay the cumulative dividend and to resume payment of regular quarterly
dividends out of available surplus, there can be no assurance that we will
maintain sufficient surplus or that future earnings, if any, will be adequate to
pay the cumulative dividend or future dividends on our preferred stock. Further,
we will need the approval of the lenders under our Credit Facility to resume
payment of preferred dividends.
As of June 30, 2001, we had working capital of approximately $15.6 million
prior to the reclassification of $95.6 million of long-term debt to current
liabilities. Excluding payment obligations in respect of indebtedness, preferred
stock, Internal Revenue Service payments and potential penalties, and earn-out
payments relating to acquired businesses, management believes that our current
working capital position, along with anticipated results of operations, will be
16
sufficient to allow us to fund our working capital requirements for at least the
next twelve months. This assessment is dependent upon the successful outcome of
the negotiations with the lenders under our Credit Facility and with the
Internal Revenue Service with respect to our outstanding excise tax liabilities.
We have been advised by our independent accountants that if these matters are
not resolved prior to issuance of our March 31, 2002 annual report, they may
have to modify their report as to whether we are a going concern.
In April 2000 we acquired all of the outstanding capital stock of Airborne
and Arell. Under the terms of those acquisition agreements, we agreed to pay
approximately $5.1 million in the event that certain earnings targets were
achieved during the three years following the acquisition. Accordingly, we
accrued for a liability of approximately $2 million for the fiscal year ended
March 31, 2001, representing the portion of the earnout attributable to that
year. Airborne and Arell met their earnings targets for the fiscal year ended
March 31, 2001. However, we are prohibited from paying this amount under the
terms of the forbearance agreement with our senior lenders. Additionally, we
have also agreed to pay a certain percentage of the earnings of both companies
to the extent that their cumulative earnings for the fiscal years ending March
31, 2001, 2002 and 2003 exceed a certain level.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to interest rate risk primarily through our borrowings under
the Credit Facility. As of June 30, 2001, we had approximately $91.0 million of
prime based debt not including accrued interest outstanding under the Credit
Facility. A hypothetical 100 basis-point increase in the floating interest rate
from the current level corresponds to an increase in our interest expense over a
one-year period of $951,000. This sensitivity analysis does not account for the
change in our competitive environment indirectly related to the change in
interest rates and the potential decisions which could be taken in response to
any of these changes. Furthermore, on April 25, 2000 we entered into an interest
rate hedge with a notional amount of $37,500,000 to protect against interest
rate increases.
Foreign Currency Exchange Risk
In April 2000, we acquired Airborne and Arell, both located outside of
Montreal, Canada, and in April 1999 we commenced production at our facility in
Sonora, Mexico. Accordingly, fluctuations in the value of the Canadian dollar
and/or Mexican peso compared to the U.S. dollar upon currency conversion may
affect our financial position and cash flow. As of June 30, 2001, we had not
established any programs for hedging against foreign currency losses. Because a
majority of our transactions are U.S. based and U.S. dollar-denominated, a
hypothetical 10 % change in the value of the Canadian dollar or Mexican peso
would not have a materially adverse impact on our financial position and cash
flow.
Risk Factors
Our auditors have issued a "going concern" audit opinion.
The auditor's report on our financial statements for the fiscal year ended
March 31, 2001 states that because of operating losses and our continued
experience of negative cash flows from operations, there is substantial doubt
about our ability to continue as a going concern. A "going concern" opinion
indicates that the financial statements have been prepared assuming we will
continue as a going concern and do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
We have recently incurred losses which are likely to continue.
During the fiscal year ended March 31, 2001, we incurred net losses of
approximately $10.2 million, and during the three months ended June 30, 2001 we
incurred net losses of approximately $3.6 million. Because of the general
decline in the trucking industry, our significantly increased interest expense
as a result of recent acquisitions and our inability to successfully integrate
acquired businesses, these losses are likely to continue, and perhaps increase,
during at least a portion of our current fiscal year. In addition, our revenues
declined from the year ended March 31, 2000 to the year ended March 31, 2001 as
well as for the three months ended June 30, 2001 versus the comparable period in
2000. We will need to generate additional revenue and achieve cost reductions if
we are to regain and sustain profitability. We may not achieve or
17
sustain profitability and our losses may continue to grow in the future. As a
result, we may not be able to pursue our business strategy effectively.
We are in default under our Credit Facility. If we fail to obtain further
forbearance or waivers with respect to these defaults or obtain additional
financing to enable us to cure them, then our lenders under the Credit Facility
may foreclose on substantially all of our assets, which would severely impair
our ability to operate our business and perhaps require us to seek protection
from our creditors.
In December 2000, we informed the agent under the Credit Facility that we
were then in default of certain financial covenants under the Credit Facility.
In addition, we failed to make scheduled interest and principal payments
totaling approximately $2.8 million and $4.2 million under the Credit Facility
on March 31, 2001 and July 2, 2001, respectively, which constituted additional
events of default thereunder. Absent significant additional financing or a
restructuring, we expect to be unable to pay additional principal and interest
payments totaling approximately $4.1 million on the next payment date of
September 30, 2001. We have engaged an investment banking firm to assist us in
obtaining additional financing, although we can give no assurance that our
efforts to obtain additional financing or restructure our existing indebtedness
will be successful.
From May 21, 2001 to July 17, 2001, we and the bank lenders under the
Credit Facility had been operating under the terms of a forbearance agreement
pursuant to which the banks had agreed to refrain from exercising their remedies
under the Credit Facility until such date. During the forbearance period, and
since then, we have been engaged in efforts to obtain additional financing to
facilitate a restructuring of our existing indebtedness. As disclosed in our
Form 8-K filed with the Securities and Exchange Commission on August 1, 2001, we
received an acceleration notice from PNC Bank, N.A. ("PNC"), the administrative
agent under our Credit Facility, terminating the commitments to make loans under
the Credit Facility and declaring all amounts due under the Credit Facility,
approximately $91 million at June 30, 2001, excluding costs and legal fees, to
be immediately due and payable. According to the notice of acceleration, if the
amounts due were not paid by Wednesday, August 1, 2001, the administrative
agents and the banks under the Credit Facility reserved their rights without
further notice to exercise all of their rights and remedies under the Credit
Facility documents, including but not limited to collecting receivables owed to
us and our subsidiaries directly from the parties owing such amounts, taking
control of and voting and managing all or part of the pledged stock of our
subsidiaries and instituting suit, including foreclosure actions, to collect the
debt as well as cost and legal fees. In the event that the banks were to take
the foregoing actions, our ability to operate our business would be severely
impaired and, in all likelihood, we would be required to seek protection from
our creditors to continue operations, which could involve filing for bankruptcy
protection in the United States and possibly Canada and Mexico where we have
operations.
On August 9, 2001, we received a letter from the administrative agent under
the Credit Facility, withdrawing the acceleration notice previously sent to us.
The withdrawal letter is subject to our acknowledgement that the defaults set
forth in the acceleration notice continue to exist, including the default of
certain financial covenants under the Credit Facility since December 2000, and
the failure to make scheduled interest and principal payments totaling
approximately $2.8 million and $4.2 million under the Credit Facility on March
31, 2001 and July 2, 2001, respectively. We have agreed that the lenders under
the Credit Facility may send an acceleration notice at any time and that the
lenders have reserved all rights and remedies under the Credit Facility.
We are currently negotiating with the lenders under the Credit Facility to
enter into a new forbearance agreement that would extend the forbearance period
to mid-September, although no assurance can be given that we will be able to
obtain such forbearance or that during any extended forbearance period we will
be able to obtain additional financing or restructure our indebtedness. Even if
we are able to enter into an additional forbearance agreement with the lenders
under the Credit Facility, they would retain their rights to foreclose on the
collateral under the Credit Facility to the extent we defaulted under such
forbearance agreement or at any time following the termination of such
forbearance agreement.
We need to obtain additional financing, or a significant restructuring of
obligations under Credit Facility, in order to meet our existing debt
obligations and to fund our operations. We may not be able to obtain such
additional financing or restructuring. We could experience a change of control
as a result of such a financing or restructuring if either of such events
occurs. In addition, holders of our common stock and preferred stock may be
severely diluted or eliminated entirely in connection with a restructuring
transaction or if we become subject to proceedings in respect of protection from
our creditors.
We are currently developing a business plan that will offer a basis for a
restructuring proposal that we intend to provide to our creditors that we expect
will include additional, new equity or equity-linked financing. We have engaged
an investment banking firm to assist us in obtaining additional financing,
although we can give no assurance that our efforts to obtain additional
financing or restructure our existing indebtedness will be successful. Events of
default under our existing
18
indebtedness, our recent history of losses and the "going concern" audit opinion
on our 2001 fiscal year financial statements increase the difficulty of
obtaining such additional financing. Any additional financing will require the
consent of our senior lenders and, to the extent it contemplates the issuance of
shares of preferred stock senior to our existing preferred stock, holders of a
majority of the shares of our preferred stock. We may be unable to effectuate a
restructuring proposal if we are unable to reach agreement with our creditors or
preferred stockholders or because we are unable to obtain additional financing.
In the event that we obtain additional financing and/or a restructuring of our
existing indebtedness, such events could cause a change of control of the
company.
If we are unable to accomplish an out-of-court restructuring, we may seek
protection from our creditors. Moreover, it is possible that our creditors may
seek to initiate involuntary proceedings against us or against one or more of
our subsidiaries in the United States and/or in Canada or Mexico, which would
force us to make defensive voluntary filing(s) of our own. Should we be forced
to take action with respect to one or more of our foreign subsidiaries, such
filings raise substantial additional risk to us and the success of our proposed
restructuring transaction due to both the uncertainty created by foreign
creditors' rights laws and the additional complexity that would be caused by
such additional filings. We can provide no assurance that we would be able to
successfully restructure our foreign subsidiaries should such filings be
required. In addition, if we restructure our debt or file for protection from
our creditors, it is very likely that our common stock and preferred stock will
be severely diluted if not eliminated entirely.
Restructuring our indebtedness may require us to sell assets. The terms of
such sales may not be advantageous and the loss of such assets may harm our
ability to operate our business.
In order to effect a restructuring of our indebtedness we will be required
to obtain the consent of the lenders under our Credit Facility. These lenders
may require as a condition of their consent that we dispose of certain assets or
businesses and apply the proceeds to reduce our indebtedness to them. In the
event that we are required to engage in such sales of assets, we may not be able
to negotiate favorable terms and may realize reduced values for such assets. In
addition, the loss of the assets that we sell could harm our ability to operate
our business.
We currently are, and will continue to be, highly leveraged and subject to
substantial restrictions as to our operations.
As of June 30, 2001, we had $95.6 million of debt outstanding, of which
$91.0 million was outstanding under our Credit Facility. Due to conditions of
default previously described, the entire $95.6 million of outstanding debt was
reclassified, for reporting purposes, from long-term debt to current
liabilities. To date, a substantial portion of our cash flow has been devoted to
debt service. Our ability to make payments of principal and interest on our
outstanding indebtedness will be largely dependent upon our ability to raise
additional financing, restructure existing indebtedness and on our future
operating performance. Even if we are able to obtain additional financing and
restructure our existing indebtedness, we will remain highly leveraged. All
amounts outstanding under the Credit Facility are secured by a lien on
substantially all of our assets. In addition, our Credit Facility imposes, and
any new or restructured indebtedness will impose, significant operating and
financial restrictions on us, including certain limitations on our ability to
incur additional debt, make payments on subordinated indebtedness, pay
dividends, redeem capital stock, sell assets, engage in mergers and acquisitions
or make investments, make loans, transact business with affiliates, enter into
sale and leaseback transactions, and place liens on our assets. In addition, our
Credit Facility contains covenants regarding the maintenance of certain
financial ratios. Servicing our debt obligations will significantly reduce the
amount of cash available for investment in our businesses and, together with
restrictions imposed by the terms of our indebtedness, may cause our results of
operations to suffer.
We have recently undergone changes in our management team and cannot assure
you that our management team can effectively work together to operate our
business.
In March 2001, our board appointed our new President and Chief Executive
Officer. In August 2001, we hired a new Chief Financial Officer. Neither our new
President and Chief Executive Officer or our new Chief Financial Officer have
worked together or with our remaining management team before and they, and
additional managers or that they may hire, may not be able to forge effective
working relationships with other members of management at the corporate or
operating unit levels. In addition, they, and any other newly hired managers,
will need to learn about our company and the industries in which we operate. If
our senior management cannot work together effectively, then our business and
strategies will be harmed and we will incur additional costs in seeking and
retaining new management personnel.
Even if we are able to secure additional financing, the trading prices of
shares of our common stock and preferred stock could decline and our
stockholders could experience significant ownership dilution, further depressing
the prices of shares of our common stock and preferred stock.
19
Any financing that we complete is likely to involve the issuance of our
equity securities. If we issue additional equity securities, such issuances may
depress the trading prices of our common stock and preferred stock and
stockholders may experience significant dilution of their ownership interest. In
addition, the newly issued securities may have rights superior to those of our
common stock and existing preferred stock. The dilutive effect of these
issuances will be increased to the extent our share price declines.
Our stock price has declined and may continue to decline, which could
reduce the value of stockholders' investments, subject us to litigation, cause
us to be unable to maintain our listing on the American Stock Exchange, and make
obtaining future equity financing more difficult for us.
The market prices of our common stock and preferred stock have declined
since we completed our initial public offering in January 1998, and it is likely
that they will continue to decline. In the past, companies whose stock prices
have declined have been the object of securities class action litigation. If we
were to become the object of securities class action litigation, it could result
in substantial additional costs for which we are unprepared and it could divert
our management's attention and resources.
Our common stock and preferred stock are each currently listed on the
American Stock Exchange (the "Exchange"). The Exchange has broad discretion to
suspend a company's securities from trading or to de-list a company's securities
from the Exchange. The Exchange will consider suspending or de-listing the
securities of a company if the company sustains losses which are so substantial
in relation to its existing financial resources that it appears questionable as
to whether such company will be able to continue operations and/or meet its
obligations as they mature. The Exchange will also consider suspension or
de-listing if the aggregate market value of shares of common stock publicly held
is less than $1 million, if the number of shareholders is less than 300, if the
company has sold or disposed of a substantial portion of its operations, assets
or business as a result of foreclosure or receivership, or if the selling price
of shares of a company's stock sell at a low price per share for a substantial
period of time, among other reasons. If the Exchange should suspend or de-list
our common stock or our preferred stock, the market for our shares would become
significantly less liquid, and the value of shareholders' investments would
likely decline substantially.
In addition, the declines in our stock price may have harmed, may continue
to harm our ability to issue or significantly increase the ownership dilution to
stockholders caused by our issuing, equity in financing or other transactions.
The price at which we issue shares in such transactions is generally based on
the market price of our common stock and a decline in our stock price would
result in our needing to issue a greater number of shares to raise a given
amount of funding or acquire a given dollar value of goods or services. The
occurrence of any of the foregoing would likely have a material adverse effect
on Standard's and shareholders' investments.
We are in arrears on payment of certain federal excise taxes of
approximately $6.7 million, which has resulted in an additional event of default
under our Credit Facility, and which could subject us to penalties in material
amounts.
We are currently in arrears on payment of certain federal excise taxes of
approximately $6.7 million, on which approximately $1.5 million of interest was
accrued as of June 30, 2001. We expect to attempt to negotiate a payment plan
with the Internal Revenue Service ("IRS") to resolve the arrearage. Although no
formal plan is yet in place, we made a voluntary tax payment in the amount of
$634,135 on March 9, 2001 as well as $20,000 on July 16, 2001, and intend to
make voluntary monthly payments of $20,000 August 15, 2001 and September 15,
2001. This arrearage has also resulted in an additional event of default under
our Credit Facility. Our financial statements include approximately $206,000 of
interest expense for the quarter related to federal excise tax currently in
arrears. Further, the IRS has the statutory authority to impose penalties which
could be material. If we are unable to negotiate a payment plan with the IRS, or
if the IRS imposes statutory penalties on Standard, the IRS could commence
proceedings to freeze or foreclose upon our assets, including our bank accounts.
In any of those events our business, financial position or results of operations
could be materially and adversely affected.
Our quarterly operating results are likely to be subject to substantial
fluctuations in the future due to numerous factors, many of which are outside of
our control. These fluctuations can make assessing an investment in our
securities difficult and depress the trading prices of our securities.
Our future quarterly operating results are likely to be subject to
substantial fluctuations as a result of a variety of factors, including:
o our ability to restructure our payment obligations under the Credit
Facility;
o general economic conditions;
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o the conditions of the trucking, aerospace, defense, nuclear and
industrial industries in general;
o the collectability of accounts receivables from customers;
o further price depression in the industries in which we participate;
o our ability to introduce new products and services;
o timing of sales;
o changes in estimates of the cost of completion of long-term contracts;
o the timing and costs of any acquisitions of services or technologies;
o changes in vendor trade terms (payment terms); and
o our ability to further cut overhead costs.
Variability in our operating results could have a material adverse effect
on our business, financial condition and results of operations, as well as the
trading prices of our common and preferred stock.
Our reported revenue numbers may not prove to be comparable to prior or
future periods because accounting for our revenues on certain of our long-term
contracts requires us to estimate future costs which are uncertain.
We account for a significant percentage of our long-term contracts at our
Ranor and TPG facilities on a percentage-of-completion basis. For the three
months ended June 30, 2001, Ranor and TPG accounted for approximately 22.3% of
our total revenues. This accounting method requires that, for each uncompleted
long-term contract, we recognize revenues and earnings based on management's
estimates to complete, which are reviewed periodically, with adjustments
recorded in the period in which the revisions are made. Accordingly, the revenue
we recognize in any given period on such contracts depends to a significant
extent on our estimate of the total remaining costs to complete individual
projects. As with any estimates, our estimates of costs of completion are
subject to numerous risks and uncertainties, including risks of increased costs
for, or unavailability of, raw materials, as well as engineering and
manufacturing risks in producing products on a timely basis. If in any period we
significantly increase our estimate of the total cost to complete a project, we
may recognize very little or no additional revenue with respect to that project.
As a result, our gross margin in that period may not be directly comparable to
prior or future periods and in such period and future periods may be
significantly reduced. In some cases we may recognize a loss on individual
projects prior to their completion.
We have suspended dividend payments that have and will continue to cumulate
and we are in default on certain of our subordinated debt.
The annual dividend requirement on our preferred stock is currently
$1,155,000. We suspended payment of the quarterly dividend of $289,000 during
the quarter ended December 31, 2000. Unpaid dividends on the preferred stock are
cumulative. Our future earnings, if any, may not be adequate to pay the
cumulative dividend or future dividends on the preferred stock. Although we
intend to pay the cumulative dividends and to resume payment of regular
quarterly dividends out of available surplus, there can be no assurance that we
will maintain sufficient surplus or that future earnings, if any, will be
adequate to pay the cumulative dividend or future dividends on our preferred
stock. In addition, we are in default of interest payments under approximately
$4.6 million of convertible subordinated notes issued in connection with our
acquisition of our Ranor subsidiary during 1999. We will need the approval of
the lenders under our Credit Facility to resume payment of preferred dividends
and payment of interest and principal on our subordinated debt.
Our business is concentrated in industries that are subject to economic
cycles.
A significant portion of our business and business development efforts are
concentrated in the trucking, and, to a lesser extent, the aerospace, nuclear,
industrial and defense industries. Since March 2000, the U.S. economy has
suffered a sharp decline. As demonstrated by our decline in revenues from our
Truck Body/Trailer Division in the quarter ending June 30, 2001, many of our
customers have substantially curtailed, if not eliminated, significant
additional expenditures in these areas. Certain of these developments have
already had an adverse impact on our business. A continuation of the current
economic environment will likely further adversely affect our business.
The Critical Components Division relies on U.S. government contracts and
subcontracts for a substantial portion of its revenues.
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A significant portion of our business and business development efforts are
concentrated in industries where the U.S. government is a major customer.
Approximately 23.5% of the Critical Components Division's net revenues for the
quarter ended June 30, 2001 were derived directly from contracts with the U.S.
government, or agencies or departments thereof, or indirectly from subcontracts
with U.S. Government contractors. The majority of these Government contracts are
subject to termination and renegotiation for the convenience of the government.
As a result, our business, financial condition and results of operations may be
materially affected by changes in U.S. Government expenditures in the industries
in which we operate.
We are dependent on a few customers for a substantial percentage of our
revenues.
Due to the nature of the markets we participate in, including the
heavy-duty trailer chassis and container industry and the nuclear waste disposal
industry, the available pool of potential customers is limited. For the quarter
ended June 30, 2001, two customers were responsible for 42% of the sales of
Truck Body/Trailer Division and one customer was responsible for 33% of the
sales of our Critical Components Division. Our preferred supplier arrangement
with this customer expires in the second quarter of our 2001 fiscal year. We are
currently negotiating with this customer to renew our preferred supplier
arrangement, although we cannot be sure we will be successful in doing so. The
loss of any major customer could have a material adverse effect on our business,
financial condition and operating results.
We could face additional regulatory requirements, tax liabilities and other
risks as a result of our international operations.
In April 2000, our Critical Components division acquired Airborne and
Arell, both based in Canada. In addition, our Truck Body/Trailer Division
operates a facility in Mexico. There are risks related to doing business in
international markets, such as changes in regulatory requirements, tariffs and
other trade barriers, fluctuations in currency exchange rates, more stringent
rules relating to labor or the environment, and adverse tax consequences.
Furthermore, we may face difficulties in staffing and managing any foreign
operations. One or more of these factors could harm any existing or future
international operations.
Many of the raw materials we use come from a small number of suppliers.
A significant portion of our precision machining business depends on the
adequate supply of specialty metals and exotic alloys at competitive prices and
on reasonable terms. Many of these raw materials may be obtained from a small
number of suppliers, and in some cases, a single supplier. Although we have not
experienced significant problems with our suppliers in the past, there can be no
assurance that such relationship will continue or that we will continue to
obtain such supplies at cost levels that would not adversely affect our gross
margins. The partial or complete loss of any of our suppliers, or production
shortfalls or interruptions that otherwise impair our supply of raw materials,
would have a material adverse effect on our business, financial condition and
results of operations. It is uncertain whether alternative sources of supply
could be developed without a material disruption in our ability to provide
products to our customers.
We must comply with strict government and environmental regulations. Both
compliance and non-compliance could result in substantial expenses and
liabilities.
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. Standard's manufactured chassis are also subject to federal excise
taxes, for which we are in substantial arrears. Changes or anticipated changes
in these regulations or in applicable tax laws may have a material adverse
impact on the Truck Body/Trailer Division's manufacturing operations and sales.
We are subject to Federal, state and local laws and regulations relating to
our operations, including building and occupancy codes, occupational safety and
environmental laws including laws governing the use, discharge and disposal of
hazardous materials. Except as otherwise described above with regard to air
quality regulations, the Company is not aware of any material non-compliance
with any such laws and regulations. The Company is a manufacturer of truck
trailer chassis and is covered by Standard Industrial Code (SIC) #3715.
Companies covered by SIC Code #3715 are among those companies subject to the New
Jersey Industrial Site Recovery Act ("ISRA"). Pursuant to ISRA, the Company is
conducting an investigation into any environmental "Areas of Concern" ("AOCs")
that may be present at the facility. The Company has entered into a Remediation
Agreement with NJDEP by which the Company will fulfill its obligations under
ISRA. AOCs could require remediation, which could have a material adverse effect
on the Company. Furthermore, there can be no assurance that additional similar
or different 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 or that any such issues will
not have a material adverse effect on the Company's operating results and
financial position.
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We have acquired numerous businesses and we may not be able to successfully
integrate them.
Over the past years, we have made several acquisitions of complementary
businesses which we continue to integrate. The growth associated with these
acquisitions has resulted in a significant strain on our managerial, financial,
engineering and other resources. There can be no assurance that we will be
successful in the integration process.
Our largest stockholders could act together to exercise significant control
over us.
As of June 30, 2001, our three largest shareholders, including one director
and one former director who are brothers, collectively beneficially owned
approximately 51.9% of our outstanding common stock. As a result of this
concentration of ownership, these stockholders, should they choose to act
together, would be able to exercise significant influence over matters requiring
approval by our stockholders, including the election of directors and approval
of significant corporate transactions. This concentration of ownership could
also have the effect of delaying or preventing a change in control of the
company.
Certain anti-takeover provisions could cause harm to our shareholders.
Our 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, even if such a transaction would be beneficial to our stockholders. For
example, our 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 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 preferred stock
and/or common stock. Issuance of such preferred stock may have an adverse effect
on the then prevailing market price of the preferred stock and/or common stock.
Our certificate of incorporation also requires a vote of 75% for certain
business combination transactions, whether or not shareholders are otherwise
entitled to vote on such transactions under applicable law. Similarly, our
by-laws establish a "staggered" board of directors and contain provisions
limiting the ability of stockholders to nominate new directors. Additionally, we
are subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law, which prohibits us 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 even if it would be in the best interests of the company or our
shareholders.
In April 2000, we acquired Airborne and Arell in Montreal, Canada and in
April 1999 we commenced production at our facility in Sonora, Mexico.
Accordingly, fluctuations in the value of the Canadian Dollar or the Mexican
Peso, compared to the U.S. Dollar upon currency conversion, may affect our
financial position and cash flow. As of June 30, 2001, we had not established a
foreign currency hedging program. Because a majority of our transactions are
U.S. based and U.S. Dollar denominated, a hypothetical 10% change in the value
of the Canadian Dollar or the Mexican Peso would not have a materially adverse
impact on our financial position and cash flow.
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PART II. Other Information
Item 1. Legal Proceedings
We are involved in litigation arising in the normal course of our business.
Management believes that the litigation in which we are currently involved,
either individually or in the aggregate, is not material to Standard's financial
position or results of operations.
On June 22, 2001, the United States District Court for the Eastern District
of Wisconsin entered a judgment of $570,000 against our subsidiary R/S in a suit
brought by a former distributor with whom R/S terminated its relationship in
September 1999. On July 3, 2001, we filed a motion with the court seeking
judgment in our favor as a matter of law notwithstanding the verdict and filed a
motion for a new trial, arguing that the evidence adduced at trial does not
support the jury's verdict. In our motion for a new trial, we requested that the
court, in the alternative, reduce the amount of the jury's verdict to a figure
reasonably supported by the evidence. The court has yet to rule on our motions.
We believe that our position is meritorious and intend to vigorously defend our
interests in this matter. The Company set up an accrual for $570,000.
Item 3. Defaults Upon Senior Securities
(a) During the fiscal year ending March 31, 2001, we incurred net losses of
approximately $10.2 million. In December 2000, we notified the agent under our
Credit Facility that we were not in compliance with certain financial covenants
under the Credit Facility. In addition, we failed to make scheduled interest and
principal payments totaling approximately $2.8 and $4.2 million under the Credit
Facility on March 31, 2001 and July 2, 2001, respectively, which constituted
additional events of default thereunder. As of June 30, 2001, we were also in
default in interest payments totaling approximately $548,000 in respect of
convertible subordinated notes issued to finance the acquisition of our Ranor
subsidiary. We expect to be unable to pay additional principal and interest
payments totaling approximately $4.1 million under the Credit Facility on the
next payment date of September 30, 2001.
We are currently unable to meet our payment obligations under the Credit
Facility and will be unable to achieve compliance with the terms of the Credit
Facility absent additional equity or debt financing, restructuring of the terms
of the Credit Facility or a combination of such financing and restructuring. We
have engaged an investment banking firm to assist us in obtaining additional
financing, although we can give no assurance that our efforts to obtain
additional financing or restructure our existing indebtedness will be
successful. Due to our current condition of default, our entire long-term debt
has been reclassified to current liabilities.
(b) The holders of our Preferred Stock are entitled to receive cumulative
dividends at the rate of $1.02 per share per year, paid quarterly on the last
business day of March, June, September and December of each year, commencing on
March 31, 1998. To date, we have paid all required dividends on the Preferred
Stock with cash generated from operations with the exception of the dividends
for the three quarters ended December 31, 2000, March 31, 2001 and June 30,
2001. The cumulated arrearage at March 31, 2001 was $578,000 and as of June 30,
2001 was $867,000. If Standard is in arrearage on dividend payments for four or
more quarters, the holders of our Preferred Stock are entitled to appoint two
directors to Standard's board of directors.
The annual dividend requirement on our Preferred Stock is $1,155,000.
During the quarter ending December 31, 2000, we suspended payment of the
quarterly dividend of $289,000 on the Preferred Stock. Unpaid dividends on the
Preferred Stock are cumulative. Our future earnings, if any, may not be adequate
to pay the cumulative dividend or future dividends on the Preferred Stock.
Although we intend to pay the cumulative dividend and to resume payment of
regular quarterly dividends out of available surplus, there can be no assurance
that we will maintain sufficient surplus or that future earnings, if any, will
be adequate to pay the cumulative dividend or future dividends on the Preferred
Stock. Further, we will need approval of our senior lenders to resume payment of
dividends on the Preferred Stock.
We have not paid dividends on our common stock to date. The future payment
of dividends is subject to the discretion of our board of directors. Moreover,
our senior secured Credit Facility contains restrictions on our ability to pay
dividends. The current intention of the board of directors is to retain all
earnings, other than Preferred Stock dividends, for use in our business.
Accordingly, we do not currently expect to pay dividends on our common stock in
the foreseeable future.
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Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q
10.38 Agreement dated May 16, 2001 between Standard Automotive and
William Merker
10.39 Amended and Restated Employment Agreement dated as of July 16,
2001 between Standard Automotive and James F. "Pat" O'Crowley.
10.40 Separation Agreement dated July 12, 2001 for Joseph Spinella
(b) Reports on Form 8-K
We filed a report on Form 8-K, Item 6, on May 23, 2001,
announcing the election of Messrs. James F. O'Crowley, III, James E.
Gross and John E. Elliott, II to our board of directors and the
resignation of Mr. William Merker from our board of directors.
We filed a report on Form 8-K, Item 5, on June 7, 2001,
announcing Mr. Steven Merker's resignation as Chairman of our board of
directors.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STANDARD AUTOMOTIVE CORPORATION
/s/ James F. O'Crowley, III Date: August 14, 2001
By: ________________________________________
James F. O'Crowley, III
President and Chief Executive Officer
(Duly Authorized Officer)
/s/ Matthew B. Burris Date: August 14, 2001
___________________________________________
Matthew B. Burris
Chief Financial Officer (Principal Financial Officer)