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 December 31, 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
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
280 Park Avenue, 21st Floor West, New York, NY 10017
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(Address of principal executive offices) (Zip Code)
(908) 874-7778 3715
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(Registrant's telephone number) (Primary Standard Industrial Code)
Former address:
401 Plaza Route 206, Hillsborough, NJ 08844
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 February 13, 2002, the registrant had a total of 3,722,400 shares
of Common Stock outstanding and 1,132,600 shares of Preferred Stock outstanding.
STANDARD AUTOMOTIVE CORPORATION
For the Nine Months Ended December 31, 2001
Form 10-Q Quarterly Report
Index
Part I. Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2001
(unaudited) and March 3l,2001 3
Condensed Consolidated Statements of Operations for the three and nine
months ended December 31, 2001 (unaudited) and December 31, 2000
(unaudited and restated) 4
Condensed Consolidated Statement of Stockholders' Equity for the nine
months ended December 31, 2001 (unaudited and restated) 5
Condensed Consolidated Statements of Cash Flows for the nine months
ended December 31, 2001 (unaudited) and December 31, 2000
(restated and unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Part II. Other Information
Item 1 Legal Proceedings 22
Item 3. Defaults Upon Senior Securities 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 25
PART I. Financial Information
Item 1. Financial Statements
2
STANDARD AUTOMOTIVE CORPORATION
Condensed Consolidated Balance Sheets
(in thousands, except share data )
December 31, 2001 March 31, 2001
(Unaudited)
------------------ --------------
Assets
Cash and cash equivalents $ 1,240 $ 857
Restricted Cash 4,904
Marketable securities 102 102
Accounts receivable, net 8,753 10,620
Inventory, net 14,653 32,052
Other current assets 1,351 9,649
---------- ---------
Total current assets 31,003 53,280
Property and equipment, net 37,699 44,891
Intangible assets, net of accumulated amortization
of $3,147 and $5,408, respectively 40,213 60,538
Other assets 3,669 4,296
---------- ---------
Total assets $ 112,584 $ 163,005
========== =========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 19,714 $ 20,447
Liabilities due to banks and other lenders 95,641 95,641
Income and federal excise taxes payable 5,872 7,547
Cumulative preferred stock dividend 1,347 578
Other liabilities 3,724 7,944
---------- ----------
Total current liabilities 126,298 132,157
Other long term liabilities 2,851 4,397
---------- ---------
Total liabilities 129,149 136,554
---------- ---------
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; 3,722,400 issued and outstanding 4 4
Additional paid-in capital 31,455 31,308
Deferred compensation (55) (90)
Retained earnings (deficit) (47,947) (4,665)
Accumulated other comprehensive income (loss) (23) (107)
---------- ---------
Total stockholders' equity (16,565) 26,451
---------- ---------
Total liabilities and stockholders' equity $ 112,584 $ 163,005
========== =========
The accompanying notes are an integral part of these consolidated
condensed statements.
3
STANDARD AUTOMOTIVE CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
Three months ended Nine months ended
December 31, December 31,
----------------------------- -----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
(Restated) (Restated)
Revenues, net $ 18,232 $ 32,329 $ 76,751 $ 117,840
Operating costs and expenses:
Cost of revenues 15,234 25,955 64,141 93,665
Selling, general and administrative expenses 5,320 5,402 17,525 14,352
Loss on impairment of assets -- -- 25,983 --
------------ ------------ ------------ ------------
Total operating costs and expenses 20,554 31,357 107,649 108,017
------------ ------------ ------------ ------------
Operating income (loss) (2,322) 972 (30,898) 9,823
Interest and other expenses 3,075 4,183 9,552 9,624
------------ ------------- ------------ ------------
(Loss) before income taxes (5,397) (3,211) (40,450) 199
Provision (benefit) for income taxes 440 (1,335) 1,966 248
------------ ------------ ------------ ------------
Net (Loss) (5,837) (1,876) (42,416) (49)
Preferred dividend 289 289 866 866
------------ ------------- ------------ ------------
Net (loss) available to common stockholders $ (6,126) $ (2,165) $ (43,282) $ (915)
============ ============ ============ ============
Basic net (loss) per common share $ (1.65) $ (0.58) $ (11.63) $ (0.25)
============ ============ ============ ============
Diluted net (loss) per common share $ (1.65) $ (0.58) $ (11.63) $ (0.25)
============ ============ ============ ============
Basic weighted average number of shares outstanding 3,722 3,722 3,722 3,711
Diluted weighted average number of shares outstanding 3,722 3,722 3,722 3,711
The accompanying notes are an integral part of these consolidated
condensed statements.
4
Standard Automotive Corporation
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Retained Other Stockholders
Preferred Common Additional Deferred Earnings Comprehensive Equity
Shares Preferred Shares Common Paid In Compensation (Deficit) Income (Loss)
Outstanding Shares Outstanding Stock Capital
Balance - March 31, 1,133 $ 1 3,822 $ 4 $ 31,308 $ (90) $ (4,665) $ (107) 26,451
2001
Currency Translation 57 57
Adjustment
Warrants and Options 50 50
Issued
Preferred Stock (289) (289)
Dividend
Net Loss (3,618) (3,618)
Amortization of 15 15
Deferred
Compensation
-------- -------- --------- --------- ----------- --------- --------- ------------ -----------
Balance - June 30, 2001 1,133 1 3,822 4 31,358 (75) (8,572) (50) 22,666
-------- -------- --------- --------- ----------- --------- --------- ------------ ------------
Currency Translation (46) (46)
Adjustment
Warrants and Options 50 50
Issued
Preferred Stock (289) (289)
Dividend
Net Loss (32,960) (32,960)
Amortization of 15 15
Deferred
Compensation
-------- -------- --------- --------- ----------- --------- --------- ------------ -----------
Balance - September 1,133 1 3,822 4 31,408 (60) (41,821) (96) (10,564)
30, 2001 -------- -------- --------- --------- ----------- --------- --------- ------------ -----------
Currency Translation 73 73
Adjustment
Warrants and Options
Issued
47 47
Preferred Stock (289) (289)
Dividend
Net Loss (5,837) (5,837)
Amortization of 5 5
Deferred
Compensation
-------- -------- --------- --------- ----------- --------- --------- ------------ -----------
Balance - December 31, 1,133 $ 1 3,822 $ 4 $ 31,455 $ (55) $(47,947) $ (23) $ (16,565)
2001 ======== ======== ========= ========= =========== ========= ========= ============ ===========
The accompanying notes are an integral part of these consolidated
condensed statements.
5
<Page>
STANDARD AUTOMOTIVE CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine months ended
December 31,
------------------------------
2001 2000
------------ -------------
(Restated)
Cash flows from operating activities:
Net income (loss) $ (42,416) $ (49)
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 5,262 5,525
Loss on impairment of assets 25,983 -
Non-cash interest and compensation 35 163
Deferred financing costs (683) (2,819)
Change in assets and liabilities:
Accounts receivable 1,770 6,103
Inventory 8,881 7,553
Prepaid expenses and other 6,357 (1,001)
Deferred revenue 653
Accounts payable and accrued expenses 1,474 (13,931)
------------ -------------
Net cash provided by operating activities 7,316 1,544
------------ -------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (26,463)
Acquisition of property and equipment (1,177) (2,966)
Disposition of property and equipment 14
------------ -------------
Net cash provided (used) by investing activities (1,163) (29,429)
------------ -------------
Cash flows from financing activities:
Proceeds from bank loan 32,255
Repayment of bank loan (3,938)
Preferred dividend (866) (577)
------------ -------------
Net cash provided by financing activities (866) 27,740
------------ -------------
Net increase (decrease) in cash and cash equivalents 5,287 (145)
Cash and cash equivalents, beginning of period 857 3,136
------------ -------------
Cash and cash equivalents, end of period $ 6,144 $ 2,991
============ =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,723 $ 6,965
Income taxes 1,214 3,316
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 nine months ended December 31, 2001 and
December 31, 2000 are unaudited. The financial statements for the nine months
ended December 31, 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 nine months ended December 31, 2001 should be
read in conjunction with our audited financial statements for the fiscal year
ended March 31, 2001 and with the risk factors below.
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 in two segments: (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 Company,
Inc. ("R&S") and CPS Trailer Co. ("CPS"). Standard's Critical Components
Division operates through its wholly-owned subsidiaries: Ranor, Inc. ("Ranor"),
Airborne Gear & Mach. Ltd. ("Airborne"), Arell Machining Ltd. ("Arell") and The
Providence Group Inc. ("TPG"). Subsequent to December 31, 2001 both the East and
West divisions of Ajax have been closed, and substantially all the assets of TPG
were sold.
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 amortization of
goodwill and requires companies to use a fair-value approach to determine
whether there is an impairment of existing and future goodwill amortization.
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. Amortization of goodwill for the three months ending December 31, 2001
was $684,000 compared to $577,000 for the three months ending December 31, 2000.
Goodwill amortization for the nine months ending December 31, 2001 was
$1,660,000 compared to $1,609,000 for the same period last year. The effect of
implementing SFAS No. 142 could be significant.
In August 2001, SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets was issued. SFAS 144 supercedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of and
Accounting Principles Board Opinion (APB) No. 30, Reporting the Results of
Operations - Reporting the Effects of the Disposal of a Segment of a Business
and Extraordinary, Unusual. and Infrequently Occurring Events and Transactions.
SFAS 144 establishes a single accounting model for assets to be disposed of by
sale whether previously held and used or newly acquired. SFAS No. 144 retains
the provisions of APB No. 30 for presentation of discontinued operations in the
income statement, but broadens the presentation to include a component of an
entity SFAS 144 is effective for fiscal years beginning after December 15, 2001,
and the interim periods within. The Company is currently evaluating the impact
on its financial statements of adopting this statement.
7
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.
4. Inventory
Inventory is comprised of the following:
December 31,2001 March 31, 2001
------------------- --------------------
(Unaudited)
Raw materials $ 3,735,000 $ 10,762,000
Work in progress 6,532,000 8,057,000
Finished goods 4,386,000 13,233,000
------------------- --------------------
$ 14,653,000 $ 32,052,000
=================== ====================
The inventory is valued at the lower of cost (first in first out method)
or market. Approximately $6.9 million of the decrease in inventory represented
the write-down of Ajax inventories to estimated fair market value, due to
negative market conditions.
5. Long Term Debt, Credit Agreements and Federal Excise Taxes
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
condensed consolidated 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 in quarterly installments commencing in
June 2000 in specified amounts ranging from approximately $1.3 million and
increasing annually thereafter to approximately $1.6 million per quarter 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, the June 2001 principal
payment of $1.6 million, the September 2001 principal payment of $1.6 million or
the December 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 substantially all our
assets. In addition, our Credit Facility contains covenants regarding the
maintenance of certain financial and non-financial covenants.
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, $4.2 million, $4.1 million and $4.1 million
under the Credit Facility on March 31, 2001, July 2, 2001, September 30, 2001,
and December 31, 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 March 31, 2002.
From May 21, 2001 to July 17, 2001, and from August 23, 2001 to October
19, 2001 we and the Bank Lenders under the Credit Facility (the "Bank Lenders")
had been operating under the terms of forbearance agreements pursuant to which
the banks had agreed to refrain from exercising their remedies under the Credit
Facility until such date. During the term of the latter forbearance agreement,
we engaged the services of a crisis manager and an investment-banking firm to
identify potential buyers for the Company's subsidiaries. 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 December 31, 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 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
costs and legal fees. If the banks had taken the foregoing action, our ability
to operate our business would have been severely impaired and, in all
likelihood, we would have been required to seek protection from our creditors to
continue operations, which could have involved filing for bankruptcy protection
in the United States and possibly Canada and Mexico, where we have operations.
8
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 was subject to our acknowledgement that the
defaults set forth in the acceleration notice continued 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 Bank Lenders
under the Credit Facility may send an acceleration notice at any time and that
the Bank Lenders have reserved all rights and remedies under the Credit
Facility.
On October 25, 2001 we and the Bank Lenders under the Credit Facility
entered into a new forbearance agreement which was to expire on January 31,
2002, pursuant to which the banks agreed to refrain from exercising their rights
until such date. During the forbearance period, periodic reports were to be made
to the Bank Group by the investment bankers and the Company on the status of
potential asset dispositions. Pursuant to this forbearance agreement, we were
required to make payments of $750,000 on each of December 31, 2001 and January
31, 2002, both of which have been paid. We are no longer operating under the
terms of a forbearance agreement.
On October 31, 2001 the Company's crisis manager ended its engagement to
provide consulting services to the Company. As a result of the crisis manager's
subsequent failure to provide financial reports to the Bank Lenders, the Bank
Lenders notified the Company that it was in default of certain financial
reporting required pursuant to the forbearance agreement, that it had failed to
retain a crisis manager acceptable to the Bank Lenders, and that the Bank
Lenders reserve all rights and remedies under the forbearance agreement and the
Credit Facility. The Company and the Bank Lenders have come to a mutually
acceptable alternative to the replacement of the crisis manager on an interim
basis.
Since the end of January 2002, we have been operating without a
forbearance agreement from the Bank Lenders, and continue to be in default under
the Credit Facility. The Bank Lenders have advised us that they seek to resolve
our defaults under the Credit Facility by our making a consensual, voluntary
filing under Chapter 11 of the United States Bankruptcy Code (for the "Standard
Automotive Corporation" parent holding company, but not for our operating
subsidiaries). The Bank Lenders maintain the ability to exercise their rights
and remedies under the Credit Facility at any time. In connection with the
exercise of such rights and remedies, the Bank Lenders have taken possession of
one of our bank accounts containing approximately $3.5 million in cash.
On February 11, 2002, we announced that our Board of Directors had
appointed director John E. Elliott II as Chairman of the Board and Chief
Restructuring Officer. We also announced that James F. O'Crowley, III was no
longer our Chief Executive Officer and President. In addition, the following
directors have resigned from our Board: Karl M. Massaro, Steven J. Merker,
William C. Needham, Jr. and Joseph Spinella.
Our new management has been in discussions with the Bank Lenders
regarding our defaults under the Credit Facility. There can be no assurance that
the outcome of these discussions will be favorable to the Corporation or its
stockholders. There can be no assurance that we will not make a Chapter 11
filing as a result of these discussions.
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 December 31, 2001 the average rate of interest for the Loans is
10.25%, 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 December 31, 2001 the total amount outstanding under the Credit
Facility was $91.0 million, excluding $8.4 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 possibly selling our
operating units to generate cash to repay the bank debt, although we can give no
assurance that our efforts to sell such units 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 $6.6 million, on which approximately $1.9 million of interest was
accrued as of December 31, 2001. Although no formal payment 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 each of July 16, 2001, August 15, 2001 and September
15, 2001, and $40,000 on each of October 15, 2001, November 15, 2001, and
December 15, 2001. On January 25, 2002 we received notice that the Internal
Revenue Service filed a Federal Tax Lien on the assets of Ajax for the amount of
the unpaid excise tax and interest.
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 (loss) per Common Share
Basic net income (loss) per share is calculated by dividing income (loss)
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
dividend payments, 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
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 transferred to
us 200,000 shares of common stock held by him. In addition, Mr. William Merker
provided us with a promissory note, payable on December 1, 2001, in an aggregate
principal amount of $201,500, which is equal to the amount by which $800,000
exceeds the fair market value of the transferred shares as determined by an
independent appraiser, less expenses related to the appraisal in the amount of
$22,500. The note was paid by Mr. William Merker to the Company on December 1,
2001.
8. Segment Information
The segment information for the period ended December 31, 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
December 31, 2000.
Below is the selected financial segment data for the nine months ended
December 31, 2001 and 2000:
Truck Critical
Body/Trailer Components Segment
December 31, 2001 Division Division Totals
- ----------------- ---------------- -------------- ---------------
(in thousands)
Revenue $ 45,652 $ 31,099 $ 76,751
Operating income (loss) $ (26,545) 3,715 (22,830)
Identifiable assets 21,829 47,019 68,848
Capital expenditures 1,177 1,177
Truck Critical
Body/Trailer Components Segment
December 31, 2000 (a) Division Division Totals
- --------------------- ---------------- -------------- ---------------
Revenue $ 87,255 30,585 $ 117,840
Operating income 6,859 7,017 13,876
Identifiable assets 48,048 44,164 92,212
Capital expenditures 1,329 1,637 2,966
(a) Restated
The following is a reconciliation of reportable segment operating income
and assets to the Company's consolidated totals for the nine months ended
December 31, 2001 and 2000:
10
December 31,
Operating income 2001 2000
- ---------------- -------------- --------------
(Restated)
(in thousands)
Identifiable operating income (loss) for reporting segments $ (22,830) $ 13,876
Other corporate expenses 8,068 4,053
-------------- --------------
Consolidated operating income (loss) $ (30,898) $ 9,823
============== ==============
December 31,
Assets 2001 2000
- ------
-------------- --------------
(in thousands)
Total assets for reporting segments $ 68,848 $ 92,212
Goodwill 40,213 58,210
Other unallocated amounts (primarily deferred financing costs) 3,523 8,302
-------------- --------------
Consolidated total assets $ 112,584 $ 158,724
============== ==============
Revenue by geographical area are comprised as follows:
Nine months ended December 31,
2001 2000
-------------- -------------
(Restated)
(in thousands)
United States $ 62,120 $ 103,897
Canada 14,631 13,943
-------------- -------------
Total net revenues $ 76,751 $ 117,840
============== =============
9. Loss on Impairment of Assets and Subsequent Event
As of September 30, 2001 we concluded that impairments occurred in the
value of the assets of the Ajax unit of the Truck Body/Trailer Division and the
TPG unit of the Critical Components Division. The decision was made based on
current and projected earnings levels of these divisions and current market
conditions in accordance with SFAS No. 121. Accordingly, we recorded impairment
losses of $23.7 million for the Ajax unit and $2.2 million for the TPG unit
during the quarter ended September 30, 2001. The primary components of the
impairment loss included write downs of $18.0 million of goodwill, $4.6 million
of inventories and $3.3 million of property, plant and equipment.
On January 4, 2002, we sold substantially all of the operating assets of
the TPG unit for $250,000. In connection with the TPG transaction, the buyer
assumed substantially all of the unit's liabilities. The loss to be recorded on
this transaction will not be materially different from the previously recorded
impairment loss related to the TPG division.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The financial statements for the nine months ended December 31, 2001 and
December 31, 2000 are unaudited. The financial statements for the nine months
ended December 31, 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."
11
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 amortization of
goodwill and requires companies to use a fair-value approach to determine
whether there is an impairment of existing and future goodwill amortization.
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. Amortization of goodwill for the three months ending December 31, 2001
was $684,000 compared to $577,000 for the three months ending December 31, 2000.
Goodwill amortization for the nine months ending December 31, 2001 was
$1,660,000 compared to $1,609,000 for the same period last year. The effect of
implementing SFAS No. 142 could be significant.
In August 2001, SFAS 144, Accounting for the Impairment or Disposal
of Long-Lived Assets was issued. SFAS 144 supercedes SFAS 121, Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be disposed of and
Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations -Reporting the Effects of the Disposal of a Segment of a Business and
Extraordinary Unusual and Infrequently Occurring Events and Transactions. SFAS
144 establishes a single accounting model for assets to be disposed of by sale
whether previously held and used or newly acquired. SFAS No. 144 retains the
provisions of APB No. 30 for presentation of discontinued operations in the
income statement, but broadens the presentation to include a component of an
entity. SFAS 144 is effective for fiscal years beginning after December 15,
2001, and interim periods within. The Company is currently evaluating the impact
on its financial statements of adopting this statement.
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.
Recent Events
Since the end of January 2002, we have been operating without a
forbearance agreement from the Bank Lenders, and continue to be in default under
the Credit Facility. The Bank Lenders have advised us that they seek to resolve
our defaults under the Credit Facility by our making a consensual, voluntary
filing under Chapter 11 of the United States Bankruptcy Code (for the "Standard
Automotive Corporation" parent holding company, but not for our operating
subsidiaries). The Bank Lenders maintain the ability to exercise their rights
and remedies under the Credit Facility at any time. In connection with the
exercise of such rights and remedies, the Bank Lenders have taken possession of
one of our bank accounts containing approximately $3.5 million in cash.
On February 11, 2002, we announced that our Board of Directors had
appointed director John E. Elliott II as Chairman of the Board and Chief
Restructuring Officer. We also announced that James F. O'Crowley, III was no
longer our Chief Executive Officer and President. In addition, the following
directors have resigned from our Board: Karl M. Massaro, Steven J. Merker,
William C. Needham, Jr. and Joseph Spinella.
Our new management has been in discussions with the Bank Lenders
regarding our defaults under the Credit Facility. There can be no assurance that
the outcome of these discussions will be favorable to the Corporation or its
stockholders. There can be no assurance that we will not make a Chapter 11
filing as a result of these discussions.
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 segments,:
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. Subsequent to December
31, 2001, both the New Jersey and Mexico divisions of Ajax have been
closed.
o R&S Truck Body Company, 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 newly designed elliptical and
crossmemberless aluminum and steel dump bodies. R&S is currently
testing a new lightweight steerable suspension with an in house
fabricated axle for the dump body market.
o CPS Trailer Co. ("CPS"), located in Oran, Missouri, designs,
manufactures and sells bottom dump trailers, end dump trailers,
roll-off hoists, pup trailers, two-can 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.
12
o Airborne Gear & Mach. 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 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 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
service predominately in the environmental and nuclear industries. TPG
designs, manufactures and operates remote robotic retrieval systems
used in the cleaning and transferring of stored nuclear waste. We
acquired TPG in September 2000. On January 4, 2002 substantially all of
the assets of TPG were sold and the buyer also assumed most of its
liabilities.
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. We have
recently engaged the services of an investment banking firm to identify
prospective buyers and to evaluate any potential offers for the Company and/or
for its subsidiaries.
Our current business strategy is 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
Bank 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. A number 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 Operations expressed in dollar
amounts and as a percentage of net revenues. The nine months ended December 31,
2001 reflect the consolidated results of all operating companies including TPG,
which was acquired on August 31, 2000, for the entire period. The nine months
ended December 31, 2000 reflect the consolidated amounts of Standard, Ajax, R&S,
CPS and Ranor for the entire period and also Airborne and Arell from the date of
their acquisitions on April 26, 2000. The financial statements for the nine
months ended December 31, 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.
13
(in thousands) For the Three Months Ended December 31, For the Nine Months Ended December 31,
------------------------------------------- ---------------------------------------------
2001 2000 (Restated) 2001 2000 (Restated)
-------------------- -------------------- -------------------- --------------------
Revenues, net $ 18,232 100.0% $ 32,329 100.0% $ 76,751 100.0% $ 117,840 100.0%
Cost of revenues 15,234 83.6 25,955 80.3 64,141 83.6 93,665 79.5
Selling, general and
administrative 5,320 29.1 5,402 16.7 17,525 22.8 14,352 12.2
Loss on impairment
of assets -- -- -- 25,983 33.9 -- --
--------- ----- --------- ----- --------- ----- --------- -----
Operating income (loss) (2,322) (12.7) 972 3.0 (30,898) (40.3) 9,823 8.5
Interest and other 3,075 16.9 4,183 12.9 9,552 12.4 9,624 8.2
--------- ----- --------- ----- --------- ----- --------- -----
Income (loss) before
provision for taxes (5,397) (29.6) (3,211) (9.9) (40,450) (52.7) 199 0.2
Provision for income taxes 440 (2.4) (1,335) 4.1 1,966 (2.6) 248 0.2
--------- ----- --------- ----- --------- ----- --------- -----
Net income (loss) $ (5,837) (32.0)% $ (1,876) (5.8)% $ (42,416) (55.2)% $ (49) 0.0%
========= ===== ========= ===== ========= ===== ========= =====
Comparison of Nine Months Ended December 31, 2001 to December 31, 2000
Net Revenues for the nine months ended December 31, 2001 were $76.8
million, a decrease of 35% from net revenues of $117.8 million, as restated, for
the comparable period in 2000. Net revenues for our Truck Body/Trailer Division
decreased from approximately $87.3 million, as restated, for the nine months
ended December 31, 2000 to approximately $45.7 million for the nine months ended
December 31, 2001, a decrease of 48%. 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 and the downturn
in the Truck Body/ Trailer Division, the Critical Components Division
contributed 41% of revenues for the nine months ended December 31, 2001 versus
26% for the nine months ended December 31, 2000. Our Critical Components
Division experienced an overall net revenue increase of 2%, to $31.1 million for
the nine months ended December 31, 2001, compared to $30.6 million for the nine
months ended December 31, 2000.
Cost of Revenues decreased to $64.1 million, or 83.6% of net revenues,
for the nine months ended December 31, 2001 versus $93.7 million, as restated,
or 79.5% of net revenues for the comparable period in 2000. This decrease is
principally attributed to lower demand for our Truck Body/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 Body/Trailer Division. The ratio of our cost of revenues to
revenues at our Critical Components Division remained relatively constant.
Selling, General & Administrative Expenses ("SG&A") were $17.5 million
during the nine months ended December 31, 2001, an increase of $3.1 million from
$14.4 million incurred, as restated, during the comparable period in 2000. SG&A,
as a percentage of net revenue, increased to 22.8% of net revenues, up from
12.2% for the comparable period in 2000. The dollar increases include
significantly higher professional fees associated with our efforts to
restructure our Credit Facility and obtain additional forbearance from the bank.
The increases also resulted from our higher corporate oversight expense
associated with changes in management and our restructuring efforts.
Loss on the impairment of Assets reflects a loss on an impairment of
assets of $23.7 million for the Ajax unit and $2.2 million for the TPG unit.
Provision for income taxes does not reflect tax benefits being recorded
for losses, because there is no assurance that these benefits will be realized.
Comparison of Three Months Ended December 31, 2001 to December 31, 2000
Net Revenues for the three months ended December 31, 2001 were $18.2
million, a decrease of 43.7% from net revenues of $32.3 million, as restated,
for the comparable period in 2000. Net revenues for our Truck Body/Trailer
Division decreased from approximately $21.4 million, as restated, for the three
months ended December 31, 2000 to approximately $8.9 million for the three
months ended December 31, 2001, a decrease of 58%. The decrease in net revenues
was primarily attributable to the significant downturn in the truck body and
trailer industries. As a result of the downturn in the Truck Body/Trailer
Division, the Critical Components Division contributed 51.0% of revenues for the
three months ended December 31, 2001 versus 33.8% for the three months ended
December 31, 2000. Our Critical Components Division experienced an overall net
revenue decrease of 14.7%, to $9.3 million for the three months ended December
31, 2001, compared to $10.9 million for the three months ended December 31,
2000.
14
Cost of Revenues decreased to $15.2 million, or 83.6% of net revenues,
for the three months ended December 31, 2001 versus $26.0 million, as restated,
or 80.3% of net revenues for the comparable period in 2000. This decrease is
principally attributed to lower demand for our Truck Body/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 Body/Trailer Division. The ratio of our cost of revenues to
revenues at our Critical Components Division remained relatively constant.
Selling, General & Administrative Expenses ("SG&A") were $5.3 million
during the three months ended December 31, 2001, a decrease of $0.1 million from
$5.4 million incurred, as restated, during the comparable period in 2000. SG&A,
as a percentage of net revenue, increased to 29.1% of net revenues, up from
16.7% for the comparable period in 2000. The percentage increase reflects the
lower revenues in 2001 while we incurred professional fees associated with our
efforts to restructure our Credit Facility and obtain additional forbearance
from the Bank Lenders.
Interest and Other Expense decreased to $3.1 million for the three months
ended December 31, 2001 from $4.2 million, as restated, during the comparable
period in 2000. This decrease primarily reflects the provision of $1.1 million
of interest expense during the quarter ending December 31, 2000 on the
outstanding balance of federal excise taxes payable of $7.3 million as of
December 31, 2000.
Provision for income taxes does not reflect tax benefits being recorded
for losses, because there are no assurances that these benefits will be
realized. During the quarter, as the result of filing the prior year tax
returns, the Company provided taxes for the difference between prior year end
estimates and actual income tax refunds received.
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 December 31, 2001 was $6.1 million, an increase of
approximately $5.3 million from our cash and cash equivalents of approximately
$900,000 at March 31, 2001. Of the $6.1 million, $4.9 million was in a
restricted account, which is controlled by the Bank Lenders and from which the
Company does not have the ability to make disbursements. The $4.9 million is the
proceeds of our federal income tax refund received in December 2001. Subsequent
to December 31, 2001, the Bank Lenders have drawn down funds from this account
for forbearance fees and the December 31, 2001 and January 31, 2002 required
$750,000 payments to the Bank Lenders.
Approximately $7.3 million of cash was provided by operating activities
during the nine months ended December 31, 2001 compared with $1.5 million, as
restated, during the comparable period in 2000. The cash provided by operating
activities for the nine months ended December 31, 2001 primarily reflects
deferral of payments to our lenders and suppliers, reduction of inventories
since March 31, 2001 through improved asset management and the loss on
impairment of assets recorded in the quarter ended September 30, 2001.
Net cash used in investing activities was approximately $1.2 million
during the nine months ended December 31, 2001 as compared with $29.4 million,
as restated, used during the comparable period in 2000. The cash used by
investing activities during the nine months ending December 31, 2001 was
primarily for the acquisition of property and equipment, while the cash used in
investing activities during the nine months ending December 31, 2000 primarily
reflected the acquisitions of Airborne, Arell and TPG.
The $0.9 million of cash used by financing activities for the nine months
ending December 31, 2001 was for the preferred stock dividend, while the cash
provided by financing activities during the nine months ending December 31, 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 nine months ending December
31, 2000, the Credit Facility was also used to finance capital expenditures and
to provide additional working capital.
As of February 13, 2002 our existing cash, together with cash generated
from our operations will not be sufficient to fund our current obligations in
respect to 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 December 31, 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.
15
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 Bank 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, the June 2001 principal payment of
$1.6 million, the September 2001 principal payment of $1.6 million and the
December 2001 principal payment of $1.6 million as well as the related
concurrent interest payments of $1.5 million, $2.6 million, $2.5 million and
$2.5 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 approximately $2.8 million, $4.2 million, $4.1 million and $4.1 million
under the Credit Facility on March 31, 2001, July 2, 2001, September 30, 2001,
and December 28, 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 March 31, 2002.
From May 21, 2001 to July 17, 2001, and from August 23, 2001 to October
19, 2001 we and the Bank Lenders under the Credit Facility had been operating
under the terms of forbearance agreements pursuant to which the banks had agreed
to refrain from exercising their remedies under the Credit Facility until such
date. During the term of the latter forbearance agreement, we engaged the
services of a crisis manager and an investment-banking firm to identify
potential buyers for the Company's subsidiaries. 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 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. If the banks had taken the foregoing action, our ability to
operate our business would have been severely impaired and, in all likelihood,
we would have been required to seek protection from our creditors to continue
operations, which could have involved 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 was subject to our acknowledgement that the
defaults set forth in the acceleration notice continued 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 Bank Lenders
under the Credit Facility may send an acceleration notice at any time and that
the Bank Lenders have reserved all rights and remedies under the Credit
Facility.
On October 25, 2001 we and the Bank Lenders under the Credit Facility
entered into a new forbearance agreement which was to expire on January 31,
2002, pursuant to which the banks agreed to refrain from exercising their rights
until such date. During the forbearance period, periodic reports were to be made
to the Bank Group by the crisis manager, investment bankers and the Company on
the status of potential asset dispositions. We are no longer operating under the
terms of a forbearance agreement.
On October 31, 2001 the Company's crisis manager ended its engagement to
provide consulting services to the Company. As a result of the crisis manager's
subsequent failure to provide financial reports to the Bank Lenders, the Bank
Lenders notified the Company that it was in default of certain financial
reporting required pursuant to the forbearance agreement, that it had failed to
retain a crisis manager acceptable to the Bank Lenders, and that the Bank
Lenders reserve all rights and remedies under the forbearance agreement and the
Credit Facility. The Company and the Bank Lenders have come to a mutually
acceptable alternative to the replacement of the crisis manager, on an interim
basis.
Since the end of January 2002, we have been operating without a
forbearance agreement from the Bank Lenders, and continue to be in default under
the Credit Facility. The Bank Lenders have advised us that they seek to resolve
our defaults under the Credit Facility by our making a consensual, voluntary
filing under Chapter 11 of the United States Bankruptcy Code (for the "Standard
Automotive Corporation" parent holding company, but not for our operating
subsidiaries). The Bank Lenders maintain the ability to exercise their rights
and remedies under the Credit Facility at any time. In connection with the
exercise of such rights and remedies, the Bank Lenders have taken possession of
one of our bank accounts containing approximately $3.5 million in cash.
On February 11, 2002, we announced that our Board of Directors had
appointed director John E. Elliott II as Chairman of the Board and Chief
Restructuring Officer. We also announced that James F. O'Crowley, III was no
longer our Chief Executive Officer and President. In addition, the following
directors have resigned from our Board: Karl M. Massaro, Steven J. Merker,
William C. Needham, Jr. and Joseph Spinella.
Our new management has been in discussions with the Bank Lenders
regarding our defaults under the Credit Facility. There can be no assurance that
the outcome of these discussions will be favorable to the Corporation or its
stockholders. There can be no assurance that we will not make a Chapter 11
filing as a result of these discussions.
The terms on which we sell our products vary by operating company, but
generally provide for payment within 30 days.
Capital expenditures were approximately $1.2 million for the nine months
ended December 31, 2001 compared to approximately $3.0 million, as restated, for
the comparable period last year. Capital expenditures incurred during the nine
months ended December 31, 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 December 31,
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 Bank Lenders under our Credit
Facility to resume payment of preferred dividends. Beginning on September 28,
2001, as a result of the failure to pay the quarterly dividend for four
consecutive quarters, the holders of our preferred stock have been entitled to
elect two directors to our Board of Directors.
16
As of December 31, 2001, we had working capital of approximately $0.3
million prior to the reclassification of $95.6 million of long-term debt to
current liabilities. There can be no assurance that our current working capital
position, along with anticipated results of operations, will be sufficient to
allow us to fund our working capital requirements for at least the next twelve
months. If, prior to the issuance of our March 31, 2002 annual report, there is
not a successful outcome to our discussions with the Bank Lenders under our
Credit Facility or with the Internal Revenue Service with respect to our
outstanding excise tax liabilities, our independent accountants have advised us
that 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. With the authorization of the Bank Lenders, a payment of
$626,000 was made to the former owners of Airborne and Arell during the quarter
ended December 31, 2001. Any such future payments would also require the
authorization of the Bank 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 December 31, 2001, we had approximately $91.0
million of prime rate 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.
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 December 31, 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 nine months ended December 31, 2001
we incurred net losses of approximately $42.7 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 nine months ended December 31, 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 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.
17
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 Bank 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, $4.2 million, $4.1 million and $4.1 million
under the Credit Facility on March 31, 2001, July 2, 2001, September 30, 2001
and December 28, 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 March 31, 2002.
From May 21, 2001 to July 17, 2001, and from August 23, 2001 to October
19, 2001, we and the Bank Lenders under the Credit Facility had been operating
under the terms of forbearance agreements pursuant to which the banks had agreed
to refrain from exercising their remedies under the Credit Facility until such
date. During the term of the latter forbearance period, and since then, we
engaged the services of a crisis manager and an investment-banking firm to
identify potential buyers for the Company's subsidiaries. As disclosed in our
Form 8-K filed with the Securities and Exchange Commission on August 1, 2001, we
received an acceleration notice from 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 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. If the banks had taken the foregoing action, our ability to
operate our business would have been severely impaired and, in all likelihood,
we would have been required to seek protection from our creditors to continue
operations, which could have involved 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 was subject to our acknowledgement that the
defaults set forth in the acceleration notice continued 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 Bank Lenders
under the Credit Facility may send an acceleration notice at any time and that
the Bank Lenders have reserved all rights and remedies under the Credit
Facility.
On October 25, 2001 we and the Bank Lenders under the Credit Facility
entered into a new forbearance agreement which was to expire on January 31,
2002, pursuant to which the banks agreed to refrain from exercising their rights
until such date. During the forbearance period periodic reports were to be made
to the Bank Group by the crisis manager, investment bankers and the company on
the status of potential asset disposition. We are no longer operating under a
forbearance agreement and there can be no assurance that we can obtain further
forbearance or waivers on favorable terms, if at all.
On October 31, 2001 the Company's crisis manager ended its engagement to
provide consulting services to the Company. As a result of the crisis manager's
subsequent failure to provide financial reports to the Bank Lenders, the Bank
Lenders notified the Company that it was in default of certain financial
reporting required pursuant to the forbearance agreement, that it had failed to
retain a crisis manager acceptable to the Bank Lenders, and that the Bank
Lenders reserve all rights and remedies under the forbearance agreement and the
Credit Facility. The Company and the Bank Lenders have come to a mutually
acceptable alternative to the replacement of the crisis manager, on an interim
basis.
Since the end of January 2002, we have been operating without a
forbearance agreement from the Bank Lenders, and continue to be in default under
the Credit Facility. The Bank Lenders have advised us that they seek to resolve
our defaults under the Credit Facility by our making a consensual, voluntary
filing under Chapter 11 of the United States Bankruptcy Code (for the "Standard
Automotive Corporation" parent holding company, but not for our operating
subsidiaries). The Bank Lenders maintain the ability to exercise their rights
and remedies under the Credit Facility at any time. In connection with the
exercise of such rights and remedies, the Bank Lenders have taken possession of
one of our bank accounts containing approximately $3.5 million in cash.
On February 11, 2002, we announced that our Board of Directors had
appointed director John E. Elliott II as Chairman of the Board and Chief
Restructuring Officer. We also announced that James F. O'Crowley, III was no
longer our Chief Executive Officer and President. In addition, the following
directors have resigned from our Board: Karl M. Massaro, Steven J. Merker,
William C. Needham, Jr. and Joseph Spinella.
Our new management has been in discussions with the Bank Lenders
regarding our defaults under the Credit Facility. There can be no assurance that
the outcome of these discussions will be favorable to the Corporation or its
stockholders. There can be no assurance that we will not make a Chapter 11
filing as a result of these discussions.
We need to sell or dispose of assets in order to meet our existing debt
obligations and to fund our operations. We may not be able to sell such assets
at appropriate values. We could experience a change of control as a result of
such events. In addition, holders of our common stock and preferred stock may
have their equity interest 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 have engaged an investment banking firm to identify potential buyers
for our subsidiaries. We can give no assurance that our efforts to sell our
subsidiaries will be successful or that the sale of assets will be at
appropriate values. In the event we restructure our existing indebtedness as the
result of asset sales, such events could cause a change in control of the
Company.
If we are unable to accomplish an out-of-court restructuring though the
sale of assets 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.
18
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 Bank Lenders under our Credit Facility. The Bank
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 December 31, 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, sell assets, 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 a new President and Chief Executive
Officer. In August 2001, we hired a new Chief Financial Officer. In February
2002, we announced that our board had appointed director John E. Elliott II as
Chairman of the Board and Chief Restructuring Officer. We also announced that
James F. O'Crowley, III was no longer Chief Executive Officer and President.
Neither our new Chief Restructuring Officer or our new Chief Financial Officer
have worked together with our remaining management team before and they, and
additional managers 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.
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.
If we sell assets, such sales may depress the trading prices of our common
and preferred stock.
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 objects 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 stockholders 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 stockholders' investments would
likely decline substantially.
In addition, the declines in our stock price may have harmed and, 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 stockholders' investment.
19
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 $1.9 million of interest was
accrued as of December 31, 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 each of July 16, 2001,
August 15, 2001, and September 15, 2001, and $40,000 on each of October 15,
2001, November 15, 2001, and December 31, 2001. This arrearage has also resulted
in an additional event of default under our Credit Facility. Our financial
statements include approximately $205,000 of interest expense for the quarter
ended December 31, 2001 related to federal excise tax currently in arrears. On
January 25, 2002 we were informed that the IRS filed a federal tax lien on the
assets of Ajax for the amount of the unpaid excise tax and interest. 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;
o the conditions of the trucking, commercial 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 sales of assets;
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 unit on a percentage-of-completion basis. For the nine months ended
December 31, 2001, Ranor accounted for approximately 17% 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.
20
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. Beginning on September 28, 2001, as a result of the failure to pay the
quarterly dividend for four consecutive quarters, the holders of our preferred
stock have been entitled to elect two directors to our Board of Directors. Such
right shall terminate as of the next annual meeting of stockholders following
payment of all accrued dividends. 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 Bank 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 December 31, 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.
A significant portion of our business and business development efforts are
concentrated in industries where the U.S. government is a major customer.
Approximately 35% of the Critical Components Division's net revenues for the
quarter ended December 31, 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 nine
months ended December 31, 2001, three customers were responsible for 36% of the
sales of Truck Body/Trailer Division and three customers were responsible for
52% of the sales of our Critical Components Division. Our preferred supplier
arrangement with one of our major customers expired 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.
21
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.
Terrorist attacks and threats or actual war may negatively impact all aspects of
our operations, revenues, cost and stock price.
Recent terrorist attacks in the United States, as well as future events
occurring in response or connection to them, including, without limitation,
future terrorist attacks against United States targets, rumors or threats of
war, actual conflicts involving the United States or its allies or military or
trade disruptions impacting our domestic or foreign suppliers, may impact our
operations, including, among other things, causing delays or losses in the
delivery of merchandise to us and decreased sale of our products. More
generally, any of these events could cause consumer confidence and spending to
decrease or result in increased volatility in the U.S. and worldwide financial
markets and economy. They also could result in economic recession in the U.S. or
abroad. Any of these occurrences could have a significant impact on our
operating results, revenues and cost and may result in volatility of the market
price for our common stock and preferred stock and on the future price of our
common stock and preferred stock.
Our largest stockholders could act together to exercise significant control over
us.
As of February 1, 2002, our three largest stockholders, including one
director and one former director who are brothers, collectively beneficially
owned approximately 47.6% 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 stockholders.
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 stockholders 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
stockholders.
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, R&S filed a motion with the
court seeking judgment in its 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 its motion for a new trial, R&S
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 the R&S motions. We believe that the R&S position is meritorious and R&S
intends to vigorously defend its interests in this matter. The Company recorded
an accrual for $570,000.
22
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 million, $4.2
million, $4.1 million and $4.1 million under the Credit Facility on March 31,
2001, July 2, 2001, September 28, 2001, and December 31, 2001, respectively,
which constituted additional events of default thereunder. As of December 31,
2001, we were also in default in interest payments totaling approximately
$375,000 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 March 31, 2002.
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 or sell assets, although we can give no assurance
that our efforts to obtain additional financing, sell assets 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 five quarters ended December 31, 2000, March 31, 2001,
June 30, 2001, September 30, 2001, and December 31, 2001. The cumulated
arrearage at March 31, 2001 was $578,000 and as of December 31, 2001 was
$1,348,000. Since Standard has been in arrearage on dividend payments for four
or more quarters, the holders of our Preferred Stock are entitled to elect 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 Bank 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.
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
10.47 Employment Agreement dated July 30, 2001 between Standard and Matthew B.
Burris
(b) Reports on Form 8-K
We filed the following Reports on Form 8-K during the quarter ended December 31,
2001:
Date Item:
- ---- -----
October 9, 2001 Item 5- Announcing an extension of the forbearance agreement
between Standard and its Bank Lenders under the Term Loan
and Revolving Credit facility, expiring on October 29, 2001
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October 27, 2001 Item 5-Announcing a forbearance agreement expiring on
January 31, 2002 between Standard and its Bank Lenders under
the Term Loan and Revolving Credit Facility.
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SIGNATURES
Pursuant to the requirements 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/ Matthew B. Burris Date: February 19, 2002
- -------------------------------------------
Matthew B. Burris
Chief Financial Officer, Vice President, Treasurer and Secretary (Duly
Authorized Officer and Principal Financial and Accounting Officer)
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