-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FFuwWik+D3Ls5Rncv6rBDOdyoCLKe5Eg3Q5UEC8l7OzZjVz2JstgUI/hG9bn06+1 7wL389rWlCUXO6aQTBczjA== 0000950117-03-000569.txt : 20030213 0000950117-03-000569.hdr.sgml : 20030213 20030213163108 ACCESSION NUMBER: 0000950117-03-000569 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20030213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD MOTOR PRODUCTS INC CENTRAL INDEX KEY: 0000093389 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 111362020 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-103194 FILM NUMBER: 03560124 BUSINESS ADDRESS: STREET 1: 37 18 NORTHERN BLVD CITY: LONG ISLAND CITY STATE: NY ZIP: 11101 BUSINESS PHONE: 7183920200 MAIL ADDRESS: STREET 1: 3718 NORTHERN BLVD CITY: LONG ISLAND CITY STATE: NY ZIP: 11101 S-3 1 a33971.txt STANDARD MOTOR PRODUCTS As filed with the Securities and Exchange Commission on February 13, 2003 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- STANDARD MOTOR PRODUCTS, INC. (Exact name of registrant as specified in its charter) NEW YORK 11-1362020 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
37-18 NORTHERN BOULEVARD LONG ISLAND CITY, NEW YORK 11101 (718) 392-0200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------- LAWRENCE I. SILLS CHIEF EXECUTIVE OFFICER, CHAIRMAN AND DIRECTOR STANDARD MOTOR PRODUCTS, INC. 37-18 NORTHERN BOULEVARD LONG ISLAND CITY, NEW YORK 11101 (718) 392-0200 (Name and address, including zip code, and telephone number, including area code, of agent for service) WITH COPIES TO: BUD G. HOLMAN, ESQ. CARMINE J. BROCCOLE, ESQ. DONALD C. WALKOVIK, ESQ. KELLEY DRYE & WARREN LLP SULLIVAN & CROMWELL LLP 101 PARK AVENUE 125 BROAD STREET NEW YORK, NEW YORK 10178 NEW YORK, NEW YORK 10004 (212) 808-7800 (212) 558-4000
------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] ------------------- CALCULATION OF REGISTRATION FEE
============================================================================================================ PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------ Common Stock, par value $2.00 per share..................... $67,850,000 $6,242.20 ============================================================================================================
(1) Estimated solely for the purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. ================================================================================ THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject To Completion. Dated February 13, 2003. Shares STANDARD MOTOR PRODUCTS, INC. Common Stock [Logo] ------------------- Standard Motor Products, Inc. is offering shares of common stock to be sold in the offering. The common stock is listed on the New York Stock Exchange under the symbol 'SMP.' The last reported sale price of the common stock on February 12, 2003 was $13.71 per share. See 'Risk Factors' beginning on page 8 to read about factors you should consider before buying shares of the common stock. ------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------
Per Share Total --------- ----- Initial price to public..................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Standard Motor Products, Inc. ..................................................... $ $
To the extent that the underwriters sell more than shares of common stock, the underwriters have the option to purchase up to an additional shares from Standard Motor Products, Inc. at the initial price to public less the underwriting discount. ------------------- The underwriters expect to deliver the shares against payment in New York, New York on , 2003. GOLDMAN, SACHS & CO. MORGAN STANLEY ------------------- Prospectus dated , 2003. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and the documents incorporated by reference. This summary does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus and the documents incorporated by reference carefully, including 'Risk Factors' beginning on page 8 and the financial statements and the notes thereto of our company and of Dana Corporation's Engine Management Group included elsewhere in this prospectus. Unless otherwise stated, the information contained in this prospectus is based on the assumption that the underwriters' over-allotment option will not be exercised. In this prospectus, 'Standard Motor Products', 'we', 'us' and 'our' refer to Standard Motor Products, Inc. and its subsidiaries, unless the context requires otherwise. The words 'the Company' refer only to Standard Motor Products, Inc. and not to any of its subsidiaries. ABOUT STANDARD MOTOR PRODUCTS OUR BUSINESS We are a leading independent manufacturer and distributor of replacement parts for motor vehicles in the automotive aftermarket industry. We are organized into two principal operating divisions, each of which focuses on a specific segment of replacement parts. Our Engine Management Division manufactures ignition and emission parts, on-board computers, ignition wires, battery cables and fuel system parts. Our Temperature Control Division manufactures and remanufactures air conditioning compressors, and other air conditioning and heating parts. We sell our products primarily to warehouse distributors and large retail chains in the United States and Canada. We also sell our products through distributors in Latin America and Europe. Our customers consist of many of the leading warehouse distributors, such as Carquest and NAPA Auto Parts, as well as many of the leading auto parts retail chains, such as Advance Auto Parts, AutoZone and O'Reilly Automotive. We distribute parts under our own brand names, such as Standard, Blue Streak and Four Seasons, and through private labels, such as Carquest and NAPA Auto Parts. In 2001, our consolidated net sales were $591.7 million, and our operating income was $15.1 million. The following charts set forth our consolidated net sales by operating division, geographic region and customer group as a percentage of consolidated net sales in 2001. [PERFORMANCE GRAPH] 2001 CONSOLIDATED NET SALES BY OPERATING DIVISION Other 7% Temperature Control 45% Engine Management 48% 2001 CONSOLIDATED NET SALES BY GEOGRAPHIC REGION Canada 5% Rest of the World 8% United States 87% 2001 CONSOLIDATED NET SALES BY CONSUMER GROUP Retail 27% Warehouse Distributors 65% Other 8% ACQUISITION OF DANA CORPORATION'S ENGINE MANAGEMENT GROUP On February 7, 2003, we signed an agreement to purchase Dana Corporation's Engine Management Group, which we refer to throughout this prospectus as Dana's EMG Business, for a purchase price equal to the closing net book value of the business, subject to a maximum purchase price of $125 million. Dana's EMG Business is a leading manufacturer of aftermarket parts in the automotive industry focused exclusively on engine management, with approximately $229 million in consolidated net sales for the nine months ended September 30, 2002 and approximately $298 million in consolidated net sales in 2001. Dana's EMG Business manufactures ignition systems, emission parts, engine computers, ignition wires, battery cables and fuel system 1 parts. Customers of Dana's EMG Business include NAPA Auto Parts, CSK Auto, O'Reilly Automotive and Pep Boys, none of which is currently a material customer of our Engine Management Division. We believe that the acquisition will allow us to: increase sales in our Engine Management business; develop new and improved products to better satisfy the increasing requirements of customers; rationalize manufacturing and distribution facilities to achieve more efficient operations and lower costs for ourselves and our customers; consolidate and centralize corporate functions to eliminate redundant costs; improve cost structure by realizing increased economies of scale in the purchasing, processing, production and distribution of our products; and increase the proportion of our total sales and profits from our Engine Management business, which is more stable and predictable than our seasonal Temperature Control business. We intend to use our experience in integrating the 15 businesses we have acquired since January 1996 to integrate successfully Dana's EMG Business into our Engine Management Division within 18 months of the acquisition closing. At the closing, assuming the acquisition purchase price is $121 million, based on the September 30, 2002 audited balance sheet of Dana's EMG Business, we will pay Dana approximately $90.8 million in cash, $15.1 million in the form of an unsecured promissory note and $15.1 million in the form of shares of our common stock. The acquisition is subject to our obtaining financing for the acquisition and other customary closing conditions, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. We expect to complete this acquisition on or about the date of the closing of this offering. OUR STRATEGY Our goal is to grow revenues and earnings and deliver returns in excess of our cost of capital by providing high quality, low cost replacement parts in the engine management and temperature control automotive aftermarkets. The key elements of our strategy are as follows: CAPITALIZE ON THE ACQUISITION OF DANA'S EMG BUSINESS. The acquisition will allow us to combine Dana's EMG Business with our Engine Management Division, thereby creating opportunities to realize cost savings and grow earnings. MAINTAIN OUR STRONG COMPETITIVE POSITION IN THE ENGINE MANAGEMENT AND TEMPERATURE CONTROL BUSINESSES. To maintain a strong competitive position in our markets, we remain committed to providing our customers with broad lines of high quality engine management and temperature control products. PROVIDE SUPERIOR CUSTOMER SERVICE, PRODUCT AVAILABILITY AND TECHNICAL SUPPORT. Our goal is to increase sales to existing and new customers by leveraging our skills in rapidly filling orders, maintaining high levels of product availability and providing technical product support in a cost-effective manner. EVOLVE AND EXPAND OUR PRODUCT LINES. We intend to increase our sales by continuing to develop and expand the range of Engine Management and Temperature Control products we offer to our customers. We are committed to investing the resources necessary to maintain and expand our technical capability to manufacture multiple product lines that incorporate the latest technologies developed by original equipment manufacturers in North America and Europe. 2 BROADEN OUR CUSTOMER BASE. Our goal is to increase our business by marketing our products more broadly to the distribution businesses of original equipment manufacturers who sell products to new car dealer service areas. IMPROVE OPERATING EFFICIENCY AND COST POSITION. We intend to continue to improve our operating efficiency and cost position. Our management places significant emphasis on improving our financial performance, achieving operating efficiencies and improving asset utilization while maintaining product quality and high customer order fill rates. In 2001, we reduced our inventory levels by $57 million while maintaining customer fill rate levels of approximately 93%. REDUCE OUR DEBT. We intend to apply any excess cash flow from operations and the management of working capital to reduce our outstanding indebtedness. CORPORATE INFORMATION Our common stock is traded on the New York Stock Exchange under the symbol 'SMP'. On February 12, 2003, our common stock closed at $13.71. Members of our founding families continue to be actively involved in our management, and such founding family members directly or indirectly owned approximately 43% of our outstanding common stock on December 31, 2002. We are a New York corporation founded in 1919. Our principal executive offices are located at 37-18 Northern Boulevard, Long Island City, New York 11101, and our main telephone number at that location is (718) 392-0200. This prospectus contains our trademarks and trade names and also contains trademarks and trade names of other parties. 3 THE OFFERING Common stock offered by us................... shares Common stock to be outstanding after this offering................................... shares Use of proceeds.............................. We intend to use all of the net proceeds from this offering to repay a portion of our outstanding indebtedness under our revolving credit facility. We then intend to borrow the entire cash portion of the purchase price of Dana's EMG Business from our revolving credit facility to consummate the closing of the acquisition. New York Stock Exchange symbol............... SMP
The number of shares of our common stock that will be outstanding after this offering is based on our shares of common stock outstanding as of December 31, 2002 and includes shares of our common stock to be issued to Dana by us as part of the acquisition purchase price, assuming for these purposes that the price per share of our common stock is $ and that the acquisition purchase price is $121 million at closing. The number of outstanding shares of our common stock as of December 31, 2002 excludes: 909,696 shares of common stock issuable upon the exercise of options outstanding under our stock option plans at a weighted average exercise price of $17.15 per share; 356,745 shares of common stock reserved for future grants under our stock option plans; 600,000 shares held by us in an employee benefits trust, which are not currently considered outstanding for calculations of basic or diluted earnings per share; 2,796,120 shares of common stock issuable upon conversion of our 6.75% convertible subordinated debentures, which are presently convertible into 31.068 shares of common stock for each $1,000 of convertible debentures and which have a conversion price equivalent to approximately $32.19 per share of common stock; and up to shares that may be issued to the underwriters if they exercise their option to purchase additional shares in this offering. 4 SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data at and for the years ended December 31, 1999, 2000 and 2001 have been derived from our audited consolidated annual financial statements. The following summary consolidated financial data at and for the nine months ended September 30, 2001 and 2002 have been derived from our condensed consolidated quarterly financial statements, which are unaudited but in the opinion of our management reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for such periods. Results of operations for interim periods are not necessarily indicative of results to be expected for the full fiscal years. You should read this data in conjunction with the 'Selected Consolidated Financial Data,' 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and our financial statements and the notes thereto included elsewhere in this prospectus. STANDARD MOTOR PRODUCTS, INC.
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ------------------- 1999 2000 2001 2001 2002 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales(1)............................................. $653,451 $601,392 $591,652 $492,581 $488,034 Gross profit(1).......................................... 170,809 162,701 139,055 117,774 125,870 Operating income......................................... 30,223 30,711 15,123 22,146 29,580 Earnings from continuing operations...................... 8,685 10,230 312 6,642 14,095 Net earnings (loss)(2)(3)................................ 7,625 9,729 (2,485) 3,845 (19,933) PER SHARE DATA: Earnings from continuing operations: Basic................................................. $ .66 $ .86 $ .03 $ .56 $ 1.18 Diluted............................................... .66 .85 .03 .56 1.14 Net earnings (loss) per common share: Basic................................................. .58 .82 (.21) .33 (1.68) Diluted............................................... .58 .81 (.21) .33 (1.16) Cash dividends per common share.......................... .34 .36 .36 .27 .27 OTHER DATA: EBITDA(4)................................................ $ 45,210 $ 50,083 $ 36,795 $ 37,758 $ 43,020 Depreciation and amortization............................ 17,230 18,922 18,909 14,072 11,715 Capital expenditures..................................... 14,423 16,652 13,740 11,125 5,804 Dividends................................................ 4,456 4,324 4,236 3,175 3,214 BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents................................ $ 40,380 $ 7,699 $ 7,496 $ 11,814 $ 9,672 Working capital.......................................... 205,806 188,091 228,356 271,560 254,512 Total assets............................................. 556,021 549,396 509,429 578,757 565,446 Total debt............................................... 195,425 202,591 205,925 243,796 208,350 Long-term debt........................................... 163,868 150,018 200,066 237,392 200,879 Stockholders' equity..................................... 203,518 194,305 185,687 192,407 165,753
- --------- (1) On January 1, 2002, we adopted the guidelines of the Emerging Issues Task Force (EITF) entitled 'Accounting for Certain Sales Incentives' and 'Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products.' These guidelines address when sales incentives and discounts should be recognized and the accounting for certain costs incurred by a vendor on behalf of a customer, as well as where the related revenues and expenses should be classified in the financial statements. Net sales and gross profit amounts for the periods prior to 2002 included in this prospectus have been reclassified to conform to our 2002 presentation. Costs of approximately $18 million, $25.4 million, $30.4 million and $25.9 million have been reclassified from selling, general and administrative expenses for December 31, 1999, 2000 and 2001 and the nine months ended September 30, 2001, respectively. (2) Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ('SFAS No. 142'). In accordance with SFAS No. 142, goodwill will no longer be amortized, but instead, will be subject to an annual review for potential impairment. As a result, we recorded an impairment loss on goodwill as a cumulative effect of accounting change of $16 million, net of tax, or $1.35 per diluted share, during the first (footnotes continued on next page) 5 (footnotes continued from previous page) quarter of 2002. The impairment loss relates to goodwill pertaining to certain of our reporting units with our European Operations (classified as 'All Other' for segment reporting) and with our Temperature Control Division, and we recorded charges of $8.6 million related to our European Operations and $7.4 million related to our Temperature Control Division. Upon adoption of SFAS No. 142, our earnings before extraordinary item and net earnings for basic and diluted earnings per share adjusted to exclude goodwill amortization expense (net of taxes) were as follows:
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED ------------------------------ SEPTEMBER 30, 1999 2000 2001 2001 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Reported earnings before extraordinary item................. $ 8,685 $10,230 $ 312 $6,642 Add back: goodwill amortization expense, net of tax......... 2,439 2,733 2,498 1,868 ------- ------- ------- ------ Adjusted earnings before extraordinary item................. $11,124 $12,963 $ 2,810 $8,510 ------- ------- ------- ------ ------- ------- ------- ------ Basic earnings per share: Reported basic earnings per share before extraordinary item.................................................... $ 0.66 $ 0.86 $ 0.03 $ 0.56 Add back: goodwill amortization expense, net of tax...... 0.19 0.23 0.21 0.15 ------- ------- ------- ------ Adjusted basic earnings per share before extraordinary item....................................................... $ 0.85 $ 1.09 $ 0.24 $ 0.71 ------- ------- ------- ------ ------- ------- ------- ------ Diluted earnings per share: Reported diluted earnings per share before extraordinary item.................................................... $ 0.66 $ 0.85 $ 0.03 $ 0.56 Add back: goodwill amortization expense, net of tax...... 0.19 0.23 0.21 0.15 ------- ------- ------- ------ Adjusted diluted earnings per share before extraordinary item....................................................... $ 0.85 $ 1.08 $ 0.24 $ 0.71 ------- ------- ------- ------ ------- ------- ------- ------ Reported net earnings (loss)................................ $ 7,625 $ 9,729 $(2,485) $3,845 Add back: goodwill amortization expense, net of tax......... 2,439 2,733 2,498 1,868 ------- ------- ------- ------ Adjusted net earnings....................................... $10,064 $12,462 $ 13 $5,713 ------- ------- ------- ------ ------- ------- ------- ------ Basic net earnings (loss) per share: Reported basic net earnings (loss) per share............. $ 0.58 $ 0.82 $ (0.21) $ 0.33 Add back: goodwill amortization expense, net of tax...... 0.19 0.23 0.21 0.15 ------- ------- ------- ------ Adjusted basic net earnings per share....................... $ 0.77 $ 1.05 $ -- $ 0.48 ------- ------- ------- ------ ------- ------- ------- ------ Diluted net earnings (loss) per share: Reported diluted net earnings (loss) per share........... $ 0.58 $ 0.81 $ (0.21) $ 0.33 Add back: goodwill amortization expense, net of tax...... 0.19 0.23 0.21 0.15 ------- ------- ------- ------ Adjusted diluted net earnings per share..................... $ 0.77 $ 1.04 $ -- $ 0.48 ------- ------- ------- ------ ------- ------- ------- ------
(3) For the nine months ended September 30, 2002, we recorded an after tax charge of $18 million as a loss from discontinued operations to account for potential costs associated with our asbestos-related liability. See 'Risk Factors -- We may be materially adversely affected by asbestos claims arising from products sold by our former brake business, as well as by other product liability claims' for a more detailed discussion of the risks we face in connection with our exposure to asbestos-related claims. (4) EBITDA is defined as earnings from continuing operations before interest expense, income taxes, depreciation and amortization. EBITDA is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for operating income or net earnings or loss for purposes of analyzing our operating performance or financial position. EBITDA is not necessarily comparable to similarly titled measures for other companies. 6 The following summary combined financial data at and for the years ended December 31, 2000 and 2001 and for the nine months ended September 30, 2002 have been derived from the audited combined financial statements of Dana's EMG Business. You should read this data in conjunction with the 'Selected Consolidated Financial Data' and the financial statements and the notes thereto of Dana's EMG Business included elsewhere in this prospectus. DANA CORPORATION'S ENGINE MANAGEMENT GROUP(1)
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------- ------------------ 2000 2001 2002 ---- ---- ---- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales................................................ $357,475 $297,796 $229,137 Earnings (loss) before income taxes...................... (87,797) (101,531) (46,593) Net earnings (loss)...................................... (52,121) (62,467) (28,497) OTHER DATA: EBITDA(2)................................................ $(68,904) $(81,706) $(33,639) Depreciation and amortization............................ 18,802 19,216 12,810 Capital expenditures..................................... 21,557 1,378 1,560 BALANCE SHEET DATA (AT PERIOD END)(3): Cash and cash equivalents................................ $ -- $ 292 $ 734 Working capital.......................................... 172,548 89,392 93,347 Total assets............................................. 391,394 264,184 247,035 Combined equity.......................................... 317,940 170,342 156,864
- --------- (1) The combined financial data of Dana's EMG Business include its water pump and fuel pump product lines, which product lines we will not acquire and which product lines we deem immaterial in amount. (2) EBITDA is defined as earnings from continuing operations before interest expense, income taxes, depreciation and amortization. EBITDA is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for operating income or net earnings or loss for purposes of analyzing our operating performance or financial position. EBITDA is not necessarily comparable to similarly titled measures for other companies. (3) Balance sheet data at December 31, 2000 were derived from the financial records of Dana's EMG Business and are unaudited. 7 RISK FACTORS You should carefully consider the risks described below before deciding to invest in our common stock. An investment in our common stock involves a high degree of risk. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business, financial condition and results of operations. If any of the following risks actually occur, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline and you could lose all or part of your investment. In assessing these risks, you should also refer to the other information included or incorporated by reference in this prospectus, including the financial statements and the notes thereto of our company and of Dana's EMG Business included elsewhere in this prospectus. RISKS RELATED TO OUR BUSINESS THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITION AND THE INTEGRATION INTO OUR COMPANY OF DANA'S EMG BUSINESS, AND THESE RISKS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. On February 7, 2003, we entered into an agreement to purchase Dana's EMG Business. We believe that we will integrate Dana's EMG Business into our company within 18 months of the closing of the acquisition, but we cannot give you any assurance that we will be able to do so successfully and within the intended time frame. We face a variety of uncertainties and challenges regarding the acquisition and integration of Dana's EMG Business including: difficulties integrating operational and financial systems -- we may encounter difficulties integrating operational and financial systems, which may delay our integration efforts and extend the time frame in which integration of Dana's EMG Business into our company and realization of any associated cost savings will occur; higher than expected costs of restructuring and integration -- the costs of restructuring and integration may be materially higher than we expect; and lower than expected sales and profitability -- Dana's EMG Business may not achieve sales and profitability that justify our investment. These risks, and the fact that integration of the acquired business will require a significant amount of our management's and employees' time and resources, could disrupt our ongoing business. In addition, if we do not achieve the perceived benefits and anticipated cost savings of the acquisition as rapidly as, or to the extent, projected, our business, financial condition and results of operations could be materially adversely affected. OUR INDUSTRY IS HIGHLY COMPETITIVE, AND OUR SUCCESS DEPENDS ON OUR ABILITY TO COMPETE WITH SUPPLIERS OF AUTOMOTIVE AFTERMARKET PRODUCTS, SOME OF WHICH HAVE SUBSTANTIALLY GREATER FINANCIAL, MARKETING AND OTHER RESOURCES THAN WE DO. The automotive aftermarket industry is highly competitive and our success depends on our ability to compete with suppliers of automotive aftermarket products. Our competitors include a number of established independent manufacturers as well as divisions of companies, such as Delco Electronics Corporation, Delphi Corporation, Federal-Mogul Corporation, Ford (MotorCraft), KEM Manufacturing Products, Inc., M. Cardone Industries, Robert Bosch Corporation, Transpro, Inc., Visteon Corporation and Wells Manufacturing (a UIS, Inc. subsidiary). In addition, automobile manufacturers supply virtually every replacement part we sell. Some of our existing competitors have larger customer bases and significantly greater financial, technical and marketing resources than we do. These factors may allow our competitors to: respond more quickly than we can to new or emerging technologies and changes in customer requirements by devoting greater resources than we can to the development, promotion and sale of automotive aftermarket products and services; engage in more extensive research and development; 8 sell products at a lower price than we do; undertake more extensive marketing campaigns; and make more attractive offers to existing and potential customers and strategic partners. We cannot assure you that our competitors will not develop products or services that are equal or superior to our products or that achieve greater market acceptance than our products or that in the future other companies involved in the automotive aftermarket industry will not expand their operations into product lines produced and sold by us. We also cannot assure you that additional entrants will not enter the automotive aftermarket industry or that companies in the aftermarket industry will not consolidate. Any of such competitive pressures could cause us to lose market share or could result in significant price decreases and could have a material adverse effect upon our business, financial condition and results of operations. THERE IS SUBSTANTIAL PRICE COMPETITION IN OUR INDUSTRY, AND OUR SUCCESS AND PROFITABILITY WILL DEPEND ON OUR ABILITY TO MAINTAIN A COMPETITIVE COST AND PRICE STRUCTURE. There is substantial price competition in our industry, and our success and profitability will depend on our ability to maintain a competitive cost and price structure. We may have to reduce prices in the future to remain competitive. Also, our future profitability will depend in part upon our ability to continue to improve our manufacturing efficiencies and maintain a cost structure that will enable us to offer competitive prices. Our inability to maintain a competitive cost structure could have a material adverse effect on our business, financial condition and results of operations. OUR BUSINESS IS SEASONAL AND IS SUBJECT TO SUBSTANTIAL QUARTERLY FLUCTUATIONS, WHICH IMPACT OUR QUARTERLY PERFORMANCE AND WORKING CAPITAL REQUIREMENTS. Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and with revenues generally being recognized at the time of shipment. It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control segment of our business. In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather and retailer inventories. For example, a cool summer may lessen the demand for our Temperature Control products, while a hot summer may increase such demand. As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received. During this period, our working capital requirements are typically funded by borrowing from our revolving credit facility. We believe, based upon our quarterly fluctuations in operating results, that period-to-period comparisons of our operating results may not be meaningful. You should not rely on our past periods as indicators of our future performance. It is possible that in some future periods our results of operations may be below historical performance. WE DEPEND ON A LIMITED NUMBER OF KEY CUSTOMERS, AND THE LOSS OF ANY SUCH CUSTOMER OR A MATERIAL REDUCTION IN BUSINESS FROM ANY SUCH CUSTOMER COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Our five largest individual customers accounted for 46% and 44% of our consolidated net sales for the nine months ended September 30, 2002 and 2001, respectively. Members of one marketing group represent our largest group of customers and accounted for approximately 16% and 15% of our consolidated net sales for the nine months ended September 30, 2002 and 2001, respectively. One individual member of this marketing group accounted for 11% and 10% of our consolidated net sales for the nine months ended September 30, 2002 and 2001, respectively. In addition, a significant customer of our Temperature Control Division is a significant customer of Dana's EMG Business, and following the closing of the acquisition, we believe this customer 9 would become a significant customer of our Engine Management Division and would have accounted on a pro forma basis for approximately 18% of our consolidated net sales for the nine months ended September 30, 2002 and 16% of our consolidated net sales in 2001. In addition, following the closing of the acquisition, two significant customers of Dana's EMG Business, one of which is a customer of our Temperature Control Division, would have accounted on a pro forma basis for approximately 5% and 3%, respectively, of our consolidated net sales for the nine months ended September 30, 2002, and 6% and 2%, respectively, of our consolidated net sales in 2001. The loss of one or more of these customers could have a materially adverse impact on our business, financial condition and results of operations. Also, we do not typically enter into long-term agreements with any of our customers. Instead, we enter into a number of purchase order commitments with our customers, based on their current or projected needs. We have in the past and may in the future lose customers or lose a particular product line of a customer due to the highly competitive conditions in the automotive aftermarket industry. A decision by any significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to materially decrease the amount of products purchased from us, to change their manner of doing business with us, or to stop doing business with us, could have a material adverse effect on our business, financial condition and results of operations. WE MAY INCUR MATERIAL LOSSES AND SIGNIFICANT COSTS AS A RESULT OF WARRANTY-RELATED RETURNS BY OUR CUSTOMERS IN EXCESS OF ANTICIPATED AMOUNTS. Our products are required to meet rigorous standards imposed by our customers and our industry. Many of our products carry a warranty ranging from a 90-day limited warranty to a lifetime limited warranty, which generally covers defects in materials or workmanship and failure to meet industry published specifications. In the event that there are material deficiencies or defects in the design and manufacture of our products and/or installer error, the affected products may be subject to warranty returns and/or product recalls. Although we maintain a comprehensive quality control program, we cannot give any assurance that our products will not suffer from defects or other deficiencies or that we will not experience material warranty returns or product recalls in the future. We accrue for warranty returns as a percentage of sales, after giving consideration to recent historical returns. While we believe that we make reasonable estimates for warranty returns in accordance with our revenue recognition policies, actual returns may differ from our estimates. We may incur material losses and significant costs as a result of our customers returning products to us as a result of warranty-related issues in excess of anticipated amounts. For example, our financial performance in 1999 was adversely impacted by an unusually high number of our customers returning products to us that were under warranty primarily in our Temperature Control Division. Deficiencies or defects in our products in the future may result in warranty returns and product recalls in excess of anticipated amounts and may have a material adverse effect on our business, financial condition and results of operations. OUR PROFITABILITY MAY BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF OVERSTOCK INVENTORY-RELATED RETURNS BY OUR CUSTOMERS IN EXCESS OF ANTICIPATED AMOUNTS. We permit overstock returns of inventory that we allow customers to return to us and that may be either new or non-defective or non-obsolete but that we believe we can re-sell. Customers are generally limited to returning overstocked inventory according to an annual allowance based on the prior year's purchases, net of all discounts and allowances. In addition, a customer's annual allowance cannot be carried forward to the upcoming year. We accrue for overstock returns as a percentage of sales, after giving consideration to recent historical returns. While we believe that we make reasonable estimates for overstock returns in accordance with our revenue recognition policies, actual returns may differ from our estimates. For example, our financial performance in 1999 was adversely impacted by our decision to discontinue offering selected Temperature Control products, which resulted in customers returning products at levels in excess of anticipated amounts. To the extent that overstocked returns are materially in 10 excess of our projections, our business, financial condition and results of operations may be materially adversely affected. OVER THE LONG TERM, OUR BUSINESS IS DEPENDENT ON THE AUTOMOTIVE INDUSTRY, AND OUR FUTURE PERFORMANCE MAY BE MATERIALLY ADVERSELY AFFECTED BY PERSISTENT DECLINES IN THE AUTOMOTIVE INDUSTRY OR CHANGES IN TECHNOLOGIES AND IMPROVEMENTS IN THE QUALITY OF NEW VEHICLE PARTS. Over the long term, our business is dependent upon the sales of automobiles within the automotive industry, which creates the total number of vehicles available for repair following the expiration of vehicle warranties. A persistent decline in automotive sales and production over the long term would likely affect sales to our aftermarket customers. Changes in automotive technologies, such as vehicles powered by fuel cells or electricity, could also negatively affect sales to our aftermarket customers. These factors could result in less demand for our products thereby resulting in a decline in our results of operations or a deterioration in our business and financial condition and may have a material adverse effect on our long term performance. In addition, the size of the automobile replacement parts market depends, in part, upon the growth in number of vehicles on the road, increase in average vehicle age, increase in total miles driven per year, new and modified environmental regulations, increase in pricing of new cars and new car quality and related warranties. The automobile replacement parts market has been negatively impacted by the fact that the quality of more recent automotive vehicles and their component parts has improved, thereby lengthening the repair cycle. Generally, if parts last longer, there will be less demand for our products, and the average useful life of automobile parts has been steadily increasing in recent years due to innovations in products and technology. These factors could have a material adverse effect on our business, financial condition and results of operations. WE MAY BE MATERIALLY ADVERSELY AFFECTED BY ASBESTOS CLAIMS ARISING FROM PRODUCTS SOLD BY OUR FORMER BRAKE BUSINESS, AS WELL AS BY OTHER PRODUCT LIABILITY CLAIMS. In 1986, we acquired a brake business, which we subsequently sold in March 1998. When we originally acquired this brake business, we assumed future liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller of the acquired brake business. In accordance with the related purchase agreement, we agreed to assume the liabilities for all new claims filed after September 1, 2001. Our ultimate exposure will depend upon the number of claims filed against us on or after September 1, 2001 and the amounts paid for indemnity and defense thereof. We currently do not have insurance coverage for the defense and indemnity costs associated with the claims we face. To date, the amounts paid for settled claims have been immaterial, although a substantial increase in the number of new claims or increased settlement payments or awards of damages could have a material adverse affect on our business, financial condition and results of operations. Actuarial consultants with experience in assessing asbestos-related liabilities conducted a study to estimate our potential claim liability as of September 30, 2002. The actuarial study estimated an undiscounted liability for settlement payments ranging from $27.3 million to $58 million for the period through 2052. Accordingly, based on the information contained in the actuarial study and all other available information that we considered, we recorded an after tax charge of $16.9 million as a loss from discontinued operations during the third quarter of 2002 to reflect such liability. At December 31, 2001, approximately 100 cases were outstanding for which we were responsible for any related liabilities. At December 31, 2002, the number of cases outstanding for which we were responsible for related liabilities increased to approximately 2,500, which include approximately 1,600 cases filed in December 2002 in Mississippi. We believe that these Mississippi cases filed against us in December 2002 were due in large part to potential plaintiffs accelerating the filing of their claims prior to the effective date of Mississippi's tort reform statute in January 2003, which statute eliminated the ability of plaintiffs to file consolidated cases. 11 You should be aware that we have only been responsible for dealing with these asbestos-related claims since September 1, 2001, so our experience may not be adequate to accurately express a view as to the future extent of our exposure to these claims. Given the uncertainties associated with projecting asbestos-related matters into the future, the short period of time that we have been responsible for defending these claims, and other factors outside our control, we cannot give any assurance that significant increases in the number of claims filed against us will not occur, that asbestos-related damages or settlement awards will not exceed the amount we have in reserve, or that additional provisions will not be required. Management will continue to monitor the circumstances surrounding these potential liabilities in determining whether additional reserves and provisions may be necessary. In addition to asbestos-related claims, our product sales entail the risk of involvement in other product liability actions. We maintain product liability insurance coverage, but we cannot give any assurance that current or future policy limits will be sufficient to cover all possible liabilities. Further, we can give no assurance that adequate product liability insurance will continue to be available to us in the future or that such insurance may be maintained at a reasonable cost to us. In the event of a successful product liability claim against us, a lack or insufficiency of insurance coverage could have a material adverse effect on our business, financial condition and results of operations. OUR SUBSTANTIAL INDEBTEDNESS COULD NEGATIVELY AFFECT OUR FINANCIAL HEALTH. We have, and after the completion of this offering and the acquisition of Dana's EMG Business will continue to have, a significant amount of indebtedness. As of December 31, 2002, our total outstanding indebtedness was $177.2 million. We incurred $90 million of indebtedness in July 1999 from the sale of our convertible debentures. We have an existing revolving bank credit facility of $225 million with General Electric Capital Corporation, as agent, and a syndicate of lenders, which we refer to throughout this prospectus as our revolving credit facility. As of December 31, 2002, we had $76.2 million of outstanding indebtedness and approximately $58.7 million of availability under this revolving credit facility. The size of the revolving credit facility increases to $305 million upon our acquisition of Dana's EMG Business, subject to the terms and conditions of the facility. Following this offering and our acquisition of Dana's EMG Business, we expect our total outstanding indebtedness to be approximately $264 million. Our substantial indebtedness could: increase our vulnerability to general adverse economic and industry conditions; limit our ability to fund future working capital, capital expenditures, research and development costs and other general corporate requirements; limit our ability to pay future dividends; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; increase the amount of interest expense that we have to pay because some of our borrowings are at variable rates of interest, which, if interest rates increase, could result in a higher interest expense; and limit, along with the financial and other restrictive covenants of our indebtedness, among other things, our ability to borrow additional funds. In addition, we have granted the lenders under our revolving credit facility a first priority security interest in substantially all of our currently owned and future acquired personal property, real property (other than our Long Island City facility, which is currently unencumbered) and other assets. We have also pledged all of the shares of stock in our subsidiaries to those lenders. 12 WE MAY NOT BE ABLE TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO SERVICE OUR INDEBTEDNESS AND FUND OUR FUTURE OPERATIONS. Our ability either to make payments on or to refinance our indebtedness, or to fund planned capital expenditures and research and development efforts, will depend on our ability to generate cash in the future. Our ability to generate cash is in part subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations and the anticipated business opportunities provided by the acquisition of Dana's EMG Business, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next few years. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as: reducing capital expenditures; reducing research and development efforts; selling assets; restructuring or refinancing our indebtedness; and seeking additional funding. We cannot assure you, however, that our business will generate sufficient cash flow from operations, even with the anticipated sales growth, cost improvements and increased cash flow from the acquisition of Dana's EMG Business, or that future borrowings will be available to us under our revolving credit facility in amounts sufficient to enable us to pay the principal and interest on our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. OUR BUSINESS IS DEPENDENT ON OUR MAINTAINING SATISFACTORY RELATIONSHIPS WITH SUPPLIERS, AND THE LOSS OF SEVERAL MAJOR SUPPLIERS OF RAW MATERIALS OR KEY COMPONENTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS. Our business depends on our relationships with suppliers of raw materials and components that we use on our product lines and on our ability to purchase these raw materials and key components at prices and on terms comparable to similarly-situated companies. We purchase most materials in the U.S. open market. Although we do not expect that the loss of any one supplier would have a material adverse effect on us, the loss of several major suppliers would have a material adverse effect our business, financial condition and results of operations. WE MAY INCUR LIABILITIES UNDER GOVERNMENT REGULATIONS AND POLICIES AND ENVIRONMENTAL LAWS, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Domestic and foreign political developments and government regulations and policies directly affect automotive consumer products in the United States and abroad. Regulations and policies relating to over-the-highway vehicles include standards established by the United States Department of Transportation for motor vehicle safety and emissions. The modification of existing laws, regulations or policies, or the adoption of new laws, regulations or policies, could have a material adverse effect on our business, financial condition and results of operations. Our failure to comply with these laws and regulations could subject us to civil and criminal penalties. Our operations and properties are also subject to a wide variety of increasingly complex and stringent federal, state, local and international laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of materials, substances and wastes, the remediation of contaminated soil and groundwater and the 13 health and safety of employees. Such environmental laws, including but not limited to those under the Comprehensive Environmental Response Compensation & Liability Act, may impose joint and several liability and may apply to conditions at properties presently or formerly owned or operated by an entity or its predecessors, as well as to conditions at properties at which wastes or other contamination attributable to an entity or its predecessors have been sent or otherwise come to be located. The nature of our operations exposes us to the risk of claims with respect to such matters, and we can give no assurance that violations of such laws have not occurred or will not occur or that material costs or liabilities will not be incurred in connection with such claims. One of our facilities is currently undergoing minor environmental remediation, which costs are covered by insurance, subject to a $1.5 million deductible and a $3 million indemnity limitation. We also maintain a three year $10 million environmental policy to cover our other existing facilities. Based upon our experience to date, we believe that the future cost of compliance with existing environmental laws, and liability for known environmental claims pursuant to such environmental laws, will not give rise to additional significant expenditures or liabilities that would be material to us. However, future events, such as new information, changes in existing environmental laws or their interpretation, and more vigorous enforcement policies of regulatory agencies, may have a material adverse effect on our business, financial condition and results of operations. THE SUCCESS OF OUR BUSINESS IS DEPENDENT ON OUR KEY PERSONNEL, AND THE LOSS OF ANY OF THESE PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The success of our business is dependent, to a significant extent, upon the abilities and continued efforts of our senior management team, including Lawrence I. Sills, our Chairman of the Board and Chief Executive Officer, John P. Gethin, our President and Chief Operating Officer, James J. Burke, our Vice President Finance, Chief Financial Officer, and Joseph G. Forlenza, our Vice President and General Manager of Engine Management Division. None of our executive officers currently has an employment agreement with us, and we do not currently maintain key-life insurance on any of our executive officers. The loss of any of these persons and the inability to attract qualified replacements for these key personnel could have a material adverse effect on our business, financial condition and results of operations. RISKS RELATED TO OUR COMMON STOCK AND THIS OFFERING OUR PRINCIPAL SHAREHOLDERS HAVE THE ABILITY TO CONTROL US AND THEIR INTERESTS MAY, AT TIMES, CONFLICT WITH THE INTERESTS OF OUR OTHER SHAREHOLDERS. At December 31, 2002, members of the families that founded Standard Motor Products owned, directly or indirectly, approximately 43% of our outstanding common stock. Specifically, shares of common stock owned directly or indirectly by members of the family of Lawrence I. Sills, our Chairman of the Board and Chief Executive Officer, aggregated 2,913,001 shares (approximately 23% of our outstanding common stock at December 31, 2002), and shares of common stock owned directly or indirectly by members of the family of Arthur D. Davis, Marilyn Fife Cragin and Susan F. Davis, three of our directors who are family members of Bernard Fife, one of our founders, aggregated 2,491,631 shares (approximately 20% of our outstanding common stock at December 31, 2002). To the extent that these shareholders exercise their voting rights in concert, they may have the ability to control the election of our board of directors, to appoint new management and to control the outcome of matters submitted to a vote of the holders of common stock, which may make it more difficult for a third party to acquire us. The interests of these equity holders may at times conflict with the interests of our other shareholders. SALES OF A SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK HELD BY DANA OR OUR MANAGEMENT FOLLOWING THE EXPIRATION OF THEIR RESPECTIVE LOCK-UP PERIODS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE TRADING PRICE OF OUR COMMON STOCK. In connection with the acquisition of Dana's EMG Business, assuming a purchase price of $121 million, based on the September 30, 2002 audited balance sheet of Dana's EMG Business, 14 Dana will receive approximately shares of our common stock, representing approximately % of our outstanding common stock as of December 31, 2002, as part of the acquisition purchase price. Dana has agreed not to sell or otherwise transfer these shares of common stock for a period of two and a half years following the date of the closing of the acquisition. The shares of common stock received by Dana are not registered under the Securities Act. We have agreed to register these shares under the Securities Act should an exemption to registration under the securities laws be unavailable to Dana following the expiration of such two and a half year lock-up period. Accordingly, all of the shares of our common stock that Dana received as part of the acquisition purchase price will be available for sale in the public market two and a half years after the date of the closing of the acquisition. In addition, our directors and executive officers have agreed not to sell or otherwise transfer the shares of common stock held directly or indirectly by such persons for a period of 90 days following the effective date of this offering. Sales of a substantial number of shares of common stock held by Dana or our management following the expiration of their respective lock-up periods could have a material adverse effect on the market price of our common stock. OUR RESTATED CERTIFICATE OF INCORPORATION AND RESTATED BY-LAWS CONTAIN PROVISIONS THAT MAY HINDER OR PREVENT A CHANGE OF CONTROL. Some of the provisions of our restated certificate of incorporation and restated by-laws could make a takeover difficult, even if such a transaction would be beneficial to shareholders. Specifically, our restated certificate of incorporation requires a 75% vote for transactions with the direct or indirect beneficial owner of at least 5% of the outstanding shares of any class of our capital stock, and our restated certificate of incorporation and restated by-laws provide that our directors may be removed without cause only by a vote of holders of 75% of the outstanding stock. Section 912 of the New York Business Corporation Law would also prohibit business combinations with an 'interested shareholder,' which includes a person or entity who beneficially owns 20% of a company's voting stock directly or indirectly for five years unless the board of directors of such company approves the transaction before the person or entity becomes an interested shareholder. This provision may have the effect of making a takeover of us even more difficult. In addition, our shareholder rights plan may make it more difficult for a person to purchase our company if such purchase is not approved by our board of directors. OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RECOVER YOUR INVESTMENT IF OUR STOCK PRICE DECLINES. The market price of our common stock has traditionally fluctuated over a wide range and may continue to do so in the future. Factors that may affect our common stock fluctuation include: quarterly variations in our operating results; changes in concentration of our equity ownership by families of our founders and by our other significant shareholders, including Dana following the acquisition; quarterly variations in the results of operations or stock prices of comparable companies; announcements of new products or services offered by us or our competitors; changes in earnings estimates or buy/sell recommendations by financial analysts; the stock price performance of our material customers; existing competitive conditions and the possible entry of additional competitors or expansion of existing competitors into our markets; and general market conditions or market conditions specific to particular industries. Factors affecting the automotive aftermarket industry generally and changes in general market conditions may also have a significant impact on the market price for our securities. 15 THE LIMITED TRADING VOLUME OF OUR COMMON STOCK MAY CONTRIBUTE TO ITS PRICE VOLATILITY, AND AS A RESULT RELATIVELY SMALL TRADES MAY HAVE A SIGNIFICANT IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK. Our common stock is traded on The New York Stock Exchange under the symbol 'SMP.' For the fourth quarter of 2002, the average daily trading volume for our common stock as reported by the NYSE was approximately 21,258 shares. Even if we achieve a wider dissemination by means of the shares offered pursuant to this prospectus, we are uncertain as to whether a more active trading market in our common stock will develop. As a result, relatively small trades may have a significant impact on the market price of our common stock. IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK TO REPAY OR RESTRUCTURE OUR INDEBTEDNESS OR FINANCE OUR OPERATING REQUIREMENTS, THERE IS A RISK THAT YOUR STOCK OWNERSHIP COULD BE DILUTED. In order to pay down or restructure our indebtedness or fund our general operating requirements, we may issue additional equity securities in the future. The issuance of additional equity securities could be dilutive to our earnings per share and to your stock ownership, and you may not be able to recover your investment if there is a dilution of our stock. 16 SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS Various statements contained in this prospectus or incorporated by reference into this prospectus constitute 'forward-looking statements' within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as 'believe,' 'expect,' 'may,' 'will,' 'should,' 'seek,' 'plan,' 'intend' or 'anticipate' or the negative thereof or comparable terminology, or by discussion of strategy. Forward looking statements are primarily contained in the sections of this prospectus entitled 'Prospectus Summary,' 'Risk Factors,' 'Pro Forma Financial Information,' 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and 'Business.' Forward-looking statements represent as of the date of this prospectus our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. Such forward looking statements are based largely on our current expectations and are inherently subject to risks and uncertainties. Our actual results could differ materially from those that are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, a number of factors, such as: successful integration of acquired businesses; economic and market conditions; the performance of the automotive aftermarket sector; changes in business relationships with our major customers and in the timing, size and continuation of our customers' programs; the ability of our customers to achieve their projected sales; competitive product and pricing pressures; increases in production or material costs that cannot be recouped in product pricing; product liability (including, without limitation, those related to estimates to asbestos-related contingent liabilities) matters; and the other risks and uncertainties that are described in this prospectus and from time to time in our filings with the SEC. Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with the SEC pursuant to the SEC's rules, we have no duty to update these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking information contained in this prospectus will in fact transpire. 17 THE ACQUISITION AND RELATED TRANSACTIONS This offering is being made in connection with our acquisition of Dana's EMG Business. The closing of the acquisition is subject to our financing of the purchase price. We intend to finance the acquisition and the payment of related fees and expenses and restructuring and integration costs by (a) drawing on our revolving credit facility, (b) issuing shares of our common stock to Dana, and (c) obtaining seller financing. On February 7, 2003, we signed an agreement to purchase substantially all of the assets and to assume substantially all of the operating liabilities of Dana's EMG Business, excluding assets and liabilities related to its water pump and fuel pump product lines, for a purchase price equal to the closing net book value of the business, subject to a maximum purchase price of $125 million. Assuming an acquisition purchase price of $121 million, based upon the September 30, 2002 audited balance sheet of Dana's EMG Business, we will pay to Dana: approximately $90.8 million in cash; an unsecured promissory note in the aggregate principal amount of approximately $15.1 million; and shares of our common stock with a value of approximately $15.1 million. The acquisition purchase price is subject to a post-closing adjustment based upon the book value of the acquired assets of Dana's EMG Business less the book value of the assumed liabilities of Dana's EMG Business as of the close of business on the closing date. The acquisition is subject to our obtaining financing for the acquisition and other customary closing conditions, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. We expect to close the acquisition substantially simultaneously with the closing of this offering. DANA'S EMG BUSINESS Dana's EMG Business is a leading manufacturer of aftermarket parts in the automotive industry focused exclusively on engine management. Dana's EMG Business had approximately $229 million in consolidated net sales for the nine months ended September 30, 2002 and approximately $298 million in consolidated net sales in 2001. Dana's EMG Business customers consist of many of the leading warehouse distributors, such as NAPA Auto Parts, as well as many of the leading auto parts retail chains, such as O'Reilly Automotive, CSK Auto and Pep Boys. Dana's EMG Business products enjoy strong brand recognition with its many leading automotive product names, including Echlin, Borg Warner and Niehoff, as well as with private labels through NAPA Auto Parts. Dana's EMG Business currently includes nine operating facilities employing approximately 1,900 people. We intend to integrate Dana's EMG Business into our existing Engine Management Division within 18 months of the closing of the acquisition. Dana acquired Echlin Corporation's engine management business in 1998 and incurred a number of charges to its earnings as a result of operating and financial restructuring activities, including reductions in work force, the rationalization of distribution facilities, and the introduction of new management information systems. These activities had a negative impact on the financial performance of Dana's EMG Business, as evidenced by Dana's EMG Business recording an EBITDA loss (excluding the water pump and fuel pump product lines, which are being retained by Dana) for the nine months ended September 30, 2002 of approximately $31.3 million (which represented an EBITDA loss of approximately $33.6 million for Dana's EMG Business for the nine months ended September 30, 2002 excluding the loss associated with the water pump and fuel pump product lines retained by Dana of $2.3 million, as noted in the Pro Forma Financial Statements). Certain of these activities that occurred during the nine months ended September 30, 2002 are reflected in restructuring charges that Dana incurred of approximately $9.7 million. During 2002, Dana also instituted various operating initiatives related to their distribution facilities and the size of their workforce, resulting in cost savings that are expected to be approximately $8 million per annum. 18 In addition to the steps already taken by Dana, we have identified various opportunities to improve the performance of Dana's EMG Business following the closing of the acquisition. These opportunities include: rationalizing excess manufacturing capacity; improving distribution activities; consolidating redundant activities such as management information systems, accounting, and catalog production; realizing the benefits of scale in purchasing materials; and moving out of unnecessary operating facilities. We believe that once we have fully completed the integration of Dana's EMG Business these cost savings will range from $45 to $50 million per annum. RELATED DEBT AND EQUITY FINANCINGS Amendment to Our Revolving Credit Facility. On February 7, 2003, we amended our revolving credit facility to provide for an additional $80 million commitment, subject to the terms and conditions therein, which will become effective upon the closing of our acquisition of Dana's EMG Business. This additional commitment increases the total amount available for borrowing under our revolving credit facility to $305 million. After applying all of the net proceeds from this offering to repay a portion of our outstanding indebtedness under our revolving credit facility, we intend to borrow the entire cash portion of the purchase price of Dana's EMG Business from our revolving credit facility. Following the closing of this acquisition, we expect to have approximately $58.7 million available under this amended revolving credit facility. Seller Note. At the acquisition closing, we will deliver to Dana an unsecured promissory note in the aggregate principal amount of approximately $15.1 million, assuming an acquisition purchase price of $121 million, having an interest rate of 9% per annum for the first year, with such interest rate increasing by one-half of a percentage point (0.5%) on each anniversary of the date of issuance. Accrued and unpaid interest is due quarterly under the promissory note. The maturity date of the promissory note is five and a half years from the date of issuance. The promissory note may be prepaid in whole or in part at any time without penalty. Seller Equity. At the acquisition closing, we will fund a portion of the acquisition purchase price by issuing to Dana shares of our common stock with a value of approximately $15.1 million, assuming an acquisition purchase price of $121 million. Dana would receive approximately shares of our common stock, which would represent approximately % of our outstanding common stock as of December 31, 2002, assuming that the price of our common stock is $ . 19 USE OF PROCEEDS The net proceeds from our sale of shares of common stock in this offering will be approximately $ million after deducting the underwriting discount and estimated expenses. If the underwriters exercise in full their option to purchase additional shares in this offering, our net proceeds will be approximately $ million. We intend to use all of the net proceeds from this offering to repay a portion of our outstanding indebtedness under our revolving credit facility. We then intend to borrow the entire cash portion of the purchase price of Dana's EMG Business from our revolving credit facility to consummate the closing of the acquisition. 20 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Our common stock trades publicly on the New York Stock Exchange under the trading symbol 'SMP.' The following table shows the high and low sales prices per share of the common stock as reported by the New York Stock Exchange and the dividends declared per share for the periods indicated:
HIGH LOW DIVIDEND ---- --- -------- FISCAL YEAR ENDED DECEMBER 31, 2000 First Quarter......................................... $16.50 $12.63 $0.09 Second Quarter........................................ 15.70 7.38 0.09 Third Quarter......................................... 10.63 7.94 0.09 Fourth Quarter........................................ 8.44 6.44 0.09 FISCAL YEAR ENDED DECEMBER 31, 2001 First Quarter......................................... $10.60 $ 7.44 $0.09 Second Quarter........................................ 14.50 9.90 0.09 Third Quarter......................................... 13.70 11.65 0.09 Fourth Quarter........................................ 14.95 10.45 0.09 FISCAL YEAR ENDED DECEMBER 31, 2002 First Quarter......................................... $15.15 $12.90 $0.09 Second Quarter........................................ 17.04 14.30 0.09 Third Quarter......................................... 17.39 10.63 0.09 Fourth Quarter........................................ 13.90 9.45 0.09 FISCAL YEAR ENDED DECEMBER 31, 2003 First Quarter (through February 12, 2003)............. $15.70 $12.78 $ --
The last reported sale price of our common stock on the NYSE on February 12, 2003 was $13.71 per share. As of February 12, 2003, there were 503 holders of record of our common stock. Dividends are declared and paid on the common stock at the discretion of our board of directors and depend on our profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by our board. Our current policy is to pay dividends on a quarterly basis. Our credit agreement permits dividends and distributions by us provided specific conditions are met. See 'Description of Capital Stock -- Common Stock' for a discussion of such conditions under our revolving credit facility. 21 CAPITALIZATION The following table sets forth our capitalization as of September 30, 2002: on an actual basis, and on an as adjusted basis, to reflect our receipt of the estimated net proceeds of $54.3 million from the sale of 4,500,000 shares of our common stock in this offering at an assumed offering price of $13.00 per share, after deducting the underwriting discount and estimated expenses, and our acquisition of Dana's EMG Business and the related borrowing and stock issuance. You should read this table in conjunction with 'Use of Proceeds,' 'Selected Consolidated Financial Data,' 'Pro Forma Financial Information,' 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and our financial statements and the notes thereto included elsewhere in this prospectus. The shares of common stock to be outstanding after this offering exclude: 909,696 shares of common stock issuable upon exercise of options outstanding as of December 31, 2002 under our stock option plans at a weighted average exercise price of $17.15 per share; 356,745 shares of common stock reserved for future grants under our stock option plans; 600,000 shares held by us in an employee benefits trust, which are not currently considered outstanding for calculations of basic or diluted earnings per share; 2,796,120 shares of common stock issuable upon conversion of our convertible debentures, which are presently convertible into 31.068 shares of common stock for each $1,000 of convertible debentures and which have a conversion price equivalent to approximately $32.19 per share of common stock; and up to shares that may be issued to the underwriters if they exercise their option to purchase additional shares in this offering. 22
AS OF SEPTEMBER 30, 2002 ---------------------- AS ACTUAL ADJUSTED(1) ------ ----------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Cash and cash equivalents................................... $ 9,672 $ 9,672 -------- -------- -------- -------- Notes payable............................................... 3,229 3,229 -------- -------- Payments due within one year on long-term debt.............. 4,242 4,242 -------- -------- Convertible Subordinated Debentures due 2009................ 90,000 90,000 Revolving Credit Facility(2)................................ 107,195 153,795 Other....................................................... 3,684 18,784 -------- -------- Long term debt.......................................... 200,879 262,579 -------- -------- Stockholders' equity: Preferred stock -- par value $20.00 per share: Authorized -- 500,000 shares, none issued Common stock -- par value $2.00 per share: Authorized -- 30,000,000 shares, issued and outstanding -- 11,957,009 shares.................... 26,649 38,049 Capital in excess of par value.......................... 1,684 59,684 Retained earnings....................................... 160,385 160,385 Accumulated other comprehensive loss.................... (2,328) (2,328) Less: Treasury stock -- at cost 1,367,467 shares........ (20,637) (20,637) -------- -------- Total stockholders' equity.......................... 165,753 235,153 -------- -------- Total capitalization................................ $374,103 $505,203 -------- -------- -------- --------
- --------- (1) Assuming an acquisition purchase price of Dana's EMG Business of $121 million, based on the September 30, 2002 audited balance sheet for Dana's EMG Business, paid for by drawing $46.6 million on our revolving credit facility, issuing 1,200,000 shares of common stock to Dana, issuing an unsecured promissory note in the aggregate principal amount of $15.1 million to Dana, and a stock issuance of approximately 4,500,000 shares of our common stock in this offering. (2) Assumes (a) the application of all of the estimated net proceeds from this offering to pay down a portion of our outstanding indebtedness under our revolving credit facility, and (b) the borrowing of the entire cash portion of the purchase price of Dana's EMG Business from our revolving credit facility to consummate the closing of the acquisition. 23 PRO FORMA FINANCIAL INFORMATION On February 7, 2003, we entered into an agreement to purchase substantially all of the assets and to assume substantially all of the operating liabilities of Dana's EMG Business, excluding any assets related to its water pump and fuel pump product lines, for a purchase price equal to the closing net book value of the business. For purposes of preparing the pro forma financial information contained in this prospectus, we have assumed the acquisition purchase price to be $121 million, based on the September 30, 2002 audited balance sheet of Dana's EMG Business. The acquisition purchase price is subject to a post-closing adjustment based upon the net book value of the acquired assets of Dana's EMG Business less the net book value of the assumed liabilities of Dana's EMG Business as of the close of business on the closing date. The closing of the acquisition is subject to our financing of the purchase price. We intend to finance the acquisition and the payment of related fees and expenses, restructuring and integration costs by (a) drawing on our amended revolving credit facility, (b) issuing shares of our common stock to Dana, and (c) obtaining seller financing. The unaudited combined pro forma statements of operations for the year ended December 31, 2001, and for the nine months ended September 30, 2002, give effect to the acquisition of assets and operating liabilities of Dana's EMG Business (excluding its water pump and fuel pump product lines, which we will not acquire), including our financing of the acquisition purchase price, as if such acquisition had occurred on January 1, 2001. The unaudited combined pro forma balance sheet gives effect to such acquisition as if it had occurred on September 30, 2002. The unaudited pro forma combined financial data is based on our historical consolidated financial statements and the historical combined financial statements of Dana's EMG Business (adjusted to exclude its water pump and fuel pump product lines, which we will not acquire), and on the assumptions and adjustments described in the notes to such unaudited pro forma combined financial data, including assumptions relating to the allocation of the consideration paid for Dana's EMG Business to the assets and liabilities of Dana's EMG Business based on preliminary estimates of their respective fair values. The actual allocation of such consideration may differ from that reflected in the unaudited pro forma combined financial data. Amounts allocated will be based upon the estimated fair values at the time of the acquisition of Dana's EMG Business which could vary from the amounts assumed. In addition, the estimated transaction fees and expenses are assumed solely for the purpose of presenting the unaudited pro forma combined financial data. In connection with the acquisition, our plans anticipate that we will incur approximately $32 million of restructuring costs related to severance and exit costs for Dana-related employees and facilities. In addition, we anticipate $15 million of integration costs. Of the aggregate total of approximately $47 million, we expect to expend $30 to $35 million in the first 18 months. As a result of the restructuring and integration activities, we anticipate realizing significant cost savings. Neither the costs of the restructuring and integration activities nor the resulting cost savings have been included in the pro forma combined financial data. The unaudited combined pro forma financial statements should be read in conjunction with the financial statements and the notes thereto of our company and of Dana's EMG Business included elsewhere in this prospectus and 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' The unaudited combined pro forma financial statements represent management's best estimate of the effects of the acquisition of assets and operating liabilities of Dana's EMG Business and do not purport to be indicative of the results that would have actually been obtained had such acquisition been consummated as of and for the dates and periods presented, or that may be obtained in the future. 24 STANDARD MOTOR PRODUCTS, INC. UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001
STANDARD COMBINED MOTOR PRO FORMA PRODUCTS, DANA'S EMG RETAINED PRODUCT ACQUISITION-RELATED STATEMENT OF INC.(1) BUSINESS(2) LINES-DANA(3) ADJUSTMENTS OPERATIONS ------- ----------- ------------- ----------- ---------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales.............................. $ 591,652 $ 297,796 $(10,113) $ (4,231)(a) $ 875,104 Cost of sales.......................... 452,597 287,070 (14,013) (20,707)(b) 704,947 ----------- --------- -------- -------- ---------- Gross profit........................ 139,055 10,726 3,900 16,476 170,157 Selling, general and administrative expenses.............................. 123,932 66,616 190,548 Restructuring charges.................. -- 44,276 44,276 ----------- --------- -------- -------- ---------- Operating income (loss)............. 15,123 (100,166) 3,900 16,476 (64,667) Other income (expense) -- net.......... 2,763 (756) 2,007 Interest expense....................... 17,430 609 3,766(c) 21,805 ----------- --------- -------- -------- ---------- Earnings (loss) from continuing operations before taxes............ 456 (101,531) 3,900 12,710 (84,465) Income tax (benefit)................... 144 (39,064) 17,834(d) (21,086) ----------- --------- -------- -------- ---------- Earnings (loss) from continuing operations......................... $ 312 $ (62,467) $ 3,900 $ (5,124) $ (63,379) ----------- --------- -------- -------- ---------- ----------- --------- -------- -------- ---------- PER SHARE DATA: Basic earnings (loss) per share from continuing operations................. $ 0.03 $ (3.63) ----------- ---------- ----------- ---------- Diluted earnings (loss) per share from continuing operations................. $ 0.03 $ (3.63) ----------- ---------- ----------- ---------- Weighted average number of common shares outstanding -- basic(5)........ 11,774,591 17,474,591 ----------- ---------- ----------- ---------- Weighted average number of common shares and dilutive common shares(5).. 11,830,737 17,474,591 ----------- ---------- ----------- ----------
- --------- (1) Represents our historical statement of operations for the year ended December 31, 2001, derived from our audited consolidated financial statements, which are included in this prospectus. (2) Represents the historical statement of operations of Dana's EMG Business for the year ended December 31, 2001, derived from the related audited combined financial statements, which are included in this prospectus. (3) Represents the product lines of Dana's EMG Business that are being retained by Dana and excluded from the acquisition. (4) Represents the adjustments to give effect to the acquisition of Dana's EMG Business as if it were consummated at January 1, 2001. The following adjustments were made $ (in thousands): (a) Eliminates historical net sales of Dana's EMG Business to us....................................... $ 4,231 -------- -------- (b) Cost of Sales: Elimination of historical depreciation and amortization (less $340 related to retained product lines)............................................... $(18,876) Depreciation of fixed assets at new cost basis....... 2,400 Elimination of historical cost of sales of Dana's EMG Business net sales to us......................... (4,231) -------- $(20,707) -------- -------- (c) Interest expense: Removal of historical interest expense for borrowings not assumed.......................................... $ (609) Interest on promissory note to Dana (annual interest rate of 9%).......................................... 1,359 Interest on additional borrowings under our revolving credit facility ($46,600 x 5.74%).................... 2,675 Increase in historical borrowing rate under our revolving credit facility (average borrowings of $136,375 x .25%)..................................... 341 -------- $ 3,766 -------- -------- (d) Removal of historical income tax benefit related to the filing of consolidated tax return under Dana..... $ 39,064 Net income tax benefit associated with losses before income taxes, adjusted for changes in depreciation, amortization and interest expense of Dana's EMG Business............................................. (21,230) -------- $ 17,834 -------- --------
(5) Pro forma weighted average number of common shares outstanding include 5,700,000 of new shares, 1,200,000 of which are assumed to be held by Dana. 25 STANDARD MOTOR PRODUCTS, INC. UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
STANDARD COMBINED MOTOR PRO FORMA PRODUCTS, DANA'S EMG RETAINED PRODUCT ACQUISITION-RELATED STATEMENT OF INC.(1) BUSINESS(2) LINES-DANA(3) ADJUSTMENTS(4) OPERATIONS ------- ----------- ------------- -------------- ---------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales........................... $ 488,034 $ 229,137 $(7,493) $ (5,861)(a) $ 703,817 Cost of sales....................... 362,164 217,942 (9,771) (16,616)(b) 553,719 ----------- --------- ------- -------- ---------- Gross profit..................... 125,870 11,195 2,278 10,755 150,098 Selling, general and administrative expenses........................... 96,290 47,271 143,561 Restructuring charges............... -- 9,660 9,660 ----------- --------- ------- -------- ---------- Operating income (loss).......... 29,580 (45,736) 2,278 10,755 (3,123) Other income (expense) -- net....... 1,725 (713) 1,012 Interest expense.................... 10,877 144 2,634(c) 13,655 ----------- --------- ------- -------- ---------- Earnings (loss) from continuing operations before taxes........ 20,428 (46,593) 2,278 8,121 (15,766) Income tax (benefit)................ 6,333 (18,096) 9,047(d) (2,716) ----------- --------- ------- -------- ---------- Earnings (loss) from continuing operations..................... $ 14,095 $ (28,497) $ 2,278 $ (926) $ (13,050) ----------- --------- ------- -------- ---------- ----------- --------- ------- -------- ---------- PER SHARE DATA: Basic earnings (loss) per share from continuing operations................. $ 1.18 $ (.74) ----------- ---------- ----------- ---------- Diluted earnings (loss) per share from continuing operations................. $ 1.14 $ (.74) ----------- ---------- ----------- ---------- Weighted average number of common shares outstanding -- basic(5)........ 11,900,800 17,600,800 ----------- ---------- ----------- ---------- Weighted average number of common shares and dilutive common shares(5).. 14,805,121 17,600,800 ----------- ---------- ----------- ----------
- --------- (1) Represents our historical statement of operations for the nine months ended September 30, 2002, derived from our unaudited condensed consolidated financial statements, which are included in this prospectus. (2) Represents the historical statement of operations of Dana's EMG Business for the nine months ended September 30, 2002, derived from the related audited combined financial statements, which are included in this prospectus. (3) Represents the product lines of Dana's EMG Business that are being retained by Dana and excluded from the acquisition. (4) Represents the adjustments to give effect to acquisition of Dana's EMG Business as if it were consummated at January 1, 2002. The following adjustments were made: (a) Eliminates historical net sales of Dana's EMG Business to us....................................... $ 5,861 -------- -------- (b) Cost of Sales: Elimination of historical depreciation and amortization (less $255 related to retained product lines)............................................... $(12,555) Depreciation of fixed assets at new cost basis....... 1,800 Elimination of historical cost of sales related to the Dana EMG Business net sales to us................ (5,861) -------- $(16,616) -------- -------- (c) Interest expense: Removal of historical interest expense for borrowings not assumed.......................................... $ (144) Interest on promissory note to Dana (annual interest rate of 9%).......................................... 1,019 Interest on additional borrowings under our revolving credit facility ($46,600 X 4.35%).................... 1,520 Increase in historical borrowing rate under our amended revolving credit facility (average 2002 borrowings of $127,333 X .25%)....................... 239 -------- $ 2,634 -------- -------- (d) Removal of historical income tax benefit related to the filing of consolidated tax return under Dana..... $ 18,096 Net income tax benefit associated with losses before income taxes, adjusted for changes in depreciation, amortization and interest expense of Dana's EMG Business............................................. (9,049) -------- $ 9,047 -------- --------
(5) Pro Forma weighted average number of common shares outstanding include 5,700,000 of new shares, 1,200,000 of which are assumed to be held by Dana. 26 STANDARD MOTOR PRODUCTS, INC. UNAUDITED COMBINED PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 2002 (DOLLARS IN THOUSANDS)
PRO FORMA ADJUSTMENTS --------------------------------------------- COMBINED RETAINED ACQUISITION- PRO FORMA STANDARD MOTOR DANA'S EMG PRODUCT RELATED BALANCE PRODUCTS, INC.(1) BUSINESS(2) LINES-DANA(3) ADJUSTMENTS(4) FINANCING(5) SHEET ----------------- ----------- ------------- -------------- ------------ ----- ASSETS: Current assets: Cash and cash equivalents....... $ 9,672 $ 734 $ (734) $(128,100) $128,100 $ 9,672 Accounts receivable, net........ 191,703 54,135 (1,360) 244,478 Inventories..................... 161,709 87,259 (5,804) 243,164 Other current assets............ 38,178 33,174 (32,572) 38,780 -------- -------- -------- --------- -------- -------- Total current assets......... 401,262 175,302 (40,470) (128,100) 128,100 536,094 Property, plant and equipment, net of accumulated depreciation.................... 106,854 68,323 (10,572) (42,751) 121,854 Goodwill, net.................... 20,017 -- 37,701 57,718 Other assets..................... 37,313 3,410 (3,366) 3,000 40,357 -------- -------- -------- --------- -------- -------- Total assets................. $565,446 $247,035 (54,408) $(133,150) $131,100 $756,023 -------- -------- -------- --------- -------- -------- -------- -------- -------- --------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Notes payable................... $ 3,229 $ 5,337 $ (5,337) $ 3,229 Current portion of long-term debt.......................... 4,242 -- 4,242 Accounts payable................ 47,130 31,491 (414) 78,207 Sundry payables and accrued expenses...................... 92,149 45,127 (16,727) 120,549 -------- -------- -------- -------- -------- Total current liabilities.... 146,750 81,955 (22,478) -- $206,227 Long-term debt................... 200,879 -- $ 61,700 262,579 Other liabilities................ 52,064 8,216 (8,216) 52,064 -------- -------- -------- -------- -------- Total liabilities............ 399,693 90,171 (30,694) 61,700 520,870 -------- -------- -------- -------- -------- Stockholders' equity: Common stock.................... 26,649 -- 11,400 38,049 Capital in excess of par value......................... 1,684 -- 58,000 59,684 Retained earnings............... 160,385 156,864 (23,714) (133,150) 160,385 Accumulated other comprehensive loss.......................... (2,328) -- (2,328) -------- -------- -------- --------- -------- -------- 186,390 156,864 (23,714) (133,150) 69,400 255,790 Less: Treasury stock............ 20,637 -- 20,637 -------- -------- -------- --------- -------- -------- Total stockholders' equity... 165,753 156,864 (23,714) (133,150) 69,400 235,153 -------- -------- -------- --------- -------- -------- Total liabilities and stockholders' equity....... $565,446 $247,035 $(54,408) $(133,150) $131,100 $756,023 -------- -------- -------- --------- -------- -------- -------- -------- -------- --------- -------- --------
- --------- (1) Represents amounts derived from our condensed consolidated unaudited balance sheet at September 30, 2002, which is included in this prospectus. (2) Represents amounts derived from the combined audited balance sheet of Dana's EMG Business at September 30, 2002, which is included in this prospectus. (3) Represents the net assets of Dana's EMG Business that are being retained by Dana at September 30, 2002 and excluded from the acquisition, such net assets consist primarily of Dana's deferred income taxes, and inventory and fixed assets of product lines we are not purchasing. (4) The acquisition of Dana's EMG Business has been included in the pro forma combined balance sheet as if the acquisition were consummated at September 30, 2002. Assuming the purchase price is approximately $121 million, the excess of the purchase price over the related net assets acquired is determined as follows: (footnotes continued on next page) 27 STANDARD MOTOR PRODUCTS, INC. UNAUDITED COMBINED PRO FORMA BALANCE SHEET -- (CONTINUED) AS OF SEPTEMBER 30, 2002 (footnotes continued from previous page)
(DOLLARS IN THOUSANDS) Total estimated purchase price.............................. $ 121,000 Historical net assets at September 30, 2002................. (156,864) Net assets retained by Dana................................. 23,714 Net tangible assets adjustment based on fair value.......... 42,751 --------- Net tangible assets acquired................................ 30,601 Acquisition costs........................................... 7,100 --------- Excess of purchase price over net tangible assets acquired................................................... $ 37,701 --------- ---------
The excess of the purchase price over the related net assets excludes for purposes of the pro forma balance sheet, approximately $32 million of restructuring costs related to severance and exit costs for Dana-related employees and facilities that are anticipated as a direct result of the acquisition. (5) Represents the net proceeds of this offering, new borrowings under our amended revolving credit facility, common stock to be issued to Dana and an unsecured promissory note payable to Dana.
(DOLLARS IN THOUSANDS) Proceeds of the offering.................................... $ 59,000 Common stock to be issued to Dana........................... 15,100 -------- 74,100 Less: fees associated with the offering..................... (4,700) -------- 69,400 -------- Net proceeds under our amended revolving credit facility.... 46,600 Promissory note to Dana..................................... 15,100 -------- 61,700 -------- Total financing.......................................... $131,100 -------- --------
In addition, we anticipate costs of approximately $3 million in connection with our amended revolving credit facility. 28 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data at and for the years ended December 31, 1997, 1998, 1999, 2000 and 2001 have been derived from our audited consolidated annual financial statements. The following selected consolidated financial data at and for the nine months ended September 30, 2001 and 2002 have been derived from our condensed consolidated quarterly financial statements, which are unaudited but in the opinion of our management reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for such periods. Results of operations for interim periods are not necessarily indicative of results to be expected for the full fiscal years. You should read this data in conjunction with 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and our financial statements and the notes thereto included elsewhere in this prospectus. STANDARD MOTOR PRODUCTS, INC.
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------- ------------------- 1997 1998 1999 2000 2001 2001 2002 ---- ---- ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales(1).................... $538,405 $640,179 $653,451 $601,392 $591,652 $492,581 $488,034 Gross profit(1)................. 173,352 183,657 170,809 162,701 139,055 117,774 125,870 Operating income................ 9,446 43,781 30,223 30,711 15,123 22,146 29,580 Earnings (loss) from continuing operations..................... (1,620) 22,257 8,685 10,230 312 6,642 14,095 Net earnings (loss)(2)(3)....... (34,524) 22,257 7,625 9,729 (2,485) 3,845 (19,933) PER SHARE DATA: Earnings (loss) from continuing operations: Basic........................ $ (0.12) $ 1.70 $ .66 $ .86 $ .03 $ .56 $ 1.18 Diluted...................... (0.12) 1.69 .66 .85 .03 .56 1.14 Net earnings (loss) per common share: Basic........................ (2.63) 1.70 .58 .82 (.21) .33 (1.68) Diluted...................... (2.63) 1.69 .58 .81 (.21) .33 (1.16) OTHER DATA: EBITDA(4)....................... $ 29,101 $ 59,527 $ 45,210 $ 50,083 $ 36,795 $ 37,758 $ 43,020 Depreciation and amortization... 18,980 17,274 17,230 18,922 18,909 14,072 11,715 Capital expenditures............ 15,597 15,325 14,423 16,652 13,740 11,125 5,804 Dividends....................... 4,197 2,092 4,456 4,324 4,236 3,175 3,214 BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents....... $ 16,809 $ 23,457 $ 40,380 $ 7,699 $ 7,496 $ 11,814 $ 9,672 Working capital................. 177,426 178,324 205,806 188,091 228,356 271,560 254,512 Total assets.................... 577,137 521,556 556,021 549,396 509,429 578,757 565,446 Total debt...................... 239,379 159,708 195,425 202,591 205,925 243,796 208,350 Long-term debt (excluding current portion)............... 159,109 133,749 163,868 150,018 200,066 237,392 200,879 Stockholders' equity............ 183,782 205,025 203,518 194,305 185,687 192,407 165,753
- --------- (1) On January 1, 2002, we adopted the guidelines of the Emerging Issues Task Force (EITF) entitled 'Accounting for Certain Sales Incentives' and 'Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products.' These guidelines address when sales incentives and discounts should be recognized and the accounting for certain costs incurred by a vendor on behalf of a customer, as well as where the related revenues and expenses should be classified in the financial statements. Net sales and gross profit amounts for the periods prior to 2002 included in this prospectus have been reclassified to conform to our 2002 presentation. As a result, certain costs of approximately $6.1 million, $21.8 million, $18 million, $25.4 million, $30.4 million and $25.9 million have been reclassified for December 31, 1997, 1998, 1999, 2000 and 2001 and the nine months ended September 30, 2001, respectively. (2) Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ('SFAS No. 142'). In accordance with SFAS No. 142, goodwill will no longer be amortized, but instead, will be subject to an (footnotes continued on next page) 29 (footnotes continued from previous page) annual review for potential impairment. As a result, we recorded an impairment loss on goodwill as a cumulative effect of accounting change of $16 million, net of tax, or $1.35 per diluted share, during the first quarter of 2002. The impairment loss relates to goodwill pertaining to certain of our reporting units with our European Operations (classified as 'All Other' for segment reporting) and with our Temperature Control Division and we recorded charges of $8.6 million related to our European Operations and $7.4 million related to our Temperature Control Division. Upon adoption of SFAS No. 142, our earnings before extraordinary item and net earnings for basic and diluted earnings per share adjusted to exclude goodwill amortization expense (net of taxes) are as follows:
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------ ------------- 1997 1998 1999 2000 2001 2001 ---- ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Reported earnings (loss) before extraordinary item.. (1,620) 22,257 8,685 10,230 312 6,642 Add back: goodwill amortization expense, net of tax.................... 1,972 2,368 2,439 2,733 2,498 1,868 -------- ------- ------- ------- ------- ------ Adjusted earnings before extraordinary item........ $ 352 $24,625 $11,124 $12,963 $ 2,810 $8,510 -------- ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- ------ Basic earnings per share: Reported basic earnings (loss) per share before extraordinary item........ $ (0.12) $ 1.70 $ 0.66 $ 0.86 $ 0.03 $ 0.56 Add back: goodwill amortization expense, net of tax.................... 0.15 0.18 0.19 0.23 0.21 0.15 -------- ------- ------- ------- ------- ------ Adjusted basic earnings per share before extraordinary item........ $ 0.03 $ 1.88 $ 0.85 $ 1.09 $ 0.24 $ 0.71 -------- ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- ------ Diluted earnings per share: Reported diluted earnings per share before extraordinary item........ $ (0.12) $ 1.69 $ 0.66 $ 0.85 $ 0.03 $ 0.56 Add back: goodwill amortization expense, net of tax.................... 0.15 0.18 0.19 0.23 0.21 0.15 -------- ------- ------- ------- ------- ------ Adjusted diluted earnings per share before extraordinary item........ $ 0.03 $ 1.87 $ 0.85 $ 1.08 $ 0.24 $ 0.71 -------- ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- ------
(table continued on next page) 30 (table continued from previous page)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------ ------------- 1997 1998 1999 2000 2001 2001 ---- ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Reported net earnings (loss).................... $(34,524) $22,257 $ 7,625 $ 9,729 $(2,485) $3,845 Add back: goodwill amortization expense, net of tax.................... 1,972 2,368 2,439 2,733 2,498 1,868 -------- ------- ------- ------- ------- ------ Adjusted net earnings (loss).................... $(32,552) $24,625 $10,064 $12,462 $ 13 $5,713 -------- ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- ------ Basic net earnings (loss) per share: Reported basic net earnings (loss) per share......... $ (2.63) $ 1.70 $ 0.58 $ 0.82 $ (0.21) $ 0.33 Add back: goodwill amortization expense, net of tax................... 0.15 0.18 0.19 0.23 0.21 0.15 -------- ------- ------- ------- ------- ------ Adjusted basic net earnings (loss) per share......... $ (2.48) $ 1.88 $ 0.77 $ 1.05 $ -- $ 0.48 -------- ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- ------ Diluted net earnings (loss) per share: Reported diluted net earnings (loss) per share.................... $ (2.63) $ 1.69 $ 0.58 $ 0.81 $ (0.21) $ 0.33 Add back: goodwill amortization expense, net of tax................... 0.15 0.18 0.19 0.23 0.21 0.15 -------- ------- ------- ------- ------- ------ Adjusted diluted net earnings (loss) per share.................... $ (2.48) $ 1.87 $ 0.77 $ 1.04 $ -- $ 0.48 -------- ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- ------
(3) For the nine months ended September 30, 2002, we recorded an after tax charge of $18 million as a loss from discontinued operations to account for potential costs associated with our asbestos-related liability. See 'Risk Factors -- We may be materially adversely affected by asbestos claims arising from products sold by our former brake business, as well as by other product liability claims' for a more detailed discussion of the risks we face in connection with our exposure to asbestos-related claims. (4) EBITDA is defined as earnings from continuing operations before interest expense, income taxes, depreciation and amortization. EBITDA is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for operating income or net earnings or loss for purposes of analyzing our operating performance or financial position. EBITDA is not necessarily comparable to similarly titled measures for other companies. 31 The following selected combined financial data at and for the years ended December 31, 2000 and 2001 and for the nine months ended September 30, 2002 have been derived from the audited combined financial statements of Dana's EMG Business. You should read this data in conjunction with the financial statements and the notes thereto of Dana's EMG Business included elsewhere in this prospectus. DANA'S ENGINE MANAGEMENT GROUP(1)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, -------------------------- -------------- 2000 2001 2002 ---- ---- ---- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales................................................ $357,475 $297,796 $229,137 Loss before income taxes................................. (87,797) (101,531) (46,593) Net loss................................................. (52,121) (62,467) (28,497) OTHER DATA: EBITDA(2)................................................ $(68,904) $(81,706) $(33,639) Depreciation and amortization............................ 18,802 19,216 12,810 Capital expenditures..................................... 21,557 1,378 1,560 BALANCE SHEET DATA (AT PERIOD END)(3): Cash and cash equivalents................................ $ -- $ 292 $ 734 Working capital.......................................... 172,548 89,392 93,347 Total assets............................................. 391,394 264,184 247,035 Combined equity.......................................... 317,940 170,342 156,864
- --------- (1) The combined financial data of Dana's EMG Business include its water pump and fuel pump product lines, which product lines we will not acquire and which product lines we deem immaterial in amount. (2) EBITDA is defined as earnings from continuing operations before interest expense, income taxes, depreciation and amortization. EBITDA is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for operating income or net earnings or loss for purposes of analyzing our operating performance or financial position. EBITDA is not necessarily comparable to similarly titled measures for other companies. (3) Balance sheet data at December 31, 2000 were derived from the financial records of Dana's EMG Business and are unaudited. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and the notes thereto. This discussion summarizes the significant factors affecting our results of operations and the financial condition of our business during each of the fiscal years in the three year period ended December 31, 2001, and the first three fiscal quarters of 2002. BUSINESS OVERVIEW We are a leading independent manufacturer and distributor of replacement parts for motor vehicles in the automotive aftermarket industry. We are organized into two principal operating divisions, each of which focuses on a specific segment of replacement parts. Our Engine Management Division manufactures ignition and emission parts, on-board computers, ignition wires, battery cables and fuel system parts. Our Temperature Control Division manufactures and remanufactures air conditioning compressors, and other air conditioning and heating parts. We sell our products primarily in the United States and Canada. We also sell our products through distributors in Latin America and Europe. CUSTOMERS. We distribute our products through a variety of distribution channels, including wholesale distributors, retail chains, service chains and original equipment dealers. Our warehouse distribution channel represents 65% of our consolidated net sales for the nine months ended September 30, 2002. Our retail channel of distribution has grown significantly from approximately $41 million in consolidated net sales to retailers in 1993 (representing 7% of consolidated net sales) to approximately $107 million in 1997 (representing 20% of consolidated net sales), and to approximately $159 million in 2001 (representing 27% of consolidated net sales). In 1997, we commenced distributing our products through the original equipment service supplier channel, and sold approximately $3 million in consolidated net sales to original equipment service suppliers in 1997 (representing 0.6% of consolidated net sales), which increased to approximately $10 million in 2001 (representing 1.7% of consolidated net sales). The automotive aftermarket is highly competitive. We have in the past and may in the future lose customers or lose a particular product line of a customer over time, and to generate new customers to replace ones we have lost. For example, in early 2000 we lost a major temperature control retail customer and then regained this customer in 2001. SEASONALITY. Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year and revenues generally being recognized at the time of shipment. It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control segment of our business. In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather. For example, a cool summer may lessen the demand for our Temperature Control products, while a hot summer may increase such demand. As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received. During this period, our working capital requirements are typically funded by borrowing from our revolving credit facility. The seasonality of our business offers significant operational challenges in our manufacturing and distribution functions. To limit these challenges and to provide a rapid turnaround time of customer orders, we traditionally offer a pre-season selling program, known as our 'Spring Promotion', in which customers are offered a choice of a price discount or longer payment terms. See 'Risk Factors -- Our business is seasonal and is subject to substantial quarterly fluctuations, which impact our quarterly performance and working capital requirements' for a more detailed discussion of the risks related to the seasonality of our business. INVENTORY MANAGEMENT. We instituted an aggressive inventory reduction campaign initiated in 2001. We targeted a minimum $30 million inventory reduction in 2001, but exceeded our goal by 33 reducing inventory by $57 million that year. Importantly, while reducing inventory levels, we maintained customer service fill rate levels of approximately 93%. We face inventory management issues as a result of warranty and overstock returns. Many of our products carry a warranty ranging from a 90-day limited warranty to a lifetime limited warranty, which generally covers defects in materials or workmanship and failure to meet industry published specifications. In addition to warranty returns, we also permit our customers to return products to us within customer-specific limits in the event that they have overstocked their inventories. In particular, the seasonality of our Temperature Control Division requires that we increase our inventory during the winter season in preparation of the summer selling season and customers purchasing such inventory have the right to make returns. In 1999, our profits were negatively affected by warranty and overstock returns in excess of our initial estimates. See 'Risk Factors -- We may incur material losses and significant costs as a result of warranty-related returns by our customers in excess of anticipated amounts' and 'Risk Factors -- Our profitability may be materially adversely affected as a result of overstock inventory-related returns by our customers in excess of anticipated amounts' for more detailed discussions of the risks we face in connection with warranty and overstock returns by our customers. In order to better control warranty and overstock return levels, beginning in 2000 we tightened the rules for authorized warranty returns, placed further restrictions on the amounts customers can return and instituted a program so that our management can better estimate potential future product returns. In addition, with respect to our conducting compressors, our most significant customer product warranty returns, we established procedures whereby a warranty will be voided if a customer does not follow a twelve step warranty return process. ACQUISITION. On February 7, 2003, we signed an agreement to purchase Dana's EMG Business, for a purchase price equal to the closing net book value of the business, subject to a maximum purchase price of $125 million. Dana's EMG Business is a leading manufacturer of aftermarket parts in the automotive industry focused exclusively on engine management. Dana's EMG Business manufactures ignition systems, emission parts, engine computers, ignition wires, battery cables and fuel system parts. Customers of Dana's EMG Business include NAPA Auto Parts, CSK Auto, O'Reilly Automotive and Pep Boys, none of which is currently a material customer of our Engine Management Division. We intend to integrate Dana's EMG Business into our Engine Management Division within 18 months from the closing of the acquisition. ASBESTOS CONTINGENCIES. In 1986, we acquired a brake business, which we subsequently sold in March 1998 and which is accounted for as a discontinued operation in the accompanying consolidated annual and quarterly financial statements. When we originally acquired this brake business, we assumed future liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller of the acquired brake business. In accordance with the related purchase agreement, we agreed to assume the liabilities for all new claims filed on or after September 1, 2001. Our ultimate exposure will depend upon the number of claims filed against us on or after September 1, 2001 and the amounts paid for indemnity and defense thereof. To date, the amounts paid for settled claims have been immaterial. We do not have insurance coverage for the defense and indemnity costs associated with the claims we face. In evaluating our potential asbestos-related liability, we have considered various factors including, among other things, an actuarial study performed by a leading actuarial firm with expertise in assessing asbestos-related liabilities, our settlement amounts to date, the incidence of claims, the mix of the injuries of the plaintiffs, the number of cases pending against us and whether there are any co-defendants, the jurisdiction in which lawsuits are filed, and the status and results of settlement discussions. Actuarial consultants with experience in assessing asbestos-related liabilities conducted a study to estimate our potential claim liability as of September 30, 2002. The methodology used to project asbestos-related liabilities and costs in the study considered: (1) historical data available from publicly available studies; (2) an analysis of our recent claims history to estimate likely filing rates for the remainder of 2002 through 2052; (3) an analysis of our currently pending claims; and (4) an analysis of our settlements to date in order to develop average settlement values. Based upon all the information considered by the actuarial 34 firm, the actuarial study estimated an undiscounted liability for settlement payments ranging from $27.3 million to $58 million for the period through 2052. Accordingly, based on the information contained in the actuarial study and all other available information that we considered, we recorded an after tax charge of $16.9 million as a loss from discontinued operations during the third quarter of 2002 to reflect such liability. At December 31, 2001, approximately 100 cases were outstanding for which we were responsible for any related liabilities. At December 31, 2002, the number of cases outstanding for which we were responsible for related liabilities increased to approximately 2,500, which include approximately 1,600 cases filed in December 2002 in Mississippi. We believe that these Mississippi cases filed against us in December 2002 were due in large part to potential plaintiffs accelerating the filing of their claims prior to the effective date of Mississippi's tort reform statute in January 2003, which statute eliminated the ability of plaintiffs to file consolidated cases. We concluded that no amount within the range of settlement payments was more likely than any other and, therefore, recorded the low end of the range as the liability associated with future settlement payments through 2052 in our condensed consolidated financial statements, in accordance with generally accepted accounting principles. Given the uncertainties associated with projecting such matters into the future, the short period of time that we have been responsible for defending these claims, and other factors outside our control, we can give no assurance that additional provisions will not be required. We will continue to monitor the circumstances surrounding these potential liabilities in determining whether additional provisions may be necessary. At the present time, however, we do not believe that any additional provisions would be reasonably likely to have a material adverse effect on our liquidity or consolidated financial position. See 'Risk Factors -- We may be materially adversely affected by asbestos claims arising from products sold by our former brake business, as well as by other product liability claims' for a more detailed discussion of the risks we face in connection with our exposure to asbestos-related claims. RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2002 TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001 SALES. On a consolidated basis, net sales in the third quarter of 2002 were $182.6 million, $25.9 million, or 16.5%, higher, compared to $156.7 million of net sales recorded in the third quarter of 2001. The sales increase was attributable to increased sales of Temperature Control products and Engine Management products. Temperature Control consolidated net sales increased $15.7 million, or 21.4%, compared to the third quarter of 2001, as a result of warmer temperatures in key demographic areas. Engine Management consolidated net sales also improved $9.1 million, or 12.3%, in the third quarter of 2002 compared to the third quarter of 2001, assisted by the acquisition of new accounts. GROSS MARGINS. Gross margins, as a percentage of consolidated net sales, improved 1.5 percentage points to 27.2% in the third quarter of 2002 from 25.7% in the comparable quarter of 2001. Gross margins in our Engine Management Division were 29.4% for the three months ended September 30, 2002 compared to 29.5% for the three months ended September 30, 2001. Gross margins in Temperature Control Division were 25% for the three months ended September 30, 2002 compared to 21.3% for the three months ended September 30, 2001. The improvement in gross margins reflects the return to more normal production levels and our ongoing cost reduction activities. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $32.5 million in the third quarter of 2002, compared to $31.1 million in the third quarter of 2001. The increase was primarily attributable to higher insurance and employee benefit costs. As a percentage of net sales, however, selling, general and administrative expenses decreased to 17.8% in 2002 from 19.8% in 2001. Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). In accordance with 35 SFAS No. 142, goodwill will no longer be amortized, but instead, will be subject to an annual review for potential impairment. The adoption of the new accounting standard eliminated goodwill amortization expense of $0.6 million after tax for the third quarter of 2002. INCOME FROM OPERATIONS. Operating income increased by $7.9 million to $17.1 million in the third quarter of 2002, compared to $9.2 million in the third quarter of 2001, primarily due to improvements in net sales and gross margins, as discussed above. INTEREST EXPENSE. Interest expense decreased by $1.2 million in the third quarter of 2002, compared to the same period in 2001, due to lower average borrowings and lower interest rates. INCOME TAX PROVISION. The effective tax rate was 32% for the third quarter of 2002 and the third quarter of 2001. The effective tax rate increased in the third quarter of 2002 from 28% recorded in the first six months of 2002 due to higher domestic earnings and lower earnings from foreign subsidiaries. COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 SALES. On a consolidated basis, net sales for the nine month period ended September 30, 2002 were $488 million, a slight decrease of $4.6 million, or 0.9%, compared to $492.6 million in the same period in 2001. The decrease resulted from a $19.3 million decrease in the comparative year-to-date net sales in our Temperature Control Division. Consolidated net sales were unfavorable due to a combination of a loss of a few locations at a major retailer and a continued reduction of distributor inventories during the first six months of the year, as those distributors worked off inventory left over from previous mild summer seasons. Our Engine Management Division's net sales increased by $12.9 million for reasons discussed previously, mitigating the overall decrease. GROSS MARGINS. Gross margins, as a percentage of consolidated net sales, increased 1.9 percentage points to 25.8% for the nine months ended September 30, 2002 from 23.9% in the same period of 2001. The improvement in gross margins reflects the return to more normal production levels as the aggressive and successful inventory reduction campaign in 2001 is now benefitting 2002. Gross margins in our Engine Management Division were 30.0% for the nine months ended September 30, 2002 compared to 26.9% for the nine months ended September 30, 2001. Gross margins in our Temperature Control Division were 20.7% for the nine months ended September 30, 2002 compared to 18.9% for the nine months ended September 30, 2001. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased slightly to $96.3 million for the nine month period ended September 30, 2002, compared to $95.6 million in the same period of 2001. The increase is primarily attributable to insurance and employee benefit costs. Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ('SFAS No. 142'). In accordance with SFAS No. 142, goodwill will no longer be amortized, but instead, will be subject to an annual review for potential impairment. Using the discounted cash flows method, based on our weighted average cost of capital and market multiples, we reviewed the fair values of each of our reporting units. The recent decline in economic and market conditions, higher integration costs than anticipated and the general softness in the automotive aftermarket has caused a decrease in the fair values of certain of our reporting units. As a result, we recorded an impairment loss on goodwill as a cumulative effect of accounting change of $16 million, net of tax, or $1.35 per diluted share during the first quarter of 2002. The impairment loss relates to goodwill pertaining to certain of our reporting units within our European operations (classified as 'All Other' for segment reporting) and within our Temperature Control Division and we recorded charges of $8.6 million related to our European Operations and $7.4 million related to our Temperature Control Division. The adoption of the new accounting standard eliminated goodwill amortization expense of $1.9 million after tax for the nine months ended September 30, 2002. 36 INCOME FROM OPERATIONS. Operating income increased by $7.5 million to $29.6 million for the nine month period ended September 30, 2002, as compared to $22.1 million for the same period of 2001, primarily due to improved gross margins, as discussed above. INTEREST EXPENSE. Interest expense decreased $3.1 million for the nine month period ended September 30, 2002, compared to the same period in 2001, due to lower average borrowings and lower interest rates. COMPARISON OF FISCAL YEARS 2001 AND 2000 SALES. After giving consideration to the adoption of Emerging Issues Task Force guidelines entitled 'Accounting for Certain Sales Incentives' and 'Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products', consolidated net sales in 2001 were $591.7 million, a decrease of $9.7 million compared to consolidated net sales of $601.4 million in 2000. The decrease in consolidated net sales was a result of decreases in our existing traditional business lines and higher costs for adding a new customer. The decrease was mitigated by the Engine Management Division, which benefited from a full year of sales to the new major customer added during the third quarter of 2000 (with incremental sales of approximately $6 million in 2001), along with additional wire set business from a major group of warehouse distributors. The Temperature Control Division regained a major retail customer we had lost in early 2000 (this customer accounted for consolidated net sales of approximately $30 million in 2001, excluding filling the initial 'pipeline' of orders from such customer). Excluding this new business, sales to existing accounts decreased, primarily a result of another cool summer for air conditioning, and the continuing inventory reduction program on the part of many of our customers. GROSS MARGINS. Gross margins, as a percentage of consolidated net sales, decreased to 23.5% in 2001, from 27.1% in 2000. Gross margins in our Engine Management Division were 26.4% in 2001 compared to 29.4% in 2000. Gross margins in our Temperature Control Division were 18.2% in 2001 compared to 23.4% in 2000. The decrease in gross margins was primarily due to our planned inventory reduction programs. The reduction in gross margins was across all product lines as we originally targeted a minimum $30 million inventory reduction in 2001. Actual inventory reduction amounted to $57 million, while we maintained high customer service fill levels. These changes reflect the impact of underabsorbed overhead costs as a result of cutting production and temporarily closing manufacturing facilities at both Engine Management and Temperature Control facilities. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $8 million to $124 million in 2001, compared to $132 million in 2000. This decrease reflected the focus on our cost reduction efforts, with benefits primarily in the marketing and distribution areas in our Temperature Control Division. INCOME FROM OPERATIONS. Operating income decreased by $15.6 million compared to 2000, primarily due to the lower gross margins as discussed above. OTHER (INCOME) EXPENSES, NET. Other income, net increased by $2.3 million compared to 2000. The increase was primarily due to the reduction of fees related to the termination of the sale of accounts receivable agreement and an increase in interest and dividend income. INTEREST EXPENSE. Interest expense decreased slightly by $0.6 million in 2001 compared to 2000, due to lower interest rates and lower average borrowings. INCOME TAX PROVISION. Income tax expense decreased to $0.1 million in 2001 from $2.9 million in 2000. The decrease was primarily due to overall lower earnings. The effective tax rate increased from 22% in 2000 to 32% in 2001. The increase was primarily due to a decrease in earnings from our foreign subsidiaries, which have lower tax rates than the United States statutory rate. 37 COMPARISON OF FISCAL YEARS 2000 AND 1999 SALES. After giving consideration to the adoption of Emerging Issues Task Force guidelines entitled 'Accounting for Certain Sales Incentives' and 'Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products', consolidated net sales in 2000 were $601.4 million, a decrease of $52.1 million or 8% when compared to 1999. Consolidated net sales in our Temperature Control Division decreased by $49.2 million primarily due to a significant retail customer achieving substantial inventory reductions, loss of a major retail customer early in the year (contributed approximately $18.5 million to the overall decrease), and a very cool and wet summer in the northeast and mid-west. The customer that was lost in 2000 was regained in the beginning of 2001. The Engine Management Division's consolidated net sales in 2000 were $288.2 million, an increase of $3 million or 1% when compared to 1999. The slight increase reflects the successful addition of a major new customer in the third quarter of 2000 (this contributed approximately $6.4 million of consolidated net sales in 2000) offsetting declines in our traditional business. Significant warranty and overstock returns in our Temperature Control Division adversely impacted financial performance in 1999. With respect to warranty returns, after thorough analysis of related warranty claims, we have taken specific actions to reduce compressor warranty returns in 2000 and beyond. We have instituted new counterperson and installer training programs, increased emphasis on clinics and professional seminars for installers and tightened rules for authorized warranty returns. In 2000, we began to require that any compressor returned for warranty credit must have either a service repair work order or a purchase receipt providing proof that a number of additional auxiliary parts were replaced concurrently (i.e., accumulator, orifice tube, in-line filter and condenser) and that an air conditioning system flushing with an approved solvent was performed. If our defined twelve step process is not performed by the customer, the warranty is void. With respect to overstock returns, 1999 was adversely impacted by our decision to accept customer returns in connection with our decision to discontinue the offering of certain Temperature Control products. We did not have to make any such decisions in 2000. In addition, during 2000, we placed further restrictions on the amounts that customers can return as overstock returns. GROSS MARGINS. Gross margins, as a percentage of consolidated net sales, increased to 27.1% in 2000, from 26.1% in 1999. Gross margins in our Engine Management Division were 29.4% in 2000 compared to 29.5% in 1999. Gross margins in our Temperature Control Division were 23.4% in 2000 compared to 21.1% in 1999. Temperature Control gross margins were positively impacted by reduced customer returns and an increase in net pricing. Engine Management margins were positively impacted by increased sales volume, increased net pricing and certain cost reduction activities discussed below. In connection with cost reduction activities, the year 2000 was benefited by the consolidation of three distribution centers into one in our Temperature Control Division, consolidation of our two fan clutch operations into one in our Temperature Control Division, and the moving of two U.S. manufacturing plants to a single facility in Mexico in the Engine Management Division. The aforementioned initiatives improved the operating income of our Temperature Control Division by approximately $2 million and that of our Engine Management Division by approximately $1.5 million. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased approximately $8.6 million in 2000, primarily due to the cost reduction efforts described in the previous paragraph and a decrease in bad debt expense compared to 1999. INCOME FROM OPERATIONS. Operating income increased by $0.5 million, or 1.6% in 2000. Results of the Engine Management Division, compared to a year ago, reflected an increase in operating income of $11.8 million due to higher sales, favorable overhead absorption and cost reduction activities. Operating income at the Temperature Control Division decreased by $6 million, primarily due to the same reasons for the consolidated net sales decrease cited above. We 38 strengthened our controls and procedures for accepting authorized customer warranty returns in 2000, and have completed the consolidation of our manufacturing and distribution facilities. These changes had a favorable impact on 2000 results and are expected to provide future benefits. OTHER (INCOME) EXPENSES, NET. Other income, net, was approximately $0.5 million, comparing favorably to other expense, net of $2.2 million in 1999. This is primarily the result of our 1999 decision to exit the Heat Battery joint venture in Canada. INTEREST EXPENSE. Interest expense increased by approximately $2.1 million to $18 million in 2000, primarily due to higher average borrowings resulting from elevated inventory levels and decreased sales. INCOME TAX PROVISION. Income tax expense decreased from $3.3 million in 1999 to $2.9 million in 2000. The effective tax rate also decreased from 28% in 1999, to 22% in 2000, due to an increase in earnings from our Puerto Rico and Hong Kong subsidiaries, which have lower tax rates than the United States statutory rate. On March 13, 2000, we prepaid the entire outstanding balance of the 10.22% senior note payable in the amount of $14 million. In connection with this prepayment, we incurred an extraordinary loss of $0.5 million net of taxes, for prepayment penalties and the write-off of deferred loan costs. IMPACT OF INFLATION Although inflation is not a significant issue, management believes it will be able to continue to minimize any adverse effect of inflation on earnings through cost reduction programs, including the sale of manufactured products, and, where competitive situations permit, selling price increases. FUTURE RESULTS OF OPERATIONS We continue to face competitive pressures. In order to sell at competitive prices while maintaining profit margins we are continuing to focus on overhead and cost reductions. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES. During the nine months ended September 30, 2002, cash provided by operations amounted to $26.4 million, compared to $4.3 million in the same period of 2001. The increase is primarily attributable to improved earnings from continuing operations, higher accounts payable and continued reductions in inventory initially offset by an increase in accounts receivable, a direct result of net sales increasing by $25.9 million for the quarter. In 2001, cash provided by operations amounted to $40.2 million, compared to cash used in operations of $1 million in 2000 and cash provided by operations of $21 million in 1999. The improvement is primarily attributable to our efforts to reduce inventory levels from their elevated levels of December 31, 2000. This improvement was offset by a reduction in accounts payable and a decrease in earnings. For the fiscal year ended December 31, 2001, inventory decreased by $57 million as a result of our inventory reduction program, which resulted primarily from reduced production and purchases, and where needed, the temporary closing of manufacturing facilities. Reductions were realized in both the Engine Management and Temperature Control Divisions. Inventory turnover was 2.1x in 2001, versus 1.8x in 2000, on a rolling twelve-month basis, reflecting the high inventory levels at December 31, 2000. During the nine months ended September 30, 2002, inventory was further decreased by $21 million. In comparing 2000 and 1999, there are two reasons for the increase in inventory levels and the decrease in inventory turns (1.8x in 2000 versus 2.7x in 1999). First, with respect to the Temperature Control Division, the business is highly seasonal with sales of air conditioning parts being greatest in the second and third quarters of the year. This seasonality requires the build-up of inventory levels prior to the main selling season. As discussed in our comparison of the year 39 2000 and 1999, Temperature Control sales were significantly below the prior year and forecasted amounts. Although significant reductions were made to Temperature Control production levels in 2000, the shortfall in consolidated net sales more than off-set such reductions. Second, with respect to the Engine Management Division, in the third quarter of 2000, Engine Management successfully added a new major customer which required inventory levels to be increased in order to fill the initial 'pipeline' of orders. In addition, the customer launch for new orders was extended into 2001, versus the fourth quarter of 2000, as originally planned. INVESTING ACTIVITIES. Cash used in investing activities was $24.7 million in the nine months ended September 30, 2002, compared to $12.2 million in the same period of 2001. The increase was primarily due to acquisitions, partially offset by decreases in capital expenditures. Assets acquired consist primarily of property, plant and equipment, receivables and inventory. All acquisitions were financed with funds provided under our revolving credit facility and seller financing. In January 2002, we acquired the assets of a temperature control business from Hartle Industries for $4.8 million. The assets consist primarily of property, plant and equipment, and inventory. In April 2002, we acquired Carol Cable Limited, a manufacturer and distributor of wire sets based in the United Kingdom, for approximately $1.7 million. The assets from this acquisition consist primarily of property, plant and equipment, and inventory. In May 2002, we purchased the aftermarket fuel injector business of Sagem Inc., a subsidiary of Johnson Controls, for $10.5 million. Sagem Inc. is a basic manufacturer of fuel injectors and was our primary supplier prior to the acquisition. Assets acquired from this acquisition consist primarily of property, plant and equipment, and inventory. The purchase was partially financed by the seller ($5.4 million to be paid over a two year period), with the remaining funds being provided under our revolving credit facility. In 2001, cash used in investing activities was $14.2 million, compared to $18.7 million in 2000. The decrease is primarily due to a reduction in capital expenditures and acquisitions. Capital expenditures for the three most recent fiscal years ended December 31 totaled $13.7 million in 2001, $16.7 million in 2000 and $14.4 million in 1999. FINANCING ACTIVITIES. Cash used in financing activities was $0.3 million in the nine months ended September 30, 2002, compared to cash provided by financing activities of $13.2 million in the same period of 2001. The decreased borrowings reflect our focus on reducing capital employed in the business. Cash used in financing activities was $25.4 million in 2001, compared to $11.5 million in 2000. The increase in cash used was primarily due to our refinancing, as discussed below, offset by the discontinuance of stock repurchases. Dividends paid for the three most recent fiscal years ended December 31 were $4.2 million in 2001, $4.3 million in 2000 and $4.5 million in 1999. On February 7, 2003, we amended our revolving credit facility to provide for an additional $80 million commitment, subject to the terms and conditions therein, which will become effective upon the closing of our acquisition of Dana's EMG Business. This additional commitment increases the total amount available for borrowing under our revolving credit facility to $305 million. After applying all of the net proceeds from this offering to repay a portion of our outstanding indebtedness under our revolving credit facility, we intend to borrow the entire cash portion of the purchase price of Dana's EMG Business from our revolving credit facility upon the closing of the offering. Following the closing of the acquisition, we expect to have approximately $58.7 million of availability under this revolving credit facility. Availability under our revolving credit facility is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets, and includes the purchased assets of Dana's EMG Business. We expect such availability under the revolving credit facility, following the initial draw down at the acquisition closing, to be sufficient to meet our ongoing operating and integration costs. Direct borrowings under our revolving credit facility bear interest at the prime rate plus the applicable margin (as defined) or the LIBOR rate plus the applicable margin (as defined), at our option. Borrowings are collateralized by substantially all of our assets, including accounts 40 receivable, inventory and fixed assets, and those of our domestic and Canadian subsidiaries. Our credit facility prior to the acquisition provides for certain financial covenants limiting our capital expenditures and requiring us to maintain a certain tangible net worth at the end of each fiscal quarter. As of December 31, 2002, we were in compliance with our applicable financial covenants. Following our acquisition of Dana's EMG Business, the terms of our revolving credit facility provide for, among other provisions, new financial covenants requiring us, on a consolidated basis, (1) to maintain specified levels of EBITDA at the end of each fiscal quarter for the 12-month period then ended, through June 30, 2004, (2) to fall within specified levels of a fixed charge coverage ratio at the end of each fiscal quarter for the 12-month period then ended, and (3) to limit capital expenditure levels for each fiscal year through 2007. Our profitability and working capital requirements became more seasonal with the sales mix of our Temperature Control products. Our working capital requirements usually peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales, and payments on the receivables associated with such sales have yet to be received. These increased working capital requirements are funded by borrowings from our revolving credit facility. We anticipate that our present sources of funds will continue to be adequate to meet our needs for the next several years. During the years 1998 through 2000, our board of directors authorized multiple repurchase programs under which we could repurchase shares of our common stock. During such years, an aggregate of $26.7 million of common stock was repurchased to meet present and future requirements of our stock option programs and to fund our employee stock option plan. As of September 30, 2002, we had board authorization to repurchase additional shares at a maximum cost of $1.7 million. During the nine months ended September 30, 2002 and 2001, we did not repurchase any shares of our common stock. In July 2001, we entered into interest rate swap agreements to manage our exposure to interest rate changes. The swaps effectively convert a portion of our variable rate debt under the revolving credit facility to a fixed rate, without exchanging the notional principal amounts. At September 30, 2002, we had two outstanding interest rate swap agreements (in an aggregate notional principal amount of $75 million), one of which matured in January 2003 and one of which is scheduled to mature in January 2004. Under these agreements, we receive a floating rate based on the LIBOR interest rate, and pay a fixed rate of 4.92% on a notional amount of $45 million and 4.37% on a notional amount of $30 million. If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the interest rate swap agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as gain or loss in the statement of operations for the applicable period. On July 26, 1999, we issued our convertible debentures, payable semi-annually, in the aggregate principal amount of $90 million. The debentures are convertible into 2,796,120 shares of our common stock, and mature on July 15, 2009. The proceeds from the sale of the debentures were used to prepay an 8.6% senior note, reduce short term bank borrowings and repurchase a portion of our common stock. We sold certain accounts receivable to an independent financial institution through our wholly-owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. In May 1999, SMP Credit Corp. entered into a three year agreement whereby it could sell up to a $25 million undivided ownership interest in a designated pool of certain of these eligible receivables. This agreement was terminated in 2001 as part of our revolving credit facility described above. These sales were reflected as reductions of trade accounts receivable and the related fees and discounting expense were recorded as other expense. CRITICAL ACCOUNTING POLICIES We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout 'Management's Discussion and 41 Analysis of Financial Condition and Results of Operations,' where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 of the notes to our consolidated annual financial statements and Notes 2 and 3 of the notes to our condensed consolidated quarterly financial statements included elsewhere in this prospectus. Preparation of our consolidated annual and quarterly financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting periods. We can give no assurance that actual results will not differ from those estimates. REVENUE RECOGNITION. We derive our revenue primarily from sales of replacement parts for motor vehicles, from both our Engine Management and Temperature Control Divisions. We recognize revenue from product sales upon shipment to customers. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. SALES RETURNS AND OTHER ALLOWANCES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. The preparation of financial statements requires our management to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Specifically, our management must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends, and changes in customer demand when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Similarly, our management must make estimates of the uncollectability of our accounts receivables. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At September 30, 2002, we had a valuation allowance of $14.2 million, due to uncertainties related to our ability to utilize some of our deferred tax assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates, or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could materially impact our business, financial condition and results of operations. VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review, include the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and significant negative 42 industry or economic trends. With respect to goodwill, we test for potential impairment in the fourth quarter of each year as part of our annual budgeting process. We review the fair values of each of our reporting units using the discounted cash flows method and market multiples. OTHER LOSS RESERVES. We have numerous other loss exposures, such as environmental claims, product liability (including asbestos matters) and litigation. Establishing loss reserves for these matters requires the use of estimates and judgment of risk exposure and ultimate liability. We estimate losses using consistent and appropriate methods; however, changes to our assumptions could materially affect our recorded liabilities for loss. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ('FASB') issued Statement No. 143, Accounting for Asset Retirement Obligations ('Statement No. 143'), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, we will recognize a gain or loss on settlement. We are required and plan to adopt the provisions of Statement No. 143 for the quarter ending March 31, 2003. To accomplish this, we must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require us to gather market information and develop cash flow models. Additionally, we will be required to develop processes to track and monitor these obligations. The adoption of Statement No. 143 is not expected to have a material adverse effect on our financial statements. In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ('Statement No. 144'). Statement No. 144 requires that long-lived assets be reviewed for impairment whenever events and circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Additionally, Statement No. 144 broadens the presentation of discontinued operations to include components of an entity rather than being limited to a segment of the business. We adopted the provisions of Statement No. 144 as of January 1, 2002. The adoption had no effect on our financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections ('Statement No. 145'). Statement No. 145 eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary item of income and requires that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board No. 30, Reporting Results of Operations. Statement No. 145 also requires sales-leaseback accounting for lease modifications that have economic effects that are similar to sales-leaseback transactions, and makes various other technical corrections to existing pronouncements. Statement No. 145 will be effective for the year ending December 31, 2003. The adoption of Statement No. 145 is not expected to have a material effect on our financial statements. In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associates with Exit or Disposal Activities ('Statement No. 146'). Statement No. 146, which is effective prospectively for exit or disposal activities initiated after December 31, 2002, applies to costs associated with an exit activity, including restructurings, or with a disposal of long-lived assets. Those activities 43 can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. Statement No. 146 requires that exit or disposal costs are recorded as an operating expense when the liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal by itself will not meet the requirement for recognizing a liability and the related expense under Statement No. 146. Statement No. 146 grandfathers the accounting for liabilities that were previously recorded under EITF Issue 94-3. Statement No. 146 will have no effect on the restructuring costs recorded by us in 2002. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk, primarily related to foreign currency exchange and interest rates. These exposures are actively monitored by management. Our exposure to foreign exchange rate risk is due to certain costs, revenues and borrowings being denominated in currencies other than one of our subsidiary's functional currency. Similarly, we are exposed to market risk as the result of changes in interest rates which may affect the cost of our financing. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. We do not hold or issue derivative financial instruments for trading or speculative purposes. EXCHANGE RATE RISK We have exchange rate exposure, primarily, with respect to the Canadian dollar and the British pound. As of September 30, 2002, our financial instruments which are subject to this exposure are immaterial, therefore the potential immediate loss to us that would result from a hypothetical 10% change in foreign currency exchange rates would not be expected to have a material impact on our earnings or cash flows. This sensitivity analysis assumes an unfavorable 10% fluctuation in both of the exchange rates affecting both of the foreign currencies in which the indebtedness and the financial instruments described above are denominated and does not take into account the offsetting effect of such a change on our foreign-currency denominated revenues. INTEREST RATE RISK We manage our exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in our debt portfolio. To manage a portion of our exposure to interest rate changes, we have entered into interest rate swap agreements. At September 30, 2002, we had approximately $208.3 million in loans and financing outstanding, of which approximately $96.2 million bear interest at fixed interest rates and approximately $112.1 million bear interest at variable rates of interest. We invest our excess cash in highly liquid short-term investments. As a result of our refinancing agreement during the second quarter 2001, as described in the notes to our consolidated annual financial statements and our consolidated quarterly financial statements found elsewhere in this prospectus, our percentage of variable rate debt to total debt has increased from 32% at December 31, 2000 to 56% at December 31, 2001 and decreased to 54% at September 30, 2002. Depending upon the level of borrowings under our revolving credit facility, which may at times approach $200 million, the effect of a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate may have approximately $1 million negative impact on our earnings or cash flows. 44 THE AUTOMOTIVE AFTERMARKET Unless otherwise indicated, industry statistics included throughout this prospectus are based on reports of independent, third-party sources. The automotive aftermarket industry is comprised of a large, diverse number of manufacturers varying in product specialization and size. In addition to manufacturing, aftermarket companies allocate resources towards an efficient distribution process and product engineering in order to maintain the flexibility and responsiveness on which their customers depend. Aftermarket manufacturers must be efficient producers of small lot sizes and do not have to provide systems engineering support. Aftermarket manufacturers also must distribute, with rapid turnaround times, products for a full range of vehicles on the road. During periods of economic decline or weakness, more automobile owners may choose to repair their current automobiles using replacement parts rather than purchasing new automobiles, which benefits the automotive aftermarket industry, including suppliers like us. The automotive aftermarket industry is also dependent on new car sales, although to a lesser degree than original equipment manufacturers, or OEMs, and their suppliers, because these sales create the total number of cars available for repair. Despite the current economic climate, the current interest rate environment and aggressive financing programs by automakers has increased demand for new cars and trucks, which should benefit the automotive aftermarket manufacturers in the long term as vehicles age. The automotive aftermarket industry generated sales of approximately $179 billion in 2001. The automotive aftermarket industry has grown at a compound annual growth rate of 5.8% from 1992 through 2001. Despite significant consolidation in the industry, the automotive aftermarket continues to be very competitive and highly fragmented. The automotive aftermarket industry differs substantially from the OEM supply business. Unlike the OEM supply business that primarily follows trends in new car production, the automotive aftermarket industry's performance primarily tends to follow different trends, such as: growth in number of vehicles on the road; increase in average vehicle age; increase in total miles driven per year; new and modified environmental regulations; increase in pricing of new cars; and new car quality and related warranties. Traditionally, the supply arms of OEMs and the independent manufacturers who supply the original equipment part applications have supplied a majority of the business to new car dealer networks. However, Ford and General Motors have recently moved to make their supply arms more independent, which may provide future opportunities for independent automotive aftermarket manufacturers to supply replacement parts to the dealer networks of the original equipment vehicle manufacturers, both for warranty and out-of-warranty repairs. The primary customers of the automotive aftermarket manufacturers are national and regional warehouse distributors, large retail chains, automotive repair chains and the dealer service networks of the original equipment vehicle manufacturers, as illustrated below. 45 DISTRIBUTION CHANNELS [FLOW CHART] TRADITIONAL DISTRIBUTION CHANNEL RETAIL DISTRIBUTION CHANNEL STANDARD MOTOR PRODUCTS, INC. STANDARD MOTOR PRODUCTS, INC. WAREHOUSE DISTRIBUTOR AUTOMOBILE PARTS RETAILER JOBBING STORE Do-it-Yourselfer Installer Installer Dealer Do-it-Yourselfer ORIGINAL EQUIPMENT SERVICES VEHICLE MANUFACTURER PARTS AND SERVICES DEALER Installer Do-it-Yourselfer Jobber TRADITIONAL DISTRIBUTION CHANNEL. In the traditional distribution network, automotive replacement parts are distributed through a number of levels before reaching the final users. Standard Motor Products and its competitors sell their products to warehouse distributors who supply over 20,000 local auto parts jobbers. These jobbers, in turn, sell primarily to professional mechanics at service stations, garages and repair shops, and also to consumers who perform automotive repairs themselves (known as 'do-it-yourselfers'). Over the last ten years, there has been a trend toward consolidation in the distribution chain, both by warehouse distributors and retailers, as large firms, with their superior buying power and more efficient distribution systems, have gained market share at the expense of smaller, localized firms. The proliferation of new car models, which are both produced in greater varieties and carry more complex parts, may have hastened consolidation. This proliferation of new car models requires a much greater capital base to support a higher number and variety of parts that must be maintained in a warehouse distributor's inventory for same day delivery to mechanics. RETAIL DISTRIBUTION CHANNEL. Retail chains such as AutoZone, Advance Auto Parts, Pep Boys, CSK Auto and O'Reilly Automotive sell a substantial amount of automotive aftermarket parts. While both mechanics and do-it-yourselfers purchase aftermarket parts from retail chains, as automotive parts grow more complex, consumers may be less likely to service their own vehicles and may become more reliant on dealers and mechanics that have traditionally used 46 warehouse distributors as their parts suppliers. Retailers are currently expanding into the jobber market and warehouse distributors are seeking means to better serve do-it-yourselfers, possibly resulting in a long-term consolidation of the market. Through our strategy of serving all levels of the aftermarket industry, we believe that we are well-positioned to take advantage of this consolidation. A listing of the top five independent automotive retailers that distribute aftermarket parts is below. TOP FIVE INDEPENDENT AUTO PARTS RETAILERS
FISCAL YEAR RANK CHAIN 2001 STORES 2001 SALES(1) - ---- ----- ----------- ------------- 1 AutoZone (2)................................................ 3,040 $4,818,185 2 Advance Auto Parts (3)...................................... 2,484 2,517,639 3 Pep Boys (4)................................................ 628 1,765,314 4 CSK Auto (5)................................................ 1,130 1,438,585 5 O'Reilly Automotive (6)..................................... 875 1,092,112
Source: Annual Reports on Form 10-K filed with the SEC by each of the companies listed above. - --------- (1) Includes all sales volumes for these companies, which sales are provided in thousands. (2) For fiscal year ending August 25, 2001. (3) For fiscal year ending December 29, 2001. (4) For fiscal year ending February 2, 2002. (5) For fiscal year ending February 3, 2002. (6) For fiscal year ending December 31, 2001. ORIGINAL EQUIPMENT SERVICES. In 2001, there were approximately 21,800 new automobile dealers in the United States. In addition to new car sales, the majority of these automobile dealers sell 'name brand' aftermarket parts and accessories and also service vehicles. The products available through the dealers are purchased through the original equipment service network, or OES network, operated by OEMs. As part of the OES network, Standard Motor Products and its competitors sell their products directly to the vehicle manufacturers' parts and service segments. These segments then sell the products, usually under a vehicle manufacturer brand name, directly to the dealer who then sells them to the installers, jobbers and do-it-yourselfers. FACTORS INFLUENCING THE AUTOMOTIVE AFTERMARKET We believe that the automotive aftermarket industry is influenced by a variety of factors, including: growth in the number of vehicles on the road; increases in the number of drivers and number of vehicles per household; vehicles are on the road longer and driven more miles per year; automotive parts retailers are attempting to displace traditional jobbers; environmental laws are becoming more stringent; broader range in prices for replacement parts; vehicles are comprised of more complex systems, requiring a greater specialization of parts; new cars are being made better and have longer warranties; and greater need for increased repair expertise and technology. We believe that the net impact of the foregoing factors will result in a minimal rate of growth over the next several years for the North American automotive aftermarket industry. GROWTH IN THE NUMBER OF VEHICLES ON THE ROAD. From 1991 to 2001, the number of registered vehicles in the United States increased at an annual rate of approximately 2.1% to approximately 216.5 million vehicles, as represented by the graph below. Growth in light trucks in particular has been strong, increasing 3.8% in 2001 compared to 2000, continuing a decade of steady growth. Canada contributes 17 million registered light vehicles on the road and Mexico 47 contributes another 10 million of such vehicles, bringing the 2001 North American market to approximately 236 million registered light vehicles. VEHICLES IN USE -- UNITED STATES [PERFORMANCE GRAPH] (in millions)
CAGR (1991-2001): 2.1% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 - ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 175.00 181.00 185.00 190.00 191.00 195.00 200.00 197.00 208.00 212.00 216.00
Source: U.S. Department of Transportation and R.L. Polk & Co. INCREASES IN THE NUMBER OF DRIVERS AND NUMBER OF VEHICLES PER HOUSEHOLD. The number of drivers and the number of vehicles per household (vehicle penetration) impact the size of the aftermarket. In 2000, the number of licensed drivers reached roughly 190 million drivers, continuing an annual growth rate of 1.3% since 1991. On a per household basis, the number of vehicles increased to 1.91 per household in 2001, reflecting an annual growth rate of 1.83% since 1991. VEHICLES ARE ON THE ROAD LONGER AND MORE MILES ARE BEING DRIVEN PER YEAR. Approximately 40% of the 2001 vehicle population was ten years of age or older. More importantly, approximately 60% of the vehicles on the road are over six years of age, a segment which represents the primary customer base of the independent automotive aftermarket. Dealerships typically service vehicles newer than five years old, which do not contribute significant sales to aftermarket distributors or retailers. In 2001, the average car was 9.3 years old, compared to 8.1 years old in 1992. Trucks have also extended their average life to 8.5 years (see the following graph). The increase in average life per vehicle is attributable, among other things, to an increase in the structural integrity of vehicles as well as significant technological innovations in protecting automobiles from structural and exterior corrosion and improved quality in the major parts systems such as engines and transmissions. In addition, the number of miles driven each year has been steadily rising for the past decade. An increase in the number of miles driven results in greater wear on a vehicle and a greater need for replacement parts sold in the aftermarket. In 2000, the average miles driven per vehicle was approximately 11,988, a 16% increase from 1991. POPULATION OF VEHICLES BY AGE [PERFORMANCE CHART] Thousands of Vehicles
Less than 1 1 2 3 4 5 1995 2000 1995 2000 1995 2000 1995 2000 1995 2000 1995 2000 - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 10100 13000 14500 15500 13500 14500 12500 14500 12700 13000 12700 14700 6 7 8 9 10 11 1995 2000 1995 2000 1995 2000 1995 2000 1995 2000 1995 2000 - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 13500 13000 13500 12200 13200 10500 13200 10500 11500 10100 10000 11400 12 13 14 15 or more 1995 2000 1995 2000 1995 2000 1995 2000 - ---- ---- ---- ---- ---- ---- ---- ---- 6500 10100 5000 9000 4500 8500 29500 33500
Vehicle Age in Years Source: R.L. Polk & Co. AUTOMOTIVE PARTS RETAILERS ARE ATTEMPTING TO DISPLACE TRADITIONAL JOBBERS. We believe that more aftermarket parts are now being sold through the retail channel as these stores begin to serve professional mechanics as well as their traditional retail clients. Given that retailers have conveniently located stores already in place, they have been able to sell fast-moving product lines to the jobber client base by simply adding more inventory coverage, a same day delivery service, 48 and an overnight emergency order system. The increase in the number of retail outlets, serving a broader market volume (partially offset by a decrease in the number of jobbers), results in a net increase in the number of locations carrying a broader range of replacement parts. ENVIRONMENTAL LAWS ARE BECOMING MORE STRINGENT. Environmental pressures have imposed new standards on automobiles manufactured by the OEMs, as well as on existing automobiles. Recently, several states have begun to impose tighter emission controls at the inspection station, requiring otherwise 'clean' vehicles to undergo repair of their emissions systems in order to pass. These tighter emissions controls translate into a higher utilization of jobbers and service bays as these vehicles are forced to conform to tighter regulatory standards. The end result is a greater demand for aftermarket emission parts. In addition, the growth in anti-fluorocarbon legislation has made similar demands on the interior temperature control systems of the average vehicle. United States production of R-12 based refrigerants such as Freon was no longer permitted as of December 31, 1995, which has forced OEMs to replace the system with a recyclable coolant variant. As anti-ozone legislation increases, the average driver will be forced to replace his or her system as well with a variant that is not only more costly, but also requires a lengthy service bay visit. BROADER RANGE IN PRICES FOR REPLACEMENT PARTS. Many price conscious consumers have demanded lower prices for quality original equipment replacement parts for their aging cars with a limited remaining life. Aftermarket suppliers responded by supplying multiple versions of the same product at differing price/quality points. Supplying multiple versions of the same product has resulted in lower margins for aftermarket suppliers, and particularly suppliers who do not have the efficient distribution channels and production capabilities needed to handle lower margin sales. This factor is contributing heavily to the consolidation of automotive suppliers. Lower margin products have also made many of the aftermarket supplier products more attractive compared to original equipment supplier products in the replacement market, which may work to increase aftermarket suppliers' share of the automotive replacement parts business. We believe that in order to continue to offer high quality, low cost products it is important to be a large, cost-efficient supplier to the automotive aftermarket. VEHICLES ARE COMPRISED OF MORE COMPLEX SYSTEMS, REQUIRING A GREATER SPECIALIZATION OF PARTS. Vehicles are becoming increasingly complex in terms of their electronics, on a content per vehicle basis. While on average these parts have a greater longevity than the electromechanical parts they are replacing, we believe that the sheer volume of parts required and higher average prices per part outweigh any of the negative effects that longevity may have on aftermarket sales. In short, we believe that the more complicated the system, the greater the chance that a replacement part will be needed in some capacity. NEW CARS ARE BEING MADE BETTER AND HAVE LONGER WARRANTIES. As new technology makes its way into the interior of cars, it is also entering vehicles in terms of structural materials. New, corrosive-resistant steel and other materials make the average vehicle on the road today less likely to fail structurally, raising the life of the vehicle considerably. Many functional parts are now being designed to last for 100,000 miles of usage. The extension of the average new car warranty evidences the change in durability and quality in the structural and functional components of the vehicles. These longer warranties are likely to keep car owners returning to their dealer for servicing for a longer period of time, thus hurting aftermarket sales. GREATER NEED FOR INCREASED REPAIR EXPERTISE AND TECHNOLOGY. Late model domestic cars or imported vehicles require more expertise and technology to repair. As these have become a greater percentage of the vehicles on the road, non-dealer mechanics have had to invest in greater amounts of equipment and training to service them or risk losing business. While import vehicle owners may return more often to their dealer for servicing, we do not believe that this will substantially hurt aftermarket part sales. Non-dealer repair shops have been rapidly investing in technology and expertise to compete effectively with dealers in servicing import cars. The major replacement parts manufacturers have also responded by providing enhanced ongoing training of professional mechanics and telephonic services that assist mechanics in diagnosing repairs and installing parts. In addition, independent manufacturers are designing parts for ease of installation and providing specialty tools to speed the installation process. 49 BUSINESS OVERVIEW We are a leading independent manufacturer and distributor of replacement parts for motor vehicles in the automotive aftermarket industry. We are organized into two principal operating divisions, each of which focuses on a specific segment of replacement parts. Our Engine Management Division manufactures ignition and emission parts, on-board computers, ignition wires, battery cables and fuel system parts. Our Temperature Control Division manufactures and remanufactures air conditioning compressors, and other air conditioning and heating parts. We sell our products primarily to warehouse distributors and large retail chains in the United States and Canada. We also sell our products through distributors in Latin America and Europe. Our customers consist of many of the leading warehouse distributors, such as Carquest and NAPA Auto Parts, as well as many of the leading auto parts retail chains, such as Advance Auto Parts, AutoZone and O'Reilly Automotive. We distribute parts under our own brand names, such as Standard, Blue Streak and Four Seasons, and through private labels, such as Carquest and NAPA Auto Parts. In 2001, our consolidated net sales were $591.7 million, and our operating income was $15.1 million. The following charts set forth our consolidated net sales by operating division, geographic region and customer group as a percentage of consolidated net sales in 2001: [PERFORMANCE GRAPH] 2001 CONSOLIDATED NET SALES BY OPERATING DIVISION Other 7% Temperature Control 45% Engine Management 48% 2001 CONSOLIDATED NET SALES BY GEOGRAPHIC REGION Canada 5% Rest of the World 8% United States 87% 2001 CONSOLIDATED NET SALES BY CONSUMER GROUP Retail 27% Warehouse Distributors 65% Other 8% OUR STRATEGY Our goal is to grow revenues and earnings and deliver returns in excess of our cost of capital by providing high quality, low cost replacement parts in the engine management and temperature control automotive aftermarkets. The key elements of our strategy are as follows: CAPITALIZE ON THE ACQUISITION OF DANA'S EMG BUSINESS. The acquisition will allow us to combine Dana's EMG Business with our Engine Management Division, thereby creating opportunities to realize cost savings and grow earnings. We intend to integrate Dana's EMG Business into our Engine Management Division within 18 months from the closing of the acquisition, and intend to capitalize on the acquisition in the following ways: increase sales in our Engine Management business, through our access to Dana's EMG Business customer base and by strengthening our relationships with our existing customers; develop new and improved products to better satisfy the increasing requirements of our customers; rationalize manufacturing and distribution facilities to achieve more efficient operations and lower costs for ourselves and our customers; consolidate and centralize corporate functions such as sales and marketing, accounting, tax, information systems, human resources, cash management and risk management to eliminate redundant costs; improve cost structure by realizing increased economies of scale in the purchasing, processing, production and distribution of our products, including being able to bring new products to market faster and more efficiently by manufacturing more products ourselves, 50 rather than purchasing such products from third parties and then reselling such products to our customers; and increase the proportion of our total sales and profits from our Engine Management business which is more stable and predictable than our seasonal Temperature Control business. MAINTAIN OUR STRONG COMPETITIVE POSITION IN THE ENGINE MANAGEMENT AND TEMPERATURE CONTROL BUSINESSES. We are one of the leading independent manufacturers serving North America and other geographic areas in our core businesses of Engine Management and Temperature Control. We believe that our success is attributable to our emphasis on product quality, the breadth and depth of our product lines for both domestic and imported automobiles, and our reputation for outstanding customer service, as measured by rapid order turn-around times and high-order fill rates. We believe that the acquisition of Dana's EMG Business will enhance our success in these areas. To maintain our strong competitive position in our markets, we remain committed to the following: providing our customers with broad lines of high quality engine management and temperature control products, supported by the highest level of customer service and reliability; continuing to maximize our production and distribution efficiencies; continuing to improve our cost position; and focusing further our engineering development efforts. We believe our Engine Management Division will be strengthened by the acquisition of Dana's EMG Business, allowing us to offer improved and cost effective existing complimentary products and expand our customer base. PROVIDE SUPERIOR CUSTOMER SERVICE, PRODUCT AVAILABILITY AND TECHNICAL SUPPORT. Our goal is to increase sales to existing and new customers by leveraging our skills in rapidly filling orders, maintaining high levels of product availability and providing technical support in a cost-effective manner. In addition, our technically-skilled sales force of approximately 200 sales professionals provides product selection and application support to our customers. EVOLVE AND EXPAND OUR PRODUCT LINES. We intend to increase our sales by continuing to develop and expand the range of Engine Management and Temperature Control products that we offer to our customers. We are committed to investing the resources necessary to maintain and expand our technical capability to manufacture multiple product lines that incorporate the latest technologies developed by OEMs in North America and Europe. BROADEN OUR CUSTOMER BASE. Our goal is to increase our business by marketing our products more broadly to the distribution businesses of OEMs who sell products to new car dealer service areas. IMPROVE OPERATING EFFICIENCY AND COST POSITION. Our management places significant emphasis on improving our financial performance, by achieving operating efficiencies and improving asset utilization, while maintaining product quality and high customer order fill rates. We have a proven track record of managing costs and improving operating efficiency through consolidating redundant functions and realizing cost savings in our business. In 2001, we reduced our inventory level by $57 million while retaining customer fill rates of approximately 93%. We intend to continue to improve our operating efficiency and cost position by: increasing cost-effective vertical integration in key product lines through internal development; focusing on efficient inventory management, including warranty and overstock return management; 51 maintaining and improving our cost effectiveness and competitive responsiveness to better serve the automotive aftermarket customer base; adopting company-wide programs geared toward manufacturing and distribution efficiency; and initiating company-wide overhead and operating expense cost reduction programs, such as closing excess facilities. Following an effective integration of Dana's EMG Business into our company, we anticipate realizing additional operating efficiencies, cost savings and improved productivity. REDUCE OUR DEBT. Following an initial period during which our cash flows will be used to integrate Dana's EMG Business into our Engine Management Division, we intend to apply any excess cash flow from operations and the management of working capital to reduce our outstanding indebtedness. Further, we believe leveraging our capital expenditures with Dana's EMG Business will enhance our ability to generate increased cash flow for debt reduction. ACQUISITION HISTORY Over recent years, we have pursued an acquisition strategy focused on specific areas in engine management and temperature control, namely: the broadening of new product lines; the addition of low cost lines within the main areas of our business; vertical integration; and international expansion. Since January 1996, we have acquired 15 businesses. The integration of these businesses has led to improvements in production, distribution and other operating areas and in the quality and depth of our aftermarket product offerings. We believe that our customers have benefited from these acquisitions and our resulting ability to offer a broader portfolio of high quality, cost effective aftermarket products. We intend to draw on our experience integrating these past acquisitions to facilitate the integration of Dana's EMG Business. The following table summarizes acquisitions and divestitures we have made since January 1, 1996:
ACQUISITION ACQUISITION DATE LOCATION BUSINESS OF ACQUIRED COMPANY - ----------- ---------------- -------- ---------------------------- Sagem, Inc. May 2002 Greenville, South Manufacture and distribution of fuel (a subsidiary of Johnson Controls) Carolina injectors and other ignition products Carol Cable Ltd. April 2002 Wellingborough, Manufacture and distribution of United Kingdom ignition leads Chillair of Texas, Ltd. and Hartle January 2002 Dallas, Texas and Distribution of temperature control Industries Grand Prairie, products Texas Automotive Heater Exchange July 2000 Massa, Italy Distribution of temperature control products Vehicle Air Conditioning Parts January 2000 United Kingdom Distribution of temperature control products Lemark Auto Accessories Limited April 1999 United Kingdom Manufacture and distribution primarily of ignition wire and other engine management products Eaglemotive Corporation February 1999 Forth Worth, Texas Manufacture and distribution of fan clutches and oil coolers Webcon UK Limited and Injection January 1999 Two locations in Manufacture and distribution of Correction UK Limited the United Kingdom full-line of engine management products Temperature control division of March 1998 Multiple locations Manufacture and distribution of Cooper Industries in the United full-line temperature control products States
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ACQUISITION ACQUISITION DATE LOCATION BUSINESS OF ACQUIRED COMPANY - ----------- ---------------- -------- ---------------------------- Oxygen sensor manufacturing September 1997 Wilson, North Manufacture oxygen sensors business of AlliedSignal Carolina Filko Automotive Division of F&B January 1997 Multiple locations Manufacture and distribution of Manufacturing in the United ignition wire and other engine States management products Hayden Division of the Equion December 1996 Corona, California Assembly and distribution of heavy Corporation duty cooling products Fibro Friction, Inc. (since divested) July 1996 Montreal, Canada Manufacture and distribution of brake parts Intermotor Holdings Limited July 1996 Nottingham, Manufacture and distribution of engine England management products, primarily to the European market Federal Parts Corporation February 1996 Dallas, Texas Manufacture and distribution of ignition wire products DISPOSITION DISPOSITION DATE LOCATION BUSINESS OF DISPOSED COMPANY - ----------- ---------------- -------- ---------------------------- Pik-A-Nut October 1998 Huntington, General service line Indiana Fuel Pump business October 1998 Long Island City, Manufacture and distribution of fuel New York pumps Champ/ASL September 1998 Edwardsville, General service line Kansas EIS Brake parts March 1998 Berlin, Manufacture of brake parts Connecticut EIS Brake Manufacturing (EBM) March 1998 Ontario, Canada Manufacture of brake parts Fibro Friction, Inc. March 1998 Montreal, Canada Manufacture and distribution of brake parts
FINANCIAL INFORMATION ABOUT OUR OPERATING DIVISIONS The table below shows our consolidated net sales by operating division and by major product group within each division for the three years ended December 31, 2001 and for the nine months ended September 30, 2002. Our two reportable operating divisions are Engine Management and Temperature Control.
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------------------------------- --------------------- 1999 2000 2001 2002 --------------------- --------------------- --------------------- --------------------- AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL ------ ---------- ------ ---------- ------ ---------- ------ ---------- (DOLLARS IN THOUSANDS) ENGINE MANAGEMENT: Ignition and Emission Parts.................... $217,853 33.3% $219,337 36.5% $218,694 37.0% $184,609 37.8% Wires and Cables.......... 61,170 9.4% 59,517 9.9% 58,720 9.9% 44,122 9.0% Fuel System Parts......... 12,263 1.9% 9,386 1.6% 8,084 1.4% 5,182 1.1% -------- ------ -------- ------ -------- ------ -------- ------ TOTAL ENGINE MANAGEMENT...... 291,286 44.6% 288,240 48.0% 285,498 48.3% 233,913 47.9% -------- ------ -------- ------ -------- ------ -------- ------ TEMPERATURE CONTROL: Compressors............... 139,921 21.4% 118,399 19.7% 117,965 19.9% 97,328 19.9% Other Air Conditioning Parts.................... 164,328 25.1% 139,051 23.1% 138,542 23.4% 114,498 23.5% Heating Parts............. 15,834 2.5% 13,398 2.2% 13,349 2.3% 11,138 2.3% -------- ------ -------- ------ -------- ------ -------- ------ TOTAL TEMPERATURE CONTROL.... 320,083 49.0% 270,848 45.0% 269,856 45.6% 222,964 45.7% -------- ------ -------- ------ -------- ------ -------- ------ All Other.................... 42,082 6.4% 42,304 7.0% 36,298 6.1% 31,157 6.4% -------- ------ -------- ------ -------- ------ -------- ------ TOTAL.................. $653,451 100.0% $601,392 100.0% $591,652 100.0% $488,034 100.0% -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
53 The table below shows our operating profit and identifiable assets by operating division for the three years ended December 31, 2001 and for the nine months ended September 30, 2002.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------ 1999 2000 2001 ------------------------ ------------------------ ------------------------ OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE OPERATING IDENTIFIABLE PROFIT ASSETS PROFIT ASSETS PROFIT ASSETS ------ ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Engine Management........... $ 26,134 $253,346 $ 37,974 $265,336 $ 26,433 $233,564 Temperature Control......... 17,477 212,026 11,513 224,410 3,624 182,083 All Other................... (13,388) 90,649 (18,776) 59,650 (14,934) 93,782 -------- -------- -------- -------- -------- -------- TOTAL................. $ 30,223 $556,021 $ 30,711 $549,396 $ 15,123 $509,429 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 2002 ------------------------ OPERATING IDENTIFIABLE PROFIT ASSETS ------ ------ (DOLLARS IN THOUSANDS) Engine Management........... $ 31,988 $253,621 Temperature Control......... 12,682 206,668 All Other................... (15,090) 105,157 -------- -------- TOTAL................. $ 29,580 $565,446 -------- -------- -------- --------
'All Other' consists of items pertaining to the corporate headquarters function, as well as the Canadian and European business units that do not meet the criteria of a reportable operating division. ENGINE MANAGEMENT DIVISION BREADTH OF PRODUCTS. In our Engine Management Division, replacement parts for automotive ignition and emission control systems accounted for approximately 38% of our consolidated net sales for the nine months ended September 30, 2002 and approximately 37% of our 2001 consolidated net sales. These parts include distributor caps and rotors, electronic ignition control modules, voltage regulators, coils, switches, sensors and EGR valves. We are a basic manufacturer of many of the ignition parts we market and continue to develop ways of increasing the number of parts we manufacture, rather than purchasing such parts from third parties and then reselling such parts to our customers. We believe our customers benefit from lower prices and improved quality from our manufacturing such parts. These products cover a wide range of applications, from 30-year old vehicles to current models, both domestic and imports, and include passenger cars, light trucks and certain off-road and marine applications. We offer products at three different price points under a 'good-better-best' concept. We began offering ignition parts under the 'Standard' brand name that are equal in quality to original equipment parts installed on new vehicles. Soon afterward, we pioneered the concept of offering higher quality parts, sold at premium prices under the 'Blue Streak' brand name, that are significantly better than original equipment. We also offer lower-priced lines under the 'COBRA' brand to compete with lower priced private labels. COMPUTER CONTROLLED TECHNOLOGY. Nearly all new vehicles are factory-equipped with computer-controlled engine management systems to control ignition, emission control and fuel injection. These computer-controlled engine management systems, as opposed to the traditional breaker-point ignition systems installed in prior generations of new vehicles, reflect the automobile industry's response to decades of pressure from the government and environmental groups to reduce national fuel consumption and the level of pollutants from auto exhaust. The on-board computers monitor inputs from many types of sensors located throughout the vehicle, and control a myriad of valves, switches and motors to manage engine and vehicle performance. Electronic ignition systems enable the engine to improve fuel efficiency and reduce the level of hazardous fumes in exhaust gases. We are a leading manufacturer and distributor of replacements for these engine management component parts, including remanufactured automotive computers. Electronic control modules and electronic voltage regulators comprised approximately 12% of our total ignition and emission consolidated net sales for the nine months ended September 30, 2002 and approximately 13% of our total ignition and emission consolidated net sales in 2001. In 1992, we entered into a 50/50 joint venture in Canada with Blue Streak Electronics, Inc. to rebuild automotive engine management computers and mass air flow sensors. The volume of products produced by the joint venture are sold primarily to us and has positioned us as a key supplier in the growing remanufactured electronics markets. In 1994, we vastly increased our offering of remanufactured computers and instituted a program to offer slower-moving items by 54 overnight shipment from our factory, which has enabled our customers to expand their coverage without increasing inventory investment. The Blue Streak joint venture has further expanded its product range to include computers used in temperature control, anti-lock brake systems and air bags. In 1997, the joint venture launched an operation in Europe to serve that market and an operation in Florida to better serve the United States market in slow-moving items. In January 1999, Blue Streak Europe acquired Injection Correction UK LTD, and in September 2001, it also acquired TRW Inc.'s electronic control unit remanufacturing division, also located in the United Kingdom. We divide our electronic operations between product design and highly automated manufacturing operations in Orlando, Florida and assembly operations, which are performed in assembly plants in Orlando and Hong Kong. Our sales of sensors, valves, solenoids and related parts have increased steadily as automobile manufacturers equip their cars with more complex engine management systems. Government emission laws have been implemented throughout the majority of the United States. The Clean Air Act, as amended in 1990, imposes strict emission control test standards on existing and new vehicles, and remains the preeminent legislation in the area of vehicle emissions. As many states have implemented required inspection/maintenance tests, the Environmental Protection Agency, through its rulemaking ability, has also encouraged both manufacturers and drivers to reduce vehicle emissions. As the Clean Air Act was 'phased in' beginning in 1994, automobiles must now comply with emission standards from the time they are manufactured, and in most states, until the last day they are in use. This law has, and in the future we expect this law and other new government emission laws to have, a positive impact on sales of our ignition and emission controls parts. Vehicles failing these new, more stringent tests have required repairs utilizing parts sold by us. WIRE AND CABLE PRODUCTS. Wire and cable parts accounted for approximately 9% of our consolidated net sales for the nine months ended September 30, 2002 and approximately 10% of our 2001 consolidated net sales. These products include ignition (spark plug) wires, battery cables and a wide range of electrical wire, terminals, connectors and tools for servicing an automobile's electrical system. The largest component of this product line is the sale of ignition wire sets. We have historically offered a premium brand of ignition wires and battery cables, which capitalize on the market's awareness of the importance of quality. With the growing customer interest in lower-priced products, we introduced a second line of wire and cable products in 1989. This line has steadily expanded to include import coverage, and in 1995 was reintroduced under the Tru-Tech brand name. In 1999, we relocated two of our wire and cable operations, one in Dallas, Texas and the other in Bradenton, Florida, to a new facility in Reynosa, Mexico. The Mexican operation focuses on assembly and packaging of the economy wire sets, while our premium line is manufactured at our facility in Edwardsville, Kansas. TEMPERATURE CONTROL DIVISION We manufacture, remanufacture and market a broad line of replacement parts for automotive temperature control systems (air conditioning and heating), primarily under the brand names of Four Seasons, Everco, Factory Air, Trumark, NAPA Auto Parts and Carquest. The major product groups sold by our Temperature Control Division are compressors, other air conditioning parts including small motors, fan clutches, dryers, evaporators, accumulators and hoses, and heating parts, including heater cores and valves. Total sales for our Temperature Control Division accounted for approximately 46% of our consolidated net sales for the nine months ended September 30, 2002 and approximately 46% of our 2001 consolidated net sales. A major factor in the Temperature Control Division's business is the federal regulation of chlorofluorocarbon refrigerants. United States legislation phased out the production of domestic R-12 refrigerant (e.g., DuPont's Freon) completely by the end of 1995. As the new law became 55 effective, vehicle air conditioners needing repair or recharge were retrofitted to use the new R-134a refrigerant. New vehicles began to use the new refrigerants in 1993. Installers continue to seek training and certification in the new technology and our Temperature Control Division has taken the lead in providing this training and certification. Additionally, as technological changes necessitate many new automotive parts, as well as new service equipment, in anticipation of the phase-out of chlorofluorocarbon refrigerants, in 1994 we reengineered our compressor line to be able to operate efficiently utilizing either R-12 or R-134a refrigerants, and remain a leader in providing retrofit kits for conversion of R-12 systems. In 1998, we exchanged our brake business for the Moog automotive temperature control business of Cooper Industries, which expanded our position in temperature control. The Moog acquisition also expanded our position in the small motor and heater parts markets. In 1999, we acquired Eaglemotive Corporation, a manufacturer of fan clutches and oil coolers. In consolidating these two businesses with our existing operations, we closed three manufacturing facilities and consolidated three distribution sites into one. In 1997, we launched a Temperature Control program in Europe. We entered into a joint venture with Valeo to remanufacture compressors in Creteil, France and established a distribution center in, Strasbourg, France. Subsequent to this launch, we have made additional investments with Temperature Control distribution points in the UK, Italy and Spain. FINANCIAL INFORMATION ABOUT OUR FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES We sell our line of products primarily in the United States, with additional sales in Canada, Latin America and Europe. Our sales are substantially denominated in U.S. dollars. The table below shows our consolidated net sales by geographic area for the three years ended December 31, 2001 and for the nine months ended September 30, 2002:
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ------------- 1999 2000 2001 2002 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) United States............................. $572,534 $520,741 $515,322 $421,911 Canada.................................... 32,515 27,942 28,811 25,105 Other Foreign............................. 48,402 52,709 47,519 41,018 -------- -------- -------- -------- Total................................. $653,451 $601,392 $591,652 $488,034 -------- -------- -------- -------- -------- -------- -------- --------
The table below shows our long-lived assets by geographical area for the three years ended December 31, 2001 and for the nine months ended September 30, 2002:
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ------------- 1999 2000 2001 2002 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) United States............................. $125,766 $122,825 $118,455 $112,649 Canada.................................... 3,897 3,511 2,829 2,510 Other Foreign............................. 18,534 18,885 18,402 11,712 -------- -------- -------- -------- Total................................. $148,197 $145,221 $139,686 $126,871 -------- -------- -------- -------- -------- -------- -------- --------
SALES AND DISTRIBUTION We sell our products under proprietary brand names throughout the United States and Canada, and through distributors in Latin America and Europe. Products are distributed to warehouse distributors, including 15,000 jobber outlets located throughout the United States and Canada. The jobbers sell our products primarily to professional mechanics and to consumers who perform their own automobile repairs. In addition, we sell directly to large auto parts retail chains, such as Advance Auto Parts, AutoZone and O'Reilly Automotive. 56 As of December 31, 2002, we sold and serviced our products through a direct sales force of approximately 200 employees and, in some instances, through independent sales representatives. We believe that our sales force is the premier direct sales force for our two product lines. We believe the primary reason for this reputation is our high concentration of highly-qualified, well-trained salespeople dedicated to geographic territories, which allows us to provide a level of customer service that we believe is unmatched. The United States sales force is divided into three regions, each with five to six zones and approximately eight salespeople per zone. From the outset, we thoroughly train our salespeople both in the function and application of every product line we sell, as well as in proven sales techniques. Customers therefore depend on these salespeople as a reliable source for technical information. We give newly hired salespeople extensive instruction at our training facility in Irving, Texas and have a policy of continuing education that allows our sales force to stay current on troubleshooting and repair techniques, as well as the latest automotive parts and systems technology. We employ a comprehensive CD-ROM training program that further broadens our capability to provide real-time updated training to our salespeople. We generate demand for our products by directing a significant portion of our sales effort to the end-customers' customers (i.e., jobbers and professional mechanics), creating demand through our traditional distribution system. We also conduct instructional clinics, which teach mechanics how to diagnose and repair complex systems related to our products. To help our salespeople to be teachers and trainers, we focus our recruitment efforts on candidates who already have strong technical backgrounds as well as sales experience. We also create demand for our products through the Standard Plus Club. Our Standard Plus Club, a professional service dealer network comprised of approximately 7,900 members, offers technical and business development support and has a technical service telephone hotline which provides diagnostics and installation support. This club is available to any jobber or installer and provides training, special discount programs, on-line diagnostics assistance and logo merchandise. In connection with our sales activities, we offer several types of discounts and allowances. We believe these discounts and allowances are a common practice throughout the automotive aftermarket industry. First, we offer cash discounts for paying invoices in accordance with the discounted terms of the invoice. Second, we offer pricing discounts based on volume and different product lines purchased from us. Supplementally, rebates and discounts are provided to customers as advertising and sales force allowances. In addition to the aforementioned discounts and rebates, allowances for warranty and overstock returns are also provided. CUSTOMERS Our customer base is comprised largely of warehouse distributors, jobber outlets, other manufacturers and export customers. In addition to serving our traditional customer base, we have expanded into the retail market by selling to large retail chains such as Advance Auto Parts, AutoZone and O'Reilly Automotive. Our retail channel of distribution has grown significantly from approximately $41 million in consolidated net sales to retailers in 1993 (representing 7% of consolidated net sales), to approximately $107 million in 1997 (representing 20% of consolidated net sales), and to approximately $159 in 2001 (representing 27% of consolidated net sales). Our five largest individual customers accounted for 46% of our consolidated net sales for the nine months ended September 30, 2002 and 44% of our consolidated net sales in 2001. Members of one marketing group represent our largest group of customers and accounted for approximately 16% of our consolidated net sales for the nine months ended September 30, 2002 and 15% of our consolidated net sales in 2001. One individual member of this marketing group accounted for 11% of our consolidated net sales for the nine months ended September 30, 2002 and 10% of our consolidated net sales in 2001. We have in the past and may in the future lose customers or lose a particular product line of a customer. See 'Risk Factors -- We depend on a limited number of key customers, and the loss of any such customer or a material reduction in business from any such customer could have a 57 material adverse effect on our business, financial condition and results of operations' for a more detailed discussion of our risk of losing customers. COMPETITION We are a leading independent manufacturer of replacement parts for the product lines comprising our two divisions: Engine Management and Temperature Control. We compete primarily on the basis of price, product quality, customer service, product coverage, product availability, order turn-around time and order fill rate. We believe we differentiate ourselves from our competitors primarily through: a value-added, knowledgeable sales force; extensive product coverage; a sophisticated parts cataloguing systems; and inventory levels sufficient to meet the rapid delivery requirements of customers. In the engine management business, we are one of the leading independent manufacturers in the United States. Our significant competitors include Delco Electronics Corporation, Delphi Corporation, Federal-Mogul Corporation, KEM Manufacturing Products, Inc., Robert Bosch Corporation and Wells Manufacturing Corporation (a UIS, Inc. subsidiary). Our temperature control business is one of the leading independent producers and distributors of a full line of temperature control products in North America and other geographic areas. Delphi Corporation, Visteon Corporation, Transpro, Inc. and Stant (a subsidiary of Tomkins plc) are some of our key competitors in this market. Although we are a leading independent manufacturer of automotive replacement parts with strong brand name recognition, we face substantial competition in all markets that we serve. The automotive aftermarket is highly competitive and our success in the marketplace continues to depend on our ability to offer competitive prices, improved products and expanded offerings in competition with many other suppliers to the aftermarket. Some major manufacturers of replacement parts are divisions of companies having greater financial, marketing and other resources than we do. In addition, automobile manufacturers supply virtually every replacement part sold by us, although these manufacturers generally supply parts only for cars they produce. See 'Risk Factors -- Our industry is highly competitive, and our success depends on our ability to compete with suppliers of aftermarket automotive products, some of which have substantially greater financial, marketing and other resources than we do' for a more detailed discussion of the risks we face in connection with competition in the automotive aftermarket industry. SEASONALITY Historically, our operating results have fluctuated by quarter, with the greatest sales occurring in the second and third quarters of the year, with revenues generally being recognized at the time of shipment. It is in these quarters that demand for our products is typically the highest, specifically in the Temperature Control segment of our business. In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather. For example, a cool summer may lessen the demand for our Temperature Control products, while a hot summer may increase such demand. As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received. During this period, our working capital requirements are typically funded by borrowings from our revolving credit facility. The seasonality of our business offers significant operational challenges in our manufacturing and distribution functions. To limit these challenges and to provide a rapid turnaround time of customer orders, we traditionally offer a pre-season selling program, known as our 'Spring promotion', in which customers are offered a choice of a price discount or longer payment terms. 58 See 'Risk Factors -- Our business is seasonal and is subject to substantial quarterly fluctuations, which impact our quarterly performance and working capital requirements' for a more detailed discussion of the risks related to the seasonality of our business. WORKING CAPITAL MANAGEMENT Automotive aftermarket companies have been under increasing pressure to provide broad SKU (stock keeping unit) coverage in response to parts and brand proliferation. Since 1996, we have made significant changes to the inventory management system to reduce inventory requirements. We launched a new forecasting system in our Engine Management Division that permitted a significant reduction in safety stocks. Our Engine Management Division also introduced a new distribution system in the second half of 1999, which permits pack-to-order systems to be implemented. Such systems permit us to retain slow moving items in a bulk storage state until an order for a specific brand part is received. This system reduces the volume of a given part in inventory and reduces the labor requirements to package and repackage inventory. Our profitability and working capital requirements have become more seasonal with the increased sales mix of temperature control products. Our working capital requirements peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received. These increased working capital requirements are funded by borrowings from our revolving credit facility. SUPPLIERS The principal raw materials purchased by us consist of brass, electronic components, fabricated copper (primarily in the form of magnet and insulated cable), ignition wire, stainless steel coils and rods, aluminum coils and rods, lead, rubber molding compound, thermo-set and thermo plastic molding powders. Additionally, we use components and cores (used parts) in our remanufacturing processes for computerized electronics and air conditioning compressors. We purchase many materials in the U.S. open market, but do have a limited number of supply agreements on key components. A number of prime suppliers make these materials available. In the case of cores, we obtain them either from exchanges with customers who return cores when purchasing remanufactured parts, or through direct purchases from a network of core brokers. We believe there is an adequate supply of primary raw materials and cores. In order to ensure a consistent, high quality, low cost supply of key components for each product line, we continue to develop our own sources through internal manufacturing capacity. PRODUCTION AND ENGINEERING We engineer, tool and manufacture many of the components for our products, except for some commonly available small component parts from outside suppliers. We also perform our own plastic and rubber molding operations, stamping and machining operations, automated electronics assembly and a wide variety of other processes. In the case of remanufactured components, we conduct our own teardown, diagnostics and rebuilding for computer modules and air conditioning compressors. We have found this level of vertical integration to provide advantages in terms of cost, quality and availability. We intend to selectively continue efforts toward further vertical integration to ensure a consistent quality and supply of low cost components. We use the 'just-in-time' cellular manufacturing concept as a major program to lower costs and improve efficiency. The main thrust of 'just-in-time' cellular manufacturing is reducing work-in-process and finished goods inventory, and its implementation reduces the inefficient operations that burden many manufacturing processes. In 2000, we launched a program for the installation of 59 a fully integrated enterprise resource planning (ERP) system. The implementation is expected to be fully completed in 2003 in our Temperature Control Division. At that time, the system will encompass all aspects of the supply chain, including procurement, manufacturing, sales, distribution and finance at all of our Temperature Control facilities. The existing Engine Management information system continues to meet the need of our Engine Management Division and will be the foundation for consolidating Dana's EMG Business. EMPLOYEES As of December 31, 2002, we employed approximately 2,200 people in the United States, and 1,100 people in Mexico, Canada, Puerto Rico, Europe and Hong Kong. Of these, approximately 2,200 are production employees. We operate primarily in non-union facilities and have binding labor agreements with the workers at our two unionized facilities. We have approximately 130 production employees in Edwardsville, Kansas who are covered by a contract with The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America ('UAW') that expires April 1, 2003. We expect to renew this agreement prior to its expiration. As of December 31, 2002, approximately 120 of our production employees in Long Island City, New York are under a UAW contract that expires October 2, 2004. We also have a union relationship in Mexico with an agreement negotiated each year. The current union agreement in Mexico, which covers approximately 260 employees, expired on January 29, 2003. We are currently in negotiations to renew the labor agreement in Mexico. We believe that our facilities are in favorable labor markets with ready access to adequate numbers of skilled and unskilled workers, and we believe our relations with our union and non-union employees are good. PROPERTIES We maintain our executive offices and a manufacturing plant in Long Island City, New York. The table below describes our principal physical properties.
OWNED OR APPROX. EXPIRATION STATE OR SQUARE DATE LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE - -------- ------- --------------------------- ---- -------- Engine Management ----------------- Orlando FL Manufacturing (Ignition) 50,640 2007 Edwardsville KS Manufacturing and Distribution (Wire) 355,000 Owned Wilson NC Manufacturing (Ignition) 31,500 2008 Reno NV Distribution (Ignition) 67,000 Owned Long Island City NY Administration and Manufacturing (Ignition) 318,000 Owned Greenville SC Manufacturing (Ignition) 181,525 Owned Disputanta VA Distribution (Ignition) 411,000 Owned Fajardo Puerto Rico Manufacturing (Ignition) 114,000 2007 Hong Kong HK Manufacturing (Ignition) 21,350 2003 Reynosa Mexico Manufacturing (Wire) 62,500 2004 Nottingham England Administration and Distribution (Ignition and Wire) 29,000 Owned Nottingham England Manufacturing (Ignition and Wire) 46,777 Owned Nottingham England Manufacturing (Ignition) 10,000 2012 Temperature Control ------------------- Corona CA Manufacturing and Distribution 78,200 2008 Lewisville TX Administration and Distribution 415,000 2009 Fort Worth TX Manufacturing and Distribution 204,000 Owned Fort Worth TX Manufacturing and Distribution 103,000 2004 Grapevine TX Manufacturing 180,000 Owned St. Thomas Canada Manufacturing 40,000 Owned Strasbourg France Administration and Distribution 16,146 2003 Massa Italy Administration and Distribution 13,100 2004
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OWNED OR APPROX. EXPIRATION STATE OR SQUARE DATE LOCATION COUNTRY PRINCIPAL BUSINESS ACTIVITY FEET OF LEASE - -------- ------- --------------------------- ---- -------- Temperature Control/Engine Management ------------------------------------- Mississauga Canada Administration and Distribution (Ignition, Wire, 128,400 2006 Temperature Control) Sunbury at Thames England Distribution (Ignition and Temperature Control) 28,095 2007 Other ----- Ontario CA Vacated-subleased 250,200 2003 Cumming GA Vacated 77,000 2007 Grapevine TX Storage 83,125 2004 Irving TX Training Center 13,400 2004
LEGAL PROCEEDINGS On January 28, 2000, a former significant customer of ours which is currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court filed claims against a number of its former suppliers, including us. The claim against us alleged $0.5 million of preferential payments in the 90 days prior to the related Chapter 11 bankruptcy petition. The claim pertaining to the preferential payments was settled for an immaterial amount during the second quarter of 2002. In addition, this former customer seeks $9.4 million from us for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. We have purchased insurance with respect to the actions. On August 22, 2002, the court dismissed the antitrust claims. We believe that these remaining matters will not have a material adverse effect on our consolidated financial statements taken as a whole. In 1986, we acquired a brake business, which we subsequently sold in March 1998 and which is accounted for as a discontinued operation in the accompanying consolidated financial statements. When we originally acquired this brake business, we assumed future liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller of the acquired brake business. In accordance with the related purchase agreement, we agreed to assume the liabilities for all new claims filed on or after September 1, 2001. Our ultimate exposure will depend upon the number of claims filed against us on or after September 1, 2001 and the amounts paid for indemnity and defense thereof. At December 31, 2001, approximately 100 cases were outstanding for which we were responsible for any related liabilities. At December 31, 2002, the number of cases outstanding for which we were responsible for related liabilities increased to approximately 2,500, which include approximately 1,600 cases filed in December 2002 in Mississippi. We believe that these Mississippi cases filed against us in December 2002 were due in large part to potential plaintiffs accelerating the filing of their claims prior to the effective date of Mississippi's tort reform statute in January 2003, which statute eliminated the ability of plaintiffs to file consolidated cases. To date, the amounts paid for settled claims have been immaterial. We do not have insurance coverage for the defense and indemnity costs associated with these claims. We recorded a liability associated with future settlements through 2052 and recorded an after tax charge of $16.9 million as a loss from a discontinued operation during the third quarter of 2002 to reflect such liability. We are involved in various other litigation and product liability matters arising in the ordinary course of business. Although the final outcome of any asbestos-related matters or any other litigation or product liability matter cannot be determined, based on our understanding and evaluation of the relevant facts and circumstances, it is our opinion that the final outcome of these matters will not have a material adverse effect on our business, financial condition or results of operations. See 'Risk Factors -- We may be materially adversely affected by asbestos claims arising from products sold by our former brake business, as well as by other product liability claims' for a more detailed discussion of the risks we face in connection with our exposure to asbestos-related claims. 61 INSURANCE We maintain basic liability coverage of $2 million for automobile liability and $1 million for general and product liability, umbrella liability coverage of $50 million and a $10 million environmental policy to cover our existing facilities, except for one of our facilities which is currently undergoing minor environmental remediation. The environmental remediation costs at such facility are covered by an insurance policy of $3 million, which is subject to a $1.5 million deductible. Historically, we have not experienced casualty losses in any year in excess of our coverage. We have no reason to expect this experience to change, but can offer no assurances that liability losses in the future will not exceed our coverage. 62 MANAGEMENT Our executive officers and directors, and their ages and positions as of December 31, 2002, are:
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION -------------------------------- --- -------- Lawrence I. Sills............................ 63 Chairman of the Board, Chief Executive Officer and Director John P. Gethin............................... 54 President and Chief Operating Officer James J. Burke............................... 47 Vice President Finance, Chief Financial Officer Joseph G. Forlenza........................... 59 Vice President and General Manager of Engine Management Division Donald E. Herring............................ 60 Vice President of Aftermarket Sales Sanford Kay.................................. 60 Vice President of Human Resources and Secretary Nitin Parikh................................. 63 Vice President of Information Systems Robert H. Martin............................. 56 Treasurer and Assistant Secretary Arthur D. Davis.............................. 55 Vice Chairman of the Board and Director Marilyn Fife Cragin.......................... 50 Director Susan F. Davis............................... 53 Director Robert M. Gerrity(1)(2)...................... 64 Director John L. Kelsey(1)(2)......................... 77 Director Kenneth A. Lehman(1)(2)...................... 59 Director Arthur S. Sills.............................. 59 Director Peter J. Sills............................... 56 Director Frederick D. Sturdivant(1)(2)................ 65 Director William H. Turner(1)(2)...................... 62 Director
- --------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Lawrence I. Sills has been our Chief Executive Officer and Chairman of the Board since December 2000 and has been one of our directors since 1986. From 1986 to December 2000, Mr. Sills served as our President and Chief Operating Officer. From 1983 to 1986, Mr. Sills served as our Vice President of Operations. Mr. Sills is the brother of Arthur S. Sills and Peter J. Sills, who are also our directors. John P. Gethin has served as our President and Chief Operating Officer since December 2000. From December 1997 to November 2000, Mr. Gethin served as our Senior Vice President of Operations. Since October 1998, he has served as General Manager of our Four Seasons Division (part of our Temperature Control Division). From October 1995 to December 1997, Mr. Gethin was Vice President and General Manager of EIS Brake Parts Division (a former business unit of ours). James J. Burke has served as our Vice President Finance, Chief Financial Officer since October 1999. From January 1998 to September 1999, Mr. Burke served as our Director of Finance, Chief Accounting Officer. From March 1993 to December 1997, Mr. Burke served as our Corporate Controller. Joseph G. Forlenza has served as Vice President and General Manager of our Engine Management Division since July 1993. From May 1988 to June 1993, Mr. Forlenza served as Vice President and General Manager of our Champ Service Line division (a former business unit of ours). Donald E. Herring has served as our Vice President of Aftermarket Sales since January 1993. From January 1990 to December 1992, Mr. Herring served as our National Sales Manager. 63 Sanford Kay has served as our Vice President of Human Resources since June 1988 and as our Secretary since May 1993. From January 1987 to June 1988, Mr. Kay served as our Director of Labor Relations. Nitin Parikh has served as our Vice President of Information Systems since June 1985. From June 1978 to June 1985, Mr. Parikh served as our Manager of Information Systems. Robert H. Martin has served as our Treasurer and Assistant Secretary since October 1999. From April 1993 to October 1999, Mr. Martin served as Controller of our Engine Management Division. From February 1989 to April 1993, Mr. Martin was the Division Controller of Stanric, Inc., our subsidiary. Arthur D. Davis has served as our Vice Chairman of the Board since December 2000 and as a director since May 1986. Mr. Davis served as our Vice President of Materials Management from May 1986 to January 1989. Mr. Davis is currently retired. Mr. Davis is the husband of Susan F. Davis, one of our directors. Marilyn Fife Cragin has served as a director since October 1995. Ms. Fife Cragin has been an independent consultant to the Center for Research on Women at Wellesley College since July 2001 and has periodically served as an independent consultant to Planned Parenthood of Greater Massachusetts since January 2002. From November 1998 to August 2000, she served as Program Director for Arts In Progress, a private, not-for-profit education program for inner city girls. From February 1995 to October 1998, Ms. Fife Cragin was the co-owner of an art gallery. Prior to co-owning the art gallery, she was a practicing psychotherapist for more than twenty years. Ms. Fife Cragin is the sister of Susan F. Davis. Susan F. Davis has served as a director since May 1998. Ms. Davis is the wife of Arthur D. Davis and sister of Marilyn Fife Cragin. Robert M. Gerrity has served as a director since July 1996. From 1996 to 2000, Mr. Gerrity served as Chairman and Chief Executive Officer of the Antrim Group, Inc., a venture capital company. Prior to 1996, Mr. Gerrity served as Vice Chairman of New Holland, n.v., an agricultural and construction equipment company. Mr. Gerrity is also a director of Birmingham Steel Inc. and Rimrock Corporation. John L. Kelsey has served as a director since 1964. Mr. Kelsey is currently retired. From 1989 to 1994, Mr. Kelsey served as Advisory Director at PaineWebber Inc. Prior to that time, Mr. Kelsey served as Managing Director of PaineWebber Inc. (and its predecessor firms) for more than 30 years. Kenneth A. Lehman has served as a director since April 2000. Mr. Lehman has been Managing Director of the KKP Group LLC since April 1999. From 1990 to December 1998, he was the Co-Chairman and Chief Executive Officer of Fel-Pro Incorporated. He is also a director of Gold Eagle Co. Arthur S. Sills has served as a director since October 1995. Mr. Sills was an educator and administrator in Massachusetts school districts for thirty years prior to his retirement in 2000. Peter J. Sills has served as a director since December 2000. Mr. Sills has been a writer for the past ten years and is also an attorney. Fredrick D. Sturdivant has served as a director since December 2001. Mr. Sturdivant has been Chairman of the Tyler Group Inc. since April 2002. Mr. Sturdivant was Chairman of Reinventures LLC from October 2000 to March 2002. From June 1998 to September 2000, he was Executive Managing Director of Strategic Decisions Group/Navigant Consulting. From January 1996 to June 1998, he was President of Index Research and Advisory Services, a subsidiary of Computer Sciences Corporation, and its general management consulting arm, CSC Index. William H. Turner has served as a director since May 1990. Mr. Turner has been the Chairman of the Advisory Council of PNC Bank, New Jersey since June 2000. From September 1999 to June 2000, he was the Chairman of PNC Bank, N.A., New Jersey and Northeast Region and President of PNC from August 1997 to September 1999. He was President and Co-Chief Executive Officer of Franklin Electronic Publishers, Inc. from October 1996 to July 1997. He was 64 the Vice Chairman, Chase Manhattan Bank, and its predecessor, Chemical Banking Corporation, prior to his employment with Franklin Electronics Publishers, Inc., where he serves as a director. Mr. Turner is also a director of Volt Information Sciences, Inc. and New Jersey Resources Corporation. We intend to comply with all applicable rules promulgated under the Sarbanes-Oxley Act of 2002 and the applicable New York Stock Exchange rules relating to corporate governance matters, including those rules relating to audit committees. 65 PRINCIPAL SHAREHOLDERS The following table sets forth information as of December 31, 2002 with respect to the beneficial ownership of shares of our common stock, by: each person known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock, our directors, our chief executive officer during 2002 and each of our other four most highly compensated executive officers during 2002, and all of our executive officers and directors as a group.
AMOUNT AND NATURE OF BENEFICIAL PERCENTAGE NAME AND ADDRESS OWNERSHIP(1) OF CLASS - ---------------- ------------ -------- Gabelli Asset Management Inc................................ 2,368,691(2) 18.65 One Corporate Center Rye, NY Marilyn Fife Cragin(11) .................................... 1,593,048(3) 12.63 37-18 Northern Boulevard Long Island City, NY Lawrence I. Sills(10) ...................................... 1,586,775(4) 12.53 37-18 Northern Boulevard Long Island, NY Arthur D. Davis(12) ........................................ 1,451,552(5) 11.49 37-18 Northern Boulevard Long Island City, NY Peter J. Sills(10) ......................................... 1,131,020(6) 9.01 37-18 Northern Boulevard Long Island City, New York Arthur S. Sills(10) ........................................ 1,118,779(7) 8.91 37-18 Northern Boulevard Long Island, NY Susan F. Davis(11)(12) ..................................... 1,087,233(8) 8.60 37-18 Northern Boulevard Long Island City, NY Dimensional Fund Advisors Inc. ............................ 809,350(9) 6.45 1299 Ocean Avenue Santa Monica, CA John P. Gethin ............................................. 80,942(13) * 37-18 Northern Boulevard Long Island City, NY Joseph G. Forlenza ......................................... 77,782(14) * 37-18 Northern Boulevard Long Island City, NY Donald E. Herring .......................................... 62,047(15) * 37-18 Northern Boulevard Long Island City, NY James J. Burke ............................................. 56,179(16) * 37-18 Northern Boulevard Long Island City, NY John L. Kelsey ............................................. 14,770(17) * 460 Coconut Palm Road Vero Beach, FL William H. Turner .......................................... 13,742(18) * 2 Tower Center Blvd. East Brunswick, NJ Robert M. Gerrity .......................................... 12,742(19) * 114 Division Street Bellaire, MI
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AMOUNT AND NATURE OF BENEFICIAL PERCENTAGE NAME AND ADDRESS OWNERSHIP(1) OF CLASS - ---------------- ------------ -------- Kenneth A. Lehman .......................................... 8,726(20) * 2715 Sheridan Road Evanston, IL Frederick D. Sturdivant .................................... 2,054 * 8 San Clemente Drive Carmel Valley, CA 93924 Directors and Officers as a group (eighteen persons)........ 6,225,720(21) 47.11
- --------- * Represents beneficial ownership of less than 1% of the outstanding shares of common stock. (1) Applicable percentage of ownership is based on 12,557,009 shares of common stock outstanding as of December 31, 2002. Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options, warrants and our convertible debentures held by that person that are currently exercisable or exercisable within 60 days of December 31, 2002 are deemed outstanding. Regarding our convertible debentures, under Rule 13d-3 of the Exchange Act, these persons must disclose the share amounts they would hold upon conversion of our convertible debentures, even though such conversion has not actually occurred. At December 31, 2002, our convertible debentures were convertible into 31.068 shares of common stock for each $1,000 convertible debentures converted and the conversion price for our convertible debentures was equivalent to approximately $32.19 per share. Shares subject to options or our convertible debentures, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, the shareholder named in the table has sole voting power and sole investment power with respect to the shares set forth opposite such shareholder's name. In footnotes 3, 4, 5, 6, 7 and 8, where more than one director of our company is a co-trustee of a trust, co-director of a foundation, or joint purchaser of our convertible debentures, and shares voting power and investment power with another director or directors with respect to a certain number of shares, such shares are counted as being beneficially owned by each director who shares such voting power and investment power. However, in computing the aggregate number of shares owned by directors and officers in footnote 21, these same shares are only counted once. (2) The information for Gabelli Asset Management Inc. and certain of its affiliated entities ('Gabelli') is based solely on an amendment to its Schedule 13D, filed with the SEC on December 24, 2002, wherein Gabelli stated that it beneficially owned an aggregate of 2,368,691 shares of our common stock. Gabelli states that it has sole voting power for 2,368,691 shares and has sole investment power for 2,337,691 shares. (3) Includes 889,289 shares of common stock, of which: (a) 447,187 shares are held as co-trustee with, among others, Arthur D. Davis and Susan F. Davis for which Ms. Fife Cragin has shared voting and shared investment power; (b) 109,063 shares are held by the Fife Family Foundation, Inc., of which Ms. Fife Cragin is a director and officer and shares voting power and investment power with, among others, Susan F. Davis; (c) 137,270 shares are held by Ms. Fife Cragin as custodian for minor children for which she has sole voting and sole investment power; (d) 52,400 shares are held as co-trustee with Arthur D. Davis for which Ms. Fife Cragin has shared voting and shared investment power; (e) 53,527 shares are deemed beneficially owned by Ms. Fife Cragin in connection with her purchase of our convertible debentures; (f) 18,560 shares are held as co-trustee for which she has shared voting and investment power; (g) 9,307 shares are owned by Ms. Fife Cragin's husband; and (h) 61,975 shares are held by Ms. Fife Cragin's husband as trustee for their children. In her (footnotes continued on next page) 67 (footnotes continued from previous page) capacity as a trustee, director of the foundation and for shares held as custodian for minor children and owned by her spouse, Ms. Fife Cragin disclaims beneficial ownership of such shares so deemed 'beneficially owned' by her within the meaning of Rule 13d-3 of the Exchange Act. (4) Includes 974,180 shares of common stock, of which: (a) 430,312 shares are held as co-trustee with Arthur S. Sills and Peter J. Sills for which Lawrence I. Sills has shared voting and shared investment power; (b) 430,770 shares are held by the estate of Nathaniel I. Sills, of which Lawrence I. Sills is executor and has sole voting and sole investment power; (c) 4,619 shares of common stock allocated to Lawrence I. Sills under Standard Motor Products, Inc.'s Employee Stock Ownership Plan (the 'Standard Motor Products ESOP'); (d) 2,812 shares are owned by Mr. Sills's wife; and (e) 105,667 shares of common stock subject to options exercisable within 60 days of December 31, 2002. In his capacity as a trustee and executor and for shares of common stock held by his wife, Mr. Sills disclaims beneficial ownership of the shares which are deemed 'beneficially owned' by him within the meaning of Rule 13d-3 of the Exchange Act. (5) Includes 1,364,183 shares of common stock, of which: (a) 420,982 shares are held by Arthur D. Davis as trustee for which he has sole voting and sole investment power; (b) 52,400 shares are held as co-trustee with Marilyn Fife Cragin for which Mr. Davis has shared voting and shared investment power; (c) 129,835 shares are held as co-trustee with Susan F. Davis for which Mr. Davis has shared voting and shared investment power; (d) 447,187 shares are held as co-trustee with, among others, Marilyn Fife Cragin and Susan F. Davis for which Mr. Davis has shared voting and shared investment power; (e) approximately 1,287 shares are deemed beneficially owned by Arthur D. Davis and Susan F. Davis in connection with their purchase of our convertible debentures; (f) approximately 53,527 shares are deemed beneficially owned by Arthur D. Davis and Susan F. Davis in connection with their purchase of our convertible debentures; (g) 29 shares are allocated to Mr. Davis under the Standard Motor Products ESOP; (h) 238,936 shares are owned by Susan F. Davis; and (i) 20,000 shares are held by Mr. Davis that were subject to options exercisable within 60 days of December 31, 2002. In his capacity as a trustee and with regard to the 53,527 shares deemed beneficially owned by Mr. Davis in connection with the conversion of our convertible debentures and the 238,936 shares owned by Susan F. Davis, Mr. Davis disclaims beneficial ownership of the shares which are deemed 'beneficially owned' by him within the meaning of Rule 13d-3 of the Exchange Act. (6) Includes 573,374 shares of common stock, of which: (a) 430,312 shares are held as co-trustee with Lawrence I. Sills and Arthur S. Sills for which Peter J. Sills has shared voting and shared investment power; and (c) 143,062 shares are held by the Sills Family Foundation, Inc., of which Peter J. Sills is a director and officer and shares voting and investment power with, among others, Arthur S. Sills. In his capacity as a trustee and director of the foundation, Mr. Sills disclaims beneficial ownership of the shares which are deemed 'beneficially owned' by him within the meaning of Rule 13d-3 of the Exchange Act. (7) Includes 573,374 shares of common stock, of which: (a) 430,312 shares are held as co-trustee with Lawrence I. Sills and Peter J. Sills for which Arthur S. Sills has shared voting and shared investment power; and (b) 143,062 shares are held by the Sills Family Foundation, Inc., of which Arthur S. Sills is a director and officer and shares voting and investment power with, among others, Peter J. Sills. In his capacity as a trustee and director of the foundation, Mr. Sills disclaims beneficial ownership of the shares which are deemed 'beneficially owned' by him within the meaning of Rule 13d-3 of the Exchange Act. (8) Includes 848,297 shares of common stock, of which: (a) 447,187 shares are held as co-trustee with, among others, Marilyn Fife Cragin and Arthur D. Davis for which Ms. Davis has shared voting and shared investment power; (b) 109,063 shares are held by the Fife Family Foundation, Inc., of which Ms. Davis is a director and officer and shares voting power and investment power with, among others, Marilyn Fife Cragin; (c) 129,835 shares are held as co-trustee with Arthur D. Davis for which Ms. Davis has shared voting and shared (footnotes continued on next page) 68 (footnotes continued from previous page) investment power; (d) approximately 1,287 shares are deemed beneficially owned by Susan F. Davis and Arthur D. Davis in connection with their purchase of our convertible debentures; (e) approximately 53,527 shares are deemed beneficially owned by Susan F. Davis and Arthur D. Davis in connection with their purchase of our convertible debentures; (f) 20,000 shares held by Mr. Davis that were subject to options exercisable within 60 days of December 31, 2002; and (g) 87,398 shares are owned by Arthur D. Davis. In her capacity as trustee and director of the foundation and with regard to the 1,287 shares deemed beneficially owned by Ms. Davis in connection with the conversion of our convertible debentures and the 87,398 shares owned by Arthur D. Davis, Ms. Davis disclaims beneficial ownership of the shares so deemed 'beneficially owned' by her within the meaning of Rule 13d-3 of the Exchange Act. (9) The information for Dimensional Fund Advisors Inc. ('Dimensional Fund') is based solely on an amendment to its Schedule 13G, filed with the SEC on February 12, 2002 ('13G/A'), which states that Dimensional Fund furnishes investment advice to four investment companies and serves as investment manager to certain other commingled group trusts and separate accounts (such companies, trusts and accounts are referred to as 'Funds'). In connection with its role as an investment advisor or manager to the Funds, Dimensional Fund claims in its 13G/A to have sole voting and investment power over 809,350 shares of our common stock, but disclaims beneficial ownership of such shares. (10) Lawrence I. Sills, Arthur S. Sills and Peter J. Sills are brothers. (11) Marilyn Fife Cragin and Susan F. Davis are sisters. (12) Arthur D. Davis and Susan F. Davis are married. (13) Includes (a) 942 shares of common stock allocated to the account of John P. Gethin under the Standard Motor Products ESOP and (b) 74,500 shares of common stock held by Mr. Gethin which were subject to options exercisable within 60 days of December 31, 2002. (14) Includes (a) 3,482 shares of common stock allocated to the account of Joseph G. Forlenza under the Standard Motor Products ESOP; (b) 61,800 shares of common stock held by Mr. Forlenza which were subject to options exercisable within 60 days of December 31, 2002; and (c) 2,500 shares of common stock owned by Mr. Forlenza's wife, of which Mr. Forlenza disclaims 'beneficial ownership' of such shares within the meaning of Rule 13d-3 of the Exchange Act. (15) Includes (a) 2,646 shares of common stock allocated to the account of Donald E. Herring under the Standard Motor Products ESOP and (b) 55,000 shares of common stock held by Mr. Herring which were subject to options exercisable within 60 days of December 31, 2002. (16) Includes (a) 2,929 shares of common stock allocated to the account of James J. Burke under the Standard Motor Products ESOP and (b) 48,250 shares of common stock held by Mr. Burke which were subject to options exercisable within 60 days of December 31, 2002. (17) Includes 9,000 shares of common stock held by John L. Kelsey which were subject to options exercisable within 60 days of December 31, 2002. (18) Includes 9,000 shares of common stock held by William H. Turner which were subject to options exercisable within 60 days of December 31, 2002. (19) Includes 9,000 shares of common stock held by Robert M. Gerrity which were subject to options exercisable within 60 days of December 31, 2002. (20) Includes 4,000 shares of common stock held by Kenneth A. Lehman which were subject to options exercisable within 60 days of December 31, 2002. (21) All of our officers and directors as a group have 528,217 shares, which were subject to options that are exercisable within 60 days of December 31, 2002, 21,365 shares allocated to all officers under the Standard Motor Products ESOP and approximately 102,207 shares of common stock in connection with the purchase of our convertible debentures. 69 DESCRIPTION OF CAPITAL STOCK We are currently authorized by our Restated Certificate of Incorporation, as amended, to issue up to: 30,000,000 shares of common stock, par value $2.00 per share, and 500,000 shares of preferred stock, par value $20.00 per share, of which 30,000 shares of preferred stock have been designated as Series A participating preferred stock, par value $20.00 per share, and reserved for future issuance upon exercise of rights under our Rights Agreement (as described below). As of December 31, 2002, there were 12,557,009 shares of common stock outstanding and no shares of preferred stock outstanding. At February 12, 2003, we had 503 holders of record. The statements under this caption are brief summaries of material provisions of (1) our Restated Certificate of Incorporation, as amended, (2) our Restated By-laws, (3) the Indenture, dated as of July 26, 1999, between us and HSBC Bank USA, as trustee, and (4) the Rights Agreement, dated as of February 15, 1996, between us and Registrar & Transfer Co., as rights agent. Such summaries do not purport to be complete, and are subject to, and are qualified in their entirety by reference to, such documents. COMMON STOCK Holders of our common stock are entitled to one vote per share on all matters on which holders of common stock are entitled to vote. The holders of shares of our common stock do not have cumulative voting rights. Therefore, the holders of more than 50% of the shares of common stock voting for the election of directors can elect all of the directors, and the remaining holders will not be able to elect any directors. Subject to the rights of the holders of any shares of preferred stock, holders of our common stock are entitled to receive ratably such dividends as may from time to time be declared by our board of directors out of funds legally available therefor. Our current policy is to pay dividends on a quarterly basis. Our credit agreement with General Electric Capital Corporation, as agent, in connection with our revolving credit facility will permit dividends and distributions by us, provided specific conditions are met. Such conditions include: no default or event of default exists under the credit agreement or would result from such dividend distribution; we will not have paid dividends in an amount greater than $9 million in any 12 month period; and we will have excess borrowing availability as determined under the credit agreement of not less than $15.25 million or 5% of the total credit facility (whichever is greater) for our prior fiscal quarter. Holders of our common stock have no pre-emptive, conversion, redemption, subscription or similar rights. In the event of our liquidation, dissolution or winding up, whether voluntary or involuntary, holders of shares of our common stock are entitled to share ratably in our assets that are legally available for distribution, if any, remaining after the payment or provision for the payment of all of our debts and other liabilities and the payment of any preferential amount due to the holders of shares of any series of preferred stock. All of the outstanding shares of our common stock are fully paid and non-assessable. The transfer agent for our common stock is Registrar and Transfer Co. PREFERRED STOCK Our Restated Certificate of Incorporation authorizes our board of directors to issue from time to time up to 500,000 shares of preferred stock in one or more series and to establish and fix the number of shares of such series and the relative rights, preferences and limitations of each series. Preferred stock, if issued, will rank senior to our common stock as to dividends and 70 liquidation preference and could decrease the amount of earnings and assets available for distribution to holders of our common stock. The issuance of the preferred stock may have the effect of delaying, deterring or preventing a change in control of us and may adversely affect the rights of holders of our common stock. Preferred stock, upon issuance, against full payment of the purchase price therefor, will be fully paid and non-assessable. As of December 31, 2002, no shares of preferred stock are outstanding. However, 30,000 shares of preferred stock have been reserved for issuance as Series A participating preferred stock upon exercise of certain rights under our Rights Agreement. CONVERTIBLE DEBENTURES On July 26, 1999, we issued convertible debentures in the aggregate principal amount of $90 million under an Indenture between us and HSBC Bank USA, as trustee. The convertible debentures bear interest at the rate per annum of 6.75% and will mature on July 15, 2009. The convertible debentures are general unsecured subordinated obligations. We pay the interest due on the convertible debentures every six months, on January 15 and July 15. The convertible debentures are convertible at the option of the holder at anytime into shares of our common stock. If so converted, the holder will receive 31.0680 shares of our common stock for each $1,000 of convertible debentures that are converted (equivalent to a conversion price of approximately $32.19 per share). The number of shares of our common stock to be issued upon conversion of the convertible debentures is subject to adjustments, including, among others: dividends and other distributions payable in common stock on shares of our capital stock; the issuance of certain rights, options or warrants to all holders of our common stock that entitles them, as of a specified record date, to subscribe for or purchase our common stock at less than the then current market price of our common stock; and subdivisions, combinations and reclassifications of our common stock. We may redeem the convertible debentures at our option, at any time on or after July 15, 2004, in whole or in part, at a redemption price of 103.375% in 2004, 102.700% in 2005, 102.025% in 2006, 101.350% in 2007, 100.675% 2008 and 100% of the principal amount on July 15, 2009, in each case together with accrued interest to the redemption date. We also may repurchase the convertible debentures at the option of the holders upon a change of control at a purchase price equal to 101% of the aggregate principal amount of the convertible debentures on their date of purchase, plus accrued interest, if any. RIGHTS AGREEMENT On January 17, 1996, our board of directors declared a dividend of one preferred share purchase right, which we refer to as a 'right,' for each outstanding share of our common stock. The dividend was payable on March 1, 1996 to the shareholders of record as of February 15, 1996. All shares of our common stock issued subsequently also include these rights. Under certain conditions, each right may be exercised to purchase from us one one-thousandth of a share of Series A participating preferred stock at a price of $80.00 per one one-thousandth of a share of Series A participating preferred stock, subject to adjustment. Our Restated Certificate of Incorporation provides that holders of Series A participating preferred stock will be entitled to 1,000 votes per share of Series A participating preferred stock, to a minimum preferential quarterly dividend payment of $10.00 per share and to an aggregate dividend per share of 1,000 times the aggregate dividend declared per share of common stock. Dividends on the Series A participating preferred stock are cumulative. Further, holders of Series A participating preferred stock will be entitled to a minimum preferential liquidation payment of $1,000 per share but will be entitled to an aggregate payment of 1,000 times the payment made per share of common stock. In addition, holders of Series A participating preferred stock will be entitled to vote together as a class to elect two directors to our board of directors whenever dividends payable on Series A participating preferred stock are in default. 71 The rights are exercisable only if, without the prior written consent of our board of directors, a person or group acquires, or announces a tender offer to acquire, 20% or more of the outstanding shares of our common stock. In addition, if we are acquired in a merger or other business combination, or if 50% or more of our consolidated assets or earning power is sold after a person or group of affiliated or associated persons has acquired beneficial ownership of 20% or more of the outstanding shares of our common stock, each right (other than rights beneficially owned by the acquiring person (which will thereafter be void)) will entitle its holder to purchase, at the right's then current exercise price, a number of shares of equity securities of the acquiring company having a market value of two times the exercise price of the right. The rights are redeemable at our option at any time prior to a person or group acquiring 20% or more of the outstanding shares of our common stock at a purchase price of one-tenth of one percent per right. The rights may be exchanged by us, in whole or in part, at any time after a person or group acquires 20% or more of the outstanding shares of our common stock, but before such person or group acquires 50% or more of the outstanding shares of our common stock, at an exchange ratio of one share of common stock, or one one-thousandth of a share of preferred stock, per right, subject to adjustment. Until a right is exercised, the holder of such right has none of the rights of our shareholders, including the right to vote or to receive dividends. The rights expire on February 28, 2006, unless extended by us or unless the rights have been earlier redeemed or exchanged. The rights are designed to protect and maximize the value of the outstanding shares of our common stock in the event of an unsolicited attempt by a person or entity to acquire us in a manner or on terms not approved by our board of directors. The rights may have the effect of rendering more difficult or discouraging an acquisition of us that is deemed undesirable by our board of directors. The rights may cause substantial dilution to a person or group that attempts to acquire us on terms or in a manner not approved by our board of directors, except an offer conditioned upon the negation, purchase or redemption of the rights. NEW YORK BUSINESS CORPORATION LAW We are subject to Section 912 of the Business Corporation Law of New York, which prohibits certain 'business combinations' (as defined in Section 912 generally to include mergers, sales and leases of assets, issuances of securities and similar transactions) by us or one of our subsidiaries with an 'interested shareholder' (as defined in Section 912 and as applied to us this generally means any person or entity, other than us or any of our subsidiaries, that (1) beneficially owns, directly or indirectly, 20% or more of our outstanding voting stock or (2) is an affiliate or associate of us and was, at any time within five years prior to the date of the proposed business combination, the beneficial owner, directly or indirectly, of 20% or more of our outstanding voting stock) for five years after the person or entity becomes an interested shareholder, unless (a) our board of directors shall have approved the transaction before the person became an interested shareholder, or (b) the business combination is approved by the holders of our outstanding voting stock, excluding shares held by the interested shareholder, five years after such interested shareholder's acquisition. In addition, Article 16 of the Business Corporation Law of New York requires that any offeror making a takeover bid for a New York corporation file with the New York Attorney General, as soon as practicable on the date of commencement of the takeover bid, a registration statement containing specified details regarding the proposed takeover. The Business Corporation Law of New York also contains provisions permitting directors taking action (including action relating to a change in control) to consider employees, retirees, customers, creditors and the community, and preventing New York corporations from paying 'greenmail' without a shareholder vote. These statutory provisions may have the effect of delaying, deterring or preventing a future takeover or change in control of us, unless such takeover or change in control is approved by our board of directors. 72 RESTATED CERTIFICATE OF INCORPORATION AND RESTATED BY-LAWS In addition to the rights discussed above, our Restated Certificate of Incorporation, as amended, and Restated By-laws include other provisions that are intended to enhance the likelihood of continuity and stability in our ownership and that may have the effect of delaying, deterring or preventing a future takeover or change in control of us without approval from our board of directors. Pursuant to our Restated Certificate of Incorporation, as amended, prior to: any merger or consolidation of us or any of our subsidiaries with or into any other corporation; any sale, lease, exchange or other disposition by us or any of our subsidiaries of all or substantially all of our or such subsidiaries' assets to any other corporation, person or entity; or any purchase, lease or other acquisition by us, or any of our subsidiaries, of any assets and/or securities from any other corporation, person or entity, whereby, in connection with such purchase, lease or other acquisition, we were to issue our voting securities or the voting securities of any of our subsidiaries, including any securities convertible into our voting securities or options, warrants or rights to purchase our voting securities; and, if as of the record date for determination of shareholders entitled to notice and to vote on any of the transactions described in the bullets above: such corporation, person or entity is the other party to any of the transactions listed above and is the beneficial owner, directly or indirectly, of 5% or more of the outstanding shares of any class of our shares entitled to vote on such transaction; then, in order to consummate such transaction, we would be required to get the affirmative vote of the holders of our shares, determined as of a specified record date, of: at least 75% of the remaining outstanding shares of each class of our capital stock entitled to vote in an election of directors; and at least a majority of the outstanding shares of each class of our capital stock entitled to vote in elections of directors, excluding those which are, as determined by the board of directors, directly or indirectly beneficially owned by the other corporation, person or entity to the transaction. To repeal or amend the provisions of our Restated Certificate of Incorporation, as amended, outlined above requires a vote of at least 75% of the outstanding shares of each class of our capital stock. Our Restated Certificate of Incorporation, as amended, and Restated By-laws also provide that any director may be removed at any time, without cause, by the affirmative vote at any shareholders' meeting of the holders of at least 75% of the outstanding shares of each class of our capital stock entitled to vote at such meeting. 73 UNDERWRITING The Company and the underwriters for this offering named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated are the representatives of the underwriters.
Number of Underwriters Shares ------------ ------ Goldman, Sachs & Co..................................... Morgan Stanley & Co. Incorporated....................... --------- Total.......................................... --------- ---------
The underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered by the option described below unless and until this option is exercised. If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional shares from the Company to cover these sales. They may exercise this option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by the Company. Such amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares.
Paid By the Company No Exercise Full Exercise ------------------- ----------- ------------- Per Share................................................... $ $ Total....................................................... $ $
Shares sold by the underwriters to the public will initially be offered at the initial price to public set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial price to public. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial price to public. If all the shares are not sold at the initial price to public, the representatives may change the offering price and the other selling terms. The Company and its officers and directors have agreed with the underwriters not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of its common stock, or any options or warrants to purchase any shares of its common stock, or any securities convertible into, exchangeable for or that represent the right to receive shares of its common stock, whether now owned or hereinafter acquired, owned directly by the undersigned (including holding as a custodian) or with respect to which it or such officer or director, as the case may be, has beneficial ownership within the rules and regulations of the SEC, during the period from the date of this prospectus continuing through the date 90 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. This agreement does not apply to any existing employee benefit plans. In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. 'Covered' short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from the Company in this offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short 74 position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option. 'Naked' short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering. The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. Purchases to cover a short position and stabilizing transactions may have the effect of preventing or retarding a decline in the market price of the common stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the New York Stock Exchange, in the over-the-counter market or otherwise. The Company estimates that its share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . The Company has agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933. Certain of the underwriters and their affiliates have in the past provided, and may in the future from time to time provide, commercial or investment banking services to the Company, for which they have in the past received, and may in the future receive, customary fees. Goldman, Sachs & Co. has provided us with financial advisory services in connection with the acquisition of Dana's EMG Business, for which they will receive customary fees and commissions. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement under the Securities Act of 1933 with respect to the shares of common stock to be sold in this offering. As permitted by the rules and regulations of the SEC, this prospectus omits some information contained in the registration statement. For further information with respect to us and the shares of common stock to be sold in this offering, you should refer to the registration statement and to its exhibits and schedules. Statements contained in this prospectus regarding the contents of any agreement or other document are not necessarily complete. You should refer in each instance to the copy of the agreement or other document filed or incorporated by reference as an exhibit to the registration statement, each such statement being qualified in all respects by the document to which it refers. We are also required to file annual, quarterly and special reports, proxy statements and other information with the SEC. You can read the registration statement and the exhibits and schedules filed with the registration statement or our annual, quarterly and special reports, proxy statements or other information we have filed with the SEC, at the public reference facility maintained by the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549. Copies of such material can also be obtained at prescribed rates by mail from the Public Reference Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference services. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. You may also 75 inspect our SEC reports and other information at the New York Stock Exchange, 20 Broad Street, New York, New York 10005. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE This prospectus is part of the registration statement that we filed with the SEC. The SEC permits us to incorporate by reference the information that we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and information that we subsequently file with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below filed by us with the SEC: our Annual Report on Form 10-K for the year ended December 31, 2001, filed on April 1, 2002, excluding our consolidated annual financial statements and the related independent auditors' report dated February 22, 2002, which have been superseded by the consolidated annual financial statements included herein, which financial statements give retroactive effect to the adoption of FASB Statement No. 142, 'Business Combinations', and EITF 01- 9, 'Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)'; our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed on May 14, 2002; our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, filed on August 14, 2002; our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, filed on November 13, 2002; our Current Report on Form 8-K, filed on February 10, 2003; our Proxy Statement on Schedule 14A, filed April 22, 2002, for our annual meeting of stockholders held on May 23, 2002; the description of our common stock contained in our registration statement on Form 8-A (File No. 001-04743), filed on April 11, 1996; and the description of our preferred stock purchase rights contained in our registration statement on Form 8-A (File No. 001-04743), filed on March 1, 1996, and amended on April 11, 1996. In addition, all reports and other documents we subsequently file pursuant to Section 12, 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the initial filing of the registration statement and until the time that we sell all the securities described in this prospectus shall be deemed to be incorporated in this prospectus and to be a part of this prospectus from the date of filing of such reports and documents. Any statement contained in a previously filed document incorporated by reference in this prospectus is modified or superseded to the extent that a statement contained in this prospectus modifies or supersedes such statement. Any statement contained in this prospectus or in a document incorporated by reference in this prospectus is modified or superseded to the extent that a statement contained in any subsequently filed document which is or is deemed to be incorporated by reference in this prospectus modifies or supersedes such statement. Only the modified or superseded statement shall constitute a part of this prospectus. You may request a copy of these filings, other than their exhibits, at no cost, by oral or written request to: Standard Motor Products, Inc., 37-18 Northern Boulevard, Long Island City, New York 11101, Attention: James J. Burke, Vice President Finance, Chief Financial Officer, (718) 392-0200. 76 VALIDITY OF COMMON STOCK The validity of our common stock offered in this offering will be passed upon for us by Kelley Drye & Warren LLP, New York, New York, and for the underwriters by Sullivan & Cromwell LLP, New York, New York. EXPERTS Our audited consolidated financial statements at December 31, 2000, and 2001, and for each of the years in the three-year period ended December 31, 2001, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere and incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The audited combined financial statements of Dana's EMG Business as of December 31, 2001, and September 30, 2002 and for the years ended December 31, 2000 and 2001 and for the nine-month period ended September 30, 2002 included in this registration statement have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 77 INDEX TO FINANCIAL STATEMENTS
PAGE NO. STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES -------- CONSOLIDATED ANNUAL FINANCIAL STATEMENTS (Audited) Independent Auditors' Report................................ F-2 Consolidated Statements of Operations for the years ended December 31, 1999, 2000 and 2001.......................... F-3 Consolidated Balance Sheets as of December 31, 2000 and 2001...................................................... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001.......................... F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 2000 and 2001...... F-6 Notes to Consolidated Annual Financial Statements........... F-7 CONDENSED CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS (Unaudited) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2002... F-27 Condensed Consolidated Balance Sheets as of September 30, 2001 and 2002............................................. F-28 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2002............. F-29 Notes to Condensed Consolidated Quarterly Financial Statements................................................ F-30 PAGE NO. DANA CORPORATION'S ENGINE MANAGEMENT GROUP -------- COMBINED FINANCIAL STATEMENTS (Audited) Report of Independent Accountants........................... F-38 Combined Statements of Operations for the nine months ended September 30, 2002 and the years ended December 31, 2000 and 2001.................................................. F-39 Combined Balance Sheets as of December 31, 2001 and September 30, 2002........................................ F-40 Combined Statements of Cash Flows for the years ended December 31, 2000 and 2001 and for the nine months ended September 30, 2002........................................ F-41 Combined Statements of Changes in Combined Equity for the years ended December 31, 2000 and 2001 and the nine months ended September 30, 2002.................................. F-42 Notes to Combined Financial Statements...................... F-43
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Standard Motor Products, Inc.: We have audited the consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Standard Motor Products, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. As described in Note 2, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002. As discussed in Note 3, these consolidated financial statements have been revised to account for certain sales incentives in accordance with Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products), which was adopted by the Company as of January 1, 2002. /s/ KPMG LLP New York, New York February 22, 2002 F-2 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, --------------------------------------- 1999 2000 2001 ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales (Note 6)................................. $ 653,451 $ 601,392 $ 591,652 Cost of sales...................................... 482,642 438,691 452,597 ----------- ----------- ----------- Gross profit................................... 170,809 162,701 139,055 Selling, general and administrative expenses....... 140,586 131,990 123,932 ----------- ----------- ----------- Operating income............................... 30,223 30,711 15,123 Other income (expense), net (Notes 3 and 13)....... (2,243) 450 2,763 Interest expense................................... 15,951 18,045 17,430 ----------- ----------- ----------- Earnings before taxes and extraordinary item... 12,029 13,116 456 ----------- ----------- ----------- Provision for income taxes (Note 14)............... 3,344 2,886 144 ----------- ----------- ----------- Earnings before extraordinary item............. 8,685 10,230 312 ----------- ----------- ----------- Extraordinary loss on early extinguishment of debt, net of taxes of $707, $364 and $975 in 1999, 2000 and 2001, respectively. (Note 7)................. 1,060 501 2,797 ----------- ----------- ----------- Net earnings (loss)............................ $ 7,625 $ 9,729 $ (2,485) ----------- ----------- ----------- ----------- ----------- ----------- Net earnings (loss) Per Common Share -- Basic: Earnings before extraordinary item............. $ 0.66 $ 0.86 $ 0.03 Extraordinary (loss) from early extinguishment of debt...................................... (0.08) (0.04) (0.24) ----------- ----------- ----------- Net earnings (loss) Per Common Share -- Basic...... $ 0.58 $ 0.82 $ (0.21) ----------- ----------- ----------- ----------- ----------- ----------- Net earnings (loss) Per Common Share -- Diluted: Earnings before extraordinary item............. $ 0.66 $ 0.85 $ 0.03 Extraordinary (loss) from early extinguishment of debt...................................... (0.08) (0.04) (0.24) ----------- ----------- ----------- Net earnings (loss) Per Common Share -- Diluted.... $ 0.58 $ 0.81 $ (0.21) ----------- ----------- ----------- ----------- ----------- ----------- Average number of common shares.................... 13,073,272 11,933,774 11,774,591 ----------- ----------- ----------- ----------- ----------- ----------- Average number of common shares and dilutive common shares........................................... 13,145,743 11,974,341 11,830,737 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. F-3 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------- 2000 2001 ---- ---- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $ 7,699 $ 7,496 Accounts receivable, less allowances for discounts and doubtful accounts of $4,577 and $4,362 in 2000 and 2001, respectively (Notes 3 and 7).................... 106,261 117,965 Inventories (Notes 4 and 7)............................. 234,257 177,291 Deferred income taxes (Note 14)......................... 12,482 12,316 Prepaid expenses and other current assets............... 12,060 13,881 -------- -------- Total current assets............................ 372,759 328,949 -------- -------- Property, plant and equipment, net (Notes 5 and 7).......... 104,536 101,646 -------- -------- Goodwill, net............................................... 40,685 38,040 -------- -------- Other assets (Notes 6 and 11)............................... 31,416 40,794 -------- -------- Total assets.................................... $549,396 $509,429 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable (Note 7).................................. $ 38,930 $ 4,075 Current portion of long-term debt (Note 7).............. 13,643 1,784 Accounts payable........................................ 56,612 26,110 Sundry payables and accrued expenses.................... 49,671 41,968 Accrued customer returns................................ 17,693 18,167 Payroll and commissions................................. 8,119 8,489 -------- -------- Total current liabilities....................... 184,668 100,593 -------- -------- Long-term debt (Notes 7 and 8).............................. 150,018 200,066 -------- -------- Postretirement benefits other than pensions and other accrued liabilities (Notes 11 and 12)..................... 20,405 23,083 Commitments and contingencies (Notes 7, 9, 10, 11, 12 and 17) Stockholders' equity (Notes 7, 8, 9,10 and 11): Common Stock -- par value $2.00 per share: Authorized 30,000,000 shares, issued and outstanding 11,695,179 and 11,823,650 in 2000 and 2001, respectively...................................... 26,649 26,649 Capital in excess of par value.......................... 2,541 1,877 Retained earnings....................................... 190,253 183,532 Accumulated other comprehensive loss.................... (591) (3,722) -------- -------- 218,852 208,336 Less: Treasury stock -- at cost (1,629,297 and 1,500,826 shares in 2000 and 2001, respectively).................... 24,547 22,649 -------- -------- Total stockholders' equity...................... 194,305 185,687 -------- -------- Total liabilities and stockholders' equity...... $549,396 $509,429 -------- -------- -------- --------
See accompanying notes to consolidated financial statements. F-4 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------ 1999 2000 2001 ---- ---- ---- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss)..................................... $ 7,625 $ 9,729 $ (2,485) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization....................... 17,230 18,922 18,909 Gain on disposal of property, plant & equipment..... (2,564) (99) (265) Equity (income) loss from joint ventures............ 4,118 (702) (844) Employee stock ownership plan allocation............ 1,739 1,032 713 Tax benefit related to employee stock options....... 290 -- 48 Increase in deferred income taxes................... (4,552) (897) (3,628) Extraordinary loss on repayment of debt............. 1,767 865 3,772 Change in assets and liabilities, net of effects from acquisitions: Decrease in accounts receivable, net................ 10,782 14,793 13,296 (Increase) decrease in inventories.................. (5,944) (44,666) 56,966 (Increase) decrease in prepaid expenses and other current assets.................................... (947) 388 (1,821) (Increase) decrease in other assets................. (1,514) 3,811 (7,745) Increase (decrease) in accounts payable............. (10,349) 14,413 (30,502) Increase (decrease) in sundry payables and accrued expenses.......................................... 1,129 (16,724) (9,749) Increase (decrease) in other liabilities............ 2,174 (1,818) 3,524 -------- -------- -------- Net cash provided by (used in) operating activities.................................... 20,984 (953) 40,189 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the sale of property, plant and equipment............................................. 8,420 657 652 Capital expenditures, net of effects from acquisitions.......................................... (14,423) (16,652) (13,740) Payments for acquisitions, net of cash acquired......... (17,381) (2,718) (1,069) -------- -------- -------- Net cash used in investing activities........... (23,384) (18,713) (14,157) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayments) under line-of-credit agreements............................................ (819) 36,285 71,935 Net proceeds from issuance of long-term debt............ 86,568 -- -- Principal payments and retirement of other long-term debt.................................................. (54,664) (29,119) (93,601) Proceeds from exercise of employee stock options........ 1,830 -- 473 Purchase of treasury stock.............................. (9,765) (14,345) -- Dividends paid.......................................... (4,456) (4,324) (4,236) -------- -------- -------- Net cash (used in) provided by financing activities.................................... 18,694 (11,503) (25,429) -------- -------- -------- Effect of exchange rate changes on cash..................... 629 (1,512) (806) -------- -------- -------- Net (decrease) increase in cash and cash equivalents........ 16,923 (32,681) (203) CASH AND CASH EQUIVALENTS at beginning of year.............. 23,457 40,380 7,699 -------- -------- -------- CASH AND CASH EQUIVALENTS at end of year.................... $ 40,380 $ 7,699 $ 7,496 -------- -------- -------- -------- -------- -------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest............................................ $ 14,733 $ 18,943 $ 17,403 -------- -------- -------- -------- -------- -------- Income taxes........................................ $ 6,205 $ 2,776 $ 2,792 -------- -------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements. F-5 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
ACCUMULATED CAPITAL IN OTHER COMMON EXCESS OF RETAINED COMPREHENSIVE TREASURY STOCK PAR VALUE EARNINGS INCOME (LOSS) STOCK TOTAL ----- --------- -------- ------------- ----- ----- (DOLLARS IN THOUSANDS) BALANCE AT DECEMBER 31, 1998........... $26,649 $2,951 $181,679 $ (516) $ (5,738) $205,025 Comprehensive Income: Net earnings....................... 7,625 7,625 Foreign currency translation adjustment....................... 1,230 1,230 -------- Total comprehensive income....................... 8,855 Cash dividends paid.................... (4,456) (4,456) Exercise of employee stock options..... (381) 2,211 1,830 Tax benefits applicable to the exercise of employee stock options............ 290 290 Employee Stock Ownership Plan.......... 97 1,642 1,739 Purchase of treasury stock............. (9,765) (9,765) ------- ------ -------- ------- -------- -------- BALANCE AT DECEMBER 31, 1999........... 26,649 2,957 184,848 714 (11,650) 203,518 Comprehensive Income: Net earnings....................... 9,729 9,729 Foreign currency translation adjustment....................... (1,305) (1,305) -------- Total comprehensive income....................... 8,424 Cash dividends paid.................... (4,324) (4,324) Employee Stock Ownership Plan.......... (416) 1,448 1,032 Purchase of treasury stock............. (14,345) (14,345) ------- ------ -------- ------- -------- -------- BALANCE AT DECEMBER 31, 2000........... 26,649 2,541 190,253 (591) (24,547) 194,305 Comprehensive Loss: Net loss........................... (2,485) (2,485) Foreign currency translation adjustment....................... (1,086) (1,086) Unrealized loss on interest rate swap agreements.................. (2,045) (2,045) -------- Total comprehensive loss....... (5,616) Cash dividends paid.................... (4,236) (4,236) Exercise of employee stock options..... (295) 768 473 Tax benefits applicable to the exercise of employee stock options............ 48 48 Employee Stock Ownership Plan.......... (417) 1,130 713 ------- ------ -------- ------- -------- -------- BALANCE AT DECEMBER 31, 2001........... $26,649 $1,877 $183,532 $(3,722) $(22,649) $185,687 ------- ------ -------- ------- -------- -------- ------- ------ -------- ------- -------- --------
See accompanying notes to consolidated financial statements. F-6 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION Standard Motor Products, Inc. (the 'Company') is engaged in the manufacture and sale of automotive replacement parts. The consolidated financial statements include the accounts of the Company and all subsidiaries in which the Company has more than a 50% equity ownership. The Company's investments in unconsolidated affiliates are accounted for on the equity method. All significant intercompany items have been eliminated. USE OF ESTIMATES In conformity with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements. Some of the more significant estimates include allowances for doubtful accounts, inventory valuation reserves, depreciation and amortization of long-lived assets, product liability and litigation matters, deferred tax asset valuation allowance and sales return allowances. Actual results could differ from those estimates. RECLASSIFICATIONS Where appropriate, certain amounts in 1999 and 2000 have been reclassified to conform with the 2001 presentation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. MARKETABLE SECURITIES At December 31, 2000 and 2001, held-to-maturity securities amounted to $7.2 million. Held-to-maturity securities consist primarily of U.S. Treasury Bills and corporate debt securities which are reported at amortized cost which approximates fair value. As of December 31, 2001, the held-to-maturity securities mature within two years. INVENTORIES Inventories are stated at the lower of cost (determined by means of the first-in, first-out method) or market. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998 and June 2000, the FASB issued SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities' and SFAS No. 138, 'Accounting for Certain Derivative Instruments and Certain Hedging Activities.' These statements establish accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. For derivatives that have been formally designated as a cash flow hedge (interest rate swap agreements), the effective portion of changes in the fair value of the derivatives are recorded in 'other comprehensive income (loss).' Payment or receipts on interest rate swap agreements are recorded in the 'interest expense' caption in the statement of operations. The Company had no outstanding derivatives as of January 1, 2001. F-7 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT These assets are recorded at cost and are depreciated using the straight-line method of depreciation over the estimated useful lives as follows:
ESTIMATED LIFE ------------------------- Buildings and improvements................................. 10 to 33 1/2 years Machinery and equipment.................................... 7 to 12 years Tools, dies and auxiliary equipment........................ 3 to 8 years Furniture and fixtures..................................... 3 to 12 years Computer software.......................................... 3 to 10 years Leasehold improvements..................................... 10 years or life of lease
GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired, has been amortized on a straight-line basis over the estimated period of expected benefit, generally 15 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. Accumulated amortization at December 31, 2001 and 2000 was $16.4 million and $12.8 million. Goodwill will no longer be amortized upon adoption of Statement of Financial Accounting Standards (SFAS) No. 142, 'Goodwill and Other Intangible Assets' (See discussion in 'Recently Issued Accounting Standards'). IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. FOREIGN CURRENCY TRANSLATION Assets and liabilities are translated into U.S. dollars at year end exchange rates and revenues and expenses are translated at average exchange rates during the year. The resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) and remains there until the underlying foreign operation is liquidated or substantially disposed of. REVENUE RECOGNITION The Company recognizes revenues from product sales upon shipment to customers. The Company estimates and records provisions for cash discounts, quantity rebates, sales returns and warranties, in the period the sale is recorded, based upon its prior experience. F-8 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The annual net postretirement benefit liability and related expense under the Company's benefit plans are determined on an actuarial basis. Benefits are determined primarily based upon employees' length of service. INCOME TAXES Income taxes are calculated using the liability method in accordance with the provisions of Statement of Financial Accounting Standards ('SFAS') No. 109, 'Accounting for Income Taxes.' Deferred tax assets and liabilities are determined based on the estimated future tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by the current enacted tax rates. Deferred tax expense (benefit) is the result of changes in the deferred tax asset and liability. NET EARNINGS PER COMMON SHARE The Company presents two calculations of earnings per common share. 'Basic' earnings per common share equals net income divided by weighted average common shares outstanding during the period. 'Diluted' earnings per common share equals net income divided by the sum of weighted average common shares outstanding during the period plus potentially dilutive common shares. Potentially dilutive common shares that are anti-dilutive are excluded from net earnings per common share. The following is a reconciliation of the shares used in calculating basic and dilutive net earnings per common share.
1999 2000 2001 ---- ---- ---- (IN THOUSANDS) Weighted average common shares........................... 13,073 11,934 11,775 Effect of stock options.................................. 73 40 56 ------ ------ ------ Weighted average common shares outstanding assuming dilution............................................... 13,146 11,974 11,831 ------ ------ ------ ------ ------ ------
The average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented.
1999 2000 2001 ---- ---- ---- (IN THOUSANDS) Stock options............................................... 552 861 625 ----- ----- ----- ----- ----- ----- Convertible debentures...................................... 1,165 2,796 2,796 ----- ----- ----- ----- ----- -----
STOCK OPTION PLANS The Company accounts for its stock option plans in accordance with the provisions of SFAS No. 123 'Accounting for Stock Based Compensation.' As permitted by this statement, the Company has chosen to continue to apply the intrinsic value-based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees' and related interpretations including SFAS interpretation No. 44, 'Accounting for certain transactions involving stock compensation and interpretation of APB No. 25,' issued in March 2001. Accordingly, no compensation expense has been recognized for options granted because the exercise price is equal to the fair value of the stock at the date of grant. As required, the Company provides pro forma net income and pro forma earnings per share F-9 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) disclosures for stock option grants, as if the fair value based method defined in SFAS No. 123 had been applied. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company places its cash investments with high quality financial institutions and limits the amount of credit exposure to any one institution. With respect to accounts receivable, such receivables are primarily from warehouse distributors and major retailers in the automotive aftermarket industry located in the United States. The Company performs ongoing credit evaluations of its customers' financial conditions. Members of one marketing group represent the Company's largest group of customers and accounted for approximately 14%, 15% and 14% of consolidated net sales for the years ended December 31, 1999, 2000 and 2001, respectively. One individual member of this marketing group accounted for 9%, 9%, and 10% of net sales for the years ended December 31, 1999, 2000 and 2001, respectively. The Company's five largest individual customers, including members of this marketing group, accounted for 35%, 33% and 42% of net sales in 1999, 2000 and 2001, respectively. RECENTLY ISSUED ACCOUNTING STANDARDS On January 1, 2002, the Company adopted the guidelines of the Emerging Issues Task Force Issue No. 01-9, Accounting Consideration Given by a Vendor to a Customer (Including Reseller of the Vendor's Products) ('EITF 01-9'). These guidelines address when sales incentives and discounts should be recognized and the accounting for certain costs incurred by a vendor on behalf of a customer, as well as where the related revenues and expenses should be classified in the financial statements. Historically, the Company has provided certain consideration, including rebates, product and discounts to customers and treated such costs as advertising, marketing and sales force expenses. Such costs are now treated as a reduction of revenues or as cost of sales. As a result, certain costs of approximately $18.0 million, $25.4 million and $30.4 million, respectively, have been reclassified from selling, general and administrative expenses for the three fiscal years ended December 31, 1999, 2000 and 2001. These reclassifications had no effect on net earnings. In June 2001, the FASB issued SFAS No. 141, Business Combinations, (SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria to determine whether intangible assets acquired in a business combination should be recognized and reported separately from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. SFAS No. 142 requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 142 after its adoption. The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS No. 142 effective January 1, 2002. As of the date of adoption of SFAS No. 142, the Company has unamortized goodwill in the amount of $38 million. Upon adoption of SFAS No. 142, our earnings before extraordinary item and net earnings for basic and diluted earnings per share adjusted to exclude goodwill amortization expense (net of taxes) were as follows: F-10 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------------ 1999 2000 2001 ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Reported earnings before extraordinary item................. $ 8,685 $10,230 $ 312 Add back: goodwill amortization expense, net of tax......... 2,439 2,733 2,498 ------- ------- ------- Adjusted earnings before extraordinary item................. $11,124 $12,963 $ 2,810 ------- ------- ------- ------- ------- ------- Basic earnings per share: Reported basic earnings per share before extraordinary item.................................................. $ 0.66 $ 0.86 $ 0.03 Add back: goodwill amortization expense, net of tax..... 0.19 0.23 0.21 ------- ------- ------- Adjusted basic earnings per share before extraordinary item...................................................... $ 0.85 $ 1.09 $ 0.24 ------- ------- ------- ------- ------- ------- Diluted earnings per share: Reported diluted earnings per share before extraordinary item.................................................. $ 0.66 $ 0.85 $ 0.03 Add back: goodwill amortization expense, net of tax..... 0.19 0.23 0.21 ------- ------- ------- Adjusted diluted earnings per share before extraordinary item...................................................... $ 0.85 $ 1.08 $ 0.24 ------- ------- ------- ------- ------- ------- Reported net earnings (loss)................................ $ 7,625 $ 9,729 $(2,485) Add back: goodwill amortization expense, net of tax......... 2,439 2,733 2,498 ------- ------- ------- Adjusted net earnings....................................... $10,064 $12,462 $ 13 ------- ------- ------- ------- ------- ------- Basic net earnings (loss) per share: Reported basic net earnings (loss) per share............ $ 0.58 $ 0.82 $ (0.21) Add back: goodwill amortization expense, net of tax..... 0.19 0.23 0.21 ------- ------- ------- Adjusted basic net earnings per share....................... $ 0.77 $ 1.05 $ -- ------- ------- ------- ------- ------- ------- Diluted net earnings (loss) per share: Reported diluted net earnings (loss) per share.......... $ 0.58 $ 0.81 $ (0.21) Add back: goodwill amortization expense, net of tax..... 0.19 0.23 0.21 ------- ------- ------- Adjusted diluted net earnings per share..................... $ 0.77 $ 1.04 $ -- ------- ------- ------- ------- ------- -------
Management is currently analyzing the impact of adoption of this Standard, but believes this Standard is likely to result in the impairment of a portion of the Company's goodwill. The Company has substantially completed the first step of the initial impairment test required by the Standard and identified approximately $16 million of goodwill that may be impaired based on the new requirements. The Company will complete the impairment testing required to determine the actual amount of goodwill impairment in the first fiscal quarter of 2002. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations. 2. ACQUISITIONS In January 2000, the Company completed the purchase of Vehicle Air Conditioning Parts, located in England, which has subsequently been named 'Four Seasons UK, LTD.' In July 2000, the Company completed the purchase of Automotive Heater Exchange SRL in Massa, Italy. In addition, during 2000 and 2001, the Company increased its ownership percentage in Standard Motor Products Holdings Limited, formerly Intermotor Holdings Limited, from 74.25% to 86%. In aggregate, approximately $3.8 million was incurred in connection with these acquisitions. Such acquisitions had an immaterial effect on net earnings. F-11 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1999, the Company acquired and accounted for as a purchase, the following business: In January 1999, the Company acquired 85% of the stock of Webcon UK Limited, and, through its UK joint venture Blue Streak Europe Limited, Webcon's affiliate Injection Correction UK Limited located in Sunbury-on-Thames England, for approximately $3.5 million. The remaining 15% was acquired in January 2000. The acquisition increased consolidated net sales by approximately $12 million in 1999 and had an immaterial effect on net earnings for the year ended December 31, 1999. In February 1999, the Company acquired 100% of the stock of Eaglemotive Corporation for approximately $12.4 million. The acquisition increased consolidated net sales by approximately $22 million in 1999 and had an immaterial effect on net earnings for the year ended December 31, 1999. In April 1999, the Company acquired Lemark Auto Accessories Limited, located in Redditch, England, for approximately $1.9 million. The acquisition increased consolidated net sales by approximately $3 million and had an immaterial effect on net earnings for the year ended December 31, 1999. The Company's acquisitions were funded from cash and short term borrowings. Assets acquired in all of the acquisitions consisted primarily of inventory and property, plant and equipment. The purchase prices have been allocated to the assets acquired and liabilities assumed based on the fair value at the dates of acquisition. In aggregate, the excess of the purchase price over the fair value of the net assets acquired during 2001, 2000 and 1999 was approximately $1.1 million, $2.6 million and $5.7 million, respectively. The operating results of these acquired businesses have been included in the consolidated financial statements from the date of each respective acquisition. In December 2001, the Company signed a letter of intent to acquire Carol Cable Limited, a manufacturer and distributor of wire sets, based in England, for approximately $1.7 million. Assets consist primarily of property plant and equipment, and inventory. The purchase is expected to be completed in April 2002 with funds provided under the Company's line of credit. 3. SALE OF ACCOUNTS RECEIVABLE The Company sold certain accounts receivable through its wholly-owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. In May 1999 SMP Credit Corp. and an independent financial institution entered into a three year agreement whereby SMP Credit Corp. could sell up to a $25 million undivided ownership interest in a designated pool of certain of these eligible receivables. This agreement was terminated in 2001 as part of the new credit facility described in Note 7. At December 31, 2000, net accounts receivables amounting to $25 million had been sold under this agreement. These sales were reflected as reductions of trade accounts receivable and the related fees and discounting expense were recorded as other expense. 4. INVENTORIES
DECEMBER 31, ----------------------- 2000 2001 ---- ---- (DOLLARS IN THOUSANDS) Finished goods.............................................. $165,381 $141,799 Work in process............................................. 3,552 3,155 Raw materials............................................... 65,324 32,337 -------- -------- Total inventories....................................... $234,257 $177,291 -------- -------- -------- --------
F-12 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ----------------------- 2000 2001 ---- ---- (DOLLARS IN THOUSANDS) Land, buildings and improvements............................ $ 60,435 $ 60,665 Machinery and equipment..................................... 101,884 109,617 Tools, dies and auxiliary equipment......................... 12,035 17,815 Furniture and fixtures...................................... 28,340 27,643 Computer software........................................... 4,824 10,231 Leasehold improvements...................................... 7,475 7,450 Construction in progress.................................... 12,328 6,440 -------- -------- 227,321 239,861 Less accumulated depreciation and amortization.............. 122,785 138,215 -------- -------- Total property, plant and equipment, net................ $104,536 $101,646 -------- -------- -------- --------
Depreciation expense was $13.8 million, $15.4 million and $15.3 million for 1999, 2000 and 2001, respectively. 6. OTHER ASSETS
DECEMBER 31, ------------------------ 2000 2001 ---- ---- (DOLLARS IN THOUSANDS) Marketable securities....................................... $ 7,200 $ 7,200 Unamortized customer supply agreements...................... 2,365 1,892 Equity in joint ventures.................................... 1,956 2,149 Deferred income taxes....................................... 8,859 12,653 Deferred loan costs......................................... 3,864 5,389 Other....................................................... 7,172 11,511 ------- ------- Total other assets...................................... $31,416 $40,794 ------- ------- ------- -------
Included in Other is a preferred stock investment in a customer of the Company. Net sales to such customer amounted to $58 million, $57.4 million and $57.9 million in 1999, 2000 and 2001, respectively. 7. CREDIT FACILITIES AND LONG-TERM DEBT The Company, effective April 27, 2001 entered into an agreement with GE Capital Corp. and a syndicate of lenders for a new secured revolving credit facility. The former unsecured revolving credit facility was set to expire on November 30, 2001. The term of the new credit agreement is for a period of five years and provides for a line of credit up to $225 million. The initial proceeds have been used to refinance approximately $97 million of the outstanding indebtedness under the Company's former bank line of credit, a 7.56% senior note of $52 million, a $25 million accounts receivable sales arrangement and a Canadian Credit Facility of $5 million. The Company recorded an extraordinary loss of approximately $2.8 million, net of taxes, in the second quarter of 2001, for a prepayment penalty and write-off of unamortized fees for the retirement of the above related debt. Availability under the new credit facility is based on a formula of eligible accounts receivable, eligible inventory and eligible fixed assets. Direct borrowings bear interest at the Prime Rate plus the applicable margin (as defined) or the LIBOR Rate plus the applicable margin (as defined), at the option of the Company. At December 31, 2000 and 2001, the interest rate on the Company's revolving credit facilities was 9.75% and 4.30%, respectively. Borrowings are collateralized by accounts receivable, inventory and fixed assets of the Company and its subsidiaries. The terms of the new revolving credit facility contain, among other provisions, requirements of maintaining defined levels of tangible net worth and specific limits or restrictions on additional indebtedness, F-13 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) capital expenditures, liens and acquisitions. The Company was in compliance with the covenants at December 31, 2001. In addition, a foreign subsidiary of the Company has a revolving credit facility. The amount of short-term bank borrowings outstanding under that facility was $3.9 million and $4.1 million at December 31, 2000 and 2001, respectively. At December 31, 2001, the foreign subsidiary was not in compliance with certain covenants, for which it received waivers and amendments. The weighted average interest rates on these borrowings at December 31, 2001 and 2000 were 6.4% and 6.9%, respectively. On July 26, 1999, the Company completed a public offering of convertible subordinated debentures amounting to $90 million. The Convertible Debentures carry an interest rate of 6.75%, payable semi-annually, and will mature on July 15, 2009. The Debentures are convertible into approximately 2,796,000 shares of the Company's common stock. The Company may, at its option, redeem some or all of the Debentures at any time on or after July 15, 2004, for a redemption price equal to the issuance price plus accrued interest. In addition, if a change in control, as defined, occurs at the Company, the Company will be required to make an offer to purchase the convertible debentures at a purchase price equal to 101% of their aggregate principal amount, plus accrued interest. The Company incurred fees in relation to the offering of approximately $3.4 million. Net proceeds from the offering were used to pre-pay a senior note payable, including prepayment penalties, repurchase a portion of the Company's common stock and pay down short term bank borrowings. Under the terms of the 7.56% senior note agreement, the Company was required to repay the loan in seven equal annual installments beginning in 2000. This senior note was paid off as part of the new revolving credit facility. Under the terms of a Canadian (CDN) credit agreement, the Company was required to repay the loan as follows: $2 million CDN in 2001 and a final payment of $6 million CDN in 2002. This credit agreement was paid off as part of the new revolving credit facility.
DECEMBER 31, ----------------------- 2000 2001 ---- ---- (DOLLARS IN THOUSANDS) 6.75% convertible subordinated debentures................... $ 90,000 $ 90,000 Revolving credit facility................................... -- 106,790 7.56% senior note........................................... 62,571 -- Canadian Credit Facility.................................... 5,335 -- Other....................................................... 5,755 5,060 -------- -------- 163,661 201,850 Less current portion........................................ 13,643 1,784 -------- -------- Total non-current portion of long-term debt............. $150,018 $200,066 -------- -------- -------- --------
Maturities of long-term debt during the five years ending December 31, 2002 through 2006 are $1.8 million, $1.3 million, $1.1 million, $0.6 million and $106.9 million, respectively. 8. INTEREST RATE SWAP AGREEMENTS The Company does not enter into financial instruments for trading or speculative purposes. The principal financial instruments used for cash flow hedging purposes are interest rate swaps. In July 2001, the Company entered into interest rate swap agreements to manage its exposure to interest rate changes. The swaps effectively convert a portion of the Company's variable rate debt under the revolving credit facility to a fixed rate, without exchanging the notional principal amounts. At December 31, 2001, the Company had two outstanding interest rate swap F-14 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) agreements maturing in January 2003 and 2004, with aggregate notional principal amounts of $75 million. Under these agreements the Company receives a floating rate based on the LIBOR interest rate, and pays a fixed rate of 4.92% on a notional amount of $45 million and 4.37% on a notional amount of $30 million. If, at any time, the swaps are determined to be ineffective, in all or in part, due to changes in the interest rate swap agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as gain or loss in the statement of operations in the period. It is not expected that any gain or loss will be reported in the statement of operations during the year ending December 31, 2002. 9. STOCKHOLDERS' EQUITY The Company has authority to issue 500,000 shares of preferred stock, $20 par value, and the Board of Directors is vested with the authority to establish and designate series of preferred, to fix the number of shares therein and the variations in relative rights as between series. On December 18, 1995, the Board of Directors established a new series of preferred shares designated as Series A Participating Preferred Stock. The number of shares constituting the Series A Preferred Stock is 30,000. The Series A Preferred Stock is designed to participate in dividends, ranks senior to the Company's common stock as to dividends and liquidation rights and has voting rights. Each share of the Series A Preferred Stock shall entitle the holder to one thousand votes on all matters submitted to a vote of the stockholders of the Company. No such shares were outstanding at December 31, 2001. On January 17, 1996, the Board of Directors adopted a Shareholder Rights Plan (Plan). Under the Plan, the Board declared a dividend of one Preferred Share Purchase Right (Right) for each outstanding common share of the Company. The dividend was payable on March 1, 1996, to the shareholders of record as of February 15, 1996. The Rights are attached to and automatically trade with the outstanding shares of the Company's common stock. The Rights will become exercisable only in the event that any person or group of affiliated persons becomes a holder of 20% or more of the Company's outstanding common shares, or commences a tender or exchange offer which, if consummated, would result in that person or group of affiliated persons owning at least 20% of the Company's outstanding common shares. Once the rights become exercisable they entitle all other shareholders to purchase, by payment of an $80.00 exercise price, one one-thousandth of a share of Series A Participating Preferred Stock, subject to adjustment, with a value of twice the exercise price. In addition, at any time after a 20% position is acquired and prior to the acquisition of a 50% position, the Board of Directors may require, in whole or in part, each outstanding Right (other than Rights held by the acquiring person or group of affiliated persons) to be exchanged for one share of common stock or one one-thousandth of a share of Series A Preferred Stock. The Rights may be redeemed at a price of $0.001 per Right at any time prior to their expiration on February 28, 2006. During the years 1998 through 2000, the Board of Directors authorized multiple repurchase programs under which the Company could repurchase shares of its common stock. During such years, $26.7 million (in aggregate) of common stock has been repurchased to meet present and future requirements of the Company's stock option programs and to fund the Company's ESOP. As of December 31, 2001, the Company has Board authorization to repurchase additional shares at a maximum cost of $1.7 million. 10. STOCK OPTIONS The Company has principally two fixed stock-based compensation plans. Under the 1994 Omnibus Stock Option Plan, as amended, the Company is authorized to issue 1,500,000 stock options. The options become exercisable over a three to five year period and expire at the end of five years following the date they become exercisable. Under the 1996 Independent Directors' F-15 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock Option Plan, the Company is authorized to issue 50,000 stock options. The options become exercisable one year after the date of grant and expire at the end of ten years following the date of grant. At December 31, 2001, in aggregate 1,320,280 shares of authorized but unissued common stock were reserved for issuance under the Company's stock option plans. As permitted under SFAS No. 123, the Company continues to apply the provisions of APB Opinion No. 25 for stock-based awards granted to employees. Accordingly, no compensation cost has been recognized for the fixed stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value method of SFAS No. 123, the Company's net earnings (loss) per share would have changed to the pro forma amounts as follows:
1999 2000 2001 ---- ---- ---- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) Net earnings (loss)......................... As reported $7,625 $9,729 $(2,485) Pro forma $6,648 $8,708 $(2,697) Basic earnings (loss)....................... As reported $ 0.58 $ 0.82 $ (0.21) per share................................... Pro forma $ 0.51 $ 0.73 $ (0.23) Diluted earnings............................ As reported $ 0.58 $ 0.81 $ (0.21) (loss) per share............................ Pro forma $ 0.51 $ 0.72 $ (0.23)
The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
1999 2000 2001 ---- ---- ---- Expected option life........................... 4.3 years 4.3 years 4.0 years Expected stock volatility...................... 39.5% 39.1% 38.6% Expected dividend yield........................ 1.8% 3.8% 2.8% Risk-free interest rate........................ 6.6% 4.6% 4.2% Fair value of option........................... $7.97 $2.53 $3.71
A summary of the status of the Company's stock option plans follow:
1999 2000 2001 ----------------- ----------------- ----------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- (SHARES IN THOUSANDS) Outstanding at beginning of year....................... 793 $19.58 808 $20.40 1,189 $16.60 Granted......................... 136 23.73 498 10.73 10 13.05 Exercised....................... (100) 17.83 -- -- (55) 9.29 Forfeited....................... (21) 23.13 (117) 17.78 (133) 18.18 ---- ------ ----- ------ ----- ------ Outstanding at end of year...... 808 $20.40 1,189 $16.60 1,011 $16.76 ---- ------ ----- ------ ----- ------ ---- ------ ----- ------ ----- ------ Options exercisable at end of year.......................... 431 526 671 ---- ----- -----
F-16 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCK OPTIONS OUTSTANDING
SHARES WEIGHTED-AVERAGE RANGE OF OUTSTANDING REMAINING CONTRACTUAL WEIGHTED-AVERAGE EXERCISE PRICES AT 12/31/01 LIFE (YEARS) EXERCISE PRICE --------------- ----------- ------------ -------------- $6.56-$11.29 386 6.1 $ 9.92 $13.05-$16.94 139 1.6 $16.05 $20.50-$24.84 486 3.5 $22.40
STOCK OPTIONS EXERCISABLE
RANGE OF SHARES EXERCISABLE WEIGHTED-AVERAGE EXERCISE PRICES AT 12/31/01 EXERCISE PRICE --------------- ----------- -------------- $6.56-$23.84 671 $19.17
11. RETIREMENT BENEFIT PLANS The Company has a defined benefit pension plan covering certain former employees of the Company's former Brake business. The following table represents a reconciliation of the beginning and ending benefit obligation, the fair value of plan assets and the funded status of the plan:
DECEMBER 31, ---------------------- 2000 2001 ---- ---- (DOLLARS IN THOUSANDS) Benefit obligation at beginning of year..................... $ 9,271 $ 8,957 Interest cost............................................... 658 629 Actuarial loss (gain)....................................... (102) 93 Benefits paid............................................... (870) (866) ------- ------- Benefit Obligation at End of Year........................... $ 8,957 $ 8,813 ------- ------- ------- ------- Fair value of plan assets at beginning of year.............. $12,755 $12,063 Actual return on plan assets................................ 178 (135) Benefits paid............................................... (870) (866) ------- ------- Fair value of plan assets at end of year.................... $12,063 $11,062 ------- ------- Funded status............................................... $ 3,106 $ 2,249 Unrecognized net actuarial gain............................. (2,654) (1,386) ------- ------- Prepaid benefit cost........................................ $ 452 $ 863 ------- ------- ------- -------
Weighted average assumptions are as follows:
DECEMBER 31, --------------------------- 1999 2000 2001 ---- ---- ---- Discount rates........................................... 7.50% 7.50% 7.25% Expected long-term rate of return on assets.............. 8.00% 8.00% 8.00%
Components of net periodic (benefit) cost follow: F-17 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, --------------------------- 1999 2000 2001 ---- ---- ---- (DOLLARS IN THOUSANDS) Service cost.............................................. $ -- $ -- $ -- Interest cost............................................. 651 658 629 Return on assets.......................................... (900) (988) (928) Amortization of prior service cost........................ -- -- -- Recognized actuarial (gain) loss.......................... (60) (127) (112) ----- ----- ----- Net periodic (benefit) cost............................... $(309) $(457) $(411) ----- ----- ----- ----- ----- -----
In addition, the Company participates in several multi employer plans which provide defined benefits to substantially all unionized workers. The Multi-employer Pension Plan Amendments Act of 1980 imposes certain liabilities upon employers associated with multi employer plans. The Company has not received information from the plans' administrators to determine its share, if any, of unfunded vested benefits. The Company and certain of its subsidiaries also maintain various defined contribution plans, which include profit sharing and provide retirement benefits for other eligible employees. The provisions for retirement expense in connection with the plans are as follows:
MULTI- DEFINED CONTRIBUTION EMPLOYER PLANS AND OTHER PLANS -------------- --------------- Years ended December 31, 1999 $348,000 $2,332,000 2000 344,000 2,319,000 2001 $299,000 $2,449,000
The Company has an Employee Stock Ownership Plan and Trust for employees who are not covered by a collective bargaining agreement. 75,000 shares each were granted to employees during 1999, 2000 and 2001, under the terms of the ESOP. These shares were funded directly from treasury stock. In fiscal 2000, the Company created an employee benefits trust to which it contributed 750,000 shares of treasury stock. The Company is authorized to instruct the trustees to distribute such shares toward the satisfaction of the Company's future obligations under employee benefit plans. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released. The trustees will vote the shares in accordance with its fiduciary duties. The provision for expense in connection with the ESOP was approximately $1.7 million in 1999, $1.0 million in 2000 and $0.7 million in 2001. In August 1994 the Company established an unfunded Supplemental Executive Retirement Plan (SERP) for key employees of the Company. Under the plan, these employees may elect to defer a portion of their compensation and, in addition, the Company may at its discretion make contributions to the plan on behalf of the employees. Such contributions were $98,000, $24,000 and $37,000 in 1999, 2000, and 2001, respectively. On October 1, 2001, the Company adopted a second unfunded SERP. The SERP is a defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key employees upon retirement based upon the employees' years of service and compensation. For the year ended December 31, 2001, approximately $0.9 million of benefits were accrued and $0.1 million was charged to expense. The projected benefit obligation and accumulated benefit obligation were $1.3 million and $0.9 million, respectively, at December 31, 2001. The costs and benefit obligations were determined using a discount rate and an expected rate of return on assets of 7.25% at December 31, 2001. F-18 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. POSTRETIREMENT MEDICAL BENEFITS The Company provides certain medical and dental care benefits to eligible retired employees. The Company's current policy is to fund the cost of the health care plans on a pay-as-you-go basis. The following table represents a reconciliation of the beginning and ending benefit obligation and the funded status of the plan.
DECEMBER 31, ---------------------- 2000 2001 ---- ---- (DOLLARS IN THOUSANDS) Benefit obligation at beginning of year..................... $ 18,369 $ 17,447 Service cost................................................ 1,377 1,500 Interest cost............................................... 1,152 1,314 Actuarial (gain) loss....................................... (2,586) 1,180 Benefits paid............................................... (865) (957) -------- -------- Benefit obligation at end of year........................... $ 17,447 $ 20,484 -------- -------- -------- -------- Funded status............................................... $(17,447) $(20,484) Unrecognized prior service cost............................. 1,038 914 Unrecognized net actuarial gain............................. (3,996) (2,582) -------- -------- Accrued benefit cost........................................ $(20,405) $(22,152) -------- -------- -------- --------
Components of net periodic benefit cost follow:
DECEMBER 31, ------------------------------ 1999 2000 2001 ---- ---- ---- (DOLLARS IN THOUSANDS) Service cost............................................ $1,284 $1,377 $1,500 Interest cost........................................... 1,221 1,152 1,314 Amortization of prior service cost...................... 124 124 124 Recognized actuarial gain............................... (8) (275) (232) ------ ------ ------ Net periodic benefit cost............................... $2,621 $2,378 $2,706 ------ ------ ------ ------ ------ ------
Actuarial assumptions used to determine costs and benefit obligations are as follows:
1999 2000 2001 ---- ---- ---- Discount rate............................................... 7.50% 7.50% 7.25% Current medical cost trend rate............................. 7% 10% 9% Current dental cost trend rate.............................. 6% 5.5% 5% Ultimate medical cost trend rate............................ 6% 5% 5% Year trend rate declines to ultimate........................ 2002 2005 2005
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects for 2001:
1-PERCENTAGE- 1-PERCENTAGE- POINT INCREASE POINT DECREASE -------------- -------------- (DOLLARS IN THOUSANDS) Effect on total of service and interest cost components........................................... $ 269 $ (221) Effect on post retirement benefit obligation........... $1,539 $(1,300)
F-19 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. OTHER INCOME (EXPENSE), NET
1999 2000 2001 ---- ---- ---- (DOLLARS IN THOUSANDS) Interest and dividend income.......................... $ 1,637 $ 1,038 $1,336 Loss on sale of accounts receivable (Note 3).......... (1,281) (1,567) (484) Income (loss) from joint ventures..................... (4,118) 702 844 Gain on disposal of property, plant and equipment..... 2,564 99 265 Other -- net.......................................... (366) 225 382 ------- ------- ------ Total other income (expense), net................. $(1,564) $ 497 $2,343 ------- ------- ------ ------- ------- ------
In connection with the Company's Heat Battery joint venture in Canada, in the fourth quarter of 1999, it was mutually agreed between the joint venture participants, that due to lack of significant commercial success and recurring losses, the joint venture would close. In connection with this decision, the Company recorded an approximate $4.0 million charge relating to writing down the Company's investment to net realizable value. 14. INCOME TAXES The income tax provision (benefit) consists of the following:
1999 2000 2001 ---- ---- ---- (DOLLARS IN THOUSANDS) Current: Domestic.......................................... $ 4,376 $ 1,260 $ 2,099 Foreign........................................... 3,520 2,523 1,673 ------- ------- ------- Total Current......................................... 7,896 3,783 3,772 ------- ------- ------- Deferred: Domestic.......................................... (5,167) (1,103) (3,408) Foreign........................................... 615 206 (220) ------- ------- ------- Total Deferred........................................ (4,552) (897) (3,628) ------- ------- ------- Total income tax provision............................ $ 3,344 $ 2,886 $ 144 ------- ------- ------- ------- ------- -------
The Company has not provided for federal income taxes on the undistributed income of its foreign subsidiaries because of the availability of foreign tax credits and/or the Company's intention to permanently reinvest such undistributed income. Cumulative undistributed earnings of foreign subsidiaries on which no United States income tax has been provided were $25.5 million at the end of 1999, $27.5 million at the end of 2000, and $28.2 million at the end of 2001. Earnings before income taxes for foreign operations (including Puerto Rico) amounted to approximately $13 million, $14 million, and $7 million in 1999, 2000, and 2001, respectively. Earnings of the Puerto Rico subsidiary are not subject to United States income taxes and are partially exempt from Puerto Rican income taxes under a tax exemption grant expiring on December 31, 2002. The Company intends on renewing the grant prior to the expiration date. The tax benefits of the exemption, reduced by a minimum tollgate tax instituted in 1993, amounted to $0.12 per share in 2001 (1999 -- $0.14; 2000 -- $0.23). Reconciliations between the U.S. federal income tax rate and the Company's effective income tax rate as a percentage of earnings from continuing operations before income taxes are as follows: F-20 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 2000 2001 ---- ---- ---- U.S. federal income tax rate................................ 35.0% 35.0% 35.0% Increase (decrease) in tax rate resulting from: State and local income taxes, net of federal income tax benefit................................................... 2.9 1.2 21.4 Non-deductible items, net................................... 0.8 0.1 60.5 Benefits of income subject to taxes at lower than the U.S. federal rate.............................................. (11.0) (14.3) (85.3) Other....................................................... 0.1 -- -- ----- ----- ----- Effective tax rate.......................................... 27.8% 22.0% 31.6% ----- ----- ----- ----- ----- -----
The following is a summary of the components of the net deferred tax assets and liabilities recognized in the accompanying consolidated balance sheets:
DECEMBER 31, ---------------------- 2000 2001 ---- ---- (DOLLARS IN THOUSANDS) Deferred Tax Assets: Inventories............................................. $ 7,639 $ 6,044 Allowance for customer returns.......................... 7,332 7,069 Postretirement benefits................................. 8,060 8,751 Allowance for doubtful accounts......................... 1,604 1,587 Accrued salaries and benefits........................... 3,342 2,938 Net operating loss and tax credit carryforwards......... 8,270 14,990 Other................................................... 7,188 6,551 -------- -------- 43,435 47,930 -------- -------- Valuation allowance..................................... (14,171) (14,171) -------- -------- Total............................................... $ 29,264 $ 33,759 -------- -------- -------- -------- Deferred Tax Liabilities: Depreciation............................................ $ 4,717 $ 6,702 Promotional costs....................................... 915 1,036 Other................................................... 2,291 1,052 -------- -------- Total............................................... 7,923 8,790 -------- -------- Net deferred tax assets............................. $ 21,341 $ 24,969 -------- -------- -------- --------
The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. However, if the Company is unable to generate sufficient taxable income in the future through its operations, increases in the valuation allowance may be required. 15. INDUSTRY SEGMENT AND GEOGRAPHIC DATA Under the provisions of SFAS No. 131, the Company has two reportable operating segments which are the major product areas of the automotive aftermarket in which the Company competes. The Engine Management Division consists primarily of ignition and emission parts, wires and cables, and fuel system parts. The Temperature Control Division consists primarily of compressors, other air conditioning parts and heater parts. The accounting policies of each F-21 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) segment are the same as those described in the summary of significant accounting policies (see Note 1). The following tables contain financial information for each reportable segment:
FOR THE YEAR ENDED DECEMBER 31, 1999 ----------------------------------------------------- ENGINE TEMPERATURE OTHER MANAGEMENT CONTROL ADJUSTMENTS CONSOLIDATED ---------- ------- ----------- ------------ (DOLLARS IN THOUSANDS) Net sales.......................... $291,286 $320,083 $ 42,082 $653,451 -------- -------- -------- -------- Depreciation and amortization...... 8,535 5,949 2,746 17,230 -------- -------- -------- -------- Operating income................... 26,134 17,477 (13,388) 30,223 -------- -------- -------- -------- Investment in equity affiliates.... 105 272 1,062 1,439 -------- -------- -------- -------- Capital expenditures............... 7,118 7,026 279 14,423 -------- -------- -------- -------- Total assets....................... $253,346 $212,026 $ 90,649 $556,021 -------- -------- -------- --------
FOR THE YEAR ENDED DECEMBER 31, 2000 ----------------------------------------------------- ENGINE TEMPERATURE OTHER MANAGEMENT CONTROL ADJUSTMENTS CONSOLIDATED ---------- ------- ----------- ------------ (DOLLARS IN THOUSANDS) Net sales.......................... $288,240 $270,848 $ 42,304 $601,392 -------- -------- -------- -------- Depreciation and amortization...... 10,293 6,116 2,513 18,922 -------- -------- -------- -------- Operating income................... 37,974 11,513 (18,776) 30,711 -------- -------- -------- -------- Investment in equity affiliates.... 105 -- 1,851 1,956 -------- -------- -------- -------- Capital expenditures............... 8,914 6,454 1,284 16,652 -------- -------- -------- -------- Total assets....................... $265,336 $224,410 $ 59,650 $549,396 -------- -------- -------- --------
FOR THE YEAR ENDED DECEMBER 31, 2001 ----------------------------------------------------- ENGINE TEMPERATURE OTHER MANAGEMENT CONTROL ADJUSTMENTS CONSOLIDATED ---------- ------- ----------- ------------ (DOLLARS IN THOUSANDS) Net sales.......................... $285,498 $269,856 $ 36,298 $591,652 -------- -------- -------- -------- Depreciation and amortization...... 9,649 6,462 2,798 18,909 -------- -------- -------- -------- Operating income................... 26,433 3,624 (14,934) 15,123 -------- -------- -------- -------- Investment in equity affiliates.... 105 -- 2,044 2,149 -------- -------- -------- -------- Capital expenditures............... 4,724 6,781 2,235 13,740 -------- -------- -------- -------- Total assets....................... $233,564 $182,083 $ 93,782 $509,429 -------- -------- -------- --------
Other Adjustments consist of items pertaining to the corporate headquarters function, as well as Canadian and European business units that do not meet the criteria of a reportable operating segment under SFAS No. 131.
REVENUE ------------------------------------ 1999 2000 2001 ---- ---- ---- (DOLLARS IN THOUSANDS) United States.................................... $572,534 $520,741 $515,322 Canada........................................... 32,515 27,942 28,811 Other Foreign.................................... 48,402 52,709 47,519 -------- -------- -------- Total........................................ $653,451 $601,392 $591,652 -------- -------- -------- -------- -------- --------
F-22 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG LIVED ASSETS ------------------------------------ 1999 2000 2001 ---- ---- ---- (DOLLARS IN THOUSANDS) United States.................................... $125,766 $122,825 $118,455 Canada........................................... 3,897 3,511 2,829 Other Foreign.................................... 18,534 18,885 18,402 -------- -------- -------- Total........................................ $148,197 $145,221 $139,686 -------- -------- -------- -------- -------- --------
Revenues are attributed to countries based upon the location of the customer. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS The carrying amount approximates fair value because of the short maturity of those instruments. MARKETABLE SECURITIES The fair values of investments are estimated based on quoted market prices for these or similar instruments. LONG-TERM DEBT The fair value of the Company's long-term debt is estimated based on quoted market prices or current rates offered to the Company for debt of the same remaining maturities. INTEREST RATE SWAPS The fair value of the Company's financial instruments are based on market quotes and represents the net amount required to terminate the position, taking into consideration market rates and counterparty credit risk. The estimated fair values of the Company's financial instruments are as follows:
CARRYING AMOUNT FAIR VALUE ------ ---------- (DOLLARS IN THOUSANDS) DECEMBER 31, 2000 Cash and cash equivalents................................... $ 7,699 $ 7,699 Marketable securities....................................... 7,200 7,200 Long-term debt.............................................. $(163,661) $(107,174) DECEMBER 31, 2001 Cash and cash equivalents................................... $ 7,496 $ 7,496 Marketable securities....................................... 7,200 7,400 Long-term debt.............................................. (201,850) (177,520) Interest rate swaps......................................... $ (2,045) $ (2,045)
F-23 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. COMMITMENTS AND CONTINGENCIES Total rent expense for the three-years ended December 31, 2001 was as follows:
REAL TOTAL ESTATE OTHER ----- ------ ----- (DOLLARS IN THOUSANDS) 1999...................................................... $8,176 $5,124 $3,052 2000...................................................... $9,797 $7,217 $2,580 2001...................................................... $8,673 $6,508 $2,165
At December 31, 2001, the Company is obligated to make minimum rental payments (exclusive of real estate taxes and certain other charges) through 2011, under operating leases for real estate, as follows:
(DOLLARS IN THOUSANDS) 2002.......................................... $ 6,196 2003.......................................... 5,392 2004.......................................... 4,137 2005.......................................... 3,695 2006.......................................... 3,532 Thereafter.................................... 5,417 ------- Total..................................... $28,369 ------- -------
The Company also has lease and sub-lease agreements in place for various properties under its control. The Company expects to receive operating lease payments from lessees during the five years ending December 31, 2002 through 2006 of $1.7 million, $1.0 million, $0.6 million, $0.6 million, and $0.6 million, respectively. At December 31, 2001, the Company had outstanding letters of credit aggregating approximately $0.5 million. The contract amount of the letters of credit is a reasonable estimate of their value as the value for each is fixed over the life of the commitment. The Company has entered into Change in Control arrangements with two key officers of the Company. In the event of a Change of Control (as defined), each executive will receive severance payments, (as defined), and certain other benefits. On January 28, 2000, a former significant customer of the Company currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court, filed claims against a number of its former suppliers, including the Company. The claim against the Company alleges $0.5 million (formerly $19.8 million) of preferential payments in the 90 days prior to the related bankruptcy petition. In addition, this former customer seeks $10.5 million from the Company for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. The Company has purchased insurance with respect to the two actions. The Company believes that these matters will not have a material effect on the Company's consolidated financial statements taken as a whole. The Company is involved in various other litigation and product liability matters arising in the ordinary course of business. One of the product liability matters involves a former Brake business of the Company. In 1986, the Company acquired the business resulting in the assumption by the Company of certain liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller. In accordance with the related purchase agreement, the Company agreed to assume the liabilities for all new claims filed after fifteen years from the date of the purchase. The ultimate exposure to the Company will depend upon the extent to which future claims are filed and the amounts paid for indemnity and defense. At December 31, 2001, F-24 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately 100 cases were outstanding whereby the Company is now responsible for any related liabilities. Although the final outcome of this specific matter or any other litigation or product liability matter cannot be determined, based on the Company's understanding and evaluation of the relevant facts and circumstances, it is management's opinion that the final outcome of these matters will not have a material adverse effect on the Company's financial statements taken as a whole. 18. SUBSEQUENT EVENTS (UNAUDITED) On January 17, 2002 the Company purchased the Temperature Control business of Hartle Industries for approximately $4.8 million. Assets acquired consist primarily of property, plant and equipment, and inventory. The purchase was financed with funds provided under the Company's line of credit. On March 20, 2002, the Company reached a definitive agreement to purchase the aftermarket business of Sagem Inc., a subsidiary of Johnson Controls for approximately $11.5 million. Sagem Inc. is a basic manufacturer of fuel injectors, a product line which prior to the acquisition, the Company has been purchasing. Assets to be acquired consist primarily of property, plant and equipment, and inventory. The purchase which is expected to close within sixty days will be partially financed by the seller (approximately $7 million to be paid over a two year period), with the remaining funds being provided under the Company's line of credit. 19. QUARTERLY FINANCIAL DATA (UNAUDITED)
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, QUARTER ENDED 2001 2001 2001 2001 - ------------- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales................................ $153,960 $181,914 $156,707 $ 99,071 -------- -------- -------- -------- Gross profit............................. 36,928 40,578 40,268 21,281 -------- -------- -------- -------- Earnings (loss) before extraordinary item................................... 619 2,275 3,748 (6,330) -------- -------- -------- -------- Extraordinary item -- loss on early extinguishment of debt, net of taxes... -- (2,797) -- -- -------- -------- -------- -------- Net earnings (loss)...................... $ 619 $ (522) $ 3,748 $ (6,330) -------- -------- -------- -------- Net earnings (loss) before extraordinary item per common share: Basic................................ $ 0.05 $ 0.19 $ 0.32 $ (0.54) Diluted.............................. $ 0.05 $ 0.19 $ 0.32 $ (0.54) -------- -------- -------- -------- Net earnings (loss) per common share: Basic................................ $ 0.05 $ (0.05) $ 0.32 $ (0.54) Diluted.............................. $ 0.05 $ (0.05) $ 0.32 $ (0.54) -------- -------- -------- --------
F-25 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, QUARTER ENDED 2000 2000 2000 2000 - ------------- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales................................ $147,137 $175,738 $163,622 $114,895 -------- -------- -------- -------- Gross profit............................. 40,182 49,491 45,259 27,769 -------- -------- -------- -------- Earnings (loss) before extraordinary item................................... 385 7,036 4,858 (2,049) -------- -------- -------- -------- Extraordinary item -- loss on early extinguishment of debt, net of taxes... 501 -- -- -- -------- -------- -------- -------- Net earnings (loss)...................... $ (116) $ 7,036 $ 4,858 $ (2,049) -------- -------- -------- -------- Net earnings (loss) before extraordinary item per common share: Basic................................ $ 0.03 $ 0.59 $ 0.41 $ (0.18) Diluted.............................. $ 0.03 $ 0.54 $ 0.40 $ (0.18) -------- -------- -------- -------- Net earnings (loss) per common share: Basic................................ $ (0.01) $ 0.59 $ 0.41 $ (0.18) Diluted.............................. $ (0.01) $ 0.54 $ 0.40 $ (0.18) -------- -------- -------- --------
As of January 1, 2002, the Company adopted EITF 01-9. Accordingly, the quarterly financial data above has been reclassified to conform with the requirements of EITF 01-9. F-26 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 2001 2002 2001 2002 ---- ---- ---- ---- (IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) Net sales (Note 2)....................... $ 156,707 $ 182,625 $ 492,581 $ 488,034 Cost of sales (Note 2)................... 116,439 133,023 374,807 362,164 ----------- ----------- ----------- ----------- Gross profit......................... 40,268 49,602 117,774 125,870 Selling, general and administrative expenses (Note 2)...................... 31,066 32,510 95,628 96,290 ----------- ----------- ----------- ----------- Operating income..................... 9,202 17,092 22,146 29,580 Other income (expense) -- net............ 1,081 969 1,540 1,725 Interest expense......................... 4,795 3,606 13,962 10,877 ----------- ----------- ----------- ----------- Earnings from continuing operations before taxes....................... 5,488 14,455 9,724 20,428 Income taxes............................. 1,740 4,623 3,082 6,333 ----------- ----------- ----------- ----------- Earnings from continuing operations......................... 3,748 9,832 6,642 14,095 Loss from discontinued operation, net of tax (Note 15).......................... -- (16,918) -- (18,043) ----------- ----------- ----------- ----------- Earnings (loss) before extraordinary item and cumulative effect of accounting change.................. 3,748 (7,086) 6,642 (3,948) Extraordinary item, net of tax........... -- -- (2,797) -- Cumulative effect of accounting change, net of tax (Note 3).................... -- -- -- (15,985) ----------- ----------- ----------- ----------- Net earnings (loss).................. 3,748 (7,086) 3,845 (19,933) Retained earnings at beginning of period................................. 188,239 168,547 190,253 183,532 ----------- ----------- ----------- ----------- 191,987 161,461 194,098 163,599 Less: cash dividends for period.......... 1,064 1,076 3,175 3,214 ----------- ----------- ----------- ----------- Retained earnings at end of period....... $ 190,923 $ 160,385 $ 190,923 $ 160,385 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- PER SHARE DATA: Net earnings (loss) per common share -- basic: Basic earnings per share from continuing operations.......... $ 0.32 $ 0.82 $ 0.56 $ 1.18 Discontinued operation........... -- (1.41) -- (1.52) Extraordinary Item............... -- -- (0.23) -- Cumulative effect of accounting change......................... -- -- -- (1.34) ----------- ----------- ----------- ----------- Net earnings (loss) per common share -- basic................. $ 0.32 $ (0.59) $ 0.33 $ (1.68) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net earnings (loss) per common share -- diluted: Diluted earnings per share from continuing operations.......... $ 0.32 $ 0.72 $ 0.56 $ 1.14 Discontinued operation........... -- (1.14) -- (1.22) Extraordinary Item............... -- -- (0.23) -- Cumulative effect of accounting change......................... -- -- -- (1.08) ----------- ----------- ----------- ----------- Net earnings(loss) per common share -- diluted............... $ 0.32 $ (0.42) $ 0.33 $ (1.16) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Average number of common shares outstanding........................ 11,797,961 11,954,928 11,764,870 11,900,800 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Average number of common shares and dilutive common shares............. 11,893,848 14,859,401 11,816,646 14,805,121 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to unaudited condensed consolidated financial statements. F-27 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, 2001 2002 ---- ---- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $ 7,496 $ 9,672 Marketable securities................................... -- 7,200 Accounts and notes receivable, net of allowance for doubtful accounts and discounts of $4,362 and $5,523 (Note 7).............................................. 117,965 191,703 Inventories (Notes 5 and 7)............................. 177,291 161,709 Other current assets.................................... 26,197 30,978 -------- -------- TOTAL CURRENT ASSETS............................ 328,949 401,262 -------- -------- Property, plant and equipment, net of accumulated depreciation (Notes 6 and 7).............................. 101,646 106,854 Goodwill, net (Note 3)...................................... 38,040 20,017 Other assets................................................ 40,794 37,313 -------- -------- TOTAL ASSETS.................................... $509,429 $565,446 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable........................................... $ 4,075 $ 3,229 Current portion of long-term debt (Note 7).............. 1,784 4,242 Accounts payable........................................ 26,110 47,130 Sundry payables and accrued expenses.................... 41,968 51,059 Accrued customer returns................................ 18,167 26,177 Payroll and commissions................................. 8,489 14,913 -------- -------- TOTAL CURRENT LIABILITIES....................... 100,593 146,750 -------- -------- Long-term debt (Note 7)..................................... 200,066 200,879 Other liabilities (Note 15)................................. 23,083 52,064 -------- -------- TOTAL LIABILITIES............................... 323,742 399,693 -------- -------- Commitments and contingencies (Notes 7, 8, 11, 13 and 15) STOCKHOLDERS' EQUITY (NOTES 7, 8, 10, 11 AND 13): Common stock -- par value $2.00 per share: Authorized -- 30,000,000 shares, issued and outstanding -- 11,823,650 and 11,957,009 shares in 2001 and 2002, respectively)................... 26,649 26,649 Capital in excess of par value.......................... 1,877 1,684 Retained earnings....................................... 183,532 160,385 Accumulated other comprehensive loss.................... (3,722) (2,328) -------- -------- 208,336 186,390 Less: Treasury stock -- at cost (1,500,826 and 1,367,467 shares in 2001 and 2002, respectively)................ 22,649 20,637 -------- -------- TOTAL STOCKHOLDERS' EQUITY...................... 185,687 165,753 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $509,429 $565,446 -------- -------- -------- --------
See accompanying notes to unaudited condensed consolidated financial statements. F-28 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2001 2002 ---- ---- (UNAUDITED) (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss)..................................... $ 3,845 $(19,933) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization....................... 14,072 11,715 Gain on sale of property, plant & equipment......... -- (136) Equity income from joint ventures................... (569) (607) Employee stock ownership plan allocation............ 534 907 Cumulative effect of accounting change.............. -- 15,985 Loss from discontinued operation.................... -- 18,043 Extraordinary loss on repayment of debt............. 2,797 -- Change in assets and liabilities, net of effects from acquisitions: Increase in accounts receivable, net................ (49,479) (72,757) Decrease in inventories............................. 57,070 21,072 Increase in prepaid expenses and other current assets............................................ (4,203) (4,026) Increase in other assets............................ (8,741) (674) Increase (Decrease) in accounts payable............. (20,177) 20,538 Increase (Decrease) in sundry payables and accrued expenses.......................................... (3,502) 12,288 Increase (Decrease) in other liabilities............ 12,645 24,021 ------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES....... 4,292 26,436 ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale of property, plant & equipment... -- 514 Capital expenditures.................................... (11,125) (5,804) Payments for acquisitions, net of cash acquired......... (1,069) (19,455) ------- -------- NET CASH USED IN INVESTING ACTIVITIES........... (12,194) (24,745) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line-of-credit agreements.......... 110,647 (441) Net borrowings (payments) of long-term debt............. (94,442) 2,866 Proceeds from exercise of employee stock options........ 206 524 Dividends paid.......................................... (3,175) (3,214) ------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES.................................... 13,236 (265) ------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (1,219) 750 ------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 4,115 2,176 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD........ 7,699 7,496 ------- -------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.............. $11,814 $ 9,672 ------- -------- ------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: Interest................................................ $15,243 $ 12,506 ------- -------- ------- -------- Income taxes............................................ $ 2,025 $ 347 ------- -------- ------- --------
See accompanying notes to unaudited condensed consolidated financial statements. F-29 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 Standard Motor Products, Inc. (the 'Company') is engaged in the manufacturing and distribution of replacement parts for motor vehicles in the automotive aftermarket industry. The accompanying unaudited financial information should be read in conjunction with the consolidated financial statements, including the notes thereto, for the year ended December 31, 2001. The unaudited consolidated financial statements include the accounts of the Company and all domestic and international companies in which the Company has more than a 50% equity ownership. The Company's investments in unconsolidated affiliates are accounted for on the equity method. All significant inter-company items have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year. Where appropriate, certain reclassifications have been made to the 2001 unaudited consolidated financial statements to conform with the 2002 presentation. NOTE 2 On January 1, 2002, the Company adopted the guidelines of the Emerging Issues Task Force (EITF) entitled 'Accounting for Certain Sales Incentives' and 'Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendors Products.' These guidelines address when sales incentives and discounts should be recognized and the accounting for certain costs incurred by a vendor on behalf of a customer, as well as where the related revenues and expenses should be classified in the financial statements. Historically, the Company has provided certain consideration, including rebates, product and discounts to customers and treated such costs as advertising, marketing and sales force expenses. Beginning with the first quarter of 2002, such costs are now treated as a reduction of revenue or as cost of sales. As a result, certain costs of approximately $9.7 million and $25.9 million, respectively, have been reclassified from selling, general and administrative expenses for the three month and nine month periods ended September 30, 2001. These reclassifications had no effect on net earnings. NOTE 3 Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, 'Goodwill and Other Intangible Assets' (SFAS No. 142). In accordance with SFAS No. 142, goodwill will no longer be amortized, but instead, will be subject to an annual review for potential impairment. Using the discounted cash flows method, based on the Company's weighted average cost of capital and market multiples, the Company reviewed the fair values of each of its reporting units. The recent decline in economic and market conditions, higher integration costs than anticipated relating to the Company's acquisitions and the general softness in the automotive aftermarket has caused a decrease in the fair values of certain of the Company's reporting units. As a result, the Company recorded an impairment loss on goodwill as a cumulative effect of accounting change of $16 million, net of tax, or $1.35 per diluted share, during the first quarter of 2002. The impairment loss relates to goodwill pertaining to certain of the Company's reporting units within its European Operations (classified as 'All Other' for F-30 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) segment reporting) and within its Temperature Control Segment and recorded charges of $8.6 million and $7.4 million, respectively. Upon adoption of SFAS No. 142, the Company's earnings before extraordinary item and net earnings for basic and diluted earnings per share adjusted to exclude goodwill amortization expense (net of taxes) are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------- ----------------- 2001 2002 2001 2002 ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) Reported earnings (loss) before extraordinary item.... $3,748 $(7,086) $6,642 $ (3,948) Add back: goodwill amortization expense, net of tax... 648 -- 1,868 -- ------ ------- ------ -------- Adjusted earnings (loss) before extraordinary item.... $4,396 $(7,086) $8,510 $ (3,948) ------ ------- ------ -------- ------ ------- ------ -------- Basic earnings (loss) per share: Reported basic earnings (loss) per share before extraordinary item.............................. $ 0.32 $ (0.59) $ 0.56 $ (0.34) Add back: goodwill amortization expense, net of tax... 0.05 -- 0.15 -- ------ ------- ------ -------- Adjusted basic earnings (loss) per share before extraordinary item.................................. $ 0.37 $ (0.59) $ 0.71 $ (0.34) ------ ------- ------ -------- ------ ------- ------ -------- Diluted earnings (loss) per share: Reported diluted earnings (loss) per share before extraordinary item.............................. $ 0.32 $ (0.42) $ 0.56 $ (0.08) Add back: goodwill amortization expense, net of tax... 0.05 -- 0.15 -- ------ ------- ------ -------- Adjusted diluted earnings (loss) per before extraordinary item.................................. $ 0.37 $ (0.42) $ 0.71 $ (0.08) ------ ------- ------ -------- ------ ------- ------ -------- Reported net earnings (loss).......................... $3,748 $(7,086) $3,845 $(19,933) Add back: goodwill amortization expense, net of tax... 648 -- 1,868 -- ------ ------- ------ -------- Adjusted net earnings (loss).......................... $4,396 $(7,086) $5,713 $(19,933) ------ ------- ------ -------- ------ ------- ------ -------- Basic net earnings (loss) per share: Reported basic earnings (loss) per share.......... $ 0.32 $ (0.59) $ 0.33 $ (1.68) Add back: goodwill amortization expense, net of tax... 0.05 -- 0.15 -- ------ ------- ------ -------- Adjusted basic earnings (loss) per share.............. $ 0.37 $ (0.59) $ 0.48 $ (1.68) ------ ------- ------ -------- ------ ------- ------ -------- Diluted net earnings (loss) per share: Reported diluted earnings (loss) per share........ $ 0.32 $ (0.42) $ 0.33 $ (1.16) Add back: goodwill amortization expense, net of tax... 0.05 -- 0.15 -- ------ ------- ------ -------- Adjusted diluted earnings (loss) per share............ $ 0.37 $ (0.42) $ 0.48 $ (1.16) ------ ------- ------ -------- ------ ------- ------ --------
NOTE 4 In January 2002, the Company acquired the assets of a Temperature Control business from Hartle Industries for $4.8 million. The assets acquired consist primarily of property, plant and equipment, and inventory. In April 2002, the Company acquired Carol Cable Limited, a manufacturer and distributor of wire sets, based in England, for $1.7 million. The assets acquired consist primarily of property, plant and equipment, and inventory. F-31 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) In May 2002, the Company purchased the aftermarket fuel injector business of Sagem Inc., a subsidiary of Johnson Controls, for $10.5 million. Sagem Inc. is a basic manufacturer of fuel injectors, and was the primary supplier to the Company prior to its acquisition. The assets acquired consist primarily of property, plant and equipment, and inventory. The purchase was partially financed by the seller ($5.4 million to be paid over a two-year period), with the remaining funds being provided under the Company's revolving credit facility. The above acquisitions had an immaterial effect on earnings from continuing operations. NOTE 5 INVENTORIES
DECEMBER 31, SEPTEMBER 30, 2001 2002 ---- ---- (UNAUDITED) (DOLLARS IN THOUSANDS) Finished goods.............................................. $141,799 $124,112 Work in process............................................. 3,155 2,777 Raw materials............................................... 32,337 34,820 -------- -------- Total inventories....................................... $177,291 $161,709 -------- -------- -------- --------
NOTE 6 PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, SEPTEMBER 30, 2001 2002 ---- ---- (UNAUDITED) (DOLLARS IN THOUSANDS) Land, buildings and improvements............................ $ 60,665 $ 66,070 Machinery and equipment..................................... 109,617 118,623 Tools, dies and auxiliary equipment......................... 17,815 19,526 Furniture and fixtures...................................... 26,211 26,817 Computer software........................................... 11,663 12,351 Leasehold improvements...................................... 7,450 7,398 Construction in progress.................................... 6,440 6,899 -------- -------- 239,861 257,684 Less: accumulated depreciation and amortization............. 138,215 150,830 -------- -------- Total property, plant and equipment -- net.............. $101,646 $106,854 -------- -------- -------- --------
F-32 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 7 LONG-TERM DEBT
DECEMBER 31, SEPTEMBER 30, 2001 2002 ---- ---- (UNAUDITED) (DOLLARS IN THOUSANDS) Long-term debt consists of: 6.75% convertible subordinated debentures................... $ 90,000 $ 90,000 Revolving credit facility................................... 106,790 107,195 Other....................................................... 5,060 7,926 -------- -------- 201,850 205,121 Less: current portion....................................... 1,784 4,242 -------- -------- Total non-current portion of long-term debt............. $200,066 $200,879 -------- -------- -------- --------
Effective April 27, 2001, the Company entered into an agreement with GE Capital Corp. and a syndicate of lenders for a new secured revolving credit facility. The term of the new credit agreement is for a period of five years and it provides for a line of credit up to $225 million. The initial proceeds were used to refinance the approximately $97 million of outstanding indebtedness under the Company's former bank line of credit, a senior note of $52 million, a $25 million accounts receivable sale arrangement and a Canadian Credit Facility of $5 million. The Company recorded an extraordinary loss of approximately $2.8 million, net of taxes, in the second quarter of 2001, for a prepayment penalty and write-off of unamortized fees for the retirement of the above related debt. Availability under the new credit facility is based on a formula of eligible accounts receivable, inventory and fixed assets. Direct borrowings bear interest at the Prime Rate plus the applicable margin (as defined) or the LIBOR Rate plus the applicable margin (as defined), at the option of the Company. Borrowings are collateralized by accounts receivable, inventory and fixed assets of the Company and its subsidiaries. The terms of the new revolving credit facility contain, among other provisions, requirements of maintaining defined levels of tangible net worth and specific limits or restrictions on additional indebtedness, capital expenditures, liens and acquisitions. On July 26, 1999, the Company completed a public offering of convertible subordinated debentures amounting to $90 million. The Convertible Debentures carry an interest rate of 6.75%, payable semi-annually, and will mature on July 15, 2009. The Convertible Debentures are convertible into 2,796,120 shares of the Company's common stock, subject to adjustment. NOTE 8 The Company does not enter into financial instruments for trading or speculative purposes. The principal financial instruments used for cash flow hedging purposes are interest rate swaps. In July 2001, the Company entered into interest rate swap agreements to manage its exposure to interest rate changes. The swaps effectively convert a portion of the Company's variable rate debt under the revolving credit facility to a fixed rate, without exchanging the notional principal amounts. At September 30, 2002, the Company had two outstanding interest rate swap agreements maturing in January 2003 and 2004, respectively, with an aggregate notional principal amount of $75 million. Under these agreements, the Company receives a floating rate based on the LIBOR interest rate, and pays a fixed rate of 4.92% on a notional amount of $45 million and 4.37% on a notional amount of $30 million. If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the interest rate swap agreements, the fair F-33 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) value of the portion of the interest rate swap determined to be ineffective will be recognized as gain or loss in the statement of operations for the applicable period. NOTE 9 The Company sold certain accounts receivable to an independent financial institution, through its wholly owned subsidiary, SMP Credit Corp., a qualifying special-purpose corporation. In May 1999, SMP Credit Corp. entered into a three year agreement whereby it could sell up to a $25 million undivided ownership interest in a designated pool of certain of these eligible receivables. This agreement was terminated in the second quarter of 2001 as part of the new credit facility described in Note 7. These sales were reflected as reductions of trade accounts receivable and the related fees and discounting expense were recorded as other expense. NOTE 10 Total comprehensive income (loss) was $466,000 and $(7,895,000) for the three-month periods ended September 30, 2001 and 2002, respectively, and $359,000 and $(18,539,000) for the nine-month periods ended September 30, 2001 and 2002, respectively. NOTE 11 During the nine-month period ended September 30, 2002, options to purchase 53,839 shares of common stock were exercised. At September 30, 2002, an aggregate of 1,266,441 shares of authorized but unissued common stock were reserved for issuance under the Company's stock option plans, of which 912,196 shares were subject to outstanding options. At September 30, 2002, options to purchase 740,040 shares of common stock were vested. NOTE 12 The following are reconciliations of the earnings available to common stockholders and the shares used in calculating basic and diluted net earnings (loss) per common share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2001 2002 2001 2002 ---- ---- ---- ---- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Earnings from continuing operations....... $ 3,748 $ 9,832 $ 6,642 $ 14,095 Loss from discontinued operation...... -- (16,918) -- (18,043) Extraordinary item.................... -- -- (2,797) -- Cumulative effect of accounting change.............................. -- -- -- (15,985) ---------- ---------- ---------- ---------- Earnings (loss) available to common stockholders............................ 3,748 (7,086) 3,845 (19,933) Effect of convertible debentures.......... -- 911 -- 2,734 ---------- ---------- ---------- ---------- Net earnings (loss) available to common stockholders assuming dilution............................ $ 3,748 $ (6,175) $ 3,845 $ (17,199) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common shares outstanding............................. 11,797,961 11,954,928 11,764,870 11,900,800 Effect of convertible debentures.......... -- 2,796,120 -- 2,796,120 Effect of stock options................... 95,887 108,353 51,776 108,201 ---------- ---------- ---------- ---------- Weighted average common shares outstanding assuming dilution....... 11,893,848 14,859,401 11,816,646 14,805,121 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
F-34 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) The average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2001 2002 2001 2002 ---- ---- ---- ---- Stock options............................. 640,074 566,574 768,229 566,574 Convertible debentures.................... 2,796,120 -- 2,796,120 -- --------- ------- --------- ------- --------- ------- --------- -------
NOTE 13 In fiscal 2000, the Company created an employee benefits trust to which it contributed 750,000 shares of treasury stock. The Company is authorized to instruct the trustees to distribute such shares toward the satisfaction of the Company's future obligations under Employee Benefit Plans. The shares held in trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be released. The trustees will vote the shares in accordance with its fiduciary duties. As of September 30, 2002, 150,000 shares have been released from the trust leaving 600,000 shares remaining in the trust. NOTE 14 The Company's two reportable operating segments are Engine Management and Temperature Control.
THREE MONTHS ENDED SEPTEMBER 30, --------------------------------------------- 2001 2002 --------------------- --------------------- OPERATING OPERATING NET SALES INCOME NET SALES INCOME --------- ------ --------- ------ (DOLLARS IN THOUSANDS) Engine Management................................. $ 73,892 $ 8,671 $ 82,959 $11,716 Temperature Control............................... 73,360 4,051 89,081 10,899 All Other......................................... 9,455 (3,520) 10,585 (5,523) -------- ------- -------- ------- Consolidated...................................... $156,707 $ 9,202 $182,625 $17,092 -------- ------- -------- ------- -------- ------- -------- -------
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------- 2001 2002 --------------------- --------------------- OPERATING OPERATING NET SALES INCOME NET SALES INCOME --------- ------ --------- ------ (DOLLARS IN THOUSANDS) Engine Management................................. $221,003 $21,027 $233,913 $31,988 Temperature Control............................... 242,264 10,190 222,964 12,682 All Other......................................... 29,314 (9,071) 31,157 (15,090) -------- ------- -------- ------- Consolidated...................................... $492,581 $22,146 $488,034 $29,580 -------- ------- -------- ------- -------- ------- -------- -------
All Other consists of items pertaining to European and Canadian operations and the Corporate headquarters function, which do not meet the criteria of a reportable operating segment. The carrying values of goodwill for the Company's segments as of September 30, 2002 are as follows: F-35 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(IN THOUSANDS) Engine Management........................................... $10,490 Temperature Control......................................... 4,822 All Other................................................... 4,705 ------- Goodwill, net........................................... $20,017 ------- -------
NOTE 15 On January 28, 2000, a former significant customer of the Company which is currently undergoing a Chapter 7 liquidation in U.S. Bankruptcy Court filed claims against a number of its former suppliers, including the Company. The claim against the Company alleges $0.5 million (formerly $19.8 million) of preferential payments in the 90 days prior to the related Chapter 11 bankruptcy petition. The claim pertaining to the preferential payments was settled for an immaterial amount during the second quarter of 2002. In addition, this former customer seeks $9.4 million from the Company for a variety of claims including antitrust, breach of contract, breach of warranty and conversion. These latter claims arise out of allegations that this customer was entitled to various discounts, rebates and credits after it filed for bankruptcy. The Company has purchased insurance with respect to the actions. On August 22, 2002, the court dismissed the antitrust claims. The Company believes that these remaining matters will not have a material adverse effect on the Company's consolidated financial statements taken as a whole. In 1986, the Company acquired a brake business, which it subsequently sold in March 1998 and which is accounted for as a discontinued operation in the accompanying consolidated financial statements. When the Company originally acquired this brake business, the Company assumed future liabilities relating to any alleged exposure to asbestos-containing products manufactured by the seller of the acquired brake business. In accordance with the related purchase agreement, the Company agreed to assume the liabilities for all new claims filed on or after September 1, 2001. The ultimate exposure to the Company will depend upon the number of claims filed against the Company on or after September 1, 2001 and the amounts paid for indemnity and defense thereof. At December 31, 2001, approximately 100 cases were outstanding for which the Company was responsible for any related liabilities. At September 30, 2002, the number of cases outstanding for which the Company was responsible for related liabilities had increased to approximately 600. To date, the amounts paid for settled claims have been immaterial. The Company does not have insurance coverage for the defense and indemnity costs associated with these claims. In evaluating its potential asbestos-related liability, the Company has considered various factors including, among other things, an actuarial study performed by a leading actuarial firm with expertise in assessing asbestos-related liabilities, settlement amounts of the Company, the incidence of claims, the mix of the injuries of the plaintiffs, the number of cases pending against the Company and whether there are any co-defendants, the jurisdiction in which lawsuits are filed, and the status and results of settlement discussions. Actuarial consultants with experience in assessing asbestos-related liabilities completed a study in September 2002 to estimate the Company's potential claim liability. The methodology used to project asbestos-related liabilities and costs in the study considered: (1) historical data available from publicly available studies; (2) an analysis of the Company's recent claims history to estimate likely filing rates for the remainder of 2002 through 2052; (3) an analysis of the Company's currently pending claims; and (4) an analysis of the Company's settlements to date in order to develop average settlement values. Based upon all the information considered by the actuarial firm, the actuarial study estimated an undiscounted liability for settlement payments ranging from $27.3 million to $58 million for the period through 2052. F-36 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Accordingly, based on the information contained in the actuarial study and all other available information considered by the Company, the Company recorded an after tax charge of $16.9 million as a loss from discontinued operation during the third quarter of 2002 to reflect such liability. The Company concluded that no amount within the range of settlement payments was more likely than any other and, therefore, recorded the low end of the range as the liability associated with future settlement payments through 2052 in the Company's condensed consolidated financial statements, in accordance with generally accepted accounting principles. Given the uncertainties associated with projecting such matters into the future, the short period of time that the Company has been responsible for defending these claims, and other factors outside the control of the Company, the Company can give no assurance that additional provisions will not be required. Management will continue to monitor the circumstances surrounding these potential liabilities in determining whether additional provisions may be necessary. At the present time, however, the Company does not believe that any additional provisions would be reasonably likely to have a material adverse effect on the Company's liquidity or consolidated financial position. The Company is involved in various other litigation and product liability matters arising in the ordinary course of business. Although the final outcome of these matters cannot be determined, it is management's opinion that the final resolution of these matters will not have a material effect on the Company's financial statements taken as a whole. F-37 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Dana Corporation In our opinion, the accompanying combined balance sheet and the related combined statements of operations, of equity and of cash flows present fairly, in all material respects, the financial position of Engine Management (a business of Dana Corporation) at December 31, 2001 and September 30, 2002, and the results of its operations and its cash flows for the years ended December 31, 2000 and 2001 and for the nine-month period ended September 30, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Toledo, Ohio November 8, 2002 F-38 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS)
NINE-MONTH PERIOD ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------- ------------- 2000 2001 2002 ---- ---- ---- NET SALES............................................ $357,475 $297,796 $229,137 -------- -------- -------- COSTS AND EXPENSES Cost of sales.................................... 359,201 287,070 217,942 Selling, general and administrative expenses..... 85,522 66,616 47,271 Restructuring charges............................ -- 44,276 9,660 Interest expense................................. 91 609 144 Other expense.................................... 458 756 713 -------- -------- -------- 445,272 399,327 275,730 -------- -------- -------- LOSS BEFORE INCOME TAXES............................. (87,797) (101,531) (46,593) ESTIMATED INCOME TAX BENEFIT......................... (35,676) (39,064) (18,096) -------- -------- -------- NET LOSS............................................. $(52,121) $(62,467) $(28,497) -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of the combined financial statements. F-39 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) COMBINED BALANCE SHEET (IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30, 2001 2002 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $ 292 $ 734 Accounts receivable, less allowance for doubtful accounts of $2,196 and $2,573......................... 41,922 54,135 Inventories............................................. 98,178 87,259 Deferred tax assets..................................... 36,478 31,958 Other current assets.................................... 881 1,216 -------- -------- Total current assets................................ 177,751 175,302 Property, plant and equipment, net.......................... 83,034 68,323 Deferred tax assets......................................... 2,102 2,496 Other assets................................................ 1,297 914 -------- -------- Total assets........................................ $264,184 $247,035 -------- -------- -------- -------- LIABILITIES AND EQUITY CURRENT LIABILITIES: Short-term borrowings................................... $ 13,949 $ 5,337 Accounts payable........................................ 22,807 31,491 Accrued payroll and employee benefits................... 8,119 8,476 Other accrued liabilities............................... 43,484 36,651 -------- -------- Total current liabilities........................... 88,359 81,955 -------- -------- Deferred tax liability...................................... 4,733 6,928 Other noncurrent liabilities................................ 750 1,288 Commitments and contingencies (Note 11) Combined equity............................................. 170,342 156,864 -------- -------- Total liabilities and combined equity............... $264,184 $247,035 -------- -------- -------- --------
The accompanying notes are an integral part of the combined financial statements. F-40 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) COMBINED STATEMENT OF CASH FLOWS (IN THOUSANDS)
NINE-MONTH PERIOD ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------- ------------- 2000 2001 2002 ---- ---- ---- NET CASH FLOWS -- OPERATING ACTIVITIES............... $ (7,476) $ 54,276 $ (5,117) Cash flows from (used in) investing activities: Purchases of property, plant and equipment... (21,557) (1,378) (1,560) Proceeds from sales of certain assets........ 74 22,621 545 Other........................................ (80) (707) (170) -------- -------- -------- Net cash flows -- investing activities....... (21,563) 20,536 (1,185) -------- -------- -------- Cash flows from (used in) financing activities: Net transactions with Dana....................... 29,039 (74,520) 6,744 -------- -------- -------- NET CASH FLOWS -- FINANCING ACTIVITIES............... 29,039 (74,520) 6,744 -------- -------- -------- Net increase in cash and cash equivalents.... -- 292 442 Cash and cash equivalents -- beginning of year....................................... -- -- 292 -------- -------- -------- CASH AND CASH EQUIVALENTS -- end of year............. $ -- $ 292 $ 734 -------- -------- -------- -------- -------- -------- Reconciliation of net loss to net cash flows from operating activities: Net loss..................................... $(52,121) $(62,467) $(28,497) Depreciation and amortization................ 18,802 19,216 12,810 Loss (gain) on disposal of property, plant and equipment.............................. 754 (940) 598 Asset impairment............................. -- 25,331 2,318 Deferred income taxes........................ 13,866 (1,301) 6,537 Change in accounts receivable................ 9,858 29,652 (12,213) Change in inventories........................ 24,325 34,378 10,919 Change in other operating assets............. 3,651 471 (335) Change in operating liabilities.............. (26,611) 9,936 2,746 -------- -------- -------- Net cash flows -- operating activities....... $ (7,476) $ 54,276 $ (5,117) -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of the combined financial statements. F-41 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) STATEMENT OF CHANGES IN COMBINED EQUITY (IN THOUSANDS)
NET COMBINED EQUITY ------ BALANCE, DECEMBER 31, 1999.................................. $341,022 Net loss for the year ended December 31, 2000............... (52,121) Transactions with Dana Corporation, net..................... 29,039 -------- BALANCE, DECEMBER 31, 2000.................................. 317,940 -------- Net loss for the year ended December 31, 2001............... (62,467) Transactions with Dana Corporation, net..................... (41,169) Dividend from Ponce to Dana................................. (43,600) Change in accumulated other comprehensive loss.............. (362) -------- BALANCE, DECEMBER 31, 2001.................................. 170,342 -------- Net loss for the nine-month period ended September 30, 2002...................................................... (28,497) Transactions with Dana Corporation, net..................... 15,356 Change in accumulated other comprehensive loss.............. (337) -------- BALANCE, SEPTEMBER 30, 2002................................. $156,864 -------- --------
The accompanying notes are an integral part of the combined financial statements. F-42 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION These financial statements are being presented due to the potential sale of substantially all of the US operations of the Dana Corporation (Dana) Engine Management Business (EM). EM is a component of Dana's Automotive Aftermarket Group Strategic Business Unit. EM manufactures and distributes a wide range of engine management products principally for the automotive aftermarket. These financial statements present the historical results of EM, adjusted to exclude the operations of the Beck Arnley distribution business, the CUMSA business in Mexico and Texas, and the Dana Canada distribution business, which are distinct business units within EM but are not intended to be included in the potential divestiture. Transactions between these business units and EM are further described below. The adjusted EM amounts are intended to reflect the financial position and results of operations of the business being sold, hereinafter referred to as 'Engine Management', as though managed by Dana as a separate entity. As such, the Engine Management financial statements include allocations for certain expenses, as well as assets and liabilities historically maintained by Dana and not recorded in the accounts of Engine Management. Significant allocations are discussed in the notes that follow. Engine Management and Dana management believe such allocations have been made on a reasonable basis. However, these financial statements may not necessarily be indicative of the results that would have been obtained if Engine Management had operated as a separate entity during the periods presented. The combined equity section of the Engine Management financial statements comprises the excess of Engine Management's assets over its liabilities. Combined equity is affected by the Engine Management operating results, expense allocations from Dana, and cash transfers between Engine Management and Dana, including settlement of intracompany transactions, as Dana manages all treasury activities. Dana has not historically allocated any interest expense to Engine Management with respect to Dana's net investment in the business. Accordingly, no allocations of corporate debt or corporate interest cost are reflected in these financial statements. During the periods presented, Engine Management underwent significant restructuring of its business. This involved the closing of numerous warehouses and consolidation of inventory at national distribution centers as well as closure of certain manufacturing locations. In anticipation of the warehouse consolidation, Engine Management built significant inventory. Problems with the warehouse consolidation and declines in business led to significant unfavorable cost absorption and inventory loss provisions in 2001 and 2002. Additionally, as a result of these consolidation efforts, Engine Management incurred restructuring charges related to impairment of certain fixed assets, relocation of assets, severance and similar costs and was unfavorably impacted by related operational inefficiencies. Until the warehouse and distribution center consolidation was completed in May 2002, Engine Management had not realized a significant reduction in its distribution costs. The restructuring program also included the reduction of headcount in the manufacturing and selling and administrative areas of the business. As with the warehouse consolidation initiative, the savings from these restructuring activities have yet to be fully realized. The complexity of these restructuring and reorganization actions, accompanied with general market softness, has resulted in significant operating losses for Engine Management and the continued reliance upon Dana to fund EM operations during 2000, 2001 and 2002. Dana has confirmed its intention to continue to fund Engine Management's operations while it remains under Dana's ownership. The restructuring is discussed further in Note 12. F-43 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of these financial statements required management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Some of the more significant estimates include depreciation and amortization of long-lived assets; inventory valuations; sales returns and allowances; restructuring accruals; postemployment and postretirement benefits; corporate allocations; and allowances for doubtful accounts. Actual results could differ from those estimates. ALLOCATION OF CORPORATE COSTS Certain expenses incurred by Dana Corporation on behalf of Engine Management have been included in these financial statements. These expenses include accounting, audit, legal, tax, treasury and certain other administrative services. These expenses have been allocated to Engine Management generally based upon its sales relative to the consolidated sales of Dana as this methodology yields, in the opinion of management, a reasonable allocation. CONCENTRATION OF CREDIT RISK The financial instruments that potentially subject the Company to concentrations of credit risk are accounts receivable. The Company limits its credit risk by performing ongoing credit evaluations and, when deemed necessary, requiring letters of credit, guarantees, or collateral. The majority of the Company's accounts receivable are with automotive parts wholesalers and retailers. For the nine-month period ended September 30, 2002, the Company's sales to its three largest customers were 32.1% and 8.2% and 7.6% of total sales, respectively. Accounts receivable at September 30, 2002 relating to these three customers were 35.4%, 9.9% and 11.8% of the total accounts receivable, respectively. INVENTORIES Inventories are valued at the lower of cost or market. Cost is generally determined on the first-in, first-out (FIFO) or average cost basis. PROPERTIES AND DEPRECIATION Property, plant and equipment are valued at historical costs. Depreciation is recognized over the estimated useful lives of these assets using primarily the straight-line method for financial reporting purposes and accelerated depreciation methods for federal income tax purposes. For financial reporting purposes, the estimated useful lives range from 25 to 45 years for buildings and building fixtures, from 3 to 12 years for machinery and equipment and generally 5 years for ERP-related software. Land improvements are depreciated over 20 years and leasehold improvements are amortized over the shorter of the life of the lease or the useful life of the asset. Long-lived assets are reviewed for impairment and, if necessary, are adjusted to fair value. As part of the restructuring discussed in Note 12, asset writedowns were recorded in 2001 and 2002 principally related to closed facilities. During 2001, EM sold its Nashville distribution center to a third party commercial finance company for $22,550. Concurrent with the sale of the facility, EM leased the facility from the third F-44 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) party for a period of twenty years. Other than the leaseback, EM has no continuing involvement and, therefore, the immaterial gain on sale is being recognized in earnings over the lease term. REVENUE RECOGNITION Sales are recognized when products are shipped and title has transferred to the customer. Accruals for warranty costs, sales returns and other allowances are provided at the time of shipment based upon experience; adjustments are made as new information becomes available. Shipping and handling fees billed to customers are included in sales and the costs of shipping and handling are included in cost of sales. Intragroup sales have been eliminated; sales to other Dana businesses, including those EM businesses not included in these financial statements, are included in net sales. INCOME TAXES Dana and its U.S. subsidiaries file a consolidated income tax return, which includes Engine Management. The income tax provision included in these financial statements was calculated on a method generally consistent with a separate return basis, as if Engine Management was a separate taxpayer, and the resulting current tax benefit (liability) is settled with Dana through the intercompany accounts. Deferred tax balances reflect the impact of temporary differences between the carrying amounts of Engine Management assets and liabilities in the financial statements and their related tax bases. FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 2001 and September 30, 2002, Engine Management's financial instruments included cash, cash equivalents, receivables, accounts payable, and short-term borrowings. At December 31, 2001 and September 30, 2002, because of their short term nature, the fair value of such instruments approximated their carrying values. PENSION PLANS Pension benefits are provided for certain employees of Engine Management under plans administered by Dana. Annual cost for defined benefit plans is determined on an actuarial basis and funded through deposits with trustees. Generally, Engine Management employees participate in Dana plans and the assets and liabilities are commingled with those related to other Dana businesses. Accordingly, except for one stand-alone plan, no amounts are reflected on the Engine Management balance sheet and pension expense for Engine Management has been determined on a multi-employer plan basis. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Upon retirement, certain of the Engine Management employees will be eligible to receive other postretirement benefits, including medical, dental and life insurance, pursuant to two EM plans that are sponsored by Dana. Benefit obligations of the postretirement benefit plans are not funded. Annual net postretirement benefits liability and expense under the defined benefit plans are determined on an actuarial basis for each plan. Benefits are determined primarily based upon employees' length of service and include employee cost sharing where applicable. F-45 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) COMPREHENSIVE LOSS The only component of other comprehensive income was the minimum pension liability adjustment. Comprehensive loss totaled $52,121, $62,829, and $28,834 for the years ended December 31, 2000 and 2001 and the nine months ended September 30, 2002, respectively. CASH AND MARKETABLE SECURITIES Engine Management maintains its cash in depository accounts with high credit quality financial institutions. As discussed in Note 1, treasury activities at Dana are generally centralized such that Engine Management cash relates principally to petty cash accounts and cash accounts of the operations located in Puerto Rico. NON-CASH INVESTING AND FINANCING ACTIVITIES During 2001 and 2002, EM settled certain investing and financing activities through intercompany transactions with Dana without exchanging cash. Those transactions include: the Ponce dividend to Dana in 2001 of $43,600; short-term borrowings of $13,949 in 2001; and repayments of short-term borrowings of $8,612 in 2002. STOCK-BASED COMPENSATION Certain Engine Management employees participate in Dana's stock based compensation plans. Stock-based compensation under Dana's stock based plans is accounted for using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees,' and related interpretations. No compensation expense is recorded for stock options when granted as the option price is set at the market value of the underlying Dana stock. ACCRUED WORKERS' COMPENSATION Under Dana's self insured arrangements for workers' compensation benefits, Engine Management estimates liabilities for incurred but unreported claims based on actuarial calculations using its loss history. As of December 31, 2001 and September 30, 2002, Engine Management had estimated liabilities of approximately $2,189 and $2,025, respectively. PER SHARE DATA Per share data is not relevant as Engine Management is not a separate legal entity and has no stand alone equity structure. NOTE 3. INVENTORIES The components of inventory are as follows:
DECEMBER 31, SEPTEMBER 30, 2001 2002 ---- ---- Raw materials............................................ $16,845 $19,874 Work in process and finished goods....................... 81,333 67,385 ------- ------- $98,178 $87,259 ------- ------- ------- -------
NOTE 4. SHORT-TERM BORROWINGS Beginning in March 2001, Engine Management has participated in Dana's accounts receivable securitization program. Under the program, Engine Management contributed accounts receivable to Dana Asset Funding LLC (DAF), a special purpose entity. DAF funds its accounts receivable purchases in part by pledging a portion of the receivables as collateral for short-term loans from participating banks and uses the amounts borrowed under the program to fund the purchase of F-46 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) accounts receivable. The securitized accounts receivable are owned in their entirety by DAF and are not available under this arrangement to satisfy claims of Dana's or Engine Management's creditors. DAF's Engine Management related receivables are included in the Engine Management financial statements solely because DAF does not meet certain technical accounting requirements for treatment as a 'qualifying special purpose entity' under generally accepted accounting principles. Accordingly, the sales and contributions of the Engine Management accounts receivable to DAF were eliminated and DAF's related loans were reflected as short-term borrowings in Engine Management's financial statements. NOTE 5. LONG-TERM DEBT During 2001, Dana repaid, on Engine Management's behalf, the outstanding principal balance of $3,700 of long-term industrial bonds originally issued for the construction of a former Engine Management facility. During 2000 and 2001, Engine Management incurred interest expense on these bonds of $87 and $65, respectively. NOTE 6. STOCK OPTION PLANS The Compensation Committee of Dana's Board of Directors grants stock options to Dana employees, including selected Engine Management employees, under Dana's Stock Option Plan. The option price is equal to the market price of the Dana stock at the date of grant. One-fourth of the options granted become exercisable at each of the first four anniversary dates of the grant; options generally expire ten years from the date of grant. Stock appreciation rights may be granted separately or in conjunction with the options. The following table is a summary of transactions involving Engine Management employees under the Dana stock option plan during the years ended December 31, 2000 and 2001, and the nine-month period ended September 30, 2002:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE ------ ----- Outstanding at December 31, 1999............................ 436,539 $39.56 Transactions during the year ended December 31, 2000: Granted................................................. 155,450 23.06 Exercised............................................... (2,546) 14.25 Cancelled............................................... (26,476) 39.64 -------- ------ Outstanding at December 31, 2000............................ 562,967 $35.11 -------- ------ -------- ------ Transactions during the year ended December 31, 2001: Granted................................................. 88,100 $25.05 Exercised............................................... (8,086) 13.79 Cancelled............................................... (107,179) 35.70 -------- ------ Outstanding at December 31, 2001............................ 535,802 $33.67 -------- ------ -------- ------ Transactions during the nine-month period ended September 30, 2002: Granted................................................. 68,300 $15.33 Cancelled............................................... (25,454) 28.93 -------- ------ Outstanding at September 30, 2002........................... 578,648 $31.72 -------- ------ -------- ------
F-47 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) The following table summarizes information about stock options under this plan at September 30, 2002:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS ------------------------------------ -------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE PRICES OPTIONS LIFE IN YEARS PRICE OPTIONS PRICE ------ ------- ------------- ----- ------- ----- $15.33-23.06................... 186,950 8.7 $20.30 60,075 $23.06 25.05-37.52................... 194,561 6.3 31.45 132,161 34.48 40.08-52.56................... 197,137 6.3 42.81 174,781 42.46 ------- --- ------ ------- ------ 578,648 7.1 $31.72 367,017 $36.41 ------- --- ------ ------- ------ ------- --- ------ ------- ------
In accordance with its accounting policy for stock-based compensation, Engine Management has not recognized any expense relating to these stock options. If the fair value method of accounting for stock option grants, the alternative policy set out in SFAS No. 123, 'Accounting for Stock-Based Compensation,' had been used, the after-tax expense relating to the stock options would have been approximately $617 and $403 for the years ended December 31, 2000 and 2001, respectively, and approximately $320 for the nine-month period ended September 30, 2002. If this proforma expense had been charged to operations, EM's net loss for the years ended December 31, 2000 and 2001 and the nine-month period ended September 30, 2002, would have been approximately $52,738, $62,870, and $28,817, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes model with the following assumptions:
NINE-MONTH YEAR ENDED PERIOD ENDED DECEMBER 31, SEPTEMBER 30, --------------------- ------------- 2000 2001 2002 ---- ---- ---- Risk-free interest rate......................... 6.16% 4.63% 3.53% Dividend yield.................................. 5.38% 4.95% 0.30% Expected life................................... 5.4 years 5.4 years 5.4 years Stock price volatility.......................... 40.72% 44.67% 53.24%
Based on the above assumptions, the weighted average fair value per share of options granted under the plans was $6.51 and $7.49 for the years ended December 31, 2000 and 2001, respectively, and $7.67 for the nine-month period ended September 30, 2002. NOTE 7. EMPLOYEES' STOCK PURCHASE PLAN The majority of Engine Management's full-time employees are eligible to participate in Dana's stock purchase plan. Plan participants can elect to have up to 15% of their earnings withheld and deposited with an independent custodian. The custodian uses the funds to purchase Dana's common stock at current market prices. The purchased shares are allocated to the participants, and are distributed to the participants on request. Participants' contributions are matched in cash up to 50% over a five-year period beginning with the year the amounts are withheld. If a participant withdraws any shares before the end of five years, the amount of the match will depend on how long the shares were in the account. On behalf of the Engine Management participants, the custodian purchased 29,222 shares in 2000, 34,581 shares in 2001 and 23,558 shares in the nine-month period ended September 30, 2002. The charges to expense for the matching contributions were $37 in 2000, $68 in 2001 and $74 in the nine-month period ended September 30, 2002. F-48 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) NOTE 8. PENSION AND OTHER POSTRETIREMENT BENEFITS The employees of Engine Management are participants in various defined benefit pension plans sponsored by Dana. Expenses incurred by Engine Management with respect to multi-division, defined benefit pension plans during the years ended December 31, 2000 and 2001, and the nine-month period ended September 30, 2002, were approximately $440, $552 and $589, respectively. The former employees of Engine Management's closed facility in Ottawa, Illinois were covered by a separate, defined benefit pension plan (the Ottawa Plan). As the facility was closed in 1999, no additional benefits were accumulated after that time. The following tables provide a reconciliation of the changes in the Ottawa Plan's benefit obligations and fair value of assets for the year ended December 31, 2001 and the nine-month period ended September 30, 2002, as well as statements of the funded status and schedules of the net amounts recognized in the balance sheet at December 31, 2001 and September 30, 2002.
PENSION BENEFITS ---------------------------- NINE-MONTH YEAR ENDED PERIOD ENDED DECEMBER 31, SEPTEMBER 30, 2001 2002 ---- ---- Reconciliation of benefit obligation: Obligation at January 1................................. $1,903 $2,010 Service cost............................................ -- -- Interest cost........................................... 144 113 Actuarial loss.......................................... 73 355 Benefit payments........................................ (110) (84) ------ ------ Obligation at period end.................................... $2,010 $2,394 ------ ------ ------ ------ Reconciliation of fair value of plan assets: Fair value at January 1................................. $2,242 $1,950 Actual return on plan assets............................ (182) (33) Benefit payments........................................ (110) (84) ------ ------ Fair value at December 31................................... $1,950 $1,833 ------ ------ ------ ------ Funded status: Balance at period end................................... $ (60) $ (561) Unrecognized transition obligation...................... (3) (1) Unrecognized prior service cost......................... 157 142 Unrecognized loss....................................... 596 1,147 ------ ------ Prepaid cost................................................ $ 690 $ 727 ------ ------ ------ ------ Amounts recognized in the balance sheet consist of: Prepaid benefit cost.................................... $ 690 $ 727 Accrued benefit liability............................... (750) (1,288) Intangible assets....................................... 157 142 Accumulated other comprehensive income.................. 593 1,146 ------ ------ Net asset recognized........................................ $ 690 $ 727 ------ ------ ------ ------
Components of the net periodic benefit cost of the Ottawa Plan for the years ended December 31, 2000 and 2001, and the nine-month period ended September 30, 2002, are as follows: F-49 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) PENSION BENEFITS COST
NINE-MONTH YEAR ENDED PERIOD ENDED DECEMBER 31, SEPTEMBER 30, 2000 2001 2002 ---- ---- ---- Interest cost........................................ $ 139 $ 144 $ 113 Expected return on plan assets....................... (206) (220) (165) Amortization of transition obligation................ (10) (10) (2) Amortization of prior service cost................... 20 20 15 ----- ----- ----- Net periodic benefit cost (credit)................... $ (57) $ (66) $ (39) ----- ----- ----- ----- ----- -----
The assumptions used in the measurement of pension benefit obligations are as follows:
NINE-MONTH YEAR ENDED PERIOD ENDED DECEMBER 31, SEPTEMBER 30, 2000 2001 2002 ---- ---- ---- Discount rate......................................... 7.75% 7.50% 6.50% Expected return on plan assets........................ 9.25% 9.50% 9.50%
The employees of Engine Management are also eligible to participate in defined contribution benefit plans sponsored by Dana. Under the terms of the defined contribution benefit plans, participant and sponsor contributions may be directed into a number of investment options. During the years ended December 31, 2000 and 2001, and the nine-month period ended September 30, 2002, respectively, Engine Management incurred expenses of approximately $628, $526 and $347 for matching contributions to the defined contribution benefit plans. Upon retirement, certain of the Engine Management employees will be eligible to receive other postretirement benefits, including medical, dental and life insurance, pursuant to plans sponsored by Dana. Benefit obligations of the postretirement benefit plans are not funded. The following tables provide a reconciliation of the changes in the postretirement benefit plans' benefit obligations for the year ended December 31, 2001 and the nine-month period ended September 30, 2002, as well as the funded status and the net amounts recognized in the balance sheet at December 31, 2001 and September 30, 2002. F-50 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) POSTRETIREMENT BENEFITS
NINE-MONTH YEAR ENDED PERIOD ENDED DECEMBER 31, SEPTEMBER 30, 2001 2002 ---- ---- Reconciliation of benefit obligation: Obligation at January 1.............................. $ 7,392 $ 8,591 Service cost......................................... 139 140 Interest cost........................................ 554 607 Actuarial loss....................................... 983 3,951 Benefit payments..................................... (477) (503) ------- -------- Obligation at period end................................. $ 8,591 $ 12,786 ------- -------- ------- -------- Funded status: Balance at period end................................ $(8,591) $(12,786) Unrecognized prior service cost...................... 3,649 3,395 Unrecognized loss.................................... 3,738 7,476 ------- -------- Accrued liability recorded............................... $(1,204) $ (1,915) ------- -------- ------- --------
Components of the net periodic postretirement benefit costs for the years ended December 31, 2000 and 2001, and the nine-month period ended September 30, 2002, are as follows: POSTRETIREMENT BENEFITS COST
NINE-MONTH YEAR ENDED PERIOD ENDED DECEMBER 31, SEPTEMBER 30, 2000 2001 2002 ---- ---- ---- Interest cost......................................... $390 $ 554 $ 607 Service cost.......................................... 164 139 140 Amortization of prior service cost.................... -- 339 255 Recognized net actuarial gain (loss).................. 225 108 214 ---- ------ ------ Net periodic benefit cost............................. $779 $1,140 $1,216 ---- ------ ------ ---- ------ ------
The assumptions used in the measurement of postretirement benefit obligations are as follows:
NINE-MONTH YEAR ENDED PERIOD ENDED DECEMBER 31, SEPTEMBER 30, 2000 2001 2002 ---- ---- ---- Discount rate......................................... 7.75% 7.50% 6.50% Initial weighted health care costs trend rate......... 6.80% 8.10% 12.30% Ultimate health care costs trend rate................. 5.00% 5.00% 5.00% Years to ultimate..................................... 9 9 6
Assumed health care costs trend rates have a significant effect on the health care plan. A one-percentage-point change in assumed health care costs trends rates would have the following effects for the nine-month period ended September 30, 2002: F-51 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1% POINT 1% POINT INCREASE DECREASE -------- -------- Effect on total of service and interest cost components..... 111 (111) Effect on postretirement benefit obligations................ 1,845 (1,844)
NOTE 9. ESTIMATED INCOME TAXES Engine Management is included in Dana's consolidated U.S. tax return. The income tax benefit has been calculated for each period on a method generally consistent with a separate return basis as if Engine Management were a separate taxpayer. The annual settlement of the current payable to (receivable from) Dana is recorded through equity. A valuation allowance has not been established for the recorded deferred tax assets because Dana has traditionally been a U.S. taxpayer and Engine Management expects to be able to realize these assets through Dana. The income tax benefit consists of the following components:
NINE MONTH PERIOD ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, 2000 2001 2002 ---- ---- ------------- U.S. federal Current.................................... $(45,572) $(31,979) $(22,088) Deferred................................... 13,866 (1,301) 6,537 U.S. state and local........................... (4,966) (5,737) (2,677) Other U.S. .................................... 996 (47) 132 -------- -------- -------- $(35,676) $(39,064) $(18,096) -------- -------- -------- -------- -------- --------
Other U.S. taxes pertain to Ponce, Engine Management's operation in Puerto Rico, which is part of a distinct legal entity that files a separate tax return. During 2001, Ponce declared and paid a dividend to Dana of $43,600. Deferred tax assets (liabilities) consist of the following:
DECEMBER 31, SEPTEMBER 30, 2001 2002 ---- ---- Expense accruals......................................... $17,810 $12,433 Inventory reserves....................................... 18,667 19,525 Employee benefits and other.............................. 2,103 2,496 ------- ------- Deferred tax assets...................................... 38,580 34,454 ------- ------- Depreciation............................................. (3,935) (5,970) Other.................................................... (798) (958) ------- ------- Deferred tax liabilities................................. (4,733) (6,928) ------- ------- Net deferred tax assets.................................. $33,847 $27,526 ------- ------- ------- -------
The effective income tax rate differs from the U.S. federal income tax rate for the following reasons: F-52 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
NINE-MONTH PERIOD ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, 2000 2001 2002 ---- ---- ---- U.S. federal income tax rate................. 35.0% 35.0% 35.0% Increases (reductions) resulting from: State and local income taxes, net of federal income tax benefit............. 3.7 3.7 3.7 Other-U.S. income........................ 2.0 (0.1) 0.5 Miscellaneous items...................... (0.1) (0.1) (0.4) ---- ---- ---- Effective income tax benefit rate............ 40.6% 38.5% 38.8% ---- ---- ----
NOTE 10. COMPOSITION OF CERTAIN BALANCE SHEET AMOUNTS The following items comprise the net amounts indicated in the respective balance sheet captions:
DECEMBER 31, SEPTEMBER 30, 2001 2002 ---- ---- Property, plant and equipment, net Land and improvements to land............................ $ 2,007 $ 2,546 Buildings and building fixtures.......................... 34,312 35,210 Machinery and equipment.................................. 175,306 160,326 Construction in progress................................. 3,152 950 -------- -------- 214,777 199,032 Less: Accumulated depreciation........................... 131,743 130,709 -------- -------- $ 83,034 $ 68,323 -------- -------- -------- -------- Other accrued liabilities Warranty................................................. $ 11,682 $ 15,073 Restructuring............................................ 15,063 7,323 Other.................................................... 16,739 14,255 -------- -------- $ 43,484 $ 36,651 -------- -------- -------- --------
Depreciation expense for the years ended December 31, 2000 and 2001 was $18,777 and $19,191, respectively, and $12,810 for the nine-month period ended September 30, 2002. NOTE 11. COMMITMENTS AND CONTINGENCIES At September 30, 2002, Engine Management had purchase commitments for property, plant and equipment of approximately $772. Future minimum rental commitments under operating leases were $103,876 at September 30, 2002, with rental payments during the fourth quarter of 2002 and next five years of: 2002, $3,231; 2003, $11,171; 2004, $9,320; 2005, $8,257 and 2006, $6,405. Net rental expense was $17,026 and $17,006, respectively, during the years ended December 31, 2000 and 2001, and $9,467 during the nine-month period ended September 30, 2002. Engine Management is a party to various pending judicial and administrative proceedings arising in the ordinary course of business. These include, among others, proceedings based on product liability claims. Management does not believe that any liabilities that may result from these F-53 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) proceedings are reasonably likely to have a material adverse effect on the liquidity, financial condition and results of operations of Engine Management. NOTE 12. RESTRUCTURING OF OPERATIONS As discussed in Note 1, Engine Management underwent a significant restructuring of its business during the periods presented. The restructuring program began in 1999 when Dana announced its plans to consolidate numerous warehouses within Engine Management which took place through 2000. Further consolidation activities and headcount reductions were announced in 2001 which extended into 2002. These actions were taken to rationalize Engine Management's cost structure in response to market and related factors. The following summarizes the restructuring charges and activity recorded during the periods presented:
EMPLOYEE LONG-LIVED TERMINATION ASSET BENEFITS IMPAIRMENT EXIT COSTS TOTAL -------- ---------- ---------- ----- Balance at December 31, 1999............ $ 5,374 $ -- $1,377 $ 6,751 Activity during the year Cash payments....................... (4,461) (1,328) (5,789) ------- ------- ------ -------- Balance at December 31, 2000............ 913 -- 49 962 ------- ------- ------ -------- Activity during the year Charges to expense.................. 10,675 24,509 9,092 44,276 Cash payments....................... (5,247) -- (419) (5,666) Write-off of assets................. -- (24,509) -- (24,509) ------- ------- ------ -------- Balance at December 31, 2001............ 6,341 -- 8,722 15,063 ------- ------- ------ -------- Activity during the year Charges to expense.................. 1,037 2,318 6,305 9,660 Cash payments....................... (5,882) -- (9,200) (15,082) Write-off of assets................. -- (2,318) -- (2,318) ------- ------- ------ -------- Balance at September 30, 2002........... $ 1,496 $ -- $5,827 $ 7,323 ------- ------- ------ -------- ------- ------- ------ --------
Employee terminations relating to the plans were as follows:
NINE MONTH YEAR ENDED PERIOD ENDED DECEMBER 31, SEPTEMBER 30, 2001 2002 ---- ---- Total estimated............................................. 952 149 Less terminated: Year ended December 31, 2001............................ (322) -- Nine-month period ended September 30, 2002.............. (602) (143) ---- ---- Balance at September 30, 2002............................... 28 6 ---- ---- ---- ----
At September 30, 2002, $7,323 of restructuring charges remained in accrued liabilities. This balance was comprised of $1,496 for the reduction of approximately 34 employees to be completed in 2003 and $5,827 for lease terminations and other exit costs. The estimated annual cash expenditures will be approximately $3,415 in 2003 and $2,177 in 2004 and $1,731 thereafter. F-54 ENGINE MANAGEMENT (A BUSINESS OF DANA CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) NOTE 13. RELATED PARTY TRANSACTIONS For purposes of these financial statements, sales between Engine Management and other Dana units have not been eliminated. These transactions between Engine Management and other Dana locations are currently on a cost-plus basis with the mark up on most transactions being 15%. Engine Management's sales to other Dana operations were $27,620 and $13,707, respectively, for the years ended December 31, 2000 and 2001, and $6,955 for the nine-month period ended September 30, 2002. Direct expenses incurred by Dana on behalf of Engine Management have been charged to Engine Management based on estimated or actual cost. Such services include insurance risk management, employee benefits and payroll administration. Corporate allocations from Dana for administrative services aggregated $2,691, $1,784 and $1,493 during 2000, 2001, and the nine months ended September 30, 2002, respectively, and are included in selling, general and administrative expenses. No allocation of Dana Corporate interest expense has been included in these financial statements. Engine Management provides sales and distribution support to Beck Arnley. Charges for these services in 2002 aggregate $7,893 and were principally determined on a percentage of sales basis which management believes to be reasonable. Engine Management leases certain office and warehouse space, vehicles and equipment under operating leases entered into with Dana Credit Corporation (DCC). Lease payments to DCC were $7,561 and $9,729, respectively, for the years ended December 31, 2000 and 2001, and $5,360 for the nine-month period ended September 30, 2002. The majority of these lease payments relate to a land and building lease between DCC and Engine Management for the Salt Lake City distribution center and other equipment leases. NOTE 14. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT ACCOUNTANT'S REPORT On February 7, 2003, Dana entered into an agreement to sell a substantial portion of Engine Management to Standard Motor Products. The completion of the transaction is subject to, among other things, regulatory approvals and the buyer's completion of financing related to the transaction. F-55 ==================================== =================================== No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell or to buy only the securities offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ------------------- TABLE OF CONTENTS
Page ---- Prospectus Summary.......................................... 1 Risk Factors................................................ 8 Special Notes Regarding Forward-Looking Statements.......... 17 The Acquisition and Related Transactions.................... 18 Use of Proceeds............................................. 20 Price Range of Common Stock and Dividend Policy............. 21 Capitalization.............................................. 22 Pro Forma Financial Information............................. 24 Selected Consolidated Financial Data........................ 29 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 33 The Automotive Aftermarket.................................. 45 Business.................................................... 50 Management.................................................. 63 Principal Shareholders...................................... 66 Description of Capital Stock................................ 70 Underwriting................................................ 74 Where You Can Find More Information......................... 75 Incorporation of Certain Documents by Reference............. 76 Validity of Common Stock.................................... 77 Experts..................................................... 77 Index to Financial Statements............................... F-1
Shares STANDARD MOTOR PRODUCTS, INC. Common Stock ------------------- [Logo] ------------------- GOLDMAN, SACHS & CO. MORGAN STANLEY ==================================== =================================== PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All the amounts shown are estimated, except the SEC registration fee and the NASD filing fee. SEC registration fee........................................ $ 6,242 NASD fee.................................................... 7,285 NYSE fee.................................................... * Printing expenses........................................... 125,000 Legal fees and expenses..................................... * Accounting fees and expenses................................ * Transfer agent and registrar fees and expenses.............. * Blue Sky fees and expenses.................................. * Miscellaneous............................................... * -------- Total................................................... $ -------- --------
- --------- * To be filed by amendment ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS In 1986, various Sections of Article 7 of the Business Corporation Law of New York (the 'BCL') were amended to broaden the indemnification rights of directors, officers and employees. In 1987, BCL Section 402(b) was further amended to permit a provision to be included in a certificate of incorporation shielding directors from personal liability for breach of their duties as directors. In order to protect our directors, officers and employees, as applicable, to the fullest extent permitted by these statutory amendments, we amended and restated our By-laws (the 'By-laws') and restated our Certificate of Incorporation, as amended (the 'Certificate of Incorporation'). In general, the By-laws and Certificate of Incorporation provide that we shall, to the fullest extent permitted by Article 7 of the BCL, indemnify each person made or threatened to be made a party to, or called as a witness in, or asked to submit information in, any action or proceeding by reason of the fact that such person is or was a director or officer of us, or serves or served, at our request, any other corporation in any capacity, against judgments, fines, penalties, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with such action or proceeding, or any appeal therein. This indemnification requirement covers any pending or threatened action, proceeding, hearing or investigation, whether civil or criminal, whether judicial, administrative or legislative in nature, and whether or not in the nature of a direct or shareholders' derivative action brought by us or on our behalf or any other corporation or enterprise which the director or officer of us serves or has served at our request. The By-laws prohibit indemnification if a judgment or other final adjudication adverse to such person establishes that his or her acts were committed in bad faith or were the result of active or deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled. The By-laws further provide that no indemnification shall be required with respect to any settlement or other non-adjudicated disposition of any threatened or pending action or proceeding unless we have given our prior consent to such settlement or other disposition. The By-laws require us to advance or promptly reimburse upon request any person entitled to indemnification for all expenses, including attorneys' fees, reasonably incurred in defending any action or proceeding in advance of the final disposition thereof upon receipt of an undertaking by such person to repay such amount if such person is ultimately not to be entitled to indemnification; provided, however, that such person cooperates with any request by us that counsel be utilized by the parties to an action or proceeding similarly situated unless to do so would be inappropriate due to actual or potential conflicts of interest. II-1 The Certificate of Incorporation provides that the personal liability of our directors be eliminated to the fullest extent permitted by the provisions of BCL Section 402(b). It also provides that we shall, to the fullest extent permitted by Article 7 of the BCL, indemnify under that statute from and against any and all of the expenses, liabilities or other matters covered by the statute. The By-laws, summarized above, contain the detailed terms and conditions under which this indemnification requirement of the Certificate of Incorporation is to be effected. We maintain an officers' and directors' liability insurance policy insuring our officers and directors against certain liabilities and expenses incurred by them in their capacities as such. The policy does not reimburse us for indemnification obligations to our officers and directors. Additionally, the underwriting agreement provides that the underwriter(s) shall indemnify each of our directors and each of our officers who signed the registration statement and each person who controls us for certain liabilities, including certain liabilities under the Securities Act of 1933. ITEM 16. EXHIBITS (a) Exhibits
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 1. -- Form of Underwriting Agreement between Standard Motor Products, Inc., and Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated as representatives of the underwriters. 2.1 -- Asset Purchase Agreement, dated as of February 7, 2003, by and among Dana Corporation, Automotive Controls Corp., BWD Automotive Corporation, Pacer Industries, Inc., Ristance Corporation, Engine Controls Distribution Services, Inc., as Sellers, and Standard Motor Products, Inc., as Buyer (incorporated by reference to Standard Motor Products, Inc.'s Current Report on Form 8-K (File No. 001-04743), filed on February 10, 2003). 4.1 -- Restated Certificate of Incorporation, dated July 31, 1990 (incorporated by reference to Exhibit 4.2 of Standard Motor Products, Inc.'s Registration Statement on Form S-8 (Registration No. 333-51565), dated May 1, 1998). 4.2 -- Certificate of Amendment to the Restated Certificate of Incorporation, dated July 31, 1990 (incorporated by reference to Exhibit 4.3 of Standard Motor Products, Inc.'s Registration Statement on Form S-8 (Registration No. 333-51565), filed on May 1, 1998). 4.3 -- Restated By-Laws, dated May 23, 1996 (incorporated by reference to Exhibit 3.4 of Standard Motor Products, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 4.4 -- Form of Subordinated Debenture Indenture (including form of convertible debenture) (incorporated by reference to Exhibit 4.1 to Standard Motor Products, Inc.'s Amendment No. 2 to its Registration Statement on Form S-3 (Registration No. 333-79177), filed on July 20, 1999). 4.5 -- Rights Agreement, dated as of February 15, 1996, between Standard Motor Products, Inc. and Registrar & Transfer Co., as rights agent (incorporated by reference to Standard Motor Products, Inc.'s Registration Statement on Form 8-A (File No. 001-04743), filed on April 11, 1996). 4.6 -- Form of Share Ownership Agreement by and between Standard Motor Products, Inc. and Dana Corporation (incorporated by reference to Standard Motor Products, Inc.'s Current Report on Form 8-K (File No. 001-04743), filed on February 10, 2003). 5.1* -- Opinion of Kelley Drye & Warren LLP. 23.1 -- Consent of independent auditors KPMG LLP. 23.2 -- Consent of independent accountants PricewaterhouseCoopers LLP. 23.3* -- Consent of Kelley Drye & Warren LLP (included in its opinion filed as Exhibit 5.1). 24.1 -- Powers of Attorney (included on signature page).
- --------- * To be filed by amendment. (b) Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts II-2 ITEM 17. UNDERTAKINGS (a) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Long Island City, New York, on the 13th day of February, 2003. STANDARD MOTOR PRODUCTS, INC. By: /s/ LAWRENCE I. SILLS .................................... Lawrence I. Sills Chairman of the Board, Chief Executive Officer and Director KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Lawrence I. Sills and James J. Burke, and each of them individually, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any and all amendments to this registration statement (which includes any additional registration statement under Rule 462(b)) together with all schedules and exhibits thereto, (ii) act on, sign and file with the Securities and Exchange Commission any and all exhibits to this registration statement and any and all exhibits and schedules thereto, (iii) act on, sign and file any and all applications, registration statements, notices, reports and other documents necessary or appropriate in connection with the registration or qualification under foreign and state securities laws of the securities described in this registration statement or any amendment thereto, or obtain an exemption therefrom, in connection with the offering described therein, and (iv) take any and all such actions which may be necessary or appropriate in connection therewith, granting unto such agents, proxies and attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as approving, ratifying and confirming all that such agents, proxies and attorneys-in-fact, any of them or any of his or her or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 13th day of February, 2003.
SIGNATURE TITLE --------- ----- /s/ LAWRENCE I. SILLS Chairman of the Board, Chief Executive Officer and ......................................... Director (Principal Executive Officer) Lawrence I. Sills /s/ JAMES J. BURKE Vice President Finance, Chief Financial Officer ......................................... (Principal Financial and Accounting Officer) James J. Burke /s/ ARTHUR D. DAVIS Vice Chairman of the Board and Director ......................................... Arthur D. Davis /s/ MARILYN FIFE CRAGIN Director ......................................... Marilyn Fife Cragin
II-4
SIGNATURE TITLE --------- ----- /s/ SUSAN F. DAVIS Director ......................................... Susan F. Davis /s/ ROBERT M. GERRITY Director ......................................... Robert M. Gerrity /s/ JOHN L. KELSEY Director ......................................... John L. Kelsey /s/ KENNETH A. LEHMAN Director ......................................... Kenneth A. Lehman /s/ ARTHUR S. SILLS Director ......................................... Arthur S. Sills /s/ PETER J. SILLS Director ......................................... Peter J. Sills /s/ FREDERICK D. STURDIVANT Director ......................................... Frederick D. Sturdivant /s/ WILLIAM H. TURNER Director ......................................... William H. Turner
II-5 STANDARD MOTOR PRODUCTS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER BALANCE AT DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR ----------- ------- -------- -------- ---------- ----------- (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31, 1999: Allowance for doubtful accounts..................... $ 2,664 $ 2,387 $611 $ 3,043 $ 2,619 Allowance for discounts........ 1,861 -- 131 -- 1,992 ------- -------- ---- -------- ------- $ 4,525 $ 2,387 $742 $ 3,043 $ 4,611 ------- -------- ---- -------- ------- ------- -------- ---- -------- ------- Allowance for sales returns.... $16,296 $115,749 $ -- $109,347 $22,698 ------- -------- ---- -------- ------- ------- -------- ---- -------- ------- Allowance for inventory valuation.................... $18,221 $ 1,911 $599 $ 6,965 $13,766 ------- -------- ---- -------- ------- ------- -------- ---- -------- ------- YEAR ENDED DECEMBER 31, 2000: Allowance for doubtful accounts..................... $ 2,619 $ 699 $ -- $ 339 $ 2,979 Allowance for discounts........ 1,992 -- -- 394 1,598 ------- -------- ---- -------- ------- $ 4,611 $ 699 $ -- $ 733 $ 4,577 ------- -------- ---- -------- ------- ------- -------- ---- -------- ------- Allowance for sales returns.... $22,698 $100,403 $ -- $105,408 $17,693 ------- -------- ---- -------- ------- ------- -------- ---- -------- ------- Allowance for inventory valuation.................... $13,766 $ 3,165 $ -- $ 4,001 $12,930 ------- -------- ---- -------- ------- ------- -------- ---- -------- ------- YEAR ENDED DECEMBER 31, 2001: Allowance for doubtful accounts..................... $ 2,979 $ 598 $ -- $ 660 $ 2,917 Allowance for discounts........ 1,598 -- -- 153 1,445 ------- -------- ---- -------- ------- $ 4,577 $ 598 $ -- $ 813 $ 4,362 ------- -------- ---- -------- ------- ------- -------- ---- -------- ------- Allowance for sales returns.... $17,693 $ 94,122 $ -- $ 93,648 $18,167 ------- -------- ---- -------- ------- ------- -------- ---- -------- ------- Allowance for inventory valuation.................... $12,930 $ 4,387 $ -- $ 3,422 $13,895 ------- -------- ---- -------- ------- ------- -------- ---- -------- -------
INDEX OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 1.1 -- Form of Underwriting Agreement between Standard Motor Products, Inc., and Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated as representatives of the underwriters. 2.1 -- Asset Purchase Agreement, dated as of February 7, 2003, by and among Dana Corporation, Automotive Controls Corp., BWD Automotive Corporation, Pacer Industries, Inc., Ristance Corporation, Engine Controls Distribution Services, Inc., as Sellers, and Standard Motor Products, Inc., as Buyer (incorporated by reference to Standard Motor Products, Inc.'s Current Report on Form 8-K (File No. 001-04743), filed on February 10, 2003). 4.1 -- Restated Certificate of Incorporation, dated July 31, 1990 (incorporated by reference to Exhibit 4.2 of Standard Motor Products, Inc.'s Registration Statement on Form S-8 (Registration No. 333-51565), dated May 1, 1998). 4.2 -- Certificate of Amendment to the Restated Certificate of Incorporation, dated July 31, 1990 (incorporated by reference to Exhibit 4.3 of Standard Motor Products, Inc.'s Registration Statement on Form S-8 (Registration No. 333-51565), filed on May 1, 1998). 4.3 -- Restated By-Laws, dated May 23, 1996 (incorporated by reference to Exhibit 3.4 of Standard Motor Products, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 4.4 -- Form of Subordinated Debenture Indenture (including form of convertible debenture) (incorporated by reference to Exhibit 4.1 to Standard Motor Products, Inc.'s Amendment No. 2 to its Registration Statement on Form S-3 (Registration No. 333-79177), filed on July 20, 1999). 4.5 -- Rights Agreement, dated as of February 15, 1996, between Standard Motor Products, Inc. and Registrar & Transfer Co., as rights agent (incorporated by reference to Standard Motor Products, Inc.'s Registration Statement on Form 8-A (File No. 001-04743), filed on April 11, 1996). 4.6 -- Form of Share Ownership Agreement by and between Standard Motor Products, Inc. and Dana Corporation (incorporated by reference to Standard Motor Products, Inc.'s Current Report on Form 8-K (File No. 001-04743), filed on February 10, 2003). 5.1*-- Opinion of Kelley Drye & Warren LLP. 23.1 -- Consent of independent auditors KPMG LLP. 23.2 -- Consent of independent accountants PricewaterhouseCoopers LLP. 23.3*-- Consent of Kelley Drye & Warren LLP (included in its opinion filed as Exhibit 5.1). 24.1 -- Powers of Attorney (included on signature page).
- --------- * To be filed by amendment. EX-1 3 ex-1.txt EXHIBIT 1.1 ================================================================================ FORM OF UNDERWRITING AGREEMENT BY and AMONG STANDARD MOTOR PRODUCTS, INC. and GOLDMAN, SACHS & CO. MORGAN STANLEY & CO. INCORPORATED DATED ________________ __, 2003 ================================================================================ STANDARD MOTOR PRODUCTS, INC. o Shares of Common Stock ----- Form of Underwriting Agreement o, 2003 Goldman, Sachs & Co. Morgan Stanley & Co. Incorporated As Representatives of the several Underwriters named in Schedule I hereto c/o Goldman, Sachs & Co. 85 Broad Street, New York, New York 10004 Ladies and Gentlemen: Standard Motor Products, Inc., a New York corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of o shares of common stock, par value $2.00 per share ("Stock"), of the Company (the "Firm Shares") and, at the election of the Underwriters, up to an aggregate of o additional shares of common stock, par value $2.00 per share (the "Optional Shares") (the Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof are herein collectively called the "Shares"). 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, each of the Underwriters that: (a) A registration statement on Form S-3 (File No. 333- o) (the "Initial Registration Statement") in respect of the Shares has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto but including all documents incorporated by reference in the prospectus contained therein, to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which became effective upon filing, no other document with respect to the Initial Registration Statement or document incorporated by reference therein has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated, threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act, is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including (i) the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under -1- the Act to be part of the Initial Registration Statement at the time it was declared effective and (ii) the documents incorporated by reference in the prospectus contained in the Initial Registration Statement at the time such part of the Initial Registration Statement became effective, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the "Registration Statement"; such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus"; and any reference herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Act, as of the date of such Preliminary Prospectus or Prospectus, as the case may be; any reference to any amendment or supplement to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include any documents filed after the date of such Preliminary Prospectus or Prospectus, as the case may be, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and incorporated by reference in such Preliminary Prospectus or Prospectus, as the case may be; and any reference to any amendment to the Registration Statement shall be deemed to refer to and include any annual report of the Company filed pursuant to Section 13(a) or 15(d) of the Exchange Act after the effective date of the Initial Registration Statement that is incorporated by reference in the Registration Statement); (b) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein; (c) The documents incorporated by reference in the Prospectus, when they became effective or were filed with the Commission, as the case may be, conformed in all material respects to the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder, and none of such documents contained when they became effective or were filed with the Commission, as the case may be, an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, not misleading; and any further documents so filed and incorporated by reference in the Prospectus or any further amendment or supplement thereto, when such documents become effective or are filed with the Commission, as the case may be, will conform in all material respects to the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein; (d) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will conform in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the applicable filing date as to the Prospectus and -2- any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein; (e) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included or incorporated by reference in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock or change in excess of [$6] million [to be confirmed by the Company] of long-term debt of the Company or any of its subsidiaries, or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, business, prospects, assets, liabilities, financial position, shareholders' equity or results of operations of the Company and its subsidiaries, taken as a whole ("Material Adverse Effect"), otherwise than as set forth or contemplated in the Prospectus; (f) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them, in each case, free and clear of all liens, encumbrances and defects except such as are described in the Prospectus, as set forth in Schedule IV [to include European liens], or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any material real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries; (g) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the state of New York, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; (h) The Company and its subsidiaries are qualified to do business and in good standing in each of the jurisdictions listed under their respective names on Schedule II attached hereto, which are, individually or in the aggregate, all of the jurisdictions in which failure to be so qualified or in good standing would have a Material Adverse Effect; (i) Each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; (j) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, and are fully paid and non-assessable; conform to the description of the Stock contained in the Prospectus; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and (except for directors' qualifying shares and except as otherwise set forth in the Prospectus or -3- noted on Schedule II or IV attached hereto) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims;(1) (k) The Shares to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued and fully paid and non-assessable and will conform to the description thereof in the Prospectus; (l) The issue and sale of the Shares by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation by the Company of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or material instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Restated Certificate of Incorporation, as amended or By-laws of the Company or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement except the registration under the Act of the Shares and such consents, approvals, authorizations, registrations or qualifications as may be required under state or foreign securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (m) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-Laws. Neither the Company nor any of its subsidiaries is in default in the performance or observance of any material obligation, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound, except for any such violations as would not have, individually or in the aggregate, a Material Adverse Effect; (n) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock, and under the caption "Underwriting", insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair in all material respects; provided, however, that this representation and warranty shall not apply to any statements made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein; (o) Other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would, individually or in the aggregate, have a Material Adverse Effect; and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; - ------------------------ (1) To discuss -4- (p) The Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company," as such term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (q) Each subsidiary listed on Schedule III attached hereto is material to the financial condition, business or results of operation of the Company (each, a "Material Subsidiary"); (r) The contracts, indentures, mortgages, deeds of trust, promissory notes, leases or other agreements and instruments filed as exhibits to the Registration Statement, the Company's Annual Reports on Form 10-K or the Company's Quarterly Reports on Form 10-Q are all of the agreements that are material to the financial condition, business or results of operation of the Company and its Subsidiaries, taken as a whole (each, a "Material Contract"); (s) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes; (t) Except as otherwise set forth in the Prospectus, the Company and its subsidiaries (i) are and have at all times since January 1, 2000 been in compliance with, and have not incurred any liabilities under, any and all applicable foreign, federal, state or local laws and regulations, including common law, relating to the protection of the environment and/or human health or safety, to the extent relating to hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have not incurred and will not incur any liabilities relating to asbestos containing products except for such liabilities that have already been fully satisfied, (iii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective business activities and (iv) are in compliance with all terms and conditions of any such permit, license or approval, except where, in clauses (i) through (iv), such noncompliance with Environmental Laws, liabilities, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, individually or in the aggregate, have a Material Adverse Effect; (u) KPMG LLP, who has certified certain financial statements of the Company and its subsidiaries and are independent public accountants as required by the Act and the rules and regulations of the Commission thereunder; and (v) PricewaterhouseCoopers LLP, who has certified certain financial statements and supporting schedules of Dana Corporation's Engine Management Group Business included in the Registration Statement, were independent public accountants for the period of time covered by their audit as required by the Act and the rules and regulations of the Commission thereunder. 2. Purchase and Sale of the Firm Shares. Subject to the terms and conditions herein set forth, (a) the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price of $o per share the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto, and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Securities as provided below, the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at the same purchase price set forth in clause (a) of this Section 2, that portion of the number of the Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional Shares) determined by multiplying such number of Optional Shares by a fraction, the numerator of which is the -5- maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares which all of the Underwriters are entitled to purchase hereunder. The Company hereby grants to the Underwriters the right to purchase at their election up to o Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering sales of Shares in excess of the sale of Firm Shares. Any such election to purchase Optional Shares may be exercised by written notice from you to the Company, given within a period of 30 calendar days after the date of this Agreement, setting forth the aggregate principal amount of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section (4) hereof) or, unless you and the Company otherwise agree in writing, no earlier than two or later than ten business days after the date of such notice. 3. Offer of Firm Shares By the Underwriters. Upon the authorization by you of the release of the Firm Shares, the Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. 4. Shares Matters; Time of Delivery Matters. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior notice to the Company shall be delivered by or on behalf of the Company to Goldman, Sachs & Co., through the facilities of the Depository Trust Company ("DTC"), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company to Goldman, Sachs & Co. at least forty-eight hours in advance. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) at the office of DTC or its designated custodian (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City time, on ............., 2003 or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on the date specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional Shares, or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery", such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery", and each such time and date for delivery is herein called a "Time of Delivery". (b) The documents to be delivered at the Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross-receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 7(j) hereof, will be delivered at the offices of Sullivan & Cromwell LLP, 125 Broad Street, New York, NY 10004 (the "Closing Location"), and the Shares will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location at 5:00 p.m., New York City time, on the New York Business Day next preceding the Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York City are generally authorized or obligated by law or executive order to close. -6- 5. Covenants of the Company. The Company agrees with each of the Underwriters: (a) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment or any supplement to the Registration Statement or Prospectus prior to such Time of Delivery which shall be disapproved by you promptly after reasonable notice thereof, provided, however, in no event shall the Company be prohibited from making a filing, which, upon the advice of its outside counsel, the Company should make in order to comply with applicable laws; to advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish you with copies thereof; to file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the Shares; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus or suspending any such qualification, to promptly use its best efforts to obtain the withdrawal of such order; (b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such Laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) Prior to 10:00 a.m., New York City time, on the New York Business Day next succeeding the date of this Agreement and from time to time, to furnish the Underwriters with copies of the Prospectus in New York City in such quantities as you may reasonably request, and, if the delivery of a prospectus is required at any time prior to the expiration of nine (9) months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any event shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such same period to amend or supplement the Prospectus or to file under the Exchange Act any document incorporated by reference in the Prospectus in order to comply with the Act or the Exchange Act, to notify you and upon your request to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance; and in case any Underwriter is required to deliver a prospectus in connection with sales of any of the Shares at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and -7- deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act; (d) To make generally available to its securityholders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) of the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (e) During the period beginning from the date hereof and continuing to and including the date ninety (90) days after the date of the Prospectus, not to offer, sell, contract to sell or otherwise dispose of, except as provided hereunder any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities (other than pursuant to employee stock option plans, employee stock ownership plans or other employee plans of a similar nature existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement) without your prior written consent; (f) To furnish to the shareholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, shareholders' equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail; (g) During a period of three years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to shareholders generally as such, and to deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its shareholders generally or to the Commission), except to the extent such additional information is of a confidential nature, as reasonably determined by the Company; (h) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement substantially in the manner specified in the Prospectus under the caption "Use of Proceeds"; (i) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 p.m., Washington, D.C. time, on the date of this Agreement, and the Company shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act; (j) Upon request of any Underwriter, to furnish, or cause to be furnished, to such Underwriter an electronic version of the Company's trademarks, servicemarks and corporate logo (collectively, "Intellectual Property") for use on the website, if any, operated by such Underwriter -8- for the purpose of facilitating the on-line offering of the Shares (the "License"); provided, however, that none of the Underwriters may alter, change, enhance or otherwise modify the Intellectual Property without the consent of the Company, and provided further that the License shall be used solely for the purpose described above, is granted without any fee and may not be assigned or transferred; and (k) To use its best efforts to list, subject to notice of issuance, the Shares on the New York Stock Exchange (the "Exchange"). 6. Fees and Expenses. The Company covenants and agrees with the several Underwriters that the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing any Agreement among Underwriters, this Agreement, the Blue Sky Memoranda, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 5(b) hereof, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky surveys provided that such fees, exclusive of disbursements, shall not exceed $10,000; (iv) any fees and expenses in connection with listing the Shares on the New York Stock Exchange; (v) the filing fees incident to, and the fees and disbursements of counsel for the Underwriters in connection with, any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Shares; (vi) the cost of preparing the Shares; (vii) the fees and charges of any transfer agent or registrar; and (viii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. It is understood, however, that, except as provided in this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. 7. Conditions of the Company. The obligations of the Underwriters hereunder as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company herein are, at and as of such Time of Delivery, true and correct, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions: (a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 p.m., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction; (b) Sullivan & Cromwell LLP, counsel for the Underwriters, shall have furnished to you such written opinion or opinions, dated such Time of Delivery, as you may reasonably request and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; -9- (c) Kelley Drye & Warren LLP, counsel for the Company, shall have furnished to you their written opinion (a draft of such opinion is attached as Annex II(a) hereto), dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of New York, with corporate power and authority to own and/or lease its properties and conduct its business as described in the Prospectus; (ii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company (including the Shares being delivered at such Time of Delivery) have been duly and validly authorized and issued, are fully paid and non-assessable; and the Shares conform in all material respects to the description of the Stock contained in the Prospectus; (iii) The Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each jurisdiction listed with respect to the Company on Schedule II (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (iv) Each Material Subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; and all of the issued shares of capital stock of each such Material Subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable, and (except for directors' qualifying shares and except as otherwise set forth in the Prospectus or noted on Schedule II attached hereto) are owned directly or indirectly by the Company, and, except as otherwise noted on Schedule IV, are free and clear of all liens, encumbrances, equities or claims (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (v) To such counsel's knowledge and other than as set forth in the Prospectus (including any documents incorporated by reference therein), there are no legal or governmental proceedings pending against the Company or any of its subsidiaries or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, could reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect; and, to such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (vi) This Agreement has been duly authorized, executed and delivered by the Company; (vii) The issue and sale of the Shares being delivered at such Time of Delivery and the compliance by the Company with the provisions of this Agreement and the consummation of the transactions herein contemplated will not, to such counsel's -10- knowledge, conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any Material Contract, nor will such actions result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; (viii) No consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (ix) Neither the Company nor any of its Material Subsidiaries is in violation of its Certificate of Incorporation or By-laws (or comparable organizational documents) or in default in the performance or observance of any material obligation, covenant or condition contained in any Material Contract to which it is a party or by which it or any of its properties may be bound; (x) The statements set forth in the Prospectus under the captions "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock, and under the caption "Underwriting", insofar as it purports to describe the provisions of the laws and documents referred to therein, are accurate and complete in all material respects; (xi) The Company is not an "investment company", as such term is defined in the Investment Company Act; (xii) The documents incorporated by reference in the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules and other financial data therein, as to which such counsel need express no opinion), when they became effective or were filed with the Commission, as the case may be, complied as to form in all material respects with the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder; and they have no reason to believe that any of such documents, when such documents became effective or were so filed, as the case may be, contained, (a) in the case of a registration statement which became effective under the Act, an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or, (b) in the case of other documents which were filed under the Act or the Exchange Act with the Commission, an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such documents were so filed, not misleading; (xiii) The Registration Statement and the Prospectus and any further amendments and supplements thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules and other financial data therein, as to which such counsel need express no opinion) comply as to form in all -11- material respects with the requirements of the Act and the rules and regulations thereunder; and (xiv) To such counsel's knowledge, there are no amendments to the Registration Statement required to be filed or any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be incorporated by reference into the Prospectus or required to be described in the Registration Statement or the Prospectus which are not filed or incorporated by reference or described as required (it being understood that such counsel expresses no opinion as to the financial statements and related schedules and other financial data therein). In rendering such opinion, Kelley Drye & Warren LLP shall state further that although they do not assume any responsibility for the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, except for those referred to in the opinion in subsection (x) of this Section 7(c), nothing has come to their attention that leads them to believe that, as of its effective date, the Registration Statement or any further amendment thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules and other financial data therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date, the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules and other financial data therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that, as of such Time of Delivery, either the Registration Statement or the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules and other financial data therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, Kelley Drye & Warren LLP may rely as to factual matters upon certificates of officers of the Company and its subsidiaries; as to matters involving good standing, authorization to do business and other matters within their knowledge, upon certificates of public officials, and as to all matters governed by laws other than the State of New York, the General Corporation Law of Delaware and the federal laws of the United States, on opinions satisfactory to you. (d) On the date of the Prospectus at a time prior to the execution of this Agreement, at 9:30 a.m., New York City time, on the effective date of any post-effective amendment to the Registration Statement filed subsequent to the date of this Agreement and also at each Time of Delivery, KPMG LLP shall have furnished to you a letter or letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, to the effect set forth in Annex I hereto with respect to the Company and its subsidiaries (the executed copy of the letter delivered prior to the execution of this Agreement is attached as Annex I(a) hereto and a draft of the form of letter to be delivered on the effective date of any post-effective amendment to the Registration Statement and as of each Time of Delivery is attached as Annex I(b) hereto) (e) On the date of the Prospectus at a time prior to the execution of this Agreement, at 9:30 a.m., New York City time, on the effective date of any post-effective amendment to the Registration Statement filed subsequent to the date of this Agreement and also at each Time of Delivery, PricewaterhouseCoopers LLC shall have furnished to you a letter or letters, dated the -12- respective dates of delivery thereof, in form and substance satisfactory to you, to the effect set forth in Annex II hereto with respect to the Dana Corporation's Engine Management Group Business (the executed copy of the letter delivered prior to the execution of this Agreement is attached as Annex II(a) hereto and a draft of the form of letter to be delivered on the effective date of any post-effective amendment to the Registration Statement and as of each Time of Delivery is attached as Annex II(b) hereto); (f) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included or incorporated by reference in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus, and (ii) since the respective dates as of which information is given in the Prospectus there shall not have been any change in the capital stock or change in excess of [$6] million [to be confirmed by the Company] of long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in Clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (g) On or after the date hereof (i) no downgrading shall have occurred in the rating accorded the Company's debt securities by any "nationally recognized statistical rating organization", as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities; (h) On or after the date hereof there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange; (ii) a suspension or material limitation in trading in the Company's securities on the New York Stock Exchange; (iii) a general moratorium on commercial banking activities declared by either Federal or New York State authorities; (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in this Clause (iv) in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being issued at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; or (v) the occurrence of any material adverse change in the existing financial, political or economic conditions in the United States or elsewhere which, in the judgment of the Representatives, would materially and adversely affect the financial markets or the markets for the Shares and other equity securities or the market for any debt securities; (i) The Shares to be sold at such Time of Delivery shall have been duly listed, subject to notice of issuance, on the Exchange; (j) The Company shall have complied with the provisions of Section 5(c) hereof with respect to the furnishing of prospectuses on the New York Business Day next succeeding the date of this Agreement; and -13- (k) The Company shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company satisfactory to you as to the accuracy of the representations and warranties of the Company herein at and as of such Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to such Time of Delivery, as to the matters set forth in subsections (a) and (e) of this Section and as to such other matters as you may reasonably request. 8. Indemnification. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use therein. (b) Each Underwriter will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying -14- party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company, the total underwriting discount and commissions payable to the Underwriters as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. -15- (e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company within the meaning of the Act. 9. Defaulting Underwriter. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Shares, or the Company notifies you that it has so arranged for the purchase of such Shares, you or the Company shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligation of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. Survival. The respective indemnities, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless -16- of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or any officer or director or controlling person of the Company, and shall survive delivery of and payment for the Shares. 11. Limitation of Liability. If this Agreement shall be terminated pursuant to Section 9 hereof, the Company shall not then be under any liability to any Underwriter except as provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Underwriters through Goldman, Sachs & Co. for all out-of-pocket expenses approved in writing by Goldman, Sachs & Co., including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company shall then be under no further liability to any Underwriter except as provided in Sections 6 and 8 hereof. 12. Representatives of the Underwriters as Authorized Agents; Notice. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the Underwriters. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you as the representatives in care of Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004, Attention: Registration Department; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire, or telex constituting such Questionnaire, which address will be supplied to the Company by you upon request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 13. Binding Effect. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and each person who controls the Company or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 14. Time of the Essence; Business Day. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 16. Counterparts. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. 17. Amendments in Writing. This Agreement may be amended or modified only by a written agreement referencing this Agreement and duly executed by the parties hereto. -17- If the foregoing is in accordance with your understanding, please sign and return to us one copy of this Agreement for the Company and each of the Representatives, and upon the acceptance hereof by you, as the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement between each of the Underwriters and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, Standard Motor Products, Inc. By: -------------------------------------------- Name: Lawrence I. Sills Title: Chairman and Chief Executive Officer Accepted as of the date hereof: Goldman, Sachs & Co. Morgan Stanley & Co. Incorporated - ----------------------------- (Goldman, Sachs & Co.) Morgan Stanley & Co. Incorporated By: -------------------------- Name: Title: -18- SCHEDULE I
Number of Optional Shares to be Number of Firm Purchased if Shares to be Maximum Option Underwriter Purchased Exercised ----------- --------- --------- Goldman, Sachs & Co............................. Morgan, Stanley & Co. Incorporated.............. Total.................................. ========= ==========
SCHEDULE II FOREIGN QUALIFICATIONS SCHEDULE III MATERIAL SUBSIDIARIES ANNEX I FORM OF COMFORT LETTER Pursuant to Section 7(d) of the Underwriting Agreement, the accountants shall furnish letters to the Underwriters to the effect that: (i) They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Act and the applicable published rules and regulations thereunder adopted by the SEC; (ii) In their opinion, the financial statements and any supplementary financial information and schedules (and, if applicable, prospective financial statements and/or pro forma financial information) examined by them and included or incorporated by reference in the Registration Statement or the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act or the Exchange Act, as applicable, and the related published rules and regulations thereunder; (iii) They have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited condensed consolidated statement of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus and/or included in the Company's quarterly report on Form 10-Q incorporated by reference into the Prospectus; and on the basis of specified procedures including inquiries of officials of the Company who have responsibility for financial and accounting matters regarding whether the unaudited condensed consolidated financial statements referred to in paragraph (vi)(A)(i) below comply as to form in all material respects with the applicable accounting requirements of the Securities Exchange Act of 1934 as it applied to Form 10-Q and the related rules and regulations adopted by the SEC, nothing came to their attention that caused them to believe that the unaudited condensed consolidated financial statements do not comply as to form in all material respects with the applicable accounting requirements of the Securities Exchange Act of 1934 as it applies to Form 10-Q and the Exchange Act and the related rules and regulations adopted by the SEC; (iv) The unaudited selected financial information with respect to the consolidated results of operations and financial position of the Company for the five most recent fiscal years included in the Prospectus and included or incorporated by reference in Item 6 of the Company's Annual Report on Form 10-K for the most recent fiscal year agrees with the corresponding amounts (after restatement where applicable) in the audited consolidated financial statements for such five fiscal years which were included or incorporated by reference in the Company's Annual Reports on Form 10-K for such fiscal years; (v) On the basis of limited procedures not constituting an examination in accordance with generally accepted auditing standards, consisting of a reading of the unaudited financial statements and other information referred to below, a reading of the latest available interim financial statements of the Company and its subsidiaries, a reading of the minutes of the stockholders and the board of directors as set forth in the minute books since the date of the latest audited financial statements included or incorporated by reference in the Prospectus, inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) (i) the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus and/or included in the Company's quarterly report on Form 10-Q incorporated by reference into the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Securities Exchange Act of 1934 as it relates to Form 10-Q and the related rules and regulations adopted by the SEC, or (ii) any material modifications should be made to the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included or incorporated by reference in the Company's Quarterly Reports on Form 10-Q incorporated by reference in the Prospectus, for them to be in conformity with generally accepted accounting principles; (B) any unaudited pro forma consolidated condensed financial statements included or incorporated by reference in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (C) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the consolidated capital stock (other than issuances of capital stock upon exercise of options and stock appreciation rights, upon earn-outs of performance shares and upon conversions of convertible securities, in each case which were outstanding on the date of the latest balance sheet included or incorporated by reference in the Prospectus) or any increase in the consolidated long-term debt of the Company and its subsidiaries, or any decreases in consolidated net current assets or shareholders' equity or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with amounts shown in the latest balance sheet included or incorporated by reference in the Prospectus, except in each case for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (D) for the period from the date of the latest financial statements included or incorporated by reference in the Prospectus to the specified date referred to in Clause (C) there were any decreases in consolidated net revenues or operating profit or the total or per share amounts of consolidated net income or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with the comparable period of the preceding year, except in each case for increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and -2- (vi) In addition to the examination referred to in their report(s) included or incorporated by reference in the Prospectus and the limited procedures, reading of minutes, inquiries and other procedures referred to in paragraphs (iii) and (vi) above, they have carried out certain specified procedures, not constituting an examination in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives which are derived from the general accounting records of the Company and its subsidiaries, which appear in the Prospectus (excluding documents incorporated by reference) or in Part II of, or in exhibits and schedules to, the Registration Statement specified by the Representatives or in documents incorporated by reference in the Prospectus specified by the Representatives, and have compared certain of such amounts, percentages and financial information with the accounting records of the Company and its subsidiaries and have found them to be in agreement. -3- ANNEX II FORM OF COMFORT LETTER - PRICEWATERHOUSECOOPERS LLP -4- EX-23 4 ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders Standard Motor Products, Inc.: We consent to the use of our report dated February 22, 2002, with respect to the consolidated balance sheets of Standard Motor Products, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 2001, included herein and to the reference to our firm under the heading 'Experts' in the prospectus. Our report indicates that the consolidated financial statements referred to above have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002, and to account for certain sales incentives in accordance with Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products), which was adopted by the Company as of January 1, 2002. /s/ KPMG LLP New York, New York February 13, 2003 EX-23 5 ex23-2.txt EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-3 of our report dated November 8, 2002 relating to the financial statements of Engine Management (a business of Dana Corporation), which appears in such Registration Statement. We also consent to the reference to us under the heading 'Experts' in such Registration Statement. /s/ PricewaterhouseCoopers LLP Toledo, Ohio February 13, 2003 -----END PRIVACY-ENHANCED MESSAGE-----